UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20–F
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x
☐
☐
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, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
Date of event requiring this shell company report _______________________
For the transition period from to
Commission file number 0-30070
AUDIOCODES LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
ISRAEL
(Jurisdiction of incorporation or organization)
1 Hayarden Street, Airport City Lod 70151, Israel
(Address of principal executive offices)
Shabtai Adlersberg, Chairman and CEO, Tel: 972-3-976-4105, Fax: 972-3-9764040, 1 Hayarden Street, Airport City, Lod 70151 Israel
(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, nominal value NIS 0.01 per share
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
report.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
(Title of Class)
As of December 31, 2011, the Registrant had outstanding 40,562,784 Ordinary Shares, nominal value NIS 0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
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 ☒
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 ☒
Yes ☒ No☐
Indicate by check mark whether 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)
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):
Yes ☒ No☐
Large Accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Indicate by check mark which 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): Yes☐ No ☒
☐ Item 17 ☐ Item 18
PRELIMINARY NOTE
This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and
Section 21E of the Securities Exchange Act, or the Exchange Act. These forward-looking statements can generally be identified as such because the context of
the statement will include words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,”
or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe our business outlook or future economic
performance, anticipated revenues, expenses or other financial items, introductions and advancements in development of products, and plans and objectives
related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are also forward-
looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those
stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under Item 3.D, “Key
Information – Risk Factors” of this Annual Report.
Our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-
looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use
our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking
statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. In evaluating our forward-looking
statements, you should specifically consider the risks and uncertainties set forth under Item 3.D, “Key Information – Risk Factors” of this Annual Report.
Unless the context otherwise requires, “AudioCodes,” “us,” “we” and “our” refer to AudioCodes Ltd. and its subsidiaries.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
PART I
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
1
A.
SELECTED FINANCIAL DATA
The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for each of the years from
2007 through 2011. The selected consolidated statement of operations data for the years ended December 31, 2009, 2010 and 2011, and the selected
consolidated balance sheet data as of December 31, 2010 and 2011, have been derived from our audited consolidated financial statements set forth elsewhere in
this Annual Report. The selected consolidated statement of operations data for the years ended December 31, 2007 and 2008, and the selected consolidated
balance sheet data as of December 31, 2007, 2008 and 2009, have been derived from our previously published audited consolidated financial statements, which
are not included in this Annual Report. The selected financial data should be read in conjunction with our consolidated financial statements, and are qualified
entirely by reference to these consolidated financial statements.
Statement of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expense:
Research and development, net
Selling and marketing
General and administrative
Impairment of goodwill and intangible assets
Total operating expenses
Operating income (loss)
Financial expenses, net
Income (loss) before taxes on income
Income tax expense (benefit), net
Equity in losses of affiliated companies
Net income (loss)
income
(loss) attributable
Net loss attributable to a non-controlling interest
Net
shareholders
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
Weighted average number of ordinary shares used in
to AudioCodes’
2007
$
158,235 $
69,185
89,050
40,706
42,900
9,637
-
93,243
(4,193)
2,167
(6,360)
1,265
1,097
(8,722) $
-
(8,722) $
(0.20) $
(0.20) $
$
$
$
$
2008
Year Ended December 31,
2009
(In thousands, except per share data)
2010
2011
174,744 $
77,455
97,289
37,833
44,657
9,219
85,015
176,724
(79,435)
3,268
(82,703)
505
2,582
(85,790) $
- $
(85,790) $
(2.08) $
(2.08) $
125,894 $
56,194
69,700
150,040 $
66,138
83,902
155,827
64,145
91,682
29,952
32,111
7,821
-
69,884
(184)
2,744
(2,928)
290
76
(3,294) $
472 $
(2,822) $
(0.07) $
(0.07) $
30,189
35,024
8,252
-
73,465
10,437
94
10,343
(1,885)
213
12,015 $
111 $
12,126 $
0.30 $
0.30 $
32,150
43,248
9,028
-
84,426
7,256
423
7,679
(238)
277
7,164
-
7,164
0.17
0.17
computing basic net earnings (loss) per share
42,699
41,201
40,208
40,560
41,438
Weighted average number of ordinary shares used in
computing diluted net earnings (loss) per share
42,699
41,201
40,208
40,961
41,935
2
Balance Sheet Data:
Cash and cash equivalents
Short-term bank deposits, structured notes, marketable
securities and accrued interest
Working capital
Long-term bank deposits structured notes and long-term
marketable securities
Total assets
Bank loans
Senior convertible notes
AudioCodes shareholders’ equity
Non-controlling interest
Total equity
Capital stock (*)
2007
2008
December 31,
2009
2010
2011
$
75,063 $
36,779 $
38,969 $
50,311 $
28,257
35,309
124,676
32,670
344,267
-
114,893
180,577
-
180,577
162,103
78,351
57,370
-
230,304
27,750
70,670
83,860
228
84,088
167,981
13,902
54,557
-
147,533
21,750
403
84,129
(244)
83,885
170,062
13,825
66,537
-
173,718
15,750
353
99,180
-
99,180
172,263
14,008
55,083
32,943
192,677
33,155
353
106,019
-
106,019
176,998
(*) Capital stock represents share capital plus additional paid-in capital, less carrying amount of the equity component of the senior convertible notes.
Currency and Exchange Rates
The following table sets forth the exchange rates for one United States dollar ("US$") expressed in terms of one New Israeli Shekel ("NIS") in effect at
the end of the following years, (based on the exchange rate on the last day of each year).
2007
2008
December 31,
2009
2010
2011
3.846
3.802
3.775
3.549
3.821
3
The high and low exchange rates for each month during the previous six months are as follows (NIS per United States $1.00):
Month
October 2011
November 2011
December 2011
January 2012
February 2012
March 2012
High
Low
3.763
3.800
3.821
3.854
3.803
3.814
3.602
3.650
3.727
3.733
3.700
3.715
The high, low, average (calculated by using the average of the exchange rates on the last day of each month during the period) and closing exchange
rates for each of the Company’s five previous fiscal years are as follows:
High
Low
Average
Period End
2007
2008
December 31,
2009
2010
2011
4.342
3.830
4.110
3.846
4.022
3.230
3.586
3.802
4.256
3.690
3.923
3.775
3.894
3.549
3.732
3.549
3.821
3.363
3.579
3.821
Unless otherwise indicated, in this Annual Report all references herein are to United States dollar.
The exchange rate on April 10, 2012, as reported by the Bank of Israel, for the conversion of United States dollars into New Israeli Shekel was U.S.
$1.00 equals NIS 3.744.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
4
D.
RISK FACTORS
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing, legal
and other factors or conditions that may affect us. We believe that the occurrence of any one or some combination of the following factors could have a material
adverse effect on our business, financial condition, cash flows and results of operations.
Risks Related to Our Business and Industry
We reported losses in 2007, 2008 and 2009. We may experience additional losses in the future.
We reported a net loss of $8.7 million in 2007, $85.8 million in 2008 and $2.8 million in 2009. We reported net income of $12.1 million in 2010 and
$7.2 million in 2011. The loss in 2008 included a non-cash impairment charge of $86.1 million taken in the fourth quarter of 2008 with respect to goodwill,
intangible assets and investment in an affiliate. The majority of our expenses are directly and indirectly related to the number of people we employ. We may
increase our expenses based on projections of revenue growth. If at any given time we do not meet our expectations for growth in revenues our expenses
incurred in anticipation of projected revenues may cause us to incur a loss. We may not be able to anticipate a loss in advance and adjust our variable costs
accordingly. We cannot be sure that we will continue to be profitable in 2012.
We have depended, and expect to continue to depend, on a small number of large customers. Nortel Networks, which was our largest customer in 2008
and 2009, filed for bankruptcy protection in January 2009. As a result, sales to Nortel decreased significantly in 2010 and again in 2011. The loss of one
or more of our other large customers or the reduction in purchases by a significant customer or failure of such customer to pay for the products it
purchases from us could have a material adverse effect on our revenues.
Historically, a substantial portion of our revenues has been derived from large purchases by a small number of original equipment manufacturers, or
OEMs, and network equipment providers, or NEPs, systems integrators and distributors. For example, our top three customers accounted for approximately
25.7% of our revenues in 2009, 22.2% of our revenues in 2010 and 25.5% of our revenue in 2011. Sales to ScanSource Communications Inc, our largest
customer, accounted for 14.4% of our revenues in 2011 compared to 9.8% of our revenues in 2010 and 6.9% of our revenues in 2009. We do not enter into sales
agreements in which a customer is obligated to purchase a set quantity of our products. Based on our experience, we expect that our customer base may change
from period to period. If we lose a large customer and fail to add new customers, or if purchases made by such customers are significantly reduced, there could
be a material adverse effect on our results of operations.
5
Nortel filed for bankruptcy protection in January 2009. Nortel Networks was our largest customer in 2008 and 2009 accounting for 14.4% of our
revenues in 2008 and 15.6% of our revenues in 2009. In 2010, Nortel accounted for only 3.9% of our revenue and in 2011 revenues from sales to Nortel were
negligible. Nortel has sold a number of its business units, some of which were customers of ours. We cannot be sure if companies that purchased business units
sold by Nortel will continue to purchase products from us. Any significant reduction in sales to our large customers similar to the reduction in our sales to
Nortel could have a material adverse effect on our results of operations.
Nortel has asserted a preference claim against us in its bankruptcy proceeding.
In a bankruptcy proceeding, a company is entitled to make preference claims for amounts paid by the company during specified periods prior to the
bankruptcy filing. In May, 2011, Nortel commenced an action against us that claims that we received approximately $3.2 million in payments from them during
the ninety day period prior to their bankruptcy filing that constitute avoidable preferential transfers. We have engaged in discussions with Nortel with respect to
the settlement of these claims. While we believe that we have valid defenses to these claims, we cannot be sure that we will be able to reach an acceptable
settlement with Nortel. If an acceptable settlement is not reached with Nortel, we intend to vigorously defend against any claim brought against us, but we
cannot be sure of the outcome of any litigation with respect to this claim. We could be required to repay all or a portion of the amounts claimed by Nortel to be
a preference if a litigation were to be resolved in Nortel’s favor.
Recent and future economic conditions may adversely affect our business.
The current economic and credit environment is having a negative impact on business around the world. The impact of these conditions on the
technology industry and our major customers and potential customers has been significant. Conditions may continue to be depressed or may be subject to
further deterioration which could lead to a further reduction in consumer and customer spending overall, which could have an adverse impact on sales of our
products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses
which could lead to a significant reduction in their orders of our products and the inability or failure on their part to meet their payment obligations to us, any of
which could have a material adverse effect on our results of operations and liquidity. A significant adverse change in a customer’s financial and/or credit
position could also require us to assume greater credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to
previous purchases by that customer. As a result, our reserves for doubtful accounts and write-offs of accounts receivable may increase.
We may need additional financing to operate or grow our business. We may not be able to raise additional financing for our capital needs on favorable
terms, or at all, which could limit our ability to grow and to continue our longer term expansion plans.
We may need additional financing to operate our business or continue our longer term expansion plans. To the extent that we cannot fund our activities
and acquisitions through our existing cash resources and any cash we generate from operations, we may need to raise equity or debt funds through additional
public or private financings. We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms, or at all. This could
inhibit our growth, increase our financing costs or cause us severe financial difficulties.
6
We have a significant amount of bank debt and could be forced to repay this debt in advance if we are unable to satisfy the covenants in our loan
agreements.
We borrowed $30 million in 2008 that is repayable in 20 equal quarterly payments of $1.5 million from August, 2008 through July 2013. In 2011, we
borrowed $23.8 million. Of that amount, $19.9 million is repayable in 20 equal quarterly payments of approximately $1.0 million from December 2011 through
September 2017 and the remaining $3.9 million is repayable in 10 equal semiannual payments of $390,000 from June 2012 through December 2016. If we are
unable to make payments when required by these loan agreements or if we do not comply with covenants in our loan agreements with respect to maintaining
shareholders' equity at specified levels or achieving certain levels of operating income, we could be required to repay all or portion of these bank loans prior to
their maturity.
We are party to an agreement for the construction and long-term lease of a new building in Israel. We are currently engaged in a dispute with
the landlord with respect to this lease. Any unfavorable outcome in this dispute could result in significant damages to us.
In May 2007, we entered into an agreement with respect to property adjacent to our headquarters in Israel, pursuant to which a building of
approximately 145,000 square feet has been erected and was expected to be leased to us for a period of eleven years. This new building was substantially
completed on a structural level in May 2010. The landlord claimed that we should have taken delivery of the building at that time and started paying rent. We
disagreed with the landlord’s interpretation of the relevant agreement. As a result, the landlord terminated the agreement and leased the property to a third
party. This dispute has been referred to arbitration where we claim that due to the landlord’s failure we lost significant potential revenues. The landlord
counterclaimed alleging that it sustained losses equal to approximately one year’s rent and management fees in the amount of approximately NIS 14 million
(approximately $3.7 million based on the December 31, 2011 exchange rate). The claim is at the discovery stage and it is not possible at this stage to predict the
outcome of these proceedings. We believe that we have valid defenses to the counterclaim. An unfavorable outcome in the arbitration could result in the
payment by us of a significant amount to the landlord.
We are dependent on the development of the VoIP market to increase our sales.
We are dependent on the development of the Voice over Internet Protocol, or VoIP, market to increase our sales. We cannot be sure that the delivery of
telephone and other communications services over packet networks will expand or that there will be a need to interconnect to other networks utilizing the type
of technology contained in our products. For example, the need for our media gateway products depends on the need to interconnect VoIP networks with
traditional non-packet based networks. Our enterprise session border control products depend on growth in the need to interconnect Voice over Packet and
unified communication systems with each other. The adaptation process of connecting packet networks and telephone networks can be time consuming and
costly. Sales of our VoIP products will depend on the development of packet networks and the commercialization of VoIP services. If this market develops more
slowly than we expect, we may not be able to sell our products in a significant enough volume to be profitable.
7
We may expand our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt our business and
affect our results of operations.
Part of our strategy is to pursue acquisitions of, or investments in, businesses and technologies or to establish joint ventures to expand our business.
The negotiation of acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses or technologies, could divert
our management’s time and resources. Acquired businesses, technologies or joint ventures may not be successfully integrated with our products and operations.
The markets for the products produced by the companies we acquire may take longer than we anticipated to develop and to result in increased sales and profits
for us. We may not realize the intended benefits of any acquisition, investment or joint venture and we may incur losses from any acquisition, investment or
joint venture.
The future valuation of acquired businesses may be less than the purchase price we paid and result in impairment charges related to goodwill or
intangible assets. During the fourth quarter of 2008, we recognized non-cash impairment charges of $86.1 million with respect to goodwill and intangible assets
related to previous acquisitions and an investment in an affiliated company.
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;
amortization of intangibles and potential impairment of goodwill and intangible assets, such as occurred during 2008;
reduction of management attention to other parts of the business;
failure to invest in different areas or alternative investments;
failure to generate expected financial results or reach business goals; and
increased expenditures on human resources and related costs.
If acquisitions disrupt our sales or marketing efforts or operations, our business may suffer.
8
If new products we recently introduced or expect to introduce in the future fail to generate the level of demand we anticipated, we will realize a lower
than expected return from our investment in research and development with respect to those products, and our results of operations may suffer.
Our success is dependent, in part, on the willingness of our customers to transition or migrate to new products, such as our expanded offering of
Mediant and IP media products, our residential gateways, our session border controller products, our multi service business gateways (MSBGs),our software
application products or expected future products. We are involved in a continuous process of evaluating changing market demands and customer requirements
in order to develop and introduce new products, features and applications to meet changing demands and requirements. We need to be able to interpret market
trends and the advancement of technology in order to successfully develop and introduce new products, features and applications. If potential customers defer
transition or migration to new products, our return on our investment in research and development with respect to products recently introduced or expected to
be introduced in the near future will be lower than we originally anticipated and our results of our operations may suffer.
Because of the rapid technological development in the communications equipment market and the intense competition we face, our products can
become outmoded or obsolete in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing
products. If we do not successfully manage the transition process to the next generation of our products, our operating results may be harmed.
The communications equipment market is characterized by rapid technological innovation and intense competition. Accordingly, our success depends
in part on our ability to develop next generation products in a timely and cost-effective manner. The development of new products is expensive, complex and
time consuming. If we do not rapidly develop our next generation products ahead of our competitors, we may lose both existing and potential customers to our
competitors. Further, if a competitor develops a new, less expensive product using a different technological approach to delivering informational services over
existing networks, our products would no longer be competitive. Conversely, even if we are successful in rapidly developing new products ahead of our
competitors and we do not cost-effectively manage our inventory levels of existing products when making the transition to the new products, our financial
results could be negatively affected by high levels of obsolete inventory. If any of the foregoing were to occur, then our operating results would be harmed.
Our industry is rapidly evolving and we may not be able to keep pace with technological changes, which could adversely affect our business.
The transmission of multimedia over data networks is rapidly evolving. Short product life cycles place a premium on our ability to manage the
transition from current products to new products. Our future success in generating revenues will depend on our ability to enhance our existing products and to
develop and introduce new products and product features. These products and features must keep pace with technological developments and address the
increasingly sophisticated needs of our customers. The development of new technologies and products is increasingly complex and uncertain. This increases the
difficulty in coordinating the planning and production process and can result in delay in the introduction of new technologies and products.
9
The increase in the number of IP networks may adversely affect the demand for media gateway products.
Media gateway products are primarily intended to transcode voice from traditional telephony networks to IP networks and vice versa. Along with the
growth in the number of IP networks, there has been an increase in the amount of information that is sent directly from one IP network to another IP network.
This direct network communication potentially obviates the need to use a media gateway or transcoding. A reduction in the demand for media gateways may
adversely affect the demand for our media gateway products and, in turn, adversely affect our results of operations.
New industry standards, the modification of our products to meet additional existing standards or the addition of features to our products may delay
the introduction of our products or increase our costs.
The industry standards that apply to our products are continually evolving. In addition, since our products are integrated into networks consisting of
elements manufactured by various companies, they must comply with a number of industry standards and practices established by various international bodies
and industry forums. Should new standards gain broad acceptance, we will be required to adopt those standards in our products. We may also decide to modify
our products to meet additional existing standards or add features to our products. Standards may be adopted by various industry interest groups or may be
proprietary and nonetheless accepted broadly in the industry. It may take us a significant amount of time to develop and design products incorporating these
new standards. We may also have to pay additional fees to the developers of the technologies which constitute the newly adopted standards.
Our OEM customers or potential customers may develop or prefer to develop their own technical solutions, or purchase third party technology, and as
a result, would not buy our products.
Our products are sold also as components or building blocks to large OEMs and NEPs. These customers incorporate our products into their product
offerings, usually in conjunction with value-added services of their own or of third parties. OEM or NEP customers or potential customers may prefer to
develop their own technology or purchase third party technology. They could also manufacture their own components or building blocks that are similar to the
ones we offer. Large customers have already committed significant resources in developing integrated product offerings. Customers may decide that this gives
them better profitability and/or greater control over supplies, specifications and performance. Customers may therefore not buy components or products from an
external manufacturer such as us. This could have an adverse impact on our ability to sell our products and our revenues.
We have a limited order backlog. If revenue levels for any quarter fall below our expectations, our results of operations will be adversely affected.
We have a limited order backlog, which makes revenues in any quarter substantially dependent on orders received and delivered in that quarter. A
delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a given period. We base
our decisions regarding our operating expenses on anticipated revenue trends, and our expense levels are relatively fixed, or require some time for adjustment.
Because only a small portion of our expenses varies with our revenues, if revenue levels fall below our expectations, our results of operations will be adversely
affected.
10
Generally, we sell to original equipment manufacturers, or OEMs, network equipment providers or system integrator customers, as well as to
distributors. As a result, we have less information with respect to the actual requirements of end-users and their utilization of equipment. We also have
less influence over the choice of equipment by these end-users.
We typically sell to OEM customers, network equipment providers, and system integrators, as well as to distributors. Our customers usually purchase
equipment from several suppliers and may be trying to fulfill one of their customers’ specific technical specifications. We rely heavily on our customers for
sales of our products and to inform us about market trends and the needs of their customers. We cannot be certain that this information is accurate. If the
information we receive is not accurate, we may be manufacturing products that do not have a customer or fail to manufacture products that end-users want.
Because we are selling products to OEMs, system integrators and distributors rather than directly to end-users, we have less control over the ultimate selection
of products by end-users.
The markets we serve are highly competitive and many of our competitors have much greater resources, which may make it difficult for us to
maintain profitability.
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide similar
benefits to those that we sell. There has been a significant amount of merger and acquisition activity and strategic alliances, frequently involving major
telecommunications equipment manufacturers acquiring smaller companies, and we expect that this will result in an increasing concentration of market share
among these companies, many of whom are our customers.
Our principal competitors in the residential gateway market are Pirelli Broadband (ADB), Technicolor (previously Thomson), Sagemcom, ZyXEL,
Netgear, Bewan (Pace), Huawei, FiberHome and ZTE.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Linksys (a division of Cisco Systems,
Inc.), Mediatrix Telecom, Inc., Vega Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum Technologies, Tainet Communication System Corp.,
Welltech, Ascii Corp., D-Link Systems, Inc., Multitech Inc., Inomedia, Grandstream, OKI and LG. In the area of low density digital gateway and multi-service
business gateways we face competition from companies such as Cisco, Adtran, One Access, Patton and more specifically in the enterprise class Session Border
Controller technology with ACME Packet, SIPera (acquired by Avaya), Ingate and Edgewater. In addition we face competition in low, mid density gateways
from companies such as Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from Cisco Systems, Dialogic, Genband, Sonus Networks and
Metaswitch, some of which are also customers of our products and technology.
Our competitors in the Microsoft Lync certified gateways and session border controller markets include NET, Dialogic, Cisco, Ferrari and ACME
Packet.
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Our principal competitors in the media server market segment are Dialogic/Cantata Technology, NMS Communications (acquired by Dialogoc),
Convedia/Radisys, Movius (IP Unity Glenayre), Cognitronics and Aculab. In addition, we face competition in software-based and hardware-based media
servers from internal development at companies such as Hewlett-Packard, Comverse-NetCentrex, General Bandwidth, Alcatel - Lucent, Nokia – Siemens and
Ericsson.
Our principal competitors in the sale of signal processing chips are Texas Instruments, Broadcom, Infineon/Lantiq, Centillium, Surf and Mindspeed.
Several large manufacturers of generic signal processors, such as Motorola, Agere Systems, which merged with LSI Corporation in April 2007, and Intel have
begun, or are expected to begin, marketing competing processors. Our principal competitors in the communications board market are Dialogic/NMS
Communications, Cantata, Aculab, Sangoma and PIKA Technologies.
Our principal competitors in the area of IP Phones are comprised of “best-of-breed” IP phone vendors and end-to-end IP telephony vendors. “Best of
breed” IP phone vendors sell standard-based SIP phones that can be integrated into any standards-based IP-PBX or hosted IP telephony system. These
competitors include Polycom, Mediatrix, Yaelink and SNOM. End-to-end IP telephony vendors sell IP phones that only work in their proprietary systems and
include IP telephony vendors such as Cisco, Avaya (previously Nortel), Alcatel-Lucent, Siemens and Asstra.
Many of our competitors have the ability to offer complete network solutions and vendor-sponsored financing programs to prospective customers.
Some of our competitors with broad product portfolios may also be able to offer lower prices on products that compete with ours because of their ability to
recoup a loss of margin through sales of other products or services. Additionally, voice, audio and other communications alternatives that compete with our
products are being continually introduced.
In the future, we may also develop and introduce other products with new or additional telecommunications capabilities or services. As a result, we
may compete directly with VoIP companies and other telecommunications and solution infrastructure providers, some of which may be our customers.
Additional competitors may include companies that currently provide communication software products and services. The ability of some of our competitors to
bundle other enhanced services or complete solutions with VoIP products could give these competitors an advantage over us.
Offering to sell system level products that compete with the products manufactured by our customers could negatively affect our business.
Our product offerings range from media gateway building blocks, such as chips and boards, to media gateways, media servers and session border
control products (systems). These products could compete with products offered by our customers. These customers could decide to decrease purchases from us
because of this competition. This could result in a material adverse effect on our results of operations.
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Offering to sell directly to carriers or service providers may expose us to requirements for service which we may not be able to meet.
We also sell our products directly to telecommunications carriers, service providers or other end-users. We have traditionally relied on third party
distributors and OEMs to test and/or sell our products and to inform us about the requirements of end-users. We have limited experience selling our products
directly to end-user customers. Telecommunications carriers and other service providers have great bargaining power in negotiating contracts. Generally,
contracts with end-users tend to be more complex and impose more obligations on us than contracts with third party distributors. We may be unable to meet the
requirements of these contracts. If we are unable to meet the conditions of a contract with an end-user customer, we may be subject to liquidated damages or
liabilities that could result in a material adverse effect on our results of operations.
Selling directly to end-users may adversely affect our relationship with our current third party distributors upon whom we will continue to rely for a
significant portion of our sales. Loss of third party distributors and OEMs, or a decreased commitment by them to sell our products as a result of direct sales by
us, could adversely affect our sales and results of operations.
We rely on third-party subcontractors to assemble our products and therefore do not directly control manufacturing costs, product delivery schedules
or manufacturing quality.
Our products are assembled and tested by third-party subcontractors. As a result of our reliance on third-party subcontractors, we cannot directly
control product delivery schedules. We have in the past experienced delays in delivery schedules. Any problems that occur and persist in connection with the
delivery, quality or cost of the assembly and testing of our products could have a material adverse effect on our business, financial condition and results of
operations. This reliance could also lead to product shortages or quality assurance problems, which, in turn, could lead to an increase in the costs of
manufacturing or assembling our products.
In addition, we have engaged three original design manufacturers, or ODMs, based in Asia to design and manufacture some of our products and may
engage additional ODMs in the future. Any problems that occur and persist in connection with the delivery, quality, cost of the assembly or testing of our
products, as well as the termination of our commercial relationship with an ODM or the discontinuance of the manufacturing of the respective products could
have a material adverse effect on our business, financial condition and results of operations.
We may not be able to deliver our products to our customers, and substantial reengineering costs may be incurred if a small number of third-party
suppliers do not provide us with key components on a timely basis.
Texas Instruments Incorporated supplies all of the chips for our signal processor product line. Our signal processor line is used both as a product line in
its own right and as a key component in our other product lines. Motorola manufactures all of the communications processors currently used on our
communications boards.
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We have not entered into any long-term supply agreements or alternate source agreements with our suppliers and, while we maintain an inventory of
critical components, our inventory of chips would likely not be sufficient in the event that we had to engage an alternate supplier for these components.
Texas Instruments is also one of our major competitors in providing signal processing solutions. An unexpected termination of the supply of the chips
provided by Texas Instruments or Motorola or disruption in their timely delivery would require us to make a large investment in capital and personnel to shift to
using signal processors manufactured by other companies and may cause a delay in introducing replacement products. Customers may not accept an alternative
product design. Supporting old products or redesigning products may make it more difficult for us to support our products.
We utilize other sole source suppliers upon whom we depend without having long-term supply agreements.
Some of our sole source suppliers custom produce components for us based upon our specifications and designs while other of our sole source
suppliers are the only manufacturers of certain components required by our products. We have not entered into any long-term supply agreements or alternative
source agreements with our suppliers and while we maintain an inventory of components from single source providers, our inventory would likely not be
sufficient in the event that we had to engage an alternate supplier of these single source components. In the event of any interruption in the supply of
components from any of our sole source suppliers, we may have to expend significant time, effort and other resources in order to locate a suitable alternative
manufacturer and secure replacement components. If no replacement components are available, we may be forced to redesign certain of our products. Any such
new design may not be accepted by our customers. A prolonged disruption in supply may force us to redesign and retest our products. Any interruption in
supply from any of these sources or an unexpected technical failure or termination of the manufacture of components could disrupt production, thereby
adversely affecting our ability to deliver products and to support products previously sold to our customers.
In addition, if demand for telecommunications equipment increases, we may face a shortage of components from our suppliers. This could result in
longer lead times, increases in the price of components and a reduction in our margins, all of which could adversely affect the results of our operations.
Our customers may require us to produce products or systems to hold in inventory in order to meet their “just in time”, or short lead time, delivery
requirements. If we are unable to sell this inventory on a timely basis, we could incur charges for excess and obsolete inventory which would adversely
affect our results of operations.
Our customers expect us to maintain an inventory of products available for purchase off the shelf subsequent to the initial sales cycle for these
products. This may require us to incur the costs of manufacturing inventory without having a purchase order for the products. The VoIP industry is subject to
rapid technological change and volatile customer demands, which result in a short product commercial life before a product becomes obsolete. If we are unable
to sell products that are produced to hold in inventory, we may incur write-offs as a result of slow moving items, technological obsolescence, excess inventories,
discontinued products and products with market prices lower than cost. Write-offs could adversely affect our operating results and financial condition. We wrote
off inventory in an aggregate amount of $3.4 million in 2009, $1.1 million in 2010 and $644,000 in 2011.
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The right of our customers to return products and their right to exchange products may affect our ability to recognize revenues which could adversely
affect the results of our operations.
Some of our customers expect us to permit them to return some or all of the products they purchase from us. If we contractually agree to allow a
customer to return products, the customer may be entitled to a refund for the returned products or to receive a credit for the purchase of replacement products. If
we agree to this type of contractual obligation, it could affect our ability to recognize revenues. In addition, if we are not able to resell any products that are
returned and we would have to write off this inventory. This could adversely affect our results of operations.
Our products generally have long sales cycles and implementation periods, which increase our costs in obtaining orders and reduce the predictability
of our revenues.
Our products are technologically complex and are typically intended for use in applications that may be critical to the business of our customers.
Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems.
As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new
communications equipment. The sales cycles of our products to new customers are approximately six to twelve months after a design win, depending on the
type of customer and complexity of the product. This time period may be further extended because of internal testing, field trials and requests for the addition or
customization of features. This delays the time until we realize revenue and results in significant investment of resources in attempting to make sales.
Long sales cycles also subject us to risks not usually encountered in a short sales span, including customers’ budgetary constraints, internal acceptance
reviews and cancellation. In addition, orders expected in one quarter could shift to another because of the timing of customers’ procurement decisions. The time
required to implement our products can vary significantly with the needs of our customers and generally exceeds several months; larger implementations can
take multiple calendar quarters. This complicates our planning processes and reduces the predictability of our revenues.
Our proprietary technology is difficult to protect, and our products may infringe on the intellectual property rights of third parties. Our business may
suffer if we are unable to protect our intellectual property or if we are sued for infringing the intellectual property rights of third parties.
Our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and
measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others.
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Enforcement of intellectual property rights may be expensive and may divert attention of management and of research and development personnel
away from our business. Intellectual property litigation could also call into question the ownership or scope of rights owned by us. We believe that at least one
of our patents may cover technology related to the ITU G.723.1 standard. Because of our involvement in the standard setting process, we may be required to
license certain of our patents on a reasonable and non-discriminatory basis to a current or future competitor, to the extent required to carry out the G.723.1
standard. Additionally, our products may be manufactured, sold, or used in countries that provide less protection to intellectual property than that provided
under U.S. or Israeli laws or where we do not hold relevant intellectual property rights.
We believe that the frequency of third party intellectual claims is increasing, as patent holders, including entities that are not in our industry and that
purchase patents as an investment or to monetize such rights by obtaining royalties, use infringement assertions as a competitive tactic and a source of
additional revenue. Any intellectual property claims against us, even without merit, could cost us a significant amount of money to defend and divert
management’s attention away from our business. We may not be able to secure a license for technology that is used in our products and we may face injunctive
proceedings that prevent distribution and sale of our products even prior to any dispute being concluded. These proceedings may also have a deterrent effect on
purchases by customers, who may be unsure about our ability to continue to supply their requirements. We may be forced to repurchase our products and
compensate customers that have purchased such infringing products. We may be forced to redesign the product so that it becomes non-infringing, which may
have an adverse impact on the results of our operations.
In addition, claims alleging that the development, use, or sale of our products infringes third parties’ intellectual property rights may be directed either
at us or at our direct or indirect customers. We may be required to indemnify such customers against claims made against them. We may be required to
indemnify them even if we believe that the claim of infringement is without merit.
Multiple patent holders in our industry may result in increased licensing costs.
There are a number of companies besides us that hold patents for various aspects of the technology incorporated in our industry’s standards and our
products. We expect that patent enforcement will be given high priority by companies seeking to gain competitive advantages or additional revenues. The
holders of patents from which we have not obtained licenses may take the position that we are required to obtain a license from them. We cannot be certain that
we would be able to negotiate a license agreement at an acceptable price or at all. Our results of operations could be adversely affected by the payment of any
additional licensing costs or if we are prevented from manufacturing or selling a product.
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Changes in governmental regulations in the United States or other countries could slow the growth of the VoIP telephony market and reduce the
demand for our customers’ products, which, in turn, could reduce the demand for our products.
VoIP and other services are not currently subject to all of the same regulations that apply to traditional telephony. Nevertheless, it is possible that
foreign or U.S. federal or state legislatures may seek to impose increased fees and administrative burdens on VoIP, data, and video providers. The FCC has
already required VoIP service providers to meet various emergency service requirements relating to delivery of 911 calls, known as E911, and to accommodate
law enforcement interception or wiretapping requirements, such as the Communications Assistance for Law Enforcement Act, or CALEA. In addition, the FCC
may seek to impose other traditional telephony requirements such as disability access requirements, consumer protection requirements, number assignment and
portability requirements, and other obligations, including additional obligations regarding E911 and CALEA.
The cost of complying with FCC regulations could increase the cost of providing Internet phone service which could result in slower growth and
decreased profitability for this industry, which would adversely affect our business.
The enactment of any additional regulation or taxation of communications over the Internet in the United States or elsewhere in the world could have a
material adverse effect on our customers’ (and their customers’) businesses and could therefore adversely affect sales of our products. We do not know what
effect, if any, possible legislation or regulatory actions in the United States or elsewhere in the world may have on private telecommunication networks, the
provision of VoIP services and purchases of our products.
Use of encryption technology in our products is regulated by governmental authorities and may require special development, export or import
licenses. Delays in the issuance of required licenses, or the inability to secure these licenses, could adversely affect our revenues and results of
operations.
Growth in the demand for security features may increase the use of encryption technology in our products. The use of encryption technology is
generally regulated by governmental authorities and may require specific development, export or import licenses. Encryption standards may be based on
proprietary technologies. We may be unable to incorporate encryption standards into our products in a manner that will insure interoperability. We also may be
unable to secure licenses for proprietary technology on reasonable terms. If we cannot meet encryption standards, or secure required licenses for proprietary
encryption technology, our revenues and results of operations could be adversely affected.
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We are subject to regulations that require us to use components based on environmentally friendly materials. We may be subject to various regulations
relating to management and disposal of waste with respect to electronic equipment. Compliance with these regulations has increased our costs. Failure
to comply with these regulations could materially adversely affect our results of operations.
We are subject to an increasing number of telecommunications industry regulations requiring the use of environmentally-friendly materials in
telecommunications equipment. For example, pursuant to a European Community directive, telecom equipment suppliers are required to stop using specified
materials that are not “environmentally friendly”. In addition, telecom equipment suppliers that take advantage of an exemption with respect to the use of lead
in solders are required by this directive to eliminate the lead in solders from their products by the time set forth by the European Community regulations. This
exemption has been extended by the authorities. Some of our customers may also require products that meet higher standards than those required by the
directive, such as complete removal of additional harmful substances from our products. We are dependent on our suppliers for components and sub-system
modules, such as semiconductors and purchased assemblies and goods, to comply with these requirements. This may harm our ability to sell our products in
regions or to customers that may adopt such directives.
Compliance with these directives, especially with respect to the requirement that products eliminate lead solders, requires us to undertake significant
expenses with respect to the re-design of our products. In addition, we may be required to pay higher prices for components that comply with this directive. We
may not be able to pass these higher component costs on to our customers. Compliance with these regulations have increased and could continue to increase our
product design costs. New designs may also require qualification testing with both customers and government certification boards. We cannot be certain of the
reliability of any new designs that utilize non-lead components, in part, due to the lack of experience with the replacement materials and assembly technologies.
In addition, the incorporation of new components may adversely affect equipment reliability and durability.
Some of our operations use substances regulated under various federal, state, local and international laws governing the environment, including laws
governing the management and disposal of waste with respect to electronic equipment. We could incur substantial costs, including fines and civil or criminal
sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. We also face
increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials that compose our
products. The EU has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible for
specified collection, recycling, treatment and disposal of past and future covered products. Similar legislation has been or may be enacted in other jurisdictions,
including the United States, Canada, Mexico, China and Japan.
Our inability or failure to comply with these regulations could have a material adverse effect on our results of operations. In addition, manufacturers of
components that use lead solders may decide to stop manufacturing those components prior to the required compliance date. These actions by manufacturers of
components could result in a shortage of components that could adversely affect our business and results of operations.
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A significant portion of our revenues is generated outside of the United States and Israel. We intend to continue to expand our operations
internationally and, as a result, our results of operations could suffer if we are unable to manage our international operations effectively.
We generated approximately 36% of our revenues in 2009, 39% of our revenues in 2010 and 37% of our revenues in 2011 outside of the United States
and Israel. Part of our strategy is to expand our penetration in existing foreign markets and to enter new foreign markets. Our ability to penetrate some
international markets may be limited due to different technical standards, protocols or product requirements in different markets. Expansion of our international
business will require significant management attention and financial resources. Our international sales and operations are subject to numerous risks inherent in
international business activities, including:
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economic and political instability in foreign countries;
compliance with foreign laws and regulations;
different technical standards or product requirements;
staffing and managing foreign operations;
foreign currency fluctuations;
export control issues;
governmental controls;
import or currency control restrictions;
local taxation;
increased risk of collection; and
burdens that may be imposed by tariffs and other trade barriers.
If we are unable to address these risks, our foreign operations may be unprofitable or the value of our investment in our foreign operations may
decrease.
Currently, our international sales are denominated primarily in U.S. dollars. Therefore, any devaluation in the local currencies of our customers relative
to the U.S. dollar could cause customers to decrease or cancel orders or default on payment.
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The prices of our products may become less competitive due to foreign exchange fluctuations.
Although we have operations throughout the world, the majority of our revenues and our operating costs in 2011 were denominated in, or linked to, the
U.S. dollar. Accordingly, we consider the U.S. dollar to be our functional currency. However, a significant portion of our operating costs in 2011 were incurred
in New Israeli Shekels (NIS). During 2011, the NIS depreciated against the U.S. dollar, which resulted in a decrease in the U.S. dollar cost of our operations in
Israel. As a result of this differential, from time to time we may experience increases in the costs of our operations outside the United States, as expressed in
U.S. dollars. If there is a significant increase in our expenses, we may be required to increase the prices of our products and may be less competitive. We cannot
be sure that our international customers will continue to place orders denominated in U.S. dollars.
Our sales to European customers denominated in Euros are increasing. Sales denominated in Euros could make our revenues subject to fluctuation in
the Euro/U.S. dollar exchange rate. If the U.S. dollar appreciates against the Euro, we may be required to increase the prices of our products that are
denominated in Euros. In 2011, the U.S. dollar appreciated against the Euro, which resulted in an increase in the prices of our products that are denominated in
Euros.
We may be unable to attract sales representatives who will market our products effectively.
A significant portion of our marketing and sales involves the aid of independent sales representatives that are not under our direct control. We cannot
be certain that our current independent sales representatives will continue to distribute our products or that, even if they continue to distribute our products, they
will do so successfully. These representatives are not subject to any minimum purchase requirements and can discontinue marketing our products at any time. In
addition, these representatives often market products of our competitors. Accordingly, we must compete for the attention and sales efforts of our independent
sales representatives.
Our products could contain defects, which would reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us and our customers, undetected errors or defects may be found in existing or new
products. The introduction of products with reliability, quality or compatibility problems could result in reduced revenues, additional costs, increased product
returns and difficulty or delays in collecting accounts receivable. The risk is higher with products still in the development stage, where full testing or
certification is not yet completed. This could result in, among other things, a delay in recognition or loss of revenues, loss of market share or failure to achieve
market acceptance. We could also be subject to material claims by customers that are not covered by our insurance.
Obtaining certification of our products by national regulators may be time-consuming and expensive. We may be unable to sell our products in
markets in which we are unable to obtain certification.
Our customers may expect us to obtain certificates of compliance with safety and technical standards set by national regulators, especially standards
set by U.S. or European regulators. There is no uniform set of standards, and each national regulator may impose and change its own standards. National
regulators may also prohibit us from importing products that do not conform to their standards. If we make any change in the design of a product, we are
usually required to obtain recertification of the product. The process of certification may be time-consuming and expensive and may affect the length of the
sales cycle for a product. If we are unable to obtain certification of a product in a market, we may be unable to sell the product in that market.
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We depend on a limited number of key personnel who would be difficult to replace.
Because our products are complex and our market is evolving, the success of our business depends in large part upon the continuing contributions of
our management and key personnel. Specifically, we rely heavily on the services of Shabtai Adlersberg, our Chief Executive Officer, President and Chairman of
our Board of Directors. If our Chief Executive Officer is unable or unwilling to continue with us, our results of operations could be materially and adversely
affected. We do not carry key person insurance for our Chief Executive Officer.
The success of our business also depends upon our continuing ability to attract and retain other highly-qualified management, technical, sales and
marketing personnel. We need highly-qualified technical personnel who are capable of developing technologies and products and providing the technical
support required by our customers. We experience competitive pressure with respect to retaining and hiring employees in the high technology sector in Israel. If
we fail to hire and retain skilled employees, our business may be adversely affected.
If we do not manage our operations effectively, our results of operations could be adversely affected.
We have actively expanded our operations in the past and may continue to expand them in the future. This expansion has required, and may continue to
require, the application of managerial, operational and financial resources. We cannot be sure that we will continue to expand, or that we will be able to expand
our operations successfully. In particular, our business requires us to focus on multiple markets, including the VoIP, wireline, cable, enterprise unified
communications and wireless markets. In addition, we work simultaneously with a number of large OEMs and network equipment providers each of which may
have different requirements for the products that we sell to them. We may not have sufficient personnel, or may be unable to devote this personnel when needed,
to address the requirements of these markets and customers. If we are unable to manage our operations effectively, our revenues may not increase, our cost of
operations may rise and our results of operations may be adversely affected.
As we grow we may need new or enhanced systems, procedures or controls. The transition to such systems, procedures or controls, as well as any
delay in transitioning to new or enhanced systems, procedures or controls, may seriously harm our ability to accurately forecast sales demand, manage our
product inventory and record and report financial and management information on a timely and accurate basis.
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Our gross profit percentage could be negatively impacted by amortization expenses in connection with acquisitions, increased manufacturing costs and
other factors. This could adversely affect our results of operations.
Our gross profit percentage decreased in 2008 and 2009 and increased in 2010 and 2011. The decrease in our gross profit percentage in 2008 was
primarily attributable to amortization expenses related to the acquisitions of Nuera and Netrake beginning in the third quarter of 2006 and CTI Squared
beginning in the second quarter of 2007, as well as expenses related to equity-based compensation resulting from the adoption of Accounting Standards
Codification, or ASC, 718 beginning in 2006. During the fourth quarter of 2008, we recognized non-cash impairment charges of $86.1 million with respect to
goodwill, intangible assets and investment in an affiliate. As a result of these impairment charges, non-cash amortization expense included in cost of revenues
declined in 2009, 2010 and 2011.
Our gross profit percentage has also been negatively affected in the past and could continue to be negatively affected by an increase in manufacturing
costs, a shift in our sales mix towards our less profitable products, increased customer demand for longer product warranties and increased cost pressures as a
result of increased competition. Acquisitions of new businesses could also negatively affect our gross profit percentage, which could cause an adverse effect on
our results of operations.
The growth in our product portfolio means that we have to service and support more products. This may result in an increase in our expenses and an
adverse effect on our results of operations.
The size of our product portfolio has increased and continues to increase. As a result, we are required to provide to our customers sales support.
Customers have requested that we provide a contractual commitment to support a product for a specified period of time. This period of time may exceed the
working life of the product or extend past the period of time that we may intend to manufacture or support a product. We are dependent on our suppliers for the
components (hardware and software) needed to provide support and may be unable to secure the components necessary to satisfy our service commitments. We
do not have long-term contracts with our suppliers, and they may not be obligated to provide us with products or services for any specified period of time. We
may need to purchase an inventory of replacement components and parts in advance in order to try to provide for their availability when needed. This could
result in an increased risk of write-offs with respect to our replacement component inventory to the extent that we cannot accurately predict our future
requirements under our customer service contracts. If any of our component suppliers cease production, cease operations or refuse or fail to make timely
delivery of orders, we may not be able to meet our contractual commitments for product support. We may be required to supply enhanced components or parts
as substitutes if the original versions are no longer available. Product support may be costly and any extra service revenues may not cover the hardware and
software costs associated with providing long-term support.
Terrorist attacks, or the threat of such attacks, may negatively impact the global economy which may materially adversely affect our business,
financial condition and results of operation and may cause our share price to decline.
The financial, political, economic and other uncertainties following terrorist attacks throughout the world have led to a worsening of the global
economy. As a result, many of our customers and potential customers have become much more cautious in setting their capital expenditure budgets, thereby
restricting their telecommunications procurement. Uncertainties related to the threat of terrorism have had a negative effect on global economy, causing
businesses to continue slowing spending on telecommunications products and services and further lengthen already long sales cycles. Any escalation of these
threats or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business,
financial condition and results of operations.
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We are subject to taxation in several countries.
Because we operate in several countries, mainly in the United States, Israel, the United Kingdom, Singapore and Brazil, we are subject to taxation in
multiple jurisdictions. We are required to report to and are subject to local tax authorities in the countries in which we operate. In addition, our income that is
derived from sales to customers in one country might also be subject to taxation in other countries. We cannot be sure of the amount of tax we may become
obligated to pay in the countries in which we operate. The tax authorities in the countries in which we operate may not agree with our tax position. Our tax
benefits from carry forward losses and other tax planning benefits such as Israeli approved enterprise programs, may prove to be insufficient due to Israeli tax
limitations, or may prove to be insufficient to offset tax liabilities from foreign tax authorities. Foreign tax authorities may also use our gross profit or our
revenues in each territory as the basis for determining our income tax, and our operating expenses might not be considered for related tax calculations, which
could adversely affect our results of operations.
Risks Related to Operations in Israel
Conditions in Israel affect our operations and may limit our ability to produce and sell our products and instability in the Middle East may adversely
affect us.
We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development facilities are
located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. There has been an increase in unrest and
terrorist activity in Israel, which has continued with varying levels of severity for many years through the current period of time. This has led to ongoing
hostilities between Israel, the Palestinian Authority, other groups in the West Bank and Gaza Strip, and the northern border of Lebanon. The future effect of this
violence on the Israeli economy and our operations is unclear. The Israeli-Palestinian conflict may also lead to political instability between Israel and its
neighboring countries. Ongoing violence between Israel and the Palestinians, as well as tension between Israel and the neighboring countries, may have a
material adverse effect on our business, financial conditions and results of operations.
Recent political events in various countries in the Middle East have weakened the stability of those countries, which may result in extremists coming to
power. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries. In addition, this
instability may affect the global economy and marketplace through changes in oil and gas prices. Our headquarters and research and development facilities are
located in the State of Israel. Any events that affect the State of Israel may impact us in unpredictable ways. We have contingent plans for alternative
manufacturing and supply sources, but these plans may be insufficient. Should our operations be impacted in a significant way, this may adversely affect the
results of our operations.
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We cannot predict the effect on us of an increase in these hostilities or any future armed conflict, political instability or violence in the region.
Additionally, some of our officers and employees in Israel are obligated to perform annual military reserve duty and are subject to being called for additional
active duty under emergency circumstances. Some of our employees live within conflict area territories and may be forced to stay at home instead of reporting
to work. We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political
situation occur. If many of our employees are called for active duty, or forced to stay at home, our operations in Israel and our business may be adversely
affected. Additionally, a number of countries continue to restrict or ban business with Israel or Israeli companies, which may limit our ability to make sales in
those countries.
We are adversely affected by the devaluation of the U.S. dollar against the New Israeli Shekel and could be adversely affected by the rate of inflation in
Israel.
We generate substantially all of our revenues in U.S. dollars and, in 2011, a significant portion of our expenses, primarily salaries, related personnel
expenses and the leases of our buildings in Israel, were incurred in NIS. We anticipate that a significant portion of our expenses will continue to be denominated
in NIS.
Our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. During 2011, the NIS
depreciated against the U.S. dollar, which resulted in a decrease in the U.S. dollar cost of our operations in Israel. During 2009 and 2010, the NIS appreciated
against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our operations in Israel. To the extent the U.S. dollar weakens against
the NIS, we could experience an increase in the cost of our operations, which are measured in U.S. dollars in our financial statements, which could adversely
affect our results of operations. In addition, in periods in which the U.S. dollar appreciates against the NIS, we bear the risk that the rate of inflation in Israel
will exceed the rate of such devaluation of the NIS in relation to the U.S. dollar or that the timing of such devaluations were to lag considerably behind
inflation, which will increase our costs as expressed in U.S. dollars.
The devaluation of the U.S. dollar in relation to the NIS has and may continue to have the effect of increasing the cost in U.S. dollars of these
expenses. Our U.S. dollar-measured results of operations were adversely affected in 2009 and 2010. This could happen again if the U.S. dollar were to devalue
against the NIS.
In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time, we enter into currency forward contracts and
put and call options to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In addition,
if we wish to maintain the U.S. dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to
the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
24
Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations have an impact on our profitability and
period-to-period comparisons of our results of operations. In 2011, the value of the U.S. dollar increased in relation to the NIS by 7.7% and the inflation rate in
Israel was 2.6%. In 2010, the value of the U.S. dollar decreased in relation to the NIS by 0.6%, and the inflation rate in Israel was 2.3%. Our results of
operations may be adversely affected in case of any significant fluctuations.
The Israeli government programs in which we currently participate, and the tax benefits we currently receive require us to meet several conditions
and may be terminated or reduced in the future, which would increase our costs.
Currently we have four programs under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, which entitle us
to certain tax benefits. Our facilities in Israel have been granted Approved Enterprise status under the Investment Law and we have four programs that qualify
as Privileged Enterprises pursuant to an amendment to the Investment Law that came into effect in April 2005. Among other things, the Investment Law, as
amended in 2005, provides tax benefits to both local and foreign investors and simplifies the approval process. Such amendments do not apply to investment
programs approved prior to December 31, 2004. Therefore, our Approved Enterprise program is not subject to the provisions of the amendment, but our four
Privileged Enterprise programs are subject to the amendment.
In order to be eligible for tax benefits under the Investment Law, our Approved Enterprise and Privileged Enterprises must comply with various
conditions set forth in the Investment Law and the criteria set forth in the applicable certificate of approval for the Approved Enterprise, as well as periodic
reporting obligations. If we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required
to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index. See Note 14 to our Consolidated Financial
Statements for additional information with respect to tax benefits under the Investment Law.
If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of
operations could be materially and adversely affected.
The government grants we have received for research and development expenditures limit our ability to manufacture products and transfer
technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants
previously received together with interest and penalties.
In connection with research and development grants we received from the Office of the Chief Scientist of the Israeli Minister of Industry, Trade and
Labor, or the OCS, we must pay royalties to the OCS on the revenue derived from the sale of products, technologies and services developed with the grants
from the OCS. The terms of the OCS grants and the law pursuant to which grants are made restrict our ability to manufacture products or transfer technologies
developed outside of Israel if OCS grants funded the development of the products or technology. An amendment to the relevant law facilitates the transfer of
technology or know-how developed with the funding of the OCS to third parties outside of Israel, but any future transfer would still require the approval of the
OCS, which may not be granted, and is likely to involve a material payment to the OCS. This restriction may limit our ability to enter into agreements for those
products or technologies without OCS approval. We cannot be certain that any approval of the OCS will be obtained on terms that are acceptable to us, or at all.
25
In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of
Israel concerning our Israeli operations. If we fail to meet the conditions related to the grants, including the maintenance of a material presence in Israel, or if
there is any material deviation from the representations made by us to the Israeli government, we could be required to refund the grants previously received
(together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future.
In addition, manufacturing products outside the State of Israel (as we currently do) increases the rates of royalties to be paid to the OCS. Any inability to
receive these grants would result in an increase in our research and development expenses.
In 2011, we recognized a royalty-bearing grant of $2.8 million from the Government of Israel, through the OCS, for the financing of a portion of our
research and development expenditures in Israel. The OCS budget has been subject to reductions, which may affect the availability of funds for these
prospective grants and other grants in the future. As a result, we cannot be certain that we will continue to receive grants at the same rate, or at all. In addition,
the terms of any future OCS grants may be less favorable than our past grant. As of December 31, 2011, we have a contingent obligation to pay royalties in the
amount of approximately $24.1 million.
It may be difficult to enforce a U.S. judgment against us, our officers and directors, assert U.S. securities law claims in Israel or serve process on
substantially all of our officers and directors.
We are incorporated in Israel. Substantially all of our executive officers and directors are nonresidents of the United States, and a majority of our assets
and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us
or any such persons or to effect service of process upon these persons in the United States. Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as
a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in
Israel addressing these matters. Additionally, there is doubt as to the enforceability of civil liabilities under the Securities Act and the Exchange Act in original
actions instituted in Israel.
Israeli law may delay, prevent or make difficult a merger with or an acquisition of us, which could prevent a change of control and therefore depress
the price of our shares.
Provisions of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares or assets. Israeli
corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant shareholders
and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a
change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may
limit the price that investors may be willing to pay in the future for our ordinary shares. In addition, our articles of association contain certain provisions that
may make it more difficult to acquire us, such as a staggered board, the ability of our board of directors to issue preferred stock and limitations on business
combinations with interested shareholders. Furthermore, Israel tax considerations may make potential transactions undesirable to us or to some of our
shareholders.
26
Risks Relating to the Ownership of our Ordinary Shares
The price of our ordinary shares may fluctuate significantly.
The market price for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. Between January 1, 2009
and April 10, 2012, our share price has fluctuated from a low of $0.92 to a high of $8.07. The following factors may cause significant fluctuations in the market
price of our ordinary shares:
·
·
·
·
·
·
fluctuations in our quarterly revenues and earnings or those of our competitors;
shortfalls in our operating results compared to levels forecast by securities analysts or by us;
announcements concerning us, our competitors or telephone companies;
announcements of technological innovations;
the introduction of new products;
changes in product price policies involving us or our competitors;
· market conditions in the industry;
·
·
·
integration of acquired businesses, technologies or joint ventures with our products and operations;
the conditions of the securities markets, particularly in the technology and Israeli sectors; and
political, economic and other developments in the State of Israel and worldwide.
In addition, stock prices of many technology companies fluctuate significantly for reasons that may be unrelated or disproportionate to operating
results. The factors discussed above may depress or cause volatility of our share price, regardless of our actual operating results.
Our quarterly results of operations have fluctuated in the past and we expect these fluctuations to continue. Fluctuations in our results of operations
may disappoint investors and result in a decline in our share price.
We have experienced and expect to continue to experience significant fluctuations in our quarterly results of operations. In some periods, our operating
results may be below public expectations or below revenue levels and operating results reached in prior quarters or in the corresponding quarters of the previous
year. If this occurs, the market price of our ordinary shares could decline.
27
The following factors have affected our quarterly results of operations in the past and are likely to affect our quarterly results of operations in the
future:
·
·
·
·
·
·
·
·
·
·
·
size, timing and pricing of orders, including order deferrals and delayed shipments;
launching of new product generations;
length of approval processes or market testing;
technological changes in the telecommunications industry;
competitive pricing pressures;
the timing and approval of government research and development grants;
accuracy of telecommunication company, distributor and original equipment manufacturer forecasts of their customers’ demands;
changes in our operating expenses;
disruption in our sources of supply;
temporary or permanent reduction in purchases by our significant customers; and
general economic conditions.
Therefore, the results of any past periods may not be relied upon as an indication of our future performance.
Our actual financial results might vary from our publicly disclosed financial forecasts.
From time to time, we publicly disclose financial forecasts. Our forecasts reflect numerous assumptions concerning our expected performance, as well
as other factors which are beyond our control and which might not turn out to be correct. As a result, variations from our forecasts could be material. Our
financial results are subject to numerous risks and uncertainties, including those identified throughout this “Risk Factors” section and elsewhere in this Annual
Report. If our actual financial results are worse than our financial forecasts, the price of our ordinary shares may decline.
It is our policy that we will not provide quarterly forecasts of the results of our operations. This policy could affect the willingness of analysts to
provide research with respect to our ordinary shares which could affect the trading market for our ordinary shares.
It is our policy that we will not provide quarterly forecasts of the results of our operations. This could result in the reduction of research analysts who
cover our ordinary shares. Any reduction in research coverage could affect the willingness of investors, particularly institutional investors, to invest in our
shares which could affect the trading market for our ordinary shares and the price at which our ordinary shares are traded.
28
As a foreign private issuer whose shares are listed on NASDAQ, we follow certain home country corporate governance practices instead of certain
NASDAQ requirements.
As a foreign private issuer whose shares are listed on NASDAQ, we are permitted to follow certain home country corporate governance practices
instead of certain requirements contained in the NASDAQ listing rules . We do not comply with the NASDAQ requirement that we obtain shareholder approval
for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice
which permits the establishment or amendment of certain equity based compensation plans to be approved by our board of directors without the need for a
shareholder vote, unless such arrangements are for the compensation of directors, in which case they also require audit committee and shareholder approval.
As a foreign private issuer listed on the NASDAQ, we may also elect in the future to follow home country practice with regard to, among other things,
executive officer compensation, director nomination, composition of the board of directors and quorum at shareholders’ meetings, as well as not obtain
shareholder approval for certain dilutive events.
Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
Our ordinary shares are listed for trading in more than one market and this may result in price variations.
Our ordinary shares are listed for trading on NASDAQ and on the TASE. Trading in our ordinary shares on these markets is made in different
currencies (U.S. dollars on NASDAQ and New Israeli Shekels on TASE), and at different times (resulting from different time zones, different trading days and
different public holidays in the United States and Israel). Actual trading volume on the TASE is generally lower than trading volume on NASDAQ, and as such
could be subject to higher volatility. The trading prices of our ordinary shares on these two markets often differ resulting from the factors described above, as
well as differences in exchange rates. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading
price of our ordinary shares on the other market.
We do not anticipate declaring any cash dividends on our ordinary shares.
We have never declared or paid cash dividends on our ordinary shares and do not plan to pay any cash dividends in the near future.
29
U.S. shareholders face certain income tax risks in connection with their acquisition, ownership and disposition of our ordinary shares. In any tax year,
we could be deemed a passive foreign investment company, which could result in adverse U.S. federal income tax consequences for U.S. shareholders.
Based on the composition of our gross income, the composition and value of our gross assets and the amounts of our liabilities during each of 2004,
2005, 2006, 2007, 2008, 2009, 2010 and 2011, we do not believe that we were a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes during any of such tax years. It is likely, however, that we would be deemed to have been a PFIC in each of 2001, 2002 and 2003. There can be no
assurance that we will not be deemed a PFIC for any future tax year in which, for example, the value of our assets, as measured by the public market valuation
of our ordinary shares, declines in relation to the value of our passive assets (generally, cash, cash equivalents and marketable securities). If we are a PFIC for
any tax year, U.S. shareholders who own our ordinary shares during such year may be subject to increased U.S. federal income tax liabilities and reporting
requirements for such year and succeeding years, even if we are no longer a PFIC in such succeeding years. Under legislation enacted by the U.S., a U.S. holder
of our ordinary shares will be required to file an information return containing certain information required by the U.S. Internal Revenue Service for each year
in which we are treated as a PFIC.
We urge U.S. holders of our ordinary shares to carefully review Item 10E. – “Taxation – United States Tax Considerations – United States Federal
Income Taxes” in this Annual Report and to consult their own tax advisors with respect to the U.S. federal income tax risks related to owning and disposing of
our ordinary shares and the consequences of PFIC status.
We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As a foreign private issuer subject to U.S. federal securities laws, we spend a significant amount of management time and resources to comply with
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, SEC regulations and NASDAQ rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual
review and evaluation of our internal control over financial reporting and attestations of the effectiveness of these controls by our management and by our
independent registered public accounting firm. There is no guarantee that these efforts will result in management assurance or an attestation by our independent
registered public accounting firm that our internal control over financial reporting is adequate in future periods. In connection with our compliance with Section
404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time, and may need to
hire additional accounting and financial staff, to assure that we comply with these requirements. The additional management attention and costs relating to
compliance with the Sarbanes-Oxley Act, the Dodd-Frank Act and other corporate governance requirements could materially and adversely affect our financial
results.
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ITEM 4
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
AudioCodes Ltd. was incorporated in 1992 under the laws of the State of Israel. Our principal executive offices are located at 1 Hayarden Street,
Airport City, Lod, 70151 Israel. Our telephone number is +972-3-976-4000. Our agent in the United States is AudioCodes Inc.,27 World’s Fair Drive, Somerset,
New Jersey 08873.
Major Developments since January 1, 2011
We have extended convertible loans to MailVision in the aggregate principal amount of $877,000, including a loan of $211,000 in 2011. These loans
bear interest at the rate of 4%-9% per annum and are convertible into shares of MailVision. In November 2010 and June 2011, $666,000 in principal amount of
these loans was converted by us into shares of MailVision. As of December 31, 2011, we owned 26.6% of the outstanding share capital of MailVison, or 24.8%
of the share capital of this company on a diluted basis, compared to owning 23.9% of the outstanding share capital as of December 31, 2010. As of December
31, 2011, there were $211,000 in principal amount of these loans outstanding.
In January 2010, we entered into an agreement to acquire all of the outstanding equity of Natural Speech Communication Ltd., or NSC, that we did not
own as of December 31, 2009. The closing of the transaction occurred in May 2010. Pursuant to the agreement, we purchased the remaining 40.3% of the
shares from NSC’s non-controlling shareholders with a maximum total consideration payable in the aggregate amount of $1,733,000 in any combination, at our
option, of cash and our shares. We paid $224,000 in 2010 and $278,000 in 2011 in connection with this acquisition. Additional consideration of up to $500,000
is payable by us in 2013, if certain aggregate revenue milestones are met for 2010, 2011 and 2012.
Since 2011, AudioCodes invested in the following key product lines and solutions to address the following market segments:
· Mobile Clients and Mobility Server for PBX, IP-PBX and Unified Communications Systems: We launched MobilityPLUS, an integrated
enterprise solution that extends the feature set of enterprise telephony and unified communications systems to a broad range of leading smart
phone platforms. Leveraging existing enterprise WiFi or 3G/4G data services, MobilityPLUS enhances enterprise employee productivity with
"anytime/anywhere" connectivity resulting in improved efficiencies of business operations. MobilityPLUS interoperates with market leading
PBXs and IP-PBXs, as well as with integrated unified communications systems, such as the Microsoft Office Communications Server R2 and
Microsoft Lync 2010. MobilityPLUS includes an enterprise edition of the widely deployed AudioCodes VoIP Mobile Access Solutions
(VMAS) mobile clients and an AudioCodes Mediant business gateway with an embedded mobility integration application. The VMAS
mobile client is available for Apple iOS, Android, Symbian and other popular mobile operating systems.
31
·
·
·
Extended Connectivity, Survivability and Call Recording Solution for Microsoft Lync Deployments: An additional extension of our product
range specifically designed for the Microsoft unified communications environment now includes Mediant800 Survivable Branch Appliance
(SBA), a cost-effective survivable branch solution for small locations, Mediant3000 Enhanced Gateway, supporting large enterprise
customers that need high capacity, highly available media gateways and SmartTAP, a secure call recording solution that enables the recording
of key business interactions within the Microsoft Unified Communication environment, including Microsoft Lync and Office
Communications Server R2. SmartTAP is targeting companies in the financial services sector, as well as other highly regulated industries,
providing compliance recording as well as a complete call recording solutions for mitigating liability, customer disputes, and quality
assurance. SmartTAP can be installed on stand-alone servers, or alternatively integrated into the AudioCodes Mediant 1000 platform, that is
also qualified as a Microsoft Enhanced Gateway and Survivable Branch Appliance. These products are intended to further extend our value
proposition to our growing network of Microsoft VSPs (voice specialized partners) with whom we work closely.
Software Enterprise Session Border Controller: In March, 2012, we announced the launch of our Software Enterprise Session Border
Controller (ESBC), a software only member of our ESBC product family. Enterprises deploying the software ESBC benefit from connectivity
to SIP trunking services, high VoIP quality and network security. As a software only solution, the ESBC smoothly integrates into virtualized
data center environments, and addresses the needs for scalability and connectivity of unified communications and contact center deployments.
The Software E-SBC is targeting Software-only unified communications and contact center vendors complying with their architecture and
business models.
Session Experience Manager (SEM): In March 2012, we announced the launch of our Session Experience Manager, a new software solution
built to monitor, analyze, report and control the quality of incoming and outgoing enterprise voice calling over Internet Protocol networks in
real-time. SEM is designed as an intuitive, easy to use solution, which includes an array of advanced tools producing a continuous
comprehensive view of voice quality of experience at the enterprise network and its connecting trunks. Among these tools are network views
to map devices and their associated voice quality, graphic illustrations of VoIP call metrics, convenient drill down details of a given call,
traffic trend analysis to identify current and future bottlenecks, active and historic alarm display, and flexible pre-defined reports. In addition
to VoIP, SEM includes a tool for analyzing fax transmission quality. SEM complements our Element Management System (EMS) for
comprehensive configuration, monitoring and performance solution for IT managers and service providers deploying a network of
AudioCodes network products.
Principal Capital Expenditures
We have made and expect to continue to make capital expenditures in connection with expansion of our production capacity. The table below sets forth
our principal capital expenditures incurred for the periods indicated (amounts in thousands):
32
Computers and peripheral equipment
$
1,195 $
572 $
1,420
2009
2010
2011
Office furniture and equipment
Leasehold improvements
Total
B.
BUSINESS OVERVIEW
Introduction
76
-
693
304
148
11
$
1,271 $
1,569 $
1,579
We design, develop and sell products and services for voice and data over packet networks. In broad terms, voice over packet, or VoP, networks consist
of key network elements such as software switches, application servers, Internet protocol, IP phones and media gateways. Our products primarily provide the
media gateway element in the network, as well as voice over Internet protocol, or VoIP, end-points such as IP Phones and VoIP mobile clients. Multi-service
business gateways integrate media gateway functionality with data routing and network access. The media gateways connect legacy and IP networks. They
essentially receive the legacy format of communication and convert it to an IP communication and vice versa. Typically, media gateways utilize compression
algorithms to compress the amount of information and reduce the amount of bandwidth required to convey the information (for example, a voice
communication). With the industry migration to an end-to-end IP network, gateways now also connect between different VoIP networks, providing session
border controller, or SBC, functionality.
Voice over IP gateway equipment can be generally segmented into three classes: carrier class gateways for use in central office facilities, enterprise
gateways for use by corporations and in small offices, and residential gateways for use in homes. In addition to the gateway element, which connects legacy
voice equipment to an IP network, there is growth in native VoIP end user equipment, primarily including IP phones, soft phones and VoIP mobile clients,
running on desktop PCs or portable devices such as cellular phones, smart phones, tablets, laptops, and other devices that have wireless IP connectivity running
over WiFi or cellular networks.
The need to re-route voice and fax traffic from the traditional circuit-switched networks onto the new packet networks has led to the development of
interface equipment between the two networks, generally referred to as media gateways. The processing of voice and fax signals in gateway and access
equipment is done according to industry-wide standards. These standards are needed to ensure that all traditional telephony traffic is seamlessly switched and
routed over the packet network and vice versa. The industry migration into a network that is utilizing IP end-to-end has also added a new functionality into the
media gateways that now also translates between different implementations of VoIP. This includes protocol translation as well as security services and is
provided by stand-alone SBCs as well as Enterprise SBC (E-SBC) functionality integrated into the gateway.
33
Packet networks differ fundamentally from circuit-switched networks in that the packet network’s resources and infrastructure can be shared
simultaneously by several users and bandwidth can be flexibly allocated. Packet-based communications systems format the information to be transmitted, such
as e-mail, voice, fax and data, into a series of smaller digital packages of information called “packets.” Each of these packets is then transmitted over the
network and is reassembled as a complete communication at the receiving end. The various packet networks employ different network protocols for different
applications, priority schemes and addressing formats to ensure reliable communication.
Packet networks offer a number of advantages over circuit-switched networks. Rather than requiring a dedicated circuit for each individual call, packet
networks commingle packets of voice, fax and data from several communications sources on a single physical link. This provides superior utilization of
network resources, especially in dealing with information sources with bursts of information followed by periods of silence. This superior utilization means that
more traffic can be carried over the same amount of network resources.
The integration of voice and data communications makes possible an enrichment of services and an entire range of new, value-added applications, such
as unified messaging and voice-enabled web sites. In addition, voice traffic over packet networks is usually compressed to provide a further reduction in the use
of or demand for bandwidth. Another recent trend in the VoIP environment, referred to as High Definition VoIP, or HD VoIP, now enables the improvement of
voice quality. The adoption of both VoIP technology and broadband networks has enabled the development and deployment of high-quality voice coding
algorithms that make communication more efficient, effective and natural. HD VoIP allows carriers to differentiate their services with an improved audio
experience, with the goal of creating customer loyalty and affinity. It also enables enterprises to provide better, clearer voice services for their employees, which
we believe makes them more productive and makes it easier to work across different cultures and accents.
As customers integrate more services into their IP network, they tend to use integrated products that provide all the services they need in one box.
Multi-service business gateways, or MSBGs, combine all the capabilities of media gateways with the support of native data routing and switching. The MSBGs
enables enterprise customers to connect their branch office networks into the corporate headquarters, and service providers to connect their customers into their
network core. Some MSBGs also include integrated hosts which can run off-the-shelf unified communications applications. This combination enables system
integrators to provide a fully integrated solution for small/medium businesses and enterprise branches, or SMB/E, that includes the voice and data infrastructure
and the application in one device.
Moving into the VoIP world, enterprise and service providers have started to use a new breed of phone devices that inherently produce packets instead
of legacy voice, called IP phones. The IP phone is an advanced telephone that connects into the network using VoIP over Ethernet instead of using analog TDM
interfaces. Most enterprise telephony systems sold today use IP phones, as well as service providers managed services such as IP Centrex.
34
In addition to wireline IP telephony, mobile networks have started to use VoIP as well. Mobile VoIP clients, running on smart-phones enable cost
effective mobile roaming and allow Internet telephony service providers, or ITSPs, to enter the mobile space. These include mobile VoIP clients for leading
smartphones operating systems, such as iOS, Android, Symbian and Windows phones.
We typically categorize our revenues from products and services into two main business lines: network and technology. Sales of network products
accounted for approximately 70% of our revenues in 2010 and approximately 77% of our revenues in 2011 and sales of technology products accounted for
approximately 30% of our revenues in 2010 and approximately 23% of our revenues in 2011. Network products consist of customer premises equipment, or
CPE, gateways for the enterprise and service provider (or carrier) markets and of carrier-grade-oriented low- and mid-density media gateways for service
providers. Complementing our media gateways as network products are our multi-service business gateways (MSBG), E-SBCs. IP phones, media servers,
mobile VoIP solutions and value added application products.
Technology products are enabling in nature and consist of our chips and boards business products. These are sold primarily to original equipment
manufacturers, or OEMs, through distribution channels. Our chips and boards serve as building blocks that our customers incorporate in their products. In
contrast, our networking products are used by our customers as part of a broader technological solution and are a box level product that interacts directly with
other third party products.
Our Products
We offer two categories of products, networking products and technology products.
Networking Products
Networking products are deployed in enterprise unified communications networks, service providers residential and access networks, trunking
applications in carrier networks, and fixed-mobile convergence applications.
·
·
·
Our media gateways enable voice, data and fax to be transmitted over Internet and other protocols, and interface with third party equipment to
facilitate enhanced voice and data services.
Our E-SBCs provide security, interoperability, survivability and quality assurance that are required for reliable IP to IP connectivity between
enterprise branch offices and main office, between enterprise and SIP trunking or cloud-based applications service providers. E-SBCs also
connect between IP-PBXs and unified communication systems from different vendors, and enable remote workers connectivity into the
enterprise VoIP network.
Our multi-service business gateways integrate multiple data, telephony and security services into a single device. Building on our media
gateway CPE line, we have added the support of additional functions such as a LAN switch, a data router, a firewall and a session border
controller, providing service providers with an integrated demarcation point and the enterprise with an all-in-one solution for its
communications needs.
35
·
·
Our IP phones include a family of high definition IP phones, suitable for integration with third party IP-PBX platforms for the enterprise IP
telephony market, as well as into IP-Centrex service provider solutions.
Our mobile VoIP clients include a family of soft clients for leading smartphones operating systems and a client management system,
providing mobile roaming solutions for mobile and voice over IP and voice over broadband service providers.
· We offer a variety of products that are tailored for Microsoft unified communication environments. These products are based on our Mediant
gateway platforms, as well as SPS (SIP phone support), and include survivable branch appliances (SBAs), enhanced gateways, E-SBCs, call
recording solutions (SmartTAP) and E911 solutions for Microsoft Lync.
·
Our media servers enable conferencing, multi-language announcement functionality, and other applications for voice over packet networks.
Technology Products
Our technology products are enabling products that are part of our own or our customers’ products.
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Our signal processor chips process and compress voice, data and fax and enable connectivity between traditional telephone networks and
packet networks.
Our communication boards and modules for communication system products are integrated into third-party communications systems and
deployed on both access networks and enterprise networks.
Industry Background
Market Trends
The networking and telecommunications industries have experienced rapid change over the last few years. The primary factors driving this change
include the following:
·
New technologies. The increase of speed and the proliferation of broadband access technologies alongside related technologies, such as new
high definition voice compression algorithms, quality of service mechanisms and security and encryption algorithms and protocols, have
enabled delivery of voice over packet to residential and enterprise customers with more reliability, higher quality and greater security.
Examples of these broadband access technologies include: third generation cellular, WiMax, WiFi, data over cable, digital subscriber line
technologies and fiber networks (FTTx). Packet technologies enable delivery of real time and non-real time services by different service
providers that do not necessarily own the access network or the part of the network through which the subscriber accesses the network. This
allows for the growth of alternative or virtual service providers that do not own an access network.
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Competition by alternative service providers with incumbent and traditional service providers. Competition by alternative service providers is
causing incumbents to deploy advanced broadband access technologies and increase their competitiveness by offering bundled services to
their subscribers, such as voice, video and data, and online gaming. In addition, the emergence of wide band vocoders that use a higher
sampling rate than used in legacy time domain multiplexing, or TDM, networks allows service providers to offer higher quality voice and
music over their newly established IP network.
New services enabled by broadband access. Changes in the regulatory environment affecting service providers and the availability of new
technologies or standards allow service providers to compete with one another in the provision of additional services over and above the
traditional telephony service of voice, fax and dial-up modem internet connectivity. New services that could be offered include internet
connectivity over broadband access or access to rich multimedia content such as music, video and games.
Increasing need for peering between VoIP networks. Service providers and enterprises are increasingly building out VoIP networks. As a
result, there is an increasing need to connect between two VoIP networks. In order to interconnect between two VoIP networks, service
providers and enterprises need session border controllers to provide connectivity and security.
Increased use of open source codes for enterprise telephony. Similar to the trend experienced with respect to Linux in the IT world, open
source has started to gain momentum in the VoIP space as well. Open source based IP telephony solutions, led by Asterisk, a well known IP-
PBX implementation, is starting to penetrate the enterprise space as a low cost alternative to the proprietary IP-PBX solutions from the large
vendors. The adoption of open source IP telephony solutions is gaining momentum mainly in the SMB/SME space, as well as with service
providers and developers that add their own code on top of the open source basic code to enable special services and features.
Unified communications in the enterprise. With the move to VoIP and the network integration between voice and data based on Ethernet and
IP, enterprises can easily move into a unified communications network. Unified communications networks integrate all means of
communications into a single experience, providing on line (voice, data, instant messaging) and off line (voice mail, email and fax)
integration into the same device. The devices can be PCs, desktop phones or mobile smartphones and tablets.
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· Mobility. Mobile smartphones have become popular among business professionals as well as the general public. Smartphones, running
advanced operating systems such as Symbian, Windows phone, Android and iOS, include high CPU power, large storage space, integrated
WiFi and cellular data, as well as the ability to run high performance multimedia applications. Mobile VoIP is one of these applications,
allowing cost-effective roaming for a service provider’s customers and enterprise mobility services.
·
Cloud Computing. The emergence of cloud computing services also affects the communications world. Leading unified communication
vendors offer their hosted services on the cloud as an alternative to enterprise owned systems. This includes solutions such as Microsoft
Office 365, IP Centrex services by telecom providers and quality of experience monitoring solutions such as Broadsoft PacketSmart.
The Challenges
Despite the inherent advantages and the economic attractiveness of packet voice networking, the transmission of packet voice and fax poses a variety
of technological challenges. These challenges relate to quality of service, reliability of equipment, functionality and features, and ability to provide a good
return on investment.
·
·
Quality of Service. The most critical issues leading to poor quality of service in the transmission of voice and fax over packet networks are
packet loss, packet delay and packet delay jitter. For real time signals like voice, the slightest delay in the arrival of a packet may render that
packet unusable and, in a voice transmission, the delayed packet is considered a lost packet. Delay is usually caused by traffic hitting
congestion or a bottleneck in the network. The ability to address delay is compounded by the varying arrival times of packets, called packet-
jitter, which results from the different routes taken by different packets. This “jitter” can be eliminated by holding the faster arriving packets
until the slower arriving packets can catch up, but this introduces further delay. These idiosyncrasies of packet networks do not noticeably
detract from the quality of data transmission since data delivery is relatively insensitive to time delay. However, even the slightest delay or
packet loss in voice and fax transmission can have severe ramifications such as voice quality degradation or, in the case of a fax transmission,
call interruption. Therefore, the need to compensate for lost or delayed packets without degradation of voice and fax quality is a critical issue.
Gateway Reliability. In order for a packet network to be efficient for voice or fax transmission, the VoIP gateway equipment that is installed
in core networks must be able to deliver a higher level of performance than existing switching equipment located at central offices. The
telecommunications providers’ central offices contain circuit-switching equipment that typically handles tens of thousands of lines and is built
to meet severe performance criteria relating to reliability, capacity, size, power consumption and cost.
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Connectivity and Security. In contrast with legacy circuit switched voice and video communications, IP-based communications are more
susceptible to attacks, interceptions and fraud by unauthorized entities. In addition, the complexity and relative immaturity of IP networks and
protocols pose significant quality of service and connectivity challenges when sessions cross between separate IP networks.
Functionality. In order to effectively replace legacy circuit-switching equipment, packet network equipment must be able to deliver equivalent
and improved functionality and features for the service providers and network users.
Return on Investment. With the reduction in profitability of service providers there is an even greater need for them to achieve better returns
on investment from capital expenditures on new equipment. Given the evolving nature of packet technologies and capabilities, there is greater
pressure to provide cost-effective technological solutions.
In order to maximize the benefits of using packet networks for the transmission of voice, data and fax, products must be able to address and solve these
inherent problems and challenges. These products must also be standards-based to support interoperability among different equipment manufacturers and to
allow operation over various networks.
AudioCodes’ Solution
Using our voice compression algorithms, industry standards, advanced digital signal processing techniques, VoIP control protocol expertise, and voice
communications system design expertise, our products address quality of service problems, security problems and reliability problems facing the VoIP industry.
As a result, we enable our customers to build packet networks that provide communication quality comparable to traditional telephone networks. Using
HDVoIP, voice quality can even surpass the quality of traditional TDM networks. We work closely with our customers in order to tailor our products to meet
their specific needs, assist them in integrating our products within their networks and help them bring their systems into operation on a timely basis. We also
work with our customers in deploying their systems in various network environments.
Utilizing our investment in developing standards-based VoIP protocol support for our products, customers can integrate our products with a large
number of industry leading IP-PBXs and carrier soft switches. Our interoperability teams test our products against a variety of other products for
interoperability, focusing on the leading standard VoIP protocols: Session Initiation Protocol, or SIP, and MEGACO/H.248.
We believe that the following strengths have enabled us to develop our products and provide services to our customers:
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Leadership in voice compression technology. We are a leader in voice compression technology. Voice compression exploits
redundancies within a voice signal to reduce the bit rate of data required to digitally represent the voice signal while still maintaining
acceptable voice quality. Our key development personnel have significant experience in developing voice compression technology.
We were involved in the development of the ITU G.723.1 voice coding standard that was adopted by the VoIP Forum and the
International Telecommunications Union as the recommended standard for use in voice over IP gateways. We implement industry
voice compression standards and work directly with our customers to design state-of-the-art proprietary voice compression
algorithms that satisfy specific network requirements. We believe that our significant knowledge of the basic technology permits us
to optimize its key elements and positions us to address further technological advances in the industry. We also believe that our
technological expertise has resulted in us being sought out by leading equipment manufacturers to work with them in designing their
systems and provision of solutions to their customers.
Digital signal processing design expertise. Our extensive experience and expertise in designing advanced digital signal processing
algorithms enables us to implement them efficiently in real time systems. Digital signal algorithms are computerized methods used to
extract information out of signals. In designing our signal processors, we use minimal digital signal processing memory and
processing power resources. This allows us to develop higher density solutions than our competitors. Our expertise is comprehensive
and extends to all of the functions required to perform voice compression, fax and modem transmission over packet networks and
telephone signaling processing.
Compressed voice communications systems design expertise. We have the expertise to design and develop the various building
blocks and the products required for complete voice over packet systems. In building these systems, we develop hardware
architectures, voice packetization software and signaling software, and integrate them with our signal processors to develop a
complete, high performance compressed voice communications system. We assist our customers in integrating our signal processors
into their hardware and software systems to ensure high voice quality, high completion rate of fax and data transmissions and
telephone signaling processing accuracy. Further, we are able to customize our off-the-shelf products to meet our customers’ specific
needs, thereby providing them with a complete, integrated solution.
Real time embedded software design and implementation expertise. We have the expertise to design and develop voice and data
network elements using embedded real time software to achieve more competitive pricing. The development and integration of VoIP
signaling protocols, routing protocols, management and provisioning into a more cost-effective solution uses our expertise and
investment in research and development resources. We believe that the benefits we can deliver are better price performance, smaller
footprint, reduced power consumption and more attractive products.
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· Media gateway protocols design expertise. Our extensive experience in developing media gateway standard protocols, keeping
ourselves up to date with new request for comments, or RFCs, and adjusting our features according to customers’ requirements and
interoperability testing allows us to provide our customers with a single gateway that can interface with most of the leading solution
providers in the VoIP market.
·
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Close technology relationships with market leaders. Our continuing effort of testing and certifying our systems against other
vendors’ complimentary solutions, positions us as a provider of VoIP products that can interoperate with most of the world’s leading
VoIP products. It also helps to create for us an extensive feature list that can be used by different customers for their own networks
and solutions.
Deep understanding of VoIP security. Based on long-standing market experience with deploying AudioCodes products at enterprise
networks, we have developed a detailed understanding of the VoIP security requirements of enterprises including admission control,
denial of service, throttling and traversal aspects. This understanding and knowledge helps us reach integration with our
communications protocols implementation creating an effective VoIP security solution.
We believe that our products possess the following advantages:
·
Voice over Packet signal processors. Our multi-channel signal processors enable our customers and us to create products that meet
the reliability, capacity, size, power consumption and cost requirements needed for building high capacity VoIP products.
· Multiple and comprehensive product lines. We address both the standards-based open telecommunications architecture market and
the proprietary system market. We can do this because we enable our customers to use multiple applications in different market
segments. For example, our VoIP communications boards target the open telecommunications architecture market, while our signal
processors, modules and voice packetization software target the proprietary system market. Our analog and digital media gateways
and multi-service business gateways target residential, hosted, access, trunking and enterprise applications and our digital media
gateways target wireless, wire line, cable and fixed-mobile convergence networks. Our IP phones and VoIP mobile clients target the
enterprise and service provider hosted solutions markets.
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Extensive feature set. Our products incorporate an extensive set of signal processing functions and features (such as coders, fax
processing and echo cancellation), functionalities (such as session initiation protocol, or SIP, H.248 or Megaco, H.323, and media
gateway control protocol, or MGCP) and implement a complete system. We offer the ability to manage multiple channels of
communications working independently of each other, with each channel capable of performing all of the functions required for
voice compression, fax and modem transmission, telephone signaling processing and other functions. These functions include voice,
fax or data detection, echo cancellation, telephone tone signal detection, generation and other telephony signaling processing. Our
gateway products, media server and multi-service business gateways also offer wireless/mobile features to enable fixed mobile
convergence.
Cost-effective solutions. We are able to address different market segments and applications with the same hardware platforms thus
providing our customers with efficient and cost-effective solutions.
Open architecture. Our networking products utilize industry standard control protocols that enable them to interoperate with other
vendors and easily integrate into enterprise IP telephony systems as well as carrier networks. Our voice over packet communications
boards target the open architecture gateway market segment, which enables our customers to use hardware and software products
widely available for standards-based open telecommunications platforms. We believe that this provides our customers the benefits of
scalability, upgradeability and enhanced functionality without the need to replace their systems for evolving applications.
Various entry level products. Our wide product range (chips to media gateways, multi-service business gateway, IP phones and media
servers) provides our customers with a range of entry level products. We believe that these building blocks enable our customers to
significantly shorten their time to market by adding their value added solution.
VoIPerfect™ architecture. Our VoIPerfect architecture serves as the underlying technology platform common to all of our products
since 1998. VoIPerfectTM is regularly updated and upgraded with features and functionalities required to comply with evolving
standards and protocols. VoIPerfectTM architecture comprises VoIP digital signal processing, or DSP, software and media streaming
embedded software, integrated public telephone switched network, or PTSN, signaling protocols and VoIP standard control
protocols, provisioning and management engines. Additional features enable carrier-grade quality and high availability.
VoIPerfectTM architecture components are available in AudioCodes’ products at various levels of integration, from the chip level,
through blades, to high-availability and non-high-availability analog and digital gateway platforms.
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Business Strategy
AudioCodes' vision is to become a leading strategic supplier of VoIP and converged VoIP and data solutions for service providers and enterprises
worldwide. The following are key elements of our strategy:
· Maintain and extend technological leadership. We intend to capitalize on our expertise in voice compression technology and voice signaling
protocols and proficiency in designing voice communications systems. We continually upgrade our product lines with additional
functionalities, interfaces and densities. We have invested heavily and are committed to continued investment in developing technologies that
are key to providing high performance voice, data and fax transmission over packet networks and to be at the forefront of technological
evolution in our industry.
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Strengthen and expand strategic relationships with key partners and customers. We sell our products to leading enterprise channels, regional
system integrators, global equipment manufacturers and value-added resellers, or VARs, in the telecommunications and networking industries
and establish and maintain long-term working relationships with them. We work closely with our customers to engineer products and
subsystems that meet each customer’s particular needs. The long development cycles usually required to build equipment incorporating our
products frequently results in close working relationships with our customers. By focusing on leading equipment manufacturers with large
volume potential, we believe that we reach a substantial segment of our potential customer base while minimizing the cost and complexity of
our marketing efforts.
Expand and enhance the development of highly-integrated products. We plan to continue designing, developing and introducing new product
lines and product features that address the increasingly sophisticated needs of our customers. We believe that our knowledge of core
technologies and system design expertise enable us to offer better solutions that are more complete and contain more features than
competitive alternatives. We believe that the best opportunities for our growth and profitability will come from offering a broad range of
highly-integrated network product lines and product features, the integration of data services into our VoIP products, and the expansion into
the unified communications applications market.
Build upon existing technologies to penetrate new markets. The technology we developed originally for the OEM market has served us in
building products that now sell into the service provider and enterprise markets. The same products and technology can also be used to create
vertical-specific products and solutions. Two vertical markets that we focus on are the military and government markets which have been
adopting service-provider scale VoIP solutions.
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· Work close to market and customers. Our partners and customers are distributed around the world, and part of our ability to serve them is by
being close by. For this reason, we are investing in building local operations in key countries and regions, including sales, marketing and
support resources to closely serve our partners and customers.
·
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Products
Develop a network of strategic partners. We sell our products through or in cooperation with customers that can offer or certify our products
as part of a full-service solution to their customers. We expect to further develop our strategic partner relationships with solution providers,
system integrators and other service providers in order to increase our customer base. Our strategic partners include companies such as
Microsoft, BroadSoft, Avaya, Genesys, Interactive Intelligence and Alcatel-Lucent.
Acquire complementary businesses and technologies. We may pursue the acquisition of complementary businesses and technologies or the
establishment of joint ventures to broaden our product offerings, enhance the features and functionality of our systems, increase our
penetration in targeted markets and expand our marketing and distribution capabilities.
Our products facilitate the transmission of voice, data and fax over packet networks. We have incorporated our algorithms, technologies and systems
design expertise in both our networking and technology product lines.
Networking products
This line of products includes products that are network level products. Our networking products include:
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analog media gateways for toll bypass, residential gateways, hosted, access and enterprise applications;
digital media gateways with various capacities for wireless, wireline, cable, enterprise, fixed mobile convergence, and unified
communications;
enterprise session border controllers (E-SBCs) for service providers and enterprises connecting to SIP trunk and hosted services and
between unified communications and IP PBX systems.
· multi-service business gateways for integrated voice, data and security access for service providers connecting enterprise customers
to their network and for the enterprise branch office;
·
IP phones for enterprise and managed services service providers;
· mobile VoIP access solutions;
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· Microsoft Lync specific products: survivable branch appliances (SBAs), enhanced gateways, regulatory compliance recording
(SmartTAP), SIP phone support integration (SPS);
· media servers for enhanced voice over IP services and functionalities such as conferencing, voice mail and lawful interception
(IPmedia™ Media Servers); and
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value-added applications for unified communications.
In addition, we continue to offer customers our professional services, which usually involve customization and development projects for customers.
Technology products
This line of products serves as a building block for network level products. Our technology products include:
voice over packet processors;
VoIP communication boards;
·
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· media processing boards for enhanced services and functionalities; and
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voice and data logging hardware integration board products.
Our products are designed to build on our core technologies and competencies extending them both vertically (chips inserted into boards, boards inserted into
digital media gateways) and horizontally into different applications for different market segments, such as enterprise, call centers, wireline, cable and wireless.
Our Product Families – Networking Products
Analog Media Gateways for Toll Bypass, Service Provider Access and Enterprise Applications
Our MediaPackTM family comprise our analog and basic rate interface, or BRI, media gateways for toll bypass, service provider access and enterprise
applications. These products are designed to empower the next-generation network by providing cost-effective, cutting-edge technology solutions that deliver
voice and fax services to the corporate market, small businesses and home offices. Our analog media gateways for access and enterprise applications provide
media streaming functionality while being either controlled by a centralized call agent or used in box VoIP control protocols (SIP, H.323, and MGCP).
Convergence of data, voice and fax is achieved by a combination of the media gateway with any IP access technology, eliminating the cost of multiple access
circuits. This product family utilizes our experience and digital signal processing, or DSP, technology for echo cancellation, voice compression, silence
suppression and comfort noise generation.Part of this line is composed of our analog residential gateways whose primary target market is the large volume
residential service providers, or SP, market.
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The MediaPackTM family represents a feature rich product for streaming voice quality with a powerful analog interface supporting all major control
protocols, such as H323, SIP and MGCP, and is also capable of supporting unified communication and FMC applications.
The MediaPack family also includes the MP-2xx family of residential gateways,including the MP-252 multimedia home gateway. The MediaPack™
252 (MP-252) is a feature-rich, multimedia home gateway for broadband networks with multi-play support. With ADSL2+ modem, multiple antenna wireless
LAN connectivity, DECT handsets supporting HD VoIP, bluetooth interface for connecting cellular phones and optional battery backup, it is targeting the tiers
of service providers that offer multi-play home services over broadband networks.The market for this product is focused on direct engagement with service
providers, as this product typically requires specific integration with the network.
The Mediant™ Family of Products- Digital and Mixed (Digital and Analog) Media Gateways, Enterprise Session Border Controllers (E-SBC’s) and Multi-
Service Business Gateways for Service Provider Access and Enterprise Applications (MediantTM 600,800, 1000,2000,3000 Media Gateways and E-SBC’s and
Mediant 800 and 1000TM MSBG’s),as well as higher capacity Media and Transcoding Gateways for Wireless, Wireline and Cable Service Provider networks
(Mediant™ 5000, 8000).
The MediantTM product family offers scalability and functionality, providing a full suite of standards compliant control protocols and public switched
telephone network, or PSTN, signaling interfaces for a variety of applications in most IP-PBX and softswitch controlled environments, as well as for a variety
of large enterprise, wireline, cable and wireless media gateway applications in most softswitch controlled environments. This product family is compatible with
popular wireline, cable and wireless voice coders and protocols, including code-division multiple access, or CDMA, global system for mobile communications,
or GSM, CDMA2000 and universal mobile telecommunications service, or UMTS. It builds on our VoIPerfect® architecture, which is installed in millions of
lines worldwide. It is also interoperable with most of the world’s leading vendors.
The MediantTM family provides carriers with a comprehensive line of different sized gateways. Small or medium-sized gateways enable cost-effective
solutions for enterprise or small points of presence, as well as entry into fast growing new and emerging markets. The large gateways scale to central office
capacities and are designed to meet carriers’ operational requirements. The Mediant™ family of media gateways is capable of supporting unified
communication and fixed mobile convergence applications which may be of increased interest to enterprises and service providers.
The Mediant™ family of products consists of a number of models that offer different capacity, that is the number of concurrent calls or sessions that
the gateway or ESBC can handle. The capacity of our Mediant products range from approximately 30 concurrent calls/sessions to 8,000 concurrent
calls/sessions for the wireless and wireline markets.
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Our Mediant™ 1000 and Mediant™ 800 have three different models. The first two models are a modular VoIP media gateway and enterprise session
border controllers. The other model includes multi-service business gateways, or MSBGs, which are networking devices that combine multiple multiservice
functions such as a media gateway, session border controller, data router, firewall, LAN switch, WAN access, and stand alone survivability, or SAS. The MSBG
concept is designed to address the needs of service providers that offer IP-Centrex and SIP trunking services and of distributed enterprises. The range of
interfaces supported on the Mediant ™ 800 and Mediant™ 1000 MSBG include a variety of voice and data (WAN) interfaces.
The Mediant MSBGs are based on AudioCodes’ VoIPerfect best-of-breed media gateway technology, combined with enterprise class session border
controller, data and voice security elements, data routing, LAN switching and WAN access.
We have extended our product range specifically designed for the Microsoft unified communications environment to support Microsoft Lync, the latest
Microsoft unified communications platform. These products include survivable branch appliances, based on our Mediant family of media gateways, as well as
SPS (SIP phone support), a software platform that enables the connectivity of third party SIP phones into the Microsoft environment, and SmartTAP, a passive
compliance recording solution. The marketing and sales of these products utilizes our growing network of Microsoft VSPs (voice specialized partners) with
whom we work closely.
Our ESBC technology integrates into all Mediant platforms. It offers secure VoIP and multimedia traversal of firewall, or FW, and network address
translation, or NAT, systems, as well as denial of service, or DoS, attack prevention at both the signaling and media layers. These products target the VoIP
security and connectivity needs of enterprises of different sizes, migrating from traditional PSTN connectivity to SIP trunking or hosted services. NAT and FW
traversal are necessary to allow VoIP and multimedia sessions to pass from the service provider (“SP”) network to the residential or enterprise networks. DoS
attack prevention protects the SP network from attacks that load an application server until it crashes.
The Mediant™ ESBC also provides comprehensive quality of service, or QoS, mechanisms and protocol mediation, which is the translation between
two variants of the same VoIP protocol to enable two VoIP systems to communicate with each other. Examples of protocol mediation include connecting an IP
PBX with SIP trunk services or connecting between two unified communication systems of different vendors. In addition, ESBCs support remote workers
connectivity, enabling unified communications over IP between the enterprise and its workers located outside the premises. As the ESBC line is an evolution of
our existing gateways and MSBG lines, the market for these products is expected to include the same evolving channel strategy, including value-added resellers
and service provider channels.
The Mediant 800 and 1000 products can also include an OSN (open solutions network) server module featuring a general purpose CPU and hard disk,
allowing hosting of any third-party off-the-shelf application. This solution enables system integrators and software vendors to use these platforms for integrated
unified communications solutions.
For the cable market, the MediantTM gateway family complies with packet telephony standards and is designed for either hybrid or all IP cable
network architecture. The Mediant gateway enables deployment of advanced packet-based cable telephony at multiple service operators own pace, without
costly hardware changes. The MediantTM gateway can be initially deployed as a V5.2 IP access terminal and then easily migrated by software upgrade to a
cable telephony media gateway with external call management provided by a softswitch and an SS7 interface to the PSTN.
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IPmediaTM Servers for Enhanced Services and Functionalities
IPmediaTM platforms are designed to answer the growing market demand for enhanced voice services over packet networks, particularly network-
based applications like unified communications, call recording, and conferencing by carriers and application service providers. IPmediaTM enables our
customers to develop and market applications such asunified communications, interactive voice response, call-centers, conferencing and voice-activated
personal assistants.
300HD Series of High Definition IP Phones
AudioCodes 300 Series of HD VoIP-enabled IP phones offers a new dimension of voice call quality and clarity for the enterprise and service provider
markets. This product line enables us to provide an end-to-end solution which relies heavily on the technological infrastructure and proven track record in
providing state-of-the art high quality VoIP products for enterprise, wireline, wireless and cable applications.
The 300 Series of IP phones meet the demand for high definition VoIP solutions in end-user phones and terminals, providing high voice fidelity,
advanced security and features and enhanced user interface. The 300 Series of IP phones is widely interoperable with numerous IP-PBXs, softswitches and IP-
Centrex solutions.
VoIP Mobile Access Solution (VMAS)
The VMAS™ is a mobile VoIP solution from AudioCodes comprised of a client management system (CMS) and a variety of mobile soft clients for
leading iOS and Android based mobile operating systems and smartphones. The market for this product is focused on direct engagement with service providers,
as this product typically requires specific integration with the service provider’s network.
Element Management System
Our element management system, or EMS, is an advanced solution for centralized, standards-based management of our VoP gateways, covering all
areas vital to the efficient operations, administration, management and provisioning of our MediantTM and MediaPackTM VoP gateways.
Our EMS offers network equipment providers and system integrators fast setup of medium and large VoP networks with the advantage of a single
centralized management system that configures, provisions and monitors all of AudioCodes gateways deployed, either as customer premises equipment, access
or core network platforms.
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Our Product Families – Technology Products
Voice Over Packet Processors
Our signal processor chips compress and decompress voice, data and fax communications. This enables these communications to be sent from circuit-
switched telephone networks to packet networks. Our chips are digital signal processors on which we have embedded our algorithms. These signal processor
chips are the basic building blocks used by our customers and us to enable their products to transmit voice, fax and data over packet networks. These chips may
be incorporated into our communications boards, media gateway modules and analog media gateways for access and enterprise applications or they may be
purchased separately and incorporated into other boards or customer products.
TrunkPackTMVoIP Communication Boards
Our communications boards are designed to operate in gateways connecting the circuit-switched telephone network to packet networks based on
Internet protocols. Our boards comply with VoIP industry standards and allow for interoperability with other gateways. Our boards support standards-based
open telecommunications architecture systems and combine our signal processor chips with communications software, signaling software and proprietary
hardware architecture to provide a cost efficient interoperable solution for high capacity gateways. We believe that using open architecture permits our
customers to bring their systems to market quickly and to integrate our products more easily within their systems.
IPmediaTM Boards for Enhanced Services and Functionalities
The IPmediaTM product family is designed to allow OEMs and application partners to provide sophisticated content and services that create revenue
streams and customer loyalty through the ability to provide additional services. The IPmediaTM boards provides voice and fax processing capabilities to enable,
together with our partners, an architecture for development and deployment of enhanced services.
Voice and Data Logging Hardware Integration Board Products
The SmartWORKSTM family of products is our voice and data logging hardware integration board product line. SmartWORKSTM boards for the call
recording and voice voice/data logging industry are compatible with a multitude of private branch exchange, or PBX, telephone system integrations.
Core Technologies
We believe that one of our key competitive advantages is our broad base of core technologies ranging from advanced voice compression algorithms to
complex architecture system design. We have developed and continue to build on a number of key technology areas. We have named our cross platform core
technology VoIPerfect™. It essentially allows us to leverage the same feature set and interoperability with other products across our product lines.
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Narrowband and Wideband (HDVoIP) Voice Compression Algorithms
Voice compression techniques are essential for the transmission of voice over packet networks. Voice compression exploits redundancies within a
voice signal to reduce the bit rate required to digitally represent the voice signal, from 64 kilobits per second, or kbps, down to low bit rates ranging from 5.3
kbps to 8 kbps, while still maintaining acceptable voice quality. A bit is a unit of data. Different voice compression algorithms, or coders, make certain tradeoffs
between voice quality, bit rate, delay and complexity to satisfy various network requirements. Use of voice activity detection techniques and silence removal
techniques further reduce the transmission rate by detecting the silence periods embedded in the voice flow and discarding the information packets which do not
contribute to voice intelligibility.
We are one of the innovators in developing low bit rate voice compression technologies. Our patented MP-MLQTM coder was adopted in 1995 by the
ITU as the basis for the G.723.1 voice coding standard for audio/visual applications over circuit-switched telephone networks. By adhering to this standard,
system manufacturers guarantee the interoperability of their equipment with the equipment of other vendors.
We also provide wideband compression techniques that provide high definition VoIP quality, which expands the sampled frequency range from the
traditional narrowband frequency range of 3.3Khz to over 7Khz, providing better voice quality and intelligibility, and a better user expertise. This technology is
expanding and is expected to become a de-facto standard for future VoIP communications.
Advanced Digital Signal Processing Algorithms
To provide a complete voice over packet communications solution, we have developed a library of digital signal processing functions designed to
complement voice compression coders with additional functionality, including: echo cancellation; voice activity detection; facsimile and data modem
processing; and telephony signaling processing. Our extensive experience and expertise in designing advanced digital signal processing solutions allows us to
implement algorithms using minimal processing memory and power resources.
Our algorithms include:
Echo cancellation. Low bit rate voice compression techniques introduce considerable delay, necessitating the use of echo cancellation algorithms. The
key performance criterion of an echo canceller is its ability to deal with large echo reflections, long echo delays, fast changing echo characteristics, diverse
telecommunications equipment and network effects. Our technology achieves low residual echo and fast response time to render echo effects virtually
unnoticeable.
Fax transmission. There are two widely used techniques for real time transmission of fax over networks based on Internet protocols: fax relay and fax
spoofing. Fax relay takes place when a fax is sent from a fax machine through a gateway over networks based on Internet protocols in real time to a fax
machine at the other end of the network. At the gateway, the analog fax signals are demodulated back into digital data, converted into packets, routed over the
packet network and reassembled at the receiving end. Fax relay is used when the round trip network delay is small (typically below one second). When the
round trip network delay increases, one of the fax machines may time out while waiting for a response from the other fax machine to arrive.
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Data modem technology. We have developed data modem technologies that facilitate data relay over packet networks. Our data modem relay software
algorithms support all existing data modem standards up to a bit rate of 14.4 kbps.
Telephony signaling processing. Various telephony signaling standards and protocols are employed to route calls over the traditional telephone
network, some of which use “in-band” methods, which means that the signaling tones are sent over the telephone line just like the voice signal. As a result, in-
band signaling tones may have to undergo the compression process just like the voice signal. Most low bit-rate voice coders, however, are optimized for speech
signals and exhibit poor tone transfer performance. To overcome this, our processors are equipped with tone detection and tone generation algorithms. To
provide seamless transparency between the traditional telephone network and packet networks for signaling, we employ various digital signal processing
techniques for efficient tone processing.
Voice Communications Software
To transmit the compressed voice and fax over packet networks, voice packetization processes are required to construct and deconstruct each packet of
data for transmission. The processing involves breaking up information into packets and adding address and control fields information according to the
specifications of the appropriate packet network protocol. In addition, the software provides the interface with the signal processors and addresses packet delay
and packet loss issues.
Media Processing
Our media processing products provide the enabling technology and platforms for developing enhanced voice service applications for legacy and next
generation networks. We have developed media processing technologies such as message recording/playback, announcements, voice coding and mixing and
call progress tone detection that enable our customers to develop and offer advanced revenue generating services such as conferencing, network
announcements, voice mail and interactive voice response.
Our media processing technology is integrated into our enabling technology platforms like Voice over Packet processors and VoIP blades, as well as
into our network platforms like the Mediant media gateways and the IPMedia media servers. The same technology is also integrated into our multi-service
business gateways, enabling the use of these platforms to run third party VoIP software, offloading media processing from the host CPU.
Addressing Multiple Networks and Standards Concurrently
Convergence of wireline and wireless networks is becoming a key driver for deployment of voice over packet networks, enabling operators to use
common equipment for both networks, thus lowering capital expenditures and operating expenses, while offering enriched services.
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Our voice over packet products provide a cost-effective solution for these convergence needs, complying with the requirements of broadband Wireline
operators using xDSL technologies, Cable operators, mobile operators, FTTx operators, Internet telephony service providers, or ITSPs, and virtual network
Operators (VNOs). This includes support for relevant vocoders (wireline and wireless concurrently), interfaces and protocols.
Our products are also positioned to support the requirement of all types of enterprise customers. From SOHO, SMB all the way up to large enterprises,
our products can provide integrated VoIP services and service provider access to enterprises in multiple vertical markets.
Hardware Architectures for Dense Multi-Trunk Voice over Packet Systems
Our voice over packet product offerings include high density, multi-trunk voice over packet systems for standards-based open telecommunications
platforms in access equipment. Multi-trunk processing is centered around a design encompassing two key processing elements, signal processors performing
voice, fax and data processing and a communications processor. Overall system performance, reliability, capacity, size, cost and power consumption are
optimized, based on our hardware architecture, which supports high throughput rates for multi-trunk processing. On-board efficient network and system
interfaces relieve the system controller from extensive real time data transfer and processing of data streams.
Carrier Grade System Expertise
To provide state of the art carrier grade media gateways, we have developed a wide expertise in a number of fields essential to such a product line. We
have developed or integrated the various components required to implement a full digital media gateway solution that behaves as a unified entity to the external
world. This required a major investment in adapting standard cPCI and MicroTCA (AMC) platforms to our needs. Such adaptation included optimizing power
supply and cooling requirements, adding centralized shelf controllers, fabric switches and alarm cards to the chassis. Another aspect of the expertise we
developed relates to high availability software and hardware design. High availability is a required feature in any carrier grade media gateway platform. We
have also developed a sophisticated EMS to complete our offering. Our EMS enables the user to provision and monitor a number of media gateways from a
centralized location.
Customers
Our customers consist of service providers and enterprises, primarily via channels (such as distributors), OEMs, network equipment providers and
systems integrators. Historically, we have derived the majority of our revenues from sales to a small number of customers. The identities of our principal
customers have changed and we expect that they will continue to change, from year to year. Historically, a substantial portion of our revenue has been derived
from large purchases by a small number of original equipment manufacturers, or OEMs, and network equipment providers, or NEPs, systems integrators and
distributors. Our top three customers accounted for approximately 25.7% of our revenues in 2009, 22.2% of our revenue in 2010 and 25.5% of our revenues in
2011. Based on our experience, we expect that our customer base may change from period to period.
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ScanSource Communications, our largest customer in 2010 and 2011, accounted for 14.4% of our revenues in 2011, 9.8% of our revenues in 2010 and
6.9% of our revenues in 2009. Nortel Networks was our largest customer in 2008 and 2009, accounting for 15.6% of our revenues in 2009 and 14.4% of our
revenues in 2008. Nortel accounted for 3.9% of our revenues in 2010 and, in 2011, revenues from sales to Nortel were negligible. Nortel has sold a number of
its business units, some of which were customers of ours. We cannot be sure if companies that purchased business units sold by Nortel will continue to purchase
products from us.
Sales and Marketing
Our sales and marketing strategy is to secure the leading channels and system integrators in each region, partner with leading application companies
and achieve design wins with network equipment providers in our targeted markets. We select our partners based on their ability to provide effective field sales,
marketing communications and technical support to our customers. In addition, we engage in direct sales and marketing with significant operators and
enterprises. Prospective customers and channels generally must make a significant commitment of resources to test and evaluate our products and to integrate
them into larger systems, networks and applications. As a result, our sales process is often subject to delays associated with lengthy approval processes that
typically accompany the design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often
lengthy, averaging approximately six to twelve months after achieving a design win. This time may be further extended because of internal testing, field trials
and requests for the addition or customization of features.
We also provide our customers with reference platform designs, which enable them to achieve easier and faster transitions from the initial prototype
designs we use in the test trials through final production releases. We believe this significantly enhances our customers’ confidence that our products will meet
their market requirements and product introduction schedules.
We market our products in the United States, Europe, Asia, Latin America and Israel primarily through a direct sales force. We have invested
significant resources in setting up local sales forces giving us a presence in relevant markets. We have given particular emphasis to emerging markets such as
Latin America, Asia and Eastern Europe in addition to continuing to sell our products in developed countries.
We have generally entered into a combination of exclusive and non-exclusive sales representation agreements with these customers in each of the
major countries in which we do business. These agreements are typically for renewable 12-month terms, are terminable at will by us upon 90 days notice, and
do not commit the customer to any minimum sales of our products to third parties. Some of our customers have the ability to return some of the products they
have previously purchased and purchase more up to date models.
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Manufacturing
Some of our components are obtained from single suppliers. For example, Texas Instruments Incorporated supplies all of our DSP components, while
Motorola and Cavium Networks provide embedded CPU and network processors. Other components are generic in nature and we believe they can be obtained
from multiple suppliers.
We have not entered into any long-term supply agreements. However, we have worked for years in several countries with established global
manufacturing leaders such as Flextronics and have a good experience with their level of commitment and ability to deliver. To date, we have been able to
obtain sufficient amounts of these components to meet our needs and do not foresee any supply difficulty in obtaining timely delivery of any parts or
components. However, an interruption in supply from any of these sources, especially with regard to DSP components from Texas Instruments Incorporated and
CPU and network processors from both Cavium Networks and Motorola, or an unexpected termination of the manufacture of certain electronic components,
could disrupt production, thereby adversely affecting our results. We generally maintain an inventory of critical components used in the manufacture and
assembly of our products although our inventory of signal processor chips would likely not be sufficient in the event that we had to engage an alternate supplier
for these components.
We utilize contract manufacturing for substantially all of our manufacturing processes. Most of our manufacturing is carried out by third-party
subcontractors in Israel, China and Taiwan. Our internal manufacturing activities consist primarily of the production of prototypes, test engineering, materials
purchasing and inspection, final product configuration and quality control and assurance.
In addition, we have engaged several original design manufacturers, or ODM, based in Asia to design and manufacture some of our products. We may
engage additional ODMs in the future. Termination of our commercial relationship with an ODM or the discontinuance of manufacturing of products by an
ODM would negatively affect our business operations.
We are obligated under certain agreements with our suppliers to purchase goods and under an agreement with one of our manufacturing subcontractors
to purchase excess inventory. Aggregate non-cancellable obligations under these agreements as of December 31, 2011 were approximately $1.2 million.
Industry Standards and Government Regulations
Our products must comply with industry standards relating to telecommunications equipment. Before completing sales in a country, our products must
comply with local telecommunications standards, recommendations of quasi-regulatory authorities and recommendations of standards-setting committees. In
addition, public carriers require that equipment connected to their networks comply with their own standards. Telecommunication-related policies and
regulations are continuously reviewed by governmental and industry standards-setting organizations and are always subject to amendment or change. Although
we believe that our products currently meet applicable industry and government standards, we cannot be sure that our products will comply with future
standards.
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We are subject to telecommunication industry regulations and requirements set by telecommunication carriers that address a wide range of areas
including quality, final testing, safety, packaging and use of environmentally friendly components. We comply with the European Union’s Restriction of
Hazardous Substances Directive (under certain exemptions) that requires telecommunication equipment suppliers to not use some materials that are not
environmentally friendly. These materials include cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and polybrominatel diphenyl
ethers. Under the directive, an extension for compliance was granted with respect to the usage of lead in solders in network infrastructure equipment. We expect
that other countries, including countries we operate in, will adopt similar directives or other additional regulations.
Competition
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide similar
benefits to those that we sell. There has been a significant amount of merger and acquisition activity and strategic alliances frequently involving major
telecommunications equipment manufacturers acquiring smaller companies, and we expect that this will result in an increasing concentration of market share
among these companies, many of whom are our customers.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Linksys (a division of Cisco Systems,
Inc.), Mediatrix Telecom, Inc., Vega Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum Technologies, Tainet Communication System Corp.,
Welltech, Ascii Corp., D-Link Systems, Inc., Multitech Inc., Inomedia, Grandstream, OKI and LG.
Our principal competitors in the residential gateway market are Pirelli Broadband (ADB), Technicolor (previously Thomson), Sagemcom, ZyXEL,
Netgear, Bewan (Pace), Huawei, FiberHome and ZTE.
In the area of low density digital gateways and multi-service business gateways we face competition from companies such as Cisco, Adtran, One
Access, Patton and more specifically in the enterprise class Session Border Controller technology with ACME Packet (Covergence), SIPera (acquired by
Avaya), Ingate and Edwater. In addition we face competition in low, mid density gateways from companies such as , Alcatel-Lucent, Nokia-Siemens, Huawei,
Ericsson, UTstarcom, ZTE and from Cisco, Dialogic, Genband, Sonus Networks and Metaswitch. Some of these competitors are also customers of our products
and technologies.
Our competitors in the Microsoft Lync certified gateway and session border controller markets include NET, Dialogic, Cisco, Ferrari and ACME
Packet.
Our principal competitors in the media server market segment are Dialogic/Cantata Technology/Dialogic/NMS Communications, Convedia/Radisys,
Movius (IP Unity/Glenayre), Cognitronics and Aculab. In addition, we face competition in software-based and hardware-based media servers from internal
development at companies such as Hewlett-Packard, Comverse-NetCentrex, General Bandwidth, Alcatel - Lucent, Nokia-Siemens and Ericsson.
Our principal competitors in the sale of signal processing chips are Texas Instruments, Broadcom, Infineon/Lantiq, Centillium, Surf and Mindspeed.
Several large manufacturers of generic signal processors, such as Motorola, Agere Systems, which merged with LSI Corporation in April 2007, and Intel have
begun, or are expected to begin marketing competing processors. Our principal competitors in the communications board market are Dialgic/NMS
Communications/Cantata, Aculab, Sangoma and PIKA Technologies.
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Our principal competitors in the area of IP phones are comprised of “best–of-breed” IP phone vendors and end-to-end IP telephony vendors. “Best-of-
breed” IP phone vendors sell standard-based SIP phones that can be integrated into any standards-based IP-PBX or hosted IP telephony systems. These
competitors include Polycom, Mediatrix, Yaelink and SNOM. End-to-end IP telephony vendors sell IP phones that only work in their proprietary systems.
These competitors include Cisco, Avaya (previously Nortel), Alcatel-Lucent, Siemens and Asstra.
Many of our competitors have the ability to offer vendor-sponsored financing programs to prospective customers. Some of our competitors with broad
product portfolios may also be able to offer lower prices on products that compete with ours because of their ability to recoup a loss of margin through sales of
other products or services. Additionally, voice, audio and other communications alternatives that compete with our products are being continually introduced.
In the future, we may also develop and introduce other products with new or additional telecommunications capabilities or services. As a result, we
may compete directly with VoIP companies and other telecommunications infrastructure and solution providers, some of which may be our current customers.
Additional competitors may include companies that currently provide communication software products and services. The ability of some of our competitors to
bundle other enhanced services or complete solutions with VoIP products could give these competitors an advantage over us.
Intellectual Property and Proprietary Rights
Our success is dependent in part upon proprietary technology. We rely primarily on a combination of patent, copyright and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect our proprietary rights. We also rely on trademark protection concerning various names and
marks that serve to identify it and our products. While our ability to compete may be affected by our ability to protect our intellectual property, we believe that
because of the rapid pace of technological change in our industry maintaining our technological leadership and our comprehensive familiarity with all aspects of
the technology contained in our signal processors and communication boards is also of primary importance.
We own U.S. patents that relate to our voice compression and session border control technologies. We also actively pursue patent protection in selected
other countries of interest to us. In addition to patent protection, we seek to protect our proprietary rights through copyright protection and through restrictions
on access to our trade secrets and other proprietary information which we impose through confidentiality agreements with our customers, suppliers, employees
and consultants.
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There are a number of companies besides us who hold or may acquire patents for various aspects of the technology incorporated in the ITU’s standards
or other industry standards or proprietary standards, for example, in the fields of wireless and cable. While we have obtained cross-licenses from some of the
holders of these other patents, we have not obtained a license from all of the holders. The holders of these other patents from whom we have not obtained
licenses may take the position that we are required to obtain a license from them. Companies that have submitted their technology to the ITU (and generally
other industry standards making bodies) for adoption as an industry standard are required by the ITU to undertake to agree to provide licenses to that
technology on reasonable terms. Accordingly, we believe that even if we were required to negotiate a license for the use of such technology, we would be able
to do so at an acceptable price. Similarly, however, third parties who also participate with respect to the same standards-setting organizations as do we may be
able to negotiate a license for use of our proprietary technology at a price acceptable to them, but which may be lower than the price we would otherwise prefer
to demand.
Under a pooling agreement dated March 3, 1995, as amended, between AudioCodes and DSP Group, Inc., on the one hand, and France Telecom,
Université de Sherbrooke and their agent, Sipro Lab Telecom, on the other hand, we and DSP Group, Inc. granted to France Telecom and Université de
Sherbrooke the right to use certain of our specified patents, and any other of our and DSP Group, Inc. intellectual property rights incorporated in the ITU
G.723.1 standard. Likewise France Telecom and Université de Sherbrooke granted AudioCodes and DSP Group, Inc. the right to use certain of their patents and
any other intellectual property rights incorporated in the G.723.1 standard. In each case, the rights granted are to design, make and use products developed or
manufactured for joint contribution to the G.723.1 standard without any payment by any party to the other parties.
In addition, each of the parties to the agreement granted to the other parties the right to license to third parties the patents of any party included in the
intellectual property required to meet the G.723.1 standard, in accordance with each licensing party’s standard patent licensing agreement. The agreement
provides for the fee structure for licensing to third parties. The agreement provides that certain technical information be shared among the parties, and each of
the groups agreed not to assert any patent rights against the other with respect of the authorized use of voice compression products based upon the technical
information transferred. Licensing by any of the parties of the parties’ intellectual property incorporated in the G.723.1 standard to third parties is subject to
royalties that are specified under the agreement.
Each of the parties to the agreement is free to develop and sell products embodying the intellectual property incorporated into the G.723.1 standard
without payment of royalties to other parties, so long as the G.723.1 standard is implemented as is, without modification. The agreement expires upon the last
expiration date of any of the AudioCodes, DSP Group, Inc., France Telecom or Université de Sherbrooke patents incorporated in the G.723.1 standard. The
parties to the agreement are not the only claimants to technology underlying the G.723.1 standard.
We are aware of parties who may be infringing our technology that is part of the G.723.1 standard. We evaluate these matters on a case by case basis,
directly or through our licensing partner. Although we have not yet determined whether to pursue legal action, we may do so in the future. There can be no
assurance that any legal action will be successful.
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Third parties have claimed, and from time to time in the future may claim, that our past, current or future products infringe their intellectual property
rights. Intellectual property litigation is complex and there can be no assurance of a favorable outcome of any litigation. Any future intellectual property
litigation, regardless of outcome, could result in substantial expense to us and significant diversion of the efforts of our technical and management personnel.
Litigation could also disrupt or otherwise severely impact our relationships with current and potential customers as well as our manufacturing, distribution and
sales operations in countries where relevant third party rights are held and where we may be subject to jurisdiction. An adverse determination in any proceeding
could subject us to significant liabilities to third parties, require disputed rights to be licensed from such parties, assuming licenses to such rights could be
obtained, or require us to cease using such technology and expend significant resources to develop non-infringing technology. We may not be able to obtain a
license at an acceptable price.
We have entered into technology licensing fee agreements with third parties. Under these agreements, we agreed to pay the third parties royalties,
based on sales of relevant products.
Legal Proceedings
We are not a party to any material legal proceedings, except for the proceedings referred to below.
In May 2007, we entered into an agreement with respect to property adjacent to our headquarters in Israel, pursuant to which a building of
approximately 145,000 square feet was erected and was expected to be leased to us for a period of eleven years. This new building was substantially completed
on a structural level in May 2010. The landlord claimed that we should have taken delivery of the building at that time and started paying rent. We disagreed
with the landlord’s interpretation of the relevant agreement. As a result, the landlord terminated the agreement and leased the property to a third party. This
dispute has been referred to arbitration where we claim that due to the landlord’s failure we lost significant potential revenues due. The landlord counterclaimed
alleging that it sustained losses equal to approximately one year’s rent and management fees in the amount of approximately NIS 14 million (approximately
$3.7 million based on the December 31, 2011 exchange rate). The claim is at the discovery stage and it is not possible at this stage to predict the outcome of
these proceedings. We believe that we have valid defenses to the counterclaim.
On January 14, 2009 (the “Petition Date”), Nortel Networks, Inc. and certain of its affiliates filed petitions for relief under chapter 11 of title 11 of the
United States Code (the “Bankruptcy Code”). On May 27, 2011, Nortel commenced an action against AudioCodes Inc. and AudioCodes Ltd. (collectively,
“AudioCodes”) in the United States Bankruptcy Court for the District of Delaware. Nortel asserts that AudioCodes received approximately $3,153,000 in
payments from Nortel in the 90-day period prior to Nortel’s bankruptcy filing. Nortel asserts that these payments constitute avoidable preferential transfers
pursuant to 11 U.S.C. 547(b) of the Bankruptcy Code and Nortel is entitled to recover these payments from AudioCodes pursuant to 11 U.S.C. 550. We are
currently engaged in settlement discussions with Nortel Networks with respect to these claims and have reached a settlement in principle whereby all claims by
the parties would be settled and AudioCodes would be required to pay $20,000 to Nortel. The parties are in the process of documenting the settlement. Upon
execution of the settlement agreement, Nortel will submit the settlement for court approval. Until the settlement agreement is executed and the court approves
the settlement, there can be no certainty that a settlement will occur. If a settlement does not occur, management believes that we have valid defenses to these
claims.
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In July 2011, we received notification from a successor in interest of one of our former customers (“Customer”) that it had been served with a
complaint in a patent infringement action that was commenced on April 6, 2011 in the United States District Court for the Central District of California. The
complaint alleged that certain of the Customer’s products infringe patent rights of the plaintiff. In a letter to us, the Customer claimed that the feature in its
products that allegedly infringes the patent rights was supplied by us and that, based on the purchase agreement with us, we should indemnify the Customer
with respect to this proceeding. On February 3, 2012, the patent infringement action was dismissed, with prejudice. We have not received any further
communication from the Customer with respect to this matter.
On September 15, 2011, a patent infringement action was commenced by CyberFone Systems, LLC, formerly known as LVL Patent Group LLC, in the
United States District Court for the District of Delaware against our subsidiary, AudioCodes Inc. and numerous other defendants, alleging that AudioCodes Inc.
and the other defendants infringed the plaintiff’s intellectual property rights in four patents. The claims made in this action are being reviewed and an answer to
the claims has not yet been filed. The proceeding is at an early stage and it is not possible at this time to predict the outcome of these proceedings. We believe
that we have valid defenses to the claims.
On November 1, 2011, a patent infringement action was commenced by Klausner Technologies, Inc. in the United States District Court for the Eastern
District of Texas against AudioCodes Inc. alleging that AudioCodes Inc. infringed the plaintiff’s intellectual property rights in one patent. AudioCodes Inc. filed
an answer to the complaint asserting its position of non-infringement and other defenses. We believe that we have valid defenses to the claim.
C.
ORGANIZATIONAL STRUCTURE
List of Significant Subsidiaries
AudioCodes Inc., our wholly-owned subsidiary, is a Delaware corporation.
D.
PROPERTY, PLANTS AND EQUIPMENT
We lease our main facilities, located in Airport City, Lod, Israel, which occupy approximately 200,000 square feet for annual lease payments
(including management fees) of approximately $4.6 million (including management fees In addition, we entered into an agreement with Airport City, Ltd.
regarding the neighboring property pursuant to which a building of approximately 145,000 square feet was erected and was to be leased to us for period of
eleven years. We are currently engaged in a dispute with the landlord. See “Item 4B-Information on the Company-Business Overview-Legal Proceedings.”
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Our U.S. subsidiary, AudioCodes Inc., leases a 32,000 square foot facility in Somerset, New Jersey. AudioCodes Inc. also leases facilities offices in
Plano, Texas, San Jose, California, Raleigh, North Carolina, Boston, Massachusetts. The annual lease payments (including management fees) for all our offices
in the United States is approximately $650,000.
We believe that these properties are sufficient to meet our current needs. However, we may need to increase the size of our current facilities, seek new
facilities, close certain facilities or sublease portions of our existing facilities in order to address our needs in the future.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. These accounting
principles require management to make certain estimates, judgments and assumptions based upon information available at the time that they are made,
historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can
affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during
the periods presented.
On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition and allowance for sales
returns, allowance for doubtful accounts, inventories, intangible assets, goodwill, income taxes and valuation allowance, stock-based compensation and
contingent liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources.
Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See Note 2 to the Consolidated
Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by US GAAP.
Management believes the significant accounting policies that affect its more significant judgments and estimates used in the preparation of its
consolidated financial statements and are the most critical to aid in fully understanding and evaluating AudioCodes’ reported financial results include the
following:
·
·
·
·
Revenue recognition and allowance for sales returns;
Allowance for doubtful accounts;
Inventories;
Intangible assets;
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·
·
·
·
Goodwill;
Income taxes and valuation allowance;
Stock-based compensation; and
Contingent liabilities.
Revenue Recognition and Allowance for Sales Returns
We generate our revenues primarily from the sale of products. We sell our products through a direct sales force and sales representatives. Our
customers include original equipment manufacturers, network equipment providers, systems integrators and distributors in the telecommunications and
networking industries, all of whom are considered end-users.
Revenues from products are recognized in accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition in Financial Statements”
when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred, (iii) the fee is fixed or
determinable and (iv) collectability is probable. We have no obligation to customers after the date on which products are delivered, other than pursuant to
warranty obligations and any applicable right of return. We grant to some of our customers the right of return or the ability to exchange a specific percentage of
the total price paid for products they have purchased over a limited period for other products.
We maintain a provision for product returns and exchanges and other incentives. This provision is based on historical sales returns, analysis of credit
memo data and other known factors. This provision amounted to $656,000 in 2009, $1.4 million in 2010 and $823,000 in 2011.
Revenues from the sale of products which were not yet determined to be final sales due to market acceptance or technological compatibility were
deferred and included in deferred revenues. In cases where collectability is not probable, revenues are deferred and recognized upon collection. Revenues from
services are recognized ratably over the time of the service agreement, usually one year.
In 2011, we adopted, on a prospective basis, the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-
13, Topic 605 - Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 changes the requirements for establishing separate units of
accounting in a multiple element arrangement and requires the allocation of consideration to each deliverable to be based on the relative selling price.
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The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is
not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available, We then recognize revenue on each deliverable in accordance with our
policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining
VSOE, we require that a substantial majority of the selling prices fall within a narrow range based on stand alone rates. TPE of selling price is established by
evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, as our products contain a
significant element of proprietary technology and our solutions offer substantially different features and functionality, the comparable pricing of products with
similar functionality typically cannot be obtained. Additionally, as we are unable to reliably determine the selling prices of competitors products on a stand-
alone basis, we are not typically able to determine TPE. The ESP is established considering multiple factors including, but not limited to, pricing practices in
different geographical areas and through different sales channels, gross margin objectives, internal costs, the pricing strategies of our competitors, and industry
technology lifecycles. The selling price of the products was based on ESP. Maintenance selling price was based on VSOE.
We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or
subject to customer-specific return or refund privileges. We evaluate each deliverable in an arrangement to determine whether it represents a separate unit of
accounting.
Prior to 2011, we allocated revenue to each element using the residual method when the VSOE of fair value of the undelivered items for arrangements
with multiple elements, such as sales of products that include services and software, exist. Under the residual method, the amount of revenue allocated to
delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. If VSOE of one or more undelivered
items did not exist, revenue from the entire arrangement was deferred and recognized at the earlier of: (i) delivery of those elements or (ii) when fair value
could be established unless maintenance was the only undelivered element, in which case, the entire arrangement fee was recognized ratably over the
contractual support period.
Allowance for Doubtful Accounts
Our trade receivables are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe. We perform ongoing
credit evaluations of our customers and to date have not experienced any material losses from uncollected receivables. An allowance for doubtful accounts is
determined with respect to those amounts that we have recognized as revenue and determined to be doubtful of collection. We usually do not require collateral
on trade receivables because most of our sales are to large and well-established companies. On occasion we may purchase credit insurance to cover credit
exposure for a portion of our sales and this may mitigate the amount we need to write off as a result of doubtful collections.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the “weighted average cost” method for raw materials and on the
basis of direct manufacturing costs for finished products. We periodically evaluate the quantities on hand relative to current and historical selling prices and
historical and projected sales volume and technological obsolescence. Based on these evaluations, inventory write-offs are provided to cover risks arising from
slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. We wrote-off inventory in a
total amount of $3.4 million in 2009, $1.1 million in 2010 and $644,000 in 2011.
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Intangible assets
As a result of our acquisitions, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $6.8 million as of
December 31, 2009, $5.3 million as of December 31, 2010 and $4.0 million as of December 31, 2011.
We allocated the purchase price of the companies we have acquired to the tangible and intangible assets acquired and liabilities assumed, based on
their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, trade names, backlog and customer relationships. In
addition, other factors considered are the brand awareness and market position of the products sold by the acquired companies and assumptions about the period
of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based on assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable.
If we did not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of amortization
expense may not appropriately reflect the actual impact of these costs over future periods, which will affect our net income.
Intangible assets are reviewed for impairment in accordance with Accounting Standards Codification (ASC) 360-10-35, “Property, Plant, and
Equipment- Subsequent Measurement”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The loss is allocated to the intangible assets on a pro rata basis using the relative carrying amounts of
those assets, except that the loss allocated to an individual intangible asset shall not reduce the carrying amount of that asset below its fair value whenever that
fair value is determinable.
Our intangible assets are comprised of acquired technology, customer relations, trade names, existing contracts for maintenance and backlog. All
intangible assets are amortized using the straight-line method over their estimated useful life.
During 2009, 2010 and 2011, no impairment charges were identified.
Goodwill
As a result of our acquisitions, our balance sheet included acquired goodwill in the aggregate amount of approximately $32.1 million as of December
31, 2009, 2010 and 2011. Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable
intangible assets of businesses acquired and accounted for under the purchase method. In accordance with ASC 350, “Intangible, Goodwill and Other” goodwill
is not amortized and is tested for impairment at least annually. Our annual impairment test is performed at the end of the fourth quarter each year. If events or
indicators of impairment occur between the annual impairment tests, we perform an impairment test of goodwill at that date.
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The provisions of ASC No. 350 require that a two-step impairment test be performed on goodwill at the level of the reporting units. We operate in one
operating segment and this segment comprises our only reporting unit. 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.
Fair value is generally determined using discounted cash flows, market multiples and market capitalization. The process of evaluating the potential
impairment of goodwill is subjective and requires significant judgment at many points during the analysis. Significant estimates used in the fair value
methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market
multiples of the reportable unit. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our
goodwill and intangible assets with an indefinite life.
During 2009, 2010 and 2011, no impairment losses were identified
Income Taxes and Valuation Allowance
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the
jurisdictions in which we operate. This process involves us estimating our actual current tax exposure, which is accrued as taxes payable, together with
assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets,
which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax
benefit that is more likely than not to be realized.
Although we believe that our estimates are reasonable, there is no assurance that the final tax outcome and the valuation allowance will not be different
than those which are reflected in our historical income tax provisions and accruals.
We have filed or are in the process of filing U.S. federal, state and foreign tax returns that are subject to audit by the respective tax authorities.
Although the ultimate outcome is unknown, we believe that adequate amounts have been provided for and any adjustments that may result from tax return
audits are not likely to materially adversely affect our consolidated results of operations, financial condition or cash flows.
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Stock-based compensation
We account for stock-based compensation in accordance with ASC 718 ”Compensation-Stock Compensation”. We utilize the Black-Scholes option
pricing model to estimate the fair value of stock-based compensation at the date of grant. The Black-Scholes model requires subjective assumptions regarding
dividend yields, expected volatility, expected life of options and risk-free interest rates. These assumptions reflect management’s best estimates. Changes in
these inputs and assumptions can materially affect the estimate of fair value and the amount of our stock-based compensation expenses. We recognized stock-
based compensation expense of $2.0 million in 2009, $2.1 million in 2010 and $2.3 million 2011. As of December 31, 2011, there was approximately $2.8
million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted by us. As of December
31, 2011, that expense is expected to be recognized over a weighted-average period of 1.55 years.
Contingent liabilities
We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising from the ordinary course of our
business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably
estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and
subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been
incorrect, it could have a material impact on our results of operations, financial position and cash flows. See “Item 4B-Information on the Company-Business
Overview-Legal Proceedings” for a discussion of claims against us by Nortel, by a landlord and by owners of intellectual property involving potential
contingent liabilities.
A.
OPERATING RESULTS
You should read this discussion with the consolidated financial statements and other financial information included in this Annual Report.
Overview
We design, develop and sell advanced voice over IP, or VoIP, and converged VoIP and data networking products and applications to service providers
and enterprises. We are a VoIP technology leader focused on VoIP communications, applications and networking elements, and its products are deployed
globally in broadband, mobile, cable, and enterprise networks. We provide a range of innovative, cost-effective products including media gateways, multi-
service business gateways, residential gateways, IP phones, media servers, session border controllers, s and value-added applications. Our underlying
technology, VoIPerfectHD™, relies primarily on our leadership in digital signal processing, or DSP, voice coding and voice processing technologies. Our high
definition (HD) VoIP technologies and products provide enhanced intelligibility, and a better end user communication experience in emerging voice networks.
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Our products enable our customers to build high-quality packet networking equipment and network solutions and provide the building blocks to
connect traditional telephone networks to VoIP networks, as well as connecting and securing multimedia communication between different packet-based
networks. Our products are sold primarily to leading original equipment manufacturers, or OEMs, system integrators and network equipment providers in the
telecommunications and networking industries. We have continued to broaden our offerings, both from internal and external development and through
acquisitions, as we have expanded in the last few years from selling chips to boards, subsystems, media gateway systems, media servers, session border
controllers and messaging platforms. We have also increased our product portfolio to enhance our position in the market and serve our channels better as a “one
stop shop” for voice over IP hardware.
Our headquarters and research and development facilities are located in Israel with research and development extensions in the U.S. and U.K. We have
other offices located in Europe, the Far East, and Latin America.
Nortel Networks was our largest customer in 2008 and 2009, accounting for 14.4% of our revenues in 2008 and 15.6% of our revenues in 2009. Nortel
filed for bankruptcy protection in January 2009. Nortel has operated in bankruptcy since then while also selling a number of its business units and winding
down its operations. As a result, Nortel accounted for only 3.9% of our revenues in 2010 and, in 2011, revenues from Nortel were negligible.
Our top five customers accounted for 29.8% of our revenues in 2009, 28.6% of our revenues in 2010 and 33.4% in 2011. Based on our experience, we
expect that our largest customers may change from period to period. If we lose a large customer and fail to add new customers to replace lost revenue, our
operating results may be materially adversely affected.
Revenues based on the location of our customers for the last three fiscal years are as follows:
Americas
Far East
Europe
Israel
Total
2009
2010
2011
55.6%
14.6
21.5
8.3
100.0%
47.7%
17.8
21.7
12.8
100.0%
55.0%
14.1%
23.3%
7.6%
100.0%
We believe that prospective customers generally are required to make a significant commitment of resources to test and evaluate our products and to
integrate them into their larger systems. Our sales process is often subject to delays associated with lengthy approval processes that typically accompany the
design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often lengthy, averaging
approximately six to twelve months. As a result, we may incur significant selling and product development expenses prior to generating revenues from sales.
The currency of the primary economic environment in which our operations are conducted is the U.S. dollar and, as such, we use the U.S. dollar as our
functional currency. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. All transaction gains and losses
from the remeasurement of monetary balance sheet items denominated in non-U.S. dollar currencies are reflected in the statement of operations as financial
income or expenses, as appropriate.
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The demand for Voice over IP, or VoIP, technology has increased during recent years. In recent years, the shift from traditional circuit-switched
networks to next generation packet-switched networks continued to gain momentum. As data traffic becomes the dominant factor in communications, service
providers are building and maintaining converged networks for integrated voice and data services. In developed countries, traditional and alternative service
providers adopt bundled triple play (voice, video and data) and quadruple play (voice, video, data and mobile) offerings. This trend, enabled by voice and
multimedia over IP, has fueled competition among cable, wireline, ISP and mobile operators, increasing the pressure for adopting and deploying VoIP networks.
In addition, underdeveloped markets without basic wire line service in countries such as China and India and certain countries in Eastern Europe are adopting
the use of VoIP technology to deliver voice and data services that were previously unavailable.
The general economic uncertainty, including disruptions in the world credit and equity markets, has had and continues to have a negative impact on
business around the world. This economic environment has had an adverse impact on the technology industry and our major customers. Conditions may
continue to be uncertain or may be subject to deterioration which could lead to a reduction in consumer and customer spending overall, which could have an
adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall
deterioration of their businesses which could lead to a significant reduction in their orders of our products and the inability or failure on their part to meet their
payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity. In addition, any disruption in the ability
of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us. Granting
extended payment terms or a significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk
relating to that customer’s receivables or could limit our ability to collect receivables related to purchases by that customer. As a result, our reserves for doubtful
accounts and write-offs of accounts receivable could increase.
Results of Operations
The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of total
revenues for the periods indicated:
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Statement of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial income (expenses), net
Income (loss) before taxes on income
Income tax benefit (expense), net
Equity in losses of affiliated companies, net
Net income (loss)
Year Ended December 31,
2009
2010
100.0%
44.6
55.4
23.8
25.5
6.2
55.5
(0.1)
(2.2)
(2.3)
(0.2)
(0.1)
(2.6)%
100.0%
44.1
55.9
20.1
23.3
5.5
48.9
6.9
0.0
6.9
1.3
(0.1)
8.1%
2011
100.0%
41.2
58.8
20.6
27.8
5.8
54.2
4.6
0.3
4.9
(0.1)
(0.2)
4.6%
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues. Revenues increased 3.9% to $155.8 million in 2011 from $150.0 million in 2010. The increase in revenues was primarily due to the
increased demand for networking products and services.
Gross Profit. Cost of revenues includes the manufacturing cost of hardware, quality assurance, overhead related to manufacturing activity and
technology licensing fees payable to third parties. Gross profit increased to $91.7 million in 2011 from $83.9 million in 2010. Gross profit as a percentage of
revenues increased to 58.8% in 2011 from 55.9% in 2010. The increase in our gross profit percentage was primarily attributable to an increase in our revenues
and a reduction in manufacturing costs.
Research and Development Expenses, net. Research and development expenses, net consist primarily of compensation and related costs of employees
engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors less grants from the OCS. Research
and development expenses were $32.2 million in 2011 and $30.2 million in 2010. As a percentage of revenues, these expenses were 20.6% in 2011 and 20.1%
in 2010. Research and development expenses increased primarily because grants from the OCS, which reduce these expenses, decreased by $1.4 million in 2011
compared to 2010 and stock-based compensation expense included in these expenses increased to $526,000 in 2011 from $354,000 in 2010. We expect that
research and development expenses will be about the same in 2012 as in 2011 on an absolute dollar basis.
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Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for selling and marketing personnel, as well as
exhibition, travel and related expenses. Selling and marketing expenses increased 23.4% in 2011 to $43.2 million from $35.0 million in 2010. As a percentage
of revenues, these expenses increased to 27.8% in 2011 from 23.3% in 2010. These expenses increased on an absolute basis and as a percentage of revenue
primarily due to an increase in selling and marketing personnel and associated expenses. We expect that selling and marketing expenses will be about the same
in 2012 as in 2011 on an absolute dollar basis.
General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources, general
management, rent, network and bad debt reserve, as well as insurance and professional services expenses. General and administrative expenses increased 9.4%
to $9.0 million in 2011 from $8.3 million in 2010. As a percentage of revenues, general and administrative expenses increased to 5.8% in 2011 from 5.5% in
2010. The increase in general and administrative expenses, both on an absolute and a percentage basis, was due primarily to an increase in general and
administrative personnel and associated expenses and due to an increase in allowance for doubtful accounts. We expect that general and administrative expenses
will be about the same in 2012 as in 2011 on an absolute dollar basis.
Financial Expenses, Net. Financial expenses, net consist primarily of interest derived on cash and cash equivalents, marketable securities and bank
deposits, net of interest accrued in connection with our bank loans and bank charges, as well as on our remaining senior convertible notes outstanding. Financial
income, net, in 2011 was $423,000 compared to financial expenses, net of $94,000 in 2010. The increase in financial income, net in 2011 was primarily due to
our investment in marketable securities.
Taxes on Income. We had net income tax expenses of $238,000 in 2011 compared to a net income tax benefit of $1.9 million in 2010. The change in
net income tax expenses is due to a decrease in net income tax benefit in 2011 to $652,000 from $2.3 million in 2010 as a result of a decrease in the available
net carry forward tax losses based on our expectation of generating taxable income in the foreseeable future.
Equity in Losses of Affiliated Company, Net. Equity in losses of affiliated company, net was $277,000 in 2011 compared to $213,000 in 2010. The
increase in this amount is attributable to an increase in losses of our affiliated company and increase in our ownership of the affiliated company.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues. Revenues increased 19.2% to $150.0 million in 2010 from $125.9 million in 2009. The increase in revenues was primarily due to the
recovery in the global economy.
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Gross Profit. Cost of revenues includes the manufacturing cost of hardware, quality assurance, overhead related to manufacturing activity and
technology licensing fees payable to third parties. Gross profit increased to $83.9 million in 2010 from $69.7 million in 2009. Gross profit as a percentage of
revenues increased to 55.9% in 2010 from 55.4% in 2009. The increase in our gross profit percentage was primarily attributable to an increase in our revenues
and a reduction in manufacturing costs.
Research and Development Expenses, net. Research and development expenses, net consist primarily of compensation and related costs of employees
engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors less grants from the OCS. Research
and development expenses were $30.2 million in 2010 and $30.0 million in 2009 and decreased as a percentage of revenues to 20.1% in 2010 from 23.8% in
2009. The decrease in net research and development expenses as a percentage of revenues was primarily due to the increase in our revenues. Stock-based
compensation expense included in these expenses decreased to $354,000 in 2010 from $642,000 in 2009 and grants from the OCS, which reduce these
expenses, increased by $1.7 million in 2010. We increased the number of our research and development personnel in 2010 which increased personnel costs and
associated expenses.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for selling and marketing personnel, as well as
exhibition, travel and related expenses. Selling and marketing expenses increased 9.1% in 2010 to $35.0 million from $32.1 million in 2009 and decreased as a
percentage of revenues to 23.3% in 2010 from 25.5% in 2009. These expenses increased on an absolute basis primarily due to an increase in selling and
marketing personnel and associated expenses.
General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources, general
management, rent, network and bad debt reserve, as well as insurance and professional services expenses. General and administrative expenses increased 5.5%
to $8.3 million in 2010 from $7.8 million in 2009. As a percentage of revenues, general and administrative expenses decreased to 5.5% in 2010 from 6.2% in
2009. This decrease was due primarily to the leveraging of certain fixed costs over a higher revenue base in 2010.
Financial Expenses, Net. Financial expenses, net consist primarily of interest derived on cash and cash equivalents, marketable securities and bank
deposits, net of interest accrued in connection with our senior convertible notes and bank loans and bank charges. Financial expenses, net, in 2010 were $94,000
compared to $2.7 million in 2009. The decrease in financial expenses, net in 2010 was primarily due to lower interest expense recorded with respect to our
senior convertible notes following the redemption of almost all of the outstanding notes in the fourth quarter of 2009.
Taxes on Income. We had a net income tax benefit of $1.9 million in 2010 compared to income tax expense of $290,000 in 2009. The net income tax
benefit in 2010 is a result of a tax benefit of $2.3 million relating to the available net carry forward tax losses based on expectations of generating taxable
income in the foreseeable future.
Equity in Losses of Affiliated Company, Net. Equity in losses of affiliated company, net was $213,000 in 2010 compared to $76,000 in 2009. The
increase in this amount is attributable to an increase in losses of our affiliated company and increase in our holding of the affiliated company.
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Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
Since the majority of our revenues are paid in or linked to the U.S. dollar, we believe that inflation and fluctuations in the NIS/U.S. dollar exchange
rate have no material effect on our revenues. However, a majority of the cost of our Israeli operations, mainly personnel and facility-related, is incurred in NIS.
Inflation in Israel and U.S. dollar exchange rate fluctuations have some influence on our expenses and, as a result, on our net income. Our NIS costs, as
expressed in U.S. dollars, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the NIS in relation to the U.S. dollar.
To protect against the changes in value of forecasted foreign currency cash flows resulting from payments in NIS, we maintain a foreign currency cash
flow hedging program. We hedge portions of our forecasted expenses denominated in foreign currencies with forward contracts. These measures may not
adequately protect us from material adverse effects due to the impact of inflation in Israel.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of
inflation in Israel adjusted for the devaluation:
Year ended
December 31,
2009
2010
2011
Three months ended March 31,
2012
Recent Accounting Pronouncements
Israeli
inflation
Rate
%
NIS
devaluation
rate
%
Israeli inflation
adjusted for
devaluation
%
3.9
2.3
2.6
0.0
(0.7)
(6.0)
7.7
(2.8)
4.6
8.3
(5.1)
2.8
In May 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2011-04, Topic 820 - Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which amends current fair value measurement and disclosure
guidance to converge with International Financial Reporting Standards ("IFRS") and provides increased transparency around valuation inputs and investment
categorization. This guidance is effective for fiscal years and interim periods, beginning after December 15, 2011. Early application by public companies is not
permitted. Our adoption of ASU 2011-04 is not expected to have a significant impact on our consolidated results of operations or financial condition.
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In June 2011, the FASB issued ASU No. 2011-05, Topic 220 - Presentation of Comprehensive Income (“ASU 2011-05”), which requires an entity to
present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as
part of the statement of changes in stockholders' equity. This guidance is effective for fiscal years and interim periods, beginning after December 15, 2011.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other ("ASU 2011-08"), which amends Topic 350 to
allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity
would not be required to calculate the fair value of a reporting unit unless the entity determines, based the qualitative assessment, that it is more likely than not
that its fair value is less than its carrying amount. This guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted.
In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12, Topic 220 - Comprehensive Income ("ASU 2011-12"),
which indefinitely deferred certain provisions of ASU 2011-05, including the requirement to present reclassification adjustments out of accumulated other
comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is
presented. This amendment is effective for both annual and interim financial statements for fiscal years beginning after December 15, 2011.
In December 2011, the FASB issued ASU No. 2011-11, Topic 2010 - Balance Sheet ("ASU 2011-11"), which contains new disclosure requirements
regarding the nature of an entity's rights of set off and related arrangements associated with its financial instruments and derivative instruments. Under U.S.
GAAP, certain derivative and repurchase agreement arrangements are granted exceptions from the general off-setting model. To facilitate comparison between
financial statements prepared under U.S. GAAP and IFRS, the new disclosure requirement will provide financial statement users information regarding both
gross and net exposures. This guidance is effective for annual and interim financial statements beginning on or after January 1, 2013. Retrospective application
is required. We are still considering the impact of the adoption of ASU 2011-11 on our consolidated results of operations or financial condition.
B.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations for the last three years primarily from our cash and cash equivalents, bank deposits, bank borrowings and cash from
operations.
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In November 2004, we issued $125.0 million aggregate principal amount of our 2.00% Senior Convertible Notes due 2024. The Notes are convertible
at a rate of $18.71 per share, subject to adjustment in certain circumstances, such as changes in our capital structure or upon the issuance by us of share
dividends or certain cash distributions. As of December 31, 2011, there was a total of $353,000 in principal amount of the Notes outstanding as we repurchased
all of the other Notes during 2008 and 2009.
In April and July 2008, we entered into loan agreements with two banks in Israel that provided for borrowings of an aggregate of $30 million. The
loans bear interest at an annual rate equal to LIBOR plus 1.3%-1.5% with respect to $23 million of borrowings and LIBOR plus 0.5%-0.65% with respect to
$7.0 million of borrowings. The principal amount borrowed is repayable in 20 equal quarterly payments from August 2008 through July 2013.
In September and December 2011, we entered into loan agreements with banks in Israel that provided for borrowings of an aggregate of $23.8 million.
The loans bear interest at an annual rate equal to LIBOR plus 2.1%-3.6% with respect to $19.9 million of these loans. We are required to maintain the remaining
$3.9 million of these loans as a bank deposit. This portion of the loans bears interest at 0.5% above interest paid on the bank deposit. Of these borrowings, $19.9
million of the principal amount borrowed is repayable in 20 equal quarterly payments and the remaining $3.9 million of principal amount is repayable in 10
equal semiannual payments through September 2017.
As of December 31, 2011, the banks have a lien on our assets regarding all bank loans, and we are required to maintain $16.5 million of compensating
balances with the banks. The lien and the compensation balances relate to all of the loans made to us in 2008 and 2011. The amount of the compensating
balances we are required to keep decreases over time as we repay these loans. The loan agreements require us, among other things, to maintain shareholders'
equity at specified levels and to achieve certain levels of operating income. The agreements also restrict us from paying dividends. As of December 31, 2011,
we were in compliance with the covenants contained in the loan agreements, except for a covenant not to exceed a certain amount of liabilities to the banks. We
received a waiver from the banks with respect to this covenant until June 30, 2012.
As of December 31, 2011, we owed an aggregate of $32.9 million under all of these borrowings.
As of December 31, 2011, we had $75.2 million in cash and cash equivalents, marketable securities and bank deposits, an increase of $11.1 million
from $64.1 million at December 31, 2010. The increase in this amount was primarily attributable to our borrowings in September and December 2011. As of
December 31, 2011, we were restricted with respect to using approximately $21.5 million of our cash as a result of provisions in our loan agreements and a
lease agreement.
In October 2011, our Board approved a program to allow us to repurchase up to 4,000,000 of our ordinary shares. Purchases would be made from time-
to-time at the discretion of management subject, among other things, to our share price and market conditions. If shares are purchased, we will use a portion of
our cash to effect these purchases. In 2011, we repurchased a total of approximately 1.2 million ordinary shares at a total cost of $4.0 million.
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Cash from Operating Activities
Our operating activities used in cash in the amount of $1.3 million in 2011, primarily due to an increase in trade receivables in the amount of $4.6
million and in inventories in the amount of $4.1 million and a decrease in other payables and accrued expenses and other liabilities in the amount of $5.5
million, partly offset by stock based compensation expenses in the amount of $2.3 million and an increase in deferred revenue in the amount of $2.0 million.
Our trade receivables and our inventories increased primarily because of our higher sales volume in 2011 compared to 2010. Our trade and other payables
decreased because of our lower cost of goods sold in 2011 than in 2010.
Our operating activities provided cash in the amount of $16.4 million in 2010, primarily due to our net income of $12.0 million, an increase in other
payables and accrued expenses of $8.2 million, non-cash depreciation and amortization in the amount $4.4 million, non cash stock-based compensation
expenses of $1.4 million and an increase in trade payables in the amount of $4.9 million, partly offset by an increase in trade receivables in the amount of $7.4
million and in inventories in the amount of $4.5 million. Our trade receivables and our inventories increased primarily because of our higher sales volume in
2010 compared to 2009. Our trade and other payables increased because of increased expenses relating to our higher sales volume in 2010.
Our operating activities provided cash in the amount of $21.0 million in 2009, primarily due to a decrease in trade receivables, net, of $11.0 million, a
decrease in inventories of $7.1 million, non-cash depreciation and amortization expenses of $5.0 million and non-cash amortization of discount and deferred
charges on our senior convertible notes of $2.9 million, offset, in part, by our net loss, a decrease of $3.5 million in other payables and accrued expenses and a
decrease of $3.1 million in trade payables. Our trade receivables and our inventories decreased primarily because of our lower sales volume in 2009 than in
2008. Our trade receivables also decreased because of increased collection efforts. Our trade payables, other payables and accrued expenses decreased primarily
because of our lower cost of goods sold in 2009 than in 2008 and implementation of cost reduction steps and a wage cut in January 2009.
Cash from Investing Activities
In 2011, our investing activities used cash in the amount of $35.5 million, primarily due to purchase of marketable securities in the amount of $24.4
million and investment in short-term and long-term bank deposits.
In 2010, our investing activities used cash in the amount of $1.5 million, primarily due to purchase of property and equipment.
In 2009, our investing activities provided cash in the amount of $60.3 million, primarily due to the net proceeds from bank deposits and from
redemption of marketable securities on maturity.
74
Cash from Financing Activities
In 2011, we provided cash in financing activities of $14.7 million as a result of $24.0 million proceed from bank loans offset, in part, by the use of $4.0
million to repurchase our shares and $2.6 million to repay bank loans.
In 2010, we used cash in financing activities of $3.6 million as a result of $6.0 million used for repayment of bank loans offset, in part, by $2.6 million
in proceeds from issuance of shares upon exercise of options and purchases of shares under our employee stock purchase plan.
In 2009, we used cash in financing activities of $79.1 million as a result of $73.1 million used to repurchase our Senior Convertible Notes and $6.0
million used for repayment of bank loans.
Financing Needs
We anticipate that our operating expenses will be a material use of our cash resources for the foreseeable future. We believe that our current working
capital is sufficient to meet our operating cash requirements for at least the next twelve months, including payments required under our existing bank loans, as
well as to fund any repurchase of shares we elect to make. Part of our strategy is to pursue acquisition opportunities. If we do not have available sufficient cash
to finance our operations and the completion of additional acquisitions, we may be required to obtain additional debt or equity financing. We cannot be certain
that we will be able to obtain, if required, additional financing on acceptable terms or at all.
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Research and Development
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to
improve our existing products and to develop new ones. We are developing analog and digital media gateways for carrier and enterprise applications, multi
service business gateways and session border controllers. Our platforms are expected to feature increased trunk capacity, new functionalities, enhanced
signaling software and compliance with new control protocols. As of December 31, 2011, 266 of our employees were engaged primarily in research and
development on a full-time basis.
Our research and development expenses were $32.2 million in 2011 compared to $30.2 million in 2010. From time to time we have received
royalty-bearing grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS. As a recipient of grants from the
OCS, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an exemption. Know-how from the
research and development which is used to produce products may not be transferred to third parties without the approval of the OCS and may further require
significant payments. The OCS approval is not required for the export of any products resulting from such research or development. Through December 31,
2011, we had obtained grants from the OCS aggregating $12.0 million for certain of our research and development projects. We are obligated to pay royalties to
the OCS, amounting to 3%-6% of the sales of the products and other related revenues generated from such projects, up to 100% of the grants received, if no
additional payments are required, linked to the U.S. dollar and bearing interest at the rate of LIBOR at the time of grant. The obligation to pay these royalties is
contingent on actual sales of the products and in the absence of such sales no payment is required.
75
D.
TREND INFORMATION
The accelerated demand for VoIP technology has impacted our business during the last few years. Over the past few years, the shift from traditional
circuit-switched networks to next generation packet-switched networks has continued to gain momentum. As data traffic becomes the dominant factor in
communications, service providers are building and maintaining converged networks for integrated voice and data services. In addition, underdeveloped
markets without basic wire line service in countries such as China and India and certain countries in Eastern Europe are beginning to use VoIP technology to
deliver voice and data services that were previously unavailable. In addition, the growth in broadband access and related technologies has driven the emergence
of alternative service providers. This in turn stimulates competition with incumbent providers, encouraging them to adopt voice over packet technologies. The
entry of new industry players and the demand for new equipment have impacted our business in the last few years.
In 2011, we continued to experience pressure to shorten our lead times in supplying products to customers. Some of our customers are implementing
“demand pull” programs by which they only purchase our product very close to the time, if not simultaneously with the time, they plan to sell their product. We
are increasing our sales efforts in new markets, such as Latin America, Eastern Europe and Far East. We have introduced new system level products, and
applications in our product lines. We are still experiencing low visibility into customer demand for our products and our ability to predict our level of sales.
E
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements” as this term is defined in Item 5E of Form 20-F.
76
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2011, our contractual obligations were as follows (dollars in thousands):
LESS THAN
1 YEAR
PAYMENTS DUE BY PERIOD
1-3
YEARS
3-5
YEARS
MORE THAN
5 YEARS
TOTAL
Senior convertible notes
Bank loans
Rent and lease commitments, net (1)
Severance pay fund (2)
Uncertain tax positions (3)
Payment to NSC’s former shareholders
Office of the Chief Scientist
Other commitments
10,243
5,609
353
13,121
11,178
8,771
10,217
1,020
4,677
332
787
1,233
–
–
24,062
–
353
33,155
31, 681
696
379
1,119
24,062
1,233
(1) Our obligation for rent and lease commitments as of December 31, 2011 was approximately $33.1 million. We have rent and lease income in the amount of
approximately $1.4 million, leaving a net obligation of approximately $32.0 million.
(2) Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2011 was $16.1 million. This obligation is payable only
upon termination, retirement or death of the respective employee. We have funded $15.4 million through deposits into severance pay funds, leaving a net
obligation of approximately $696,000.
(3) Uncertain income tax position under ASC 740 (formerly FASB Interpretation No 48), “Income Taxes”, are due upon settlement and we are unable to
reasonably estimate the ultimate amount of timing of settlement. See also Note 14f in our Consolidated Financial Statements for further information regarding
our liability under ASC 740.
77
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to our directors, senior executive officers and key employees at March 31, 2012:
Name
Shabtai Adlersberg
Guy Avidan
*Lior Aldema
Jeffrey Kahn
Eyal Frishberg
Eli Nir
Yehuda Herscovici
Tal Dor
*Sorin Lupu
Joseph Tenne(1)(2)(3)
Dr. Eyal Kishon(1)(2)(3)(4)
Doron Nevo(1)(2)(3)(4)
Dana Gross
Age
59
49
46
54
53
46
44
42
52
56
52
56
45
Position
Chairman of the Board, President and Chief Executive Officer
Vice President of Finance and Chief Financial Officer
Chief Operating Officer
Chief Strategy Officer
Vice President, Operations
Vice President, Research and Development
Vice President, Systems
Vice President, Human Resources
Vice President, Global Sales
Director
Director
Director
Director
(1) Member of Audit Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
(4) Outside Director
* On April 9, 2012, Lior Aldema, was appointed as Head of Global Sales, in addition to his role as Chief Operating Officer
Shabtai Adlersberg co-founded AudioCodes in 1993, and has served as our Chairman of the Board, President and Chief Executive Officer since
inception. Mr. Adlersberg co-founded DSP Group, a semiconductor company, in 1987. From 1987 to 1990, Mr. Adlersberg served as the Vice President of
Engineering of DSP Group, and from 1990 to 1992, he served as Vice President of Advanced Technology. As Vice President of Engineering, Mr. Adlersberg
established a research and development team for digital cellular communication which was spun-off in 1992 as DSP Communications. Mr. Adlersberg also
serves as Chairman of the Board of Directors of Natural Speech Communication Ltd. and as a director of MailVision Ltd and CTI Squared Ltd. Mr. Adlersberg
holds an M.Sc. in Electronics and Computer Engineering from Tel Aviv University and a B.Sc. in Electrical Engineering from the Technion-Israel Institute of
Technology, or the Technion.
78
Guy Avidan has served as our Vice President of Finance and Chief Financial Officer since July 2010. Prior to joining AudioCodes, Mr. Avidan served
for 15 years in various managerial positions at MRV Communications Inc., a global provider of optical communications network infrastructure equipment and
services. Most recently, Mr. Avidan served as Co-President of MRV Communications. Prior to that, he served as Chief Financial Officer of MRV
Communications between 2007 and 2009. He also served as Vice President and General Manager of MRV International from September 2001 to July 2007.
Prior to joining MRV Communications, from 1992 to 1995, Mr. Avidan served as Vice President of Finance and Chief Financial Officer of Ace North Hills,
which was acquired by MRV. Mr. Avidan is a CPA in Israel and holds a B.A. degree in Economics and Accounting from Haifa University.
Lior Aldema has served as Chief Operating Officer since January 2010. Previously, he served as our Vice President, Product Management from 2002
until 2009, as well as our Vice President Marketing from February 2003 until 2009. He has been employed by us since 1998, when he was team leader and later
headed our System Software Group in our research and development department. Prior to 1998, Mr. Aldema served as an officer in the Technical Unit of the
Intelligence Corps of the Israeli Defense Forces (Major), heading both operational units and large development groups related to various technologies. Mr.
Aldema holds an M.B.A. from Tel Aviv University and a B.Sc. from the Technion.
Jeffrey Kahn has served as our Chief Strategy Officer since January 2010. Prior to joining us, Mr. Kahn served as Founder and Managing Director of
Strategy3i, a global consultancy that he established in 2007 to provide counseling to leading global companies, including Pfizer, Unicredit and Renova, among
others. From 2005 to 2007, Mr. Kahn served as a director of investment banking at Maxim Group LLC, and from 1995 to 2005 he served as the Chief Strategic
Officer of Ruder Finn International, one of the world’s largest and oldest independent global communications firms. Mr. Kahn holds a B.A. in international
relations and psychology from Brooklyn College and has done graduate studies in international relations and psychology at Tel Aviv University.
Eyal Frishberg has served as our Vice President, Operations since October 2000. From 1997 to 2000, Mr. Frishberg served as Associate Vice President,
SDH Operations in ECI Telecom Ltd., a major telecommunication company. From 1987 to 1997, Mr. Frishberg worked in various operational positions in ECI
Telecom including as manager of ECI production facility and production control. Mr. Frishberg worked from 1994 until 1997 for ELTA company, part of Israeli
Aircraft Industries in the planning and control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from Tel Aviv University and an M.B.A. from
Ben-Gurion University of the Negev.
Eli Nir has served as our Vice President, Research and Development since April 2001. He has been employed by us since 1996, when he founded and
headed our System Software Group in our research and development department. Prior to 1996, Mr. Nir served as an officer in the Technical Unit of the
Intelligence Corps of the Israeli Defense Forces (Major), heading both operational units and large development groups mostly related to digital processing. Mr.
Nir holds an M.B.A. and an M.Sc. from Tel Aviv University in Digital Speech Processing and a B.Sc. from the Technion.
79
Yehuda Herscovici has served as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr. Hershkovici served as our Vice President,
Advanced Products. From 2000 to 2001, Mr. Hershkovici served as our Director of Advanced Technologies. From 1994 to 1998 and during 1999, Mr.
Hershkovici held a variety of research and development positions at Advanced Recognition Technologies, Ltd., a voice and handwriting recognition company,
heading its research and development from 1999 to 2000 as Vice President, Research and Development. From 1998 to 1999, Mr. Hershkovici was engaged in
developing various wireless communication algorithms at Comsys, a telecommunications company. Mr. Hershkovici holds an M.Sc. and a B.Sc., from the
Technion both in the area of telecommunications.
Tal Dor has served as our Vice President of Human Resources since March 2000. Prior to March 2000, Ms. Dor acted for several years as a consultant
in Israel to, among others, telephone and cable businesses, as well as health and social service organizations. Ms. Dor holds a B.A. in psychology, from Ben-
Gurion University of the Negev and an M.A. in psychology from Tel Aviv University.
Sorin Lupu joined AudioCodes in October 2010 as Vice President of Global Sales. From 2009 to 2010,Mr. Lupu led international market sales for
Carrier VoIP Applications and Solutions at Nortel. Prior to that, between 2005 and 2008 Mr. Lupu served as Vice President of Sales EMEA for emerging
markets focusing on expanding markets in Russia, Poland, Turkey, Romania and India. Mr. Lupu also served as a member of the Board for Ne tas, a Nortel and
TAF joint venture in Turkey. From 2001 to 2004, Mr. Lupu held the position of CEO Nortel Networks Israel. From 1997 to 2001, Mr. Lupu served in wireless
engineering and account management positions. Prior to joining Nortel, Mr. Lupu held engineering, operational and managerial positions at Bezeq (PTT) in
Israel. Mr. Lupu holds an International MBA from Tel Aviv and Northwestern University (Kellogg/Recanati) and an MSc in Electronics and
Telecommunications from Iasi University in Romania.
Joseph Tenne has served as one of our directors since June 2003. Mr. Tenne is currently the Chief Financial Officer of Ormat Technologies, Inc., a
company listed on the New York Stock Exchange, which is engaged in the geothermal and recovered energy business. Since January 2006, Mr. Tenne has also
served as the Chief Financial Officer of Ormat Industries Ltd., an Israeli holding company listed on the Tel-Aviv Stock Exchange and the parent company of
Ormat Technologies, Inc. From 2003 to 2005, Mr. Tenne was the Chief Financial Officer of Treofan Germany GmbH & Co. KG, a German company, which is
engaged in the development, production and marketing of oriented polypropylene films, which are mainly used in the food packaging industry. From 1997 until
2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel and a member of PricewaterhouseCoopers International
Limited. Mr. Tenne holds a B.A. in Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is also a Certified Public Accountant in
Israel.
Dr. Eyal Kishon has served as one of our directors since 1997. Since 1996, Dr. Kishon has been Managing Partner of Genesis Partners, an Israel-based
venture capital fund. From 1993 to 1996, Dr. Kishon served as Associate Director of Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. Prior to that, Dr.
Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992 to 1993. Dr. Kishon serves as a director of Allot Communications Ltd and
Celtro Inc. From 1991 to 1992, Dr. Kishon was a Research Fellow in the Multimedia Department of IBM Science & Technology. From 1989 to 1991, Dr.
Kishon worked in the Robotics Research Department of AT&T Bell Laboratories. Dr. Kishon holds a B.A. in Computer Science from the Technion – Israel
Institute of Technology and an M.Sc. and a Ph.D. in Computer Science from New York University.
80
Doron Nevo has served as one of our directors since 2000. Mr. Nevo is President and CEO of KiloLambda Technologies Ltd., an optical nano-
technology company, which he co-founded in 2001. From 1999 to 2001, Mr. Nevo was involved in fund raising activities for Israeli-based startup companies.
From 1996 to 1999, Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo established NKO in early 1995 as a startup subsidiary of Clalcom, Ltd.
NKO designed and developed a full scale, carrier grade, IP telephony system platform and established its own IP network. From 1992 to 1996, Mr. Nevo was
President and CEO of Clalcom Ltd. Mr. Nevo established Clalcom in 1992 as a telecom service provider in Israel. He also serves as a director of Etgar -
Portfolio Management Trust Co. and of a number of private companies. Mr. Nevo holds a B.Sc. in Electrical Engineering from the Technion – Israel Institute of
Technology and an M.Sc. in Telecommunications Management from Brooklyn Polytechnic.
Dana Gross has served as one of our directors since November 2010.She also served as one of our directors between 2000 and 2006. Ms. Gross has
been a Venture Partner at Camel Ventures, a leading Israeli venture capital firm since 2009. From 2006 to 2008, Ms. Gross was a Senior Vice President, Israel
Country Manager at SanDisk Corporation, a manufacturer of flash memory cards. From 1992 to 2006, Ms. Gross held various senior positions at M-Systems, a
manufacturer of flash memory cards that was acquired by SanDisk, including Chief Marketing Officer, Vice President, World Wide Sales, President of M-
Systems Inc. (U.S. subsidiary of M-Systems) and CFO, Vice President, Finance and Administration. In addition, Ms. Gross has served as a director of Tower
Semiconductor Ltd. since 2009, and served as a director of M-Systems Ltd. from 1999 to 2006 and PowerDsine Ltd. from 2004 to 2007. Ms. Gross holds a
B.Sc. in Industrial Engineering from Tel-Aviv University and an M.A. in business administration from San Jose State University.
B.
COMPENSATION
The aggregate direct remuneration paid during the year ended December 31, 2011 to the 13 persons who served in the capacity of director, senior
executive officer or key employee during 2011 was approximately $3.6 million, including approximately $433,000 which was set aside for pension and
retirement benefits. The compensation amounts do not include amounts expended by us for automobiles made available to our officers, expenses (including
business, travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel.
Stock options to purchase our ordinary shares granted under our 1997, 1999 and 2008 Stock Option Plans to persons who served in the capacity of
director or executive officer are generally exercisable at the fair market value at the date of grant, and expire ten years (under the 1997 Plan) and seven years
(under the 1999 Plan and the 2008 Plan), respectively, from the date of grant. The options are generally exercisable in four equal annual installments,
commencing one year from the date of grant.
81
Both the 1997 and 1999 Stock Option Plans have expired and no options are available for future grants under these plans.
A summary of our stock option activity and related information for the years ended December 31, 2009, 2010 and 2011 for the persons who served in
the capacity of director, senior executive or key employee officer during those years is as follows:
2009
Weighted
2011
Weighted
Number Average Number Average Number Average
Exercise
Price
2010
Weighted
Exercise
Price
Exercise
Price
Options
Options
Options
of
of
of
Outstanding at the beginning of the year
1,778,269 $
7.66 1,865,928 $
6.44 1,710,620 $
6.07
Granted
Cancelled
Exercised
483,577 $
(358,418)
(37,500) $
1.42
0
682,108 $
(536,951)
(300,465) $
3.77
2.43
349,601 $
(577,500)
(168,272) $
1.76
0.66
Outstanding at the end of the year
1,865,928 $
6.44 1,710,620 $
6.07 1,314,449 $
6.07
As of December 31, 2011, options to purchase 508,764 ordinary shares were exercisable by the 12 persons who served as an officer or director during
2011 at an average exercise price of $5.23 per share.
Under the Israeli Companies Law, the compensation arrangements for officers who are not directors require the approval of the board of directors,
unless the articles of association provide otherwise. Our articles of association do not provide otherwise. Arrangements regarding the compensation of directors
require the approval of the audit committee, the board and the shareholders, in that order.
C.
BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the
Companies Law, relating to such matters as outside directors, the audit committee, the internal auditor and approvals of interested party transactions. These
matters are in addition to the ongoing listing conditions of the NASDAQ Global Select Market and other relevant provisions of U.S. securities laws. Under the
NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ
requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further
information, see “Item 16G – Corporate Governance.”
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Independent Directors
Under the Companies Law, Israeli companies that have offered securities to the public in or outside of Israel are required to appoint at least two
“outside” directors. Doron Nevo and Dr. Eyal Kishon currently serve as our outside directors. Under the requirements for listing on the NASDAQ Global Select
Market, a majority of our directors are required to be independent as defined by NASDAQ rules. Doron Nevo, Dr. Eyal Kishon, Dana Gross and Joseph Tenne
qualify as independent directors under the applicable Securities and Exchange Commission and NASDAQ rules, as well as under the Companies Law.
Under the Companies Law, a person may not serve as an outside director if at the date of the person's election or within the prior two years the person
is a relative of the company's controlling shareholder, or the person or his or her relatives, partners, employers, supervisors or entities under the person's control,
have or had any affiliation with us or with a controlling shareholder or relatives of a controlling shareholder, and, in the case of a company without a controlling
shareholder or a shareholder holding at least 25% of the voting rights, any affiliation, at the time of election, to the chairman of the board of directors, the chief
executive officer, an interested party or the company's most senior finance officer. Under the Companies Law, "affiliation" includes:
·
·
·
·
an employment relationship,
a business or professional relationship maintained on a regular basis,
control, and
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director
was appointed or elected as a director of the private company in order to serve as an outside director following the initial public offering.
In addition, a person may not serve as an outside director:
·
·
if the person or his or her relatives, partners, employers, supervisors or entities under the person's control, maintains a business or professional
relationship with the company, even if such relationship is not on a regular basis, other than a negligible business or professional relationship, or
if the person received compensation as an outside director in excess of the amounts permitted by the Companies Law and regulations there under.
83
In addition, no individual may serve as an outside director if the individual’s position or other activities create or may create a conflict of interest with
his or her role as an outside director or are likely to interfere with his or her ability to serve as a director. Until the lapse of two years from the termination of
office, the company, a controlling shareholder and entities under the company's control may not grant the outside director or any of his or her relatives, directly
or indirectly, any benefit, or engage the outside director or his or her relatives as an office holder of the company, of a controlling shareholders or of an entity
under the company's control, and may not employ or receive services from the outside director or any of his or her relatives, either directly or indirectly,
including through a corporation controlled by that person. The restriction on a relative that is not the spouse or child of the outside director is limited to one year
from the termination of office instead of two years. Pursuant to the Companies Law, at least one of the outside directors appointed by a publicly-traded
company must have “financial and accounting expertise.” The other outside directors are required to possess “financial and accounting expertise” or
“professional expertise,” as these terms are defined in regulations promulgated under the Companies Law. Joseph Tenne is designated as the “audit committee
financial expert” as that term is defined in Securities and Exchange Commission rules.
Outside directors are elected by a majority vote at a shareholders' meeting. In addition to the majority vote, the shareholder approval of the election of
an outside director must satisfy either of two additional tests:
·
·
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who
have a personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the
controlling shareholders); or
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the
outside director does not exceed 2% of the aggregate voting rights of our company.
The term of an outside director is three years and may be extended for additional three-year terms. An outside director can be removed from office
only under very limited circumstances. All of the outside directors must serve on a company’s statutory audit committee (including one outside director serving
as the chair of the audit committee)and each other committee of a company’s board of directors is required to include at least one outside director. If, at the time
an outside director is elected, all current members of the board of directors that are not controlling shareholders or their respective relatives are of the same
gender, then the elected outside director must be of the other gender.
Pursuant to the Companies Law, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association
pursuant to which a majority of its board of directors(or a third of its board of directors in case the company has a controlling shareholder)will constitute
individuals complying with certain independence criteria prescribed by the Companies Law. Pursuant to the regulations, directors who comply with the
independence requirements of the NASDAQ and Securities and Exchange Commission regulations are deemed to comply with the independence requirements
of the Companies Law. We have not included such a provision in our articles of association since our board of directors complies with the independence
requirements of the NASDAQ and Securities and Exchange Commission regulations described above. In any event, as described above, a majority of our board
of directors and all members of our audit committee are directors who comply with the independence criteria prescribed by the Companies Law.
84
Audit Committee
Under the Companies Law and the requirements for listing on the NASDAQ Global Select Market, our board of directors is required to appoint an
audit committee. Our audit committee must be comprised of at least three directors, including all of the outside directors (one of whom must serve as the chair
of the audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law.
The audit committee consists of: Dr. Eyal Kishon, Doron Nevo and Joseph Tenne. Our board of directors has determined that Joseph Tenne is an “audit
committee financial expert” as defined in Securities and Exchange Commission rules and that all members of the audit committee are independent under the
applicable Securities and Exchange Commission, NASDAQ rules and the Companies Law.
The audit committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity
controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling
shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder
or any relatives of a controlling shareholder. Individuals who are not permitted to be audit committee members may not participate in the committee's meetings
other than to present a particular issue. However, an employee who is not a controlling shareholder or relative may participate in the committee's discussions
but not in any vote, and the company's legal counsel and corporate secretary may participate in the committee's discussions and votes if requested by the
committee.
Under the Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and in
addition a majority of the attending committee members are independent directors within the meaning of the Companies Law and include at least one outside
director.
We have adopted an audit committee charter as required by NASDAQ rules. The audit committee's duties include providing assistance to the board of
directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance
functions by approving the fees of, and services performed by, our independent accountants and reviewing their reports regarding our accounting practices and
systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems
necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor
deficiencies in the administration of our company, including by consulting with the internal auditor and independent accountants, to review, classify and
approve related party transactions and extraordinary transactions, to review the internal auditor's audit plan and to establish and monitor whistleblower
procedures.
85
Nominating Committee
NASDAQ rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of
independent directors or by a majority of independent directors. Our Nominating Committee assists the board of directors in its selection of individuals as
nominees for election to the board of directors and/or to fill any vacancies or newly created directorships on the board of directors. The Nominating Committee
consists of Dr. Eyal Kishon, Doron Nevo and Joseph Tenne. All members of the Nominating Committee are independent under the applicable NASDAQ rules
and the Companies Law.
Compensation Committee
NASDAQ rules also provide that the compensation of a company’s chief executive officer and other executive officers is required to be approved
either by a majority of the independent directors on the board of directors or a committee comprised solely of independent directors. Our board of directors has
appointed Dr. Eyal Kishon, Doron Nevo and Joseph Tenne to serve on our Compensation Committee of the board of directors. All members of the
Compensation Committee are independent under the applicable NASDAQ rules and the Companies Law.
Internal Auditor
Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The internal auditor
may be our employee, but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our
independent accounting firm. The role of the internal auditor is to examine, among other things, whether our activities comply with the law and orderly business
procedure. Brightman, Almagor Zohar & Co. (a member firm of Deloitte &Touche in Israel) has been our internal auditor since November 2008.
Board Classes
Pursuant to our articles of association, our directors, other than our outside directors, are classified into three classes (classes I, II and III). The
members of each class of directors and the expiration of the term of office are as follows:
Dana Gross
Joseph Tenne
Shabtai Adlersberg
2013
2014
2012
Class I
Class II
Class III
86
Our outside directors under the Companies Law, Doron Nevo and Dr. Eyal Kishon, are not members of any class and serve in accordance with the
provisions of the Companies Law. Mr. Nevo’s term ends in 2012 and Dr. Kishon’s term ends in 2014.
Chairman of the Board
Under the Companies Law, the chief executive officer of a company (or a relative of the chief executive officer) may not serve as the chairman of the
board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the chief executive
officer, unless approved by the shareholders by a special majority vote prescribed by the Companies Law. The shareholder vote cannot authorize the
appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote.
The chairman of the board of directors shall not hold any other position with the company (except as chief executive officer if approved in accordance with the
above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not
delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the chief executive officer. Pursuant to the provisions of the
Companies Law, our shareholders have authorized Shabtai Adlersberg to serve as our Chairman of the Board and Chief Executive Officer until December 2012.
We expect to seek extension of this authorization at the Annual General Meeting of Shareholders to be held in 2012.
D.
EMPLOYEES
We had the following number of employees as of December 31, 2009, 2010 and 2011 in the areas set forth in the table below:
Research and development
Sales and marketing, technical service and support
Operations
Management and administration
2009
As of December 31,
2010
2011
248
201
88
41
578
270
211
91
40
612
Our employees were located in the following areas as of December 31, 2009, 2010 and 2011.
Israel
United States
Europe
Far East
Latin America
2009
As of December 31,
2010
2011
384
125
26
36
7
578
394
132
25
52
9
612
87
266
238
88
42
634
402
135
28
55
14
634
The decrease in the number of employees in 2009 was primarily attributable to our cost reduction plans implemented in 2008. The increase in the
number of employees in 2010 and in 2011 was primarily attributable to an increase in sales and marketing personnel.
Israeli labor laws and regulations are applicable to our employees in Israel. These laws principally concern matters such as paid annual vacation, paid
sick days, length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law
generally requires severance pay, which may be funded by Manager’s Insurance, described below, upon the retirement or death of an employee or termination
of employment without cause (as defined under Israeli law). Furthermore, Israeli employees and employers are required to pay predetermined sums to the
National Insurance Institute, which include payments for national health insurance. The payments to the National Insurance Institute currently range from
approximately 5% to 17% of wages up to specified wage levels, of which the employee contributes approximately 65% and the employer contributes
approximately 35%.
Our employees are subject to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel)
and the Coordination Bureau of Economic Organizations (including the Industrialists Associations) by order of the Israeli Minister of Industry, Trade and
Labor. These provisions principally concern cost of living increases, recreation pay and other conditions of employment. We generally provide our employees
with benefits and working conditions above the required minimums. Our employees, as a group, are not currently represented by a labor union. To date, we
have not experienced any work stoppages.
Pursuant to an order issued in December 2007 by the Israeli Minister of Industry, Trade and Labor, provisions relating to pension arrangements in the
collective bargaining agreements between the Histadrut and the Coordination Bureau of Economic Organizations will apply to all employees in Israel, including
our employees in Israel. We regularly contribute to a “Manager’s Insurance Fund” or to a privately managed pension fund on behalf of our employees located in
Israel. These funds provide employees with a lump sum payment upon retirement (or a pension, in case of a pension fund) and severance pay, if legally entitled
thereto, upon termination of employment. We provide for payments to a Manager’s Insurance Fund and pension fund contributions in the amount of 13.3% of
an employee’s salary on account of severance pay and provident payment or pension, with the employee contributing 5.0% of his salary. We also pay an
additional amount of up to 2.5% of certain of our employees’ salaries in connection with disability payments. In addition, we administer an Education Fund for
our Israeli employees and pay 7.5% of these employees’ salaries thereto, with the employees contributing 2.5% of their salary.
88
E.
SHARE OWNERSHIP
The following table sets forth the share ownership and outstanding number of options of our directors and officers as of March 19, 2012.
Name
Total Shares
Beneficially
Owned
Percentage of
Ordinary Shares
Number of
Options and
RSU
Shabtai Adlersberg
Guy Avidan
Lior Aldema
Jeffrey Kahn
Eyal Frishberg
Eli Nir
Yehuda Herscovici
Tal Dor
Sorin Lupu
Joseph Tenne
Dr. Eyal Kishon
Doron Nevo
Dana Gross
* Less than one percent.
5,092,935
*
*
*
*
*
*
*
*
*
*
*
*
12.6%
91,264
*
*
*
*
*
*
*
*
*
*
*
Our officers and directors have the same voting rights as our other shareholders.
The following table sets forth information with respect to the options to purchase our ordinary shares held by Mr. Adlersberg as of March 19, 2012.
Number of
Options
120,808
123,456
122,201
Grant Date
Exercise
Price
Exercised Cancelled
Vesting
Expiration Date
December 14, 2009 $
December 14, 2010 $
December 14, 2011 $
2.57
5.83
3.66
-
-
-
-
-
-
4 years
4 years
4 years
December 14, 2016
December 14, 2017
December 14, 2018
The following table sets forth information with respect to the restricted share units (“RSUs”) granted to Mr. Adlersberg as of March 19, 2012. These
RSUs vest quarterly over a four-year period from the date of grant, subject to his continuing service to us.
Number of
RSUs
40,269
41,152
40,734
Grant Date
December 14, 2009
December 14, 2010
December 14, 2011
issued
22,650
12,860
2,545
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Employee Share Plans
We have Employee Share Purchase Plans for the sale of shares to our employees and Employee Share Option Plans for the granting of options to our
employees, officers, directors and consultants. Most of these plans are pursuant to the Israeli Income Tax Ordinance, entitling the beneficiaries who are our
employees to tax benefits under Israeli law. There are various conditions that must be met in order to qualify for these benefits, including registration of the
options in the name of a trustee for each of the beneficiaries who is granted options. For tax benefits each option, and any ordinary shares acquired upon the
exercise of the option, must be held by the trustee at least for a period commencing on the date of grant and ending no later than 24 months after the date of
grant, in accordance with the period of time specified by Section 102 of Israel’s Income Tax Ordinance, and deposited in trust with the trustee.
Employee Share Purchase Plans
We implemented two Employee Share Purchase Plans in May 2001. One plan, the global plan, was for our non-U.S., employees and the other our U.S.
employees. We amended and restated the global plan in July 2007 and adopted an additional plan for U.S. employees in July 2007. Under these Plans, a
maximum of 6,500,000 of our ordinary shares were reserved for sale to our employees at a price equal to 85% of the lesser of fair market value on the first day
or last day of each offering period under the Plans. As of December 31, 2011, we had issued 288,515 of our ordinary shares pursuant to purchases under these
plans. During 2011, the Employee Share Purchase Plans expired.
Employee Share Option Plans
2008 Equity Incentive Plan. We have adopted an equity incentive plan under Section 102 of the Israeli Income Tax Ordinance, or Section 102, which
provides certain tax benefits in connection with share-based compensation to employees, officers and directors. This plan, our 2008 Equity Incentive Plan, was
approved by the Israeli Tax Authority.
Under our equity incentive plan, we may grant our directors, officers and employees restricted shares, restricted share units and options to purchase our
ordinary shares under Section 102. We may also grant other persons awards under our equity incentive plan. However, such other persons (controlling
shareholders and consultants) will not enjoy the tax benefits provided by Section 102. The total number of ordinary shares that were originally available for
grant under the 2008 Plan was 2,009,122, which was increased in 2010 to 4,009,122. This number is reduced by one share for each equity grant we make under
the 2008 Plan. During 2011, options to purchase 669,701 ordinary shares and 275,600 restricted share units were granted under the 2008 Plan. As of December
31, 2011, 1,327,445 ordinary shares remained available for grant under the 2008 Plan.
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The Israeli Tax Authority approved the 2008Plan under the capital gains tax track of Section 102. Based on Israeli law currently in effect and the
election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the
underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers and
directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying ordinary shares are sold, and (ii) subject to capital gains
tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares' market value at the date of grant, the 25% capital
gains tax rate will apply only with respect to capital gains in excess of the underlying shares' market value at the date of grant and the remaining capital gains
will be taxed at the grantee's regular tax rate. We may not recognize a tax benefit pertaining to the employees' restricted shares, restricted share units and options
for tax purposes except in the events described above under which the gain is taxed at the grantee's regular tax rate.
Restricted shares, restricted share units and options granted under the 2008 Plan will generally vest over four years from the grant date. If the
employment of an employee is terminated for any reason, the employee (or in the case of death, the designated beneficiary) may exercise his or her vested
options within ninety days of the date of termination (or within twelve months of the date of termination in the case of death or disability) and shall be entitled
to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date
his or her employment terminates. Directors are generally eligible to exercise his or her vested options within twelve months from the date the director ceases to
serve on the board of directors.
As of December 31, 2010, we recorded equity-based compensation as a liability based on its fair value in the amount of $500,000 relating to a
commitment to grant restricted share units that were granted in January 2011. In addition, we recorded a liability based on its fair value in the amount of
$160,000 relating to a commitment to grant restricted share units subject to our share price in the period in between the grant date and January 1, 2013.
1999 Option Plans. In 1999, our board restated three 1997 Employee Share Option Plans for our Israeli employees, officers, directors and consultants
and two 1997 Share Option Plans for our U.S. employees, officers, directors and consultants. Additionally, in 1999 our board adopted an Employee Share
Option Plan for our Israeli employees, officers, directors and consultants, and an Employee Share Option Plan for our U.S. employees, officers, directors and
consultants. The terms of the 1999 Plans are substantially the same as those of the 1997 Plans, but have reduced the exercise period of options from 10 to 7
years. The board has the ability to grant options with longer or shorter terms. The terms of the 1999 Plans have been modified slightly since they were adopted
and, in 2003, the Israeli Plan was changed to conform to amendments to the Israeli Income Tax law. As of December 31, 2011, the 1997 and 1999 Israeli Plans
and the 1997 U.S. Plans have expired and we no longer make any grants under these plans.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the options
are based on the fair value of the ordinary shares at the time of grant as determined by our board of directors. The current practice of our board of directors is to
grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
To our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another corporation or (ii) by any foreign government and (B) there
are no arrangements, the operation of which may at a subsequent date result in a change in control of AudioCodes. The following table sets forth, as of March
19, 2012 the number of our ordinary shares, which constitute our only outstanding voting securities, beneficially owned by (i) all shareholders known to us to
own more than 5% of our outstanding ordinary shares, and (ii) all of our directors and senior executive officers as a group
Identity of Person or
Group
Shabtai Adlersberg(1)
Leon Bialik(2)
Rima Management, LLC(3)
All directors and senior executive officers
as a group (13 persons)(4)
Amount Owned
Percent of Class
5,214,738
4,079,322
3,912,733
5,632,238
12.9%
10.0%
9.5%
13.9%
(1)
(2)
(3)
(4)
Includes options to purchase 114,168 shares, exercisable within 60 days of April 10, 2012 and 7,635 ordinary shares issuable pursuant to restricted
share units that vest within 60 days of April 10, 2012.
The information is derived from a statement on Schedule 13G/A, dated February 14, 2012 of Leon Bialik filed with the Securities and Exchange
Commission.
The information is derived from a statement on Schedule 13G, dated February 14, 2012, of Rima Management, LLC and Richard Mashaal filed with
the Securities and Exchange Commission.
Includes 531,668 ordinary shares which may be purchased pursuant to options exercisable within sixty days following April 10, 2012 and 7,635
restricted share units that vest within 60 days of April 10, 2012
Mr. Adlersberg held 12.9% of our ordinary shares as of December 31, 2011 as compared to 13.5% of our ordinary shares as of December 31, 2010 and
14.4% of our ordinary shares as of December 31, 2009.
Mr. Bialik held 10.0% of our ordinary shares as of December 31, 2011 as compared to 9.9% of our ordinary shares as of December 31, 2010 and
10.1% of our ordinary shares as of December 31, 2009.
Rima Management, LLC held 9.5% of our ordinary shares as of December 31, 2011 as compared to 8.6% of our ordinary shares as of December 31,
2010 and 7.4% of our ordinary shares as of December 31, 2009.
92
As of April 10, 2012, there were approximately 20 holders of record of our ordinary shares in the United States, although we believe that the number
of beneficial owners of the ordinary shares is significantly greater. The number of record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or
other nominees.
The major shareholders have the same voting rights as the other shareholders.
B.
RELATED PARTY TRANSACTIONS
Pursuant to a distribution agreement we entered into with MailVision Ltd., a company in which we own 26.6% of the shares as of December 31, 2011,
we resell and market MailVision’s products and services. In 2011, we paid MailVision $1.4 million pursuant to this distribution agreement.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
For a discussion of our legal proceedings, please see “Item 4B-Information on the Company-Business Overview-Legal Proceedings.”
Dividend Policy
For a discussion of our dividend policy, please see “Item 10B-Additional Information-Memorandum and Articles of Association-Dividends.”
B.
Significant Changes
No significant change has occurred since December 31, 2011, except as otherwise disclosed in this Annual Report.
93
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS UPDATE ALL TABLES AND DISCLOSURE IN THIS SECTION
Our ordinary shares are listed on the NASDAQ Global Select Market and The Tel Aviv Stock Exchange under the symbol “AUDC.”
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the NASDAQ Global Select
Market.
Calendar Year
2011
2010
2009
2008
2007
Calendar Period
2012
Second quarter (through April 10, 2012)
First quarter
2011
Fourth quarter
Third quarter
Second quarter
First quarter
2010
Fourth quarter
Third quarter
Second quarter
First quarter
Price Per Share
High
Low
8.07 $
6.51 $
3.06 $
5.26 $
10.40 $
Price Per Share
High
Low
2.77 $
4.25 $
3.98 $
5.75 $
6.39 $
8.07 $
6.51 $
3.99 $
4.39 $
4.17 $
2.28
2.31
0.92
1.47
4.55
2.60
3.19
2.28
2.96
3.93
5.38
3.70
2.31
2.43
2.65
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
94
Calendar Month
2012
March
February
January
2011
December
November
October
Price Per Share
High
Low
$
$
$
$
$
$
3.69 $
4.24 $
4.25 $
3.98 $
3.58 $
3.73 $
2.58
3.26
3.47
3.46
3.00
2.28
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by The Tel Aviv Stock
Exchange. All share prices shown in the following table are in NIS. As of December 31, 2011, the exchange rate was equal to approximately NIS 3.821 per U.S.
$1.00.
Calendar Year
2011
2010
2009
2008
2007
Calendar Period
2012
Second quarter (through April 10. 2012)
First quarter
2011
Fourth quarter
Third quarter
Second quarter
First quarter
2010
Fourth quarter
Third quarter
Second quarter
First quarter
Price Per Share
High
Low
29.51
23.25
11.55
20.20
44.00
NIS
NIS
NIS
NIS
NIS
Price Per Share
10.48
15.99
NIS
NIS
14.66
19.03
21.97
29.51
NIS
NIS
NIS
NIS
23.25
13.91
16.05
15.25
NIS
NIS
NIS
NIS
8.65
9.20
4.26
5.71
18.90
9.83
9.85
8.65
11.20
13.63
19.14
13.30
9.33
9.20
9.50
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
95
Calendar Month
2012
March
February
January
2011
December
November
October
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Price Per Share
High
Low
NIS
NIS
NIS
NIS
NIS
NIS
13.76 NIS
15.51 NIS
15.99 NIS
14.66 NIS
13.28 NIS
13.77 NIS
9.85
12.71
14.47
13.01
11.14
8.65
Our ordinary shares are listed for trading on the NASDAQ Global Select Market under the symbol “AUDC”. Our ordinary shares are also listed for
trading on The Tel-Aviv Stock Exchange under the symbol “AUDC”. In addition, we are aware of our ordinary shares being traded on the following markets:
Frankfurt Stock Exchange, Berlin Stock Exchange, Munich Stock Exchange, Stuttgart Stock Exchange, the German Composite and XETRA.
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
96
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes
We were incorporated in 1992 under the laws of the State of Israel. Our registration number with the Israeli Registrar of Companies is 520044132. Our
objects and purposes, set forth in Section 2 of our memorandum of association, are:
·
·
·
·
Share Capital
to plan, develop and market voice signal systems;
to purchase, import, market and wholesale and retail distribute, in Israel and abroad, consumption goods and accompanying products;
to serve as representatives of bodies, entrepreneurs and companies from Israel and abroad with respect to their activities in Israel and
abroad; and
to carry out any activity as determined by the lawful management.
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000
preferred shares, nominal value NIS 0.01 per share. As of April 9, 2012, we had 39,813,103 ordinary shares outstanding (which does not include 9,371,177
treasury shares) and no preferred shares outstanding.
Borrowing Powers
The board of directors has the power to cause us to borrow money and to secure the payment of borrowed money. The board of directors specifically
has the power to issue bonds or debentures, and to impose mortgages or other security interests on all or any part of our property.
Amendment of Articles of Association
Shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of voting power
represented at the meeting in person or by proxy and voting thereon.
97
Dividends
Under the Israeli Companies Law, we may pay dividends only out of our profits. The amount of any dividend to be distributed among shareholders is
based on the nominal value of their shares. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt
income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have
been provided on income attributable to our Approved Enterprise program as the undistributed tax exempt income is essentially permanent in duration.
Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record. A shareholder is not entitled to vote at
any shareholders meeting unless all calls then payable by him in respect of his shares have been paid (this does not apply to separate meetings of the holders of
a particular class of shares with respect to the modification or abrogation of their rights).
Under our articles of association, we may issue preferred shares from time to time, in one or more series. However, in connection with our listing on
The Tel-Aviv Stock Exchange in 2001, we agreed that for such time as our ordinary shares are traded on The Tel-Aviv Stock Exchange, we will not issue any of
the 2,500,000 preferred shares, nominal value NIS 0.01, authorized in our articles of association. Notwithstanding the foregoing, we may issue preferred shares
if the preference of those shares is limited to a preference in the distribution of dividends and such preferred shares have no voting rights.
Business Combinations
Our articles of association impose restrictions on our ability to engage in any merger, asset or share sale or other similar transaction with a shareholder
holding 15% or more of our voting shares.
Winding Up
Upon our liquidation, our assets available for distribution to shareholders will be distributed to them in proportion to the nominal value of their shares.
Redeemable Shares
Subject to our undertaking to the Tel-Aviv Stock Exchange as described above, we may issue and redeem redeemable shares.
Modification of Rights
Subject to the provisions of our memorandum of association, and without prejudice to any special rights previously conferred upon the holders of our
existing shares, we may, from time to time, by a resolution approved by the holders of 75% voting power represented at the meeting in person or by proxy and
voting thereon, provide for shares with such preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in
regard to dividends, voting repayment of share capital or otherwise, as may be stipulated in such resolution.
98
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless otherwise
provided by the articles of association, by a resolution approved by the holders of 75% voting power represented at the meeting in person or by proxy and
voting thereon, subject to the consent in writing of the holders of 75% of the issued shares of that class.
The provisions of our articles of association relating to general meetings also apply to any separate general meeting of the holders of the shares of a
particular class, except that two or more members holding not less than 75% of the issued shares of that class must be present in person or by proxy at that
separate general meeting for a quorum to exist.
Unless otherwise provided by our articles of association, the increase of an authorized class of shares, or the issuance of additional shares thereof out
of the authorized and unissued share capital, shall not be deemed to modify or abrogate the rights attached to previously issued shares of that class or of any
other class.
Shareholders Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in
Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special shareholders
meeting at the request of:
·
·
·
at least two directors;
at least one-quarter of the directors in office; or
one or more shareholders who hold at least 5% of the outstanding share capital and at least 1% of the voting rights, or one or more
shareholders who hold at least 5% of the outstanding voting rights.
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
Notice of General Meetings; Omission to Give Notice
The provisions of the Companies Law and the related regulations override the provisions of our articles of association, and provide for notice of a
meeting of shareholders to be sent to each registered shareholder at least 21 days or 35 days in advance of the meeting depending on the items included in the
meeting agenda. Notice of a meeting of shareholders must also be published in two Israeli newspapers at least five days prior to the record date for the meeting.
99
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed
resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and telephone
number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state
of war with Israel to hold shares of Israeli companies.
Fiduciary Duties; Approval of Transactions under Israeli Law
The Companies Law imposes fiduciary duties that “office holders,” including directors and executive officers, owe to their company. An office
holder’s fiduciary duties consist of a duty of care and a duty of loyalty.
Duty of Care. The duty of care generally requires an office holder to act with the level of care which a reasonable office holder in the same position
would have acted under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given
action submitted for his or her approval or performed by virtue of his or her position and all other relevant information material to these actions.
Duty of Loyalty. The duty of loyalty generally requires an office holder to act in good faith and for the benefit of the company. Specifically, an office
holder must avoid any conflict of interest between the office holder’s position in the company and his or her other positions or personal affairs. In addition, an
office holder must avoid competing against the company or exploiting any business opportunity of the company for his or her own benefit or the benefit of
others. An office holder must also disclose to the company any information or documents relating to the company’s affairs that the office holder has received
due to his or her position in the company. A company may approve any of the acts mentioned above provided that all the following conditions apply: the office
holder acted in good faith and neither the act nor the approval of the act prejudices the good of the company, and the office holder disclosed the essence of his
or her personal interest in the act, including any substantial fact or document, a reasonable time before the date for discussion of the approval. A director is
required to exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director.
A violation of these requirements is deemed a breach of the director's duty of loyalty.
The term “office holder” includes any managing director, general manager, chief executive officer, executive vice president, vice president, or any
other person assuming the responsibilities of any of these positions regardless of that person's title, or any director or any manager directly subordinate to the
general manager. Each person listed in the table under “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management” above is
an “office holder” of AudioCodes.
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Disclosure of Personal Interest of Office Holder. The Companies Law requires that an office holder promptly disclose any personal interest that he or
she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. A “personal
interest” of an office holder, as defined in the Companies Law, includes a personal interest of the office holder’s relative or a corporation in which the office
holder or the office holder’s relative is a 5% or greater shareholder, director or general manager or has the right to appoint at least one director or the general
manager, and includes shares for which the person has the right to vote pursuant to a power-of-attorney. “Personal interest” does not apply to a personal interest
stemming merely from holding shares in the company.
The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the
particular transaction. The office holder’s duty to disclose shall not apply in the event that the personal interest only results from a personal interest of the office
holder’s relative in a transaction that is not an “extraordinary transaction”. The Companies Law defines an “extraordinary transaction” as a transaction not in the
ordinary course of business, not on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, and a "relative" is
defined as a spouse, sibling, parent, grandparent, descendent, and includes the descendant, sibling or parent of a spouse, as well as the spouse of any of the
foregoing.
Approval of Compensation of Office Holders. Under the Israeli Companies Law, compensation arrangements for officers who are not directors require
the approval of the audit committee and the board of directors. The approval of the audit committee may be substituted with the approval of the compensation
committee, provided that the compensation committee complies with all the requirements prescribed by the Israeli Companies Law regarding composition of
the audit committee. If the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director,
the approval of the audit committee is sufficient. Arrangements regarding the compensation of directors require the approval of the audit committee, the board
and the shareholders, in that order.
Approval of Other Transactions with Office Holders. In the case of a transaction that is not an extraordinary transaction, after the office holder
complies with the disclosure requirement described above, only board approval is required unless the articles of association of the company provide otherwise.
Our articles of association do not provide otherwise. Such approval must determine that the transaction is not adverse to the company’s interest. If the
transaction is an extraordinary transaction, or if it concerns exculpation, indemnification, insurance or compensation of an office holder, then the approvals of
the company's audit committee and the board of directors are required, except if the compensation arrangement is a non-material amendment to an existing
compensation arrangement of an officer who is not a director (in which case the approval of the audit committee is sufficient). Exculpation, indemnification,
insurance or compensation of a director also requires shareholder approval. The audit committee may not approve the transaction unless, at the time of the
approval, it complies with the audit committee composition and quorum requirements prescribed by the Israeli Companies Law.
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Any person who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee generally may not be
present at such meeting or vote on such matter unless a majority of the board of directors or the audit committee has a personal interest in the matter, or if such
person is invited by the chairman of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board of
directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders. Under the Israeli Companies
Law, the disclosure requirements described above that apply to an officer holder, also apply to a controlling shareholder of a public company, which includes a
shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more
shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder for this purpose.
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for:
·
·
extraordinary transactions, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal
interest; and
the terms of compensation or employment or engagement of a controlling shareholder or his or her relative, as an officer holder or employee of
our company or as a service provider to the company, including through a company controlled by a controlling shareholder.
The shareholders approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must
satisfy either of two additional tests:
·
·
the majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or
the total number of shares held by the disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the
aggregate voting rights of our company.
Generally, the approval of such a transaction may not be for more than three years. However, an extraordinary transaction, including a private
placement with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern the terms of compensation or
employment or engagement of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the
company, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a period of longer than
three years is reasonable under the circumstances.
Duties of Shareholders. Under the Israeli Companies Law, a shareholder also has a duty to act in good faith towards the company and other
shareholders and refrain from abusing his or her power in the company, including, among other things, voting in the general meeting of shareholders on the
following matters:
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·
·
·
·
any amendment to the articles of association;
an increase of the company’s authorized share capital;
a merger; or
approval of related party transactions that require shareholder approval.
In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote and any shareholder who, under the
company’s articles of association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The
Israeli Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the Israeli
Companies Law does not describe the substance of this duty.
Anti-Takeover Provisions Under Israeli Law
The Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would hold 25% or more of the voting rights in the company, unless there is already another shareholder of the company with 25% or
more of the voting rights. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if
as a result of the acquisition the purchaser would hold more than 45% of the voting rights in the company, unless there is a shareholder with more than 45% of
the voting rights in the company.
The Companies Law requires the parties to a proposed merger to file a merger proposal with the Israeli Registrar of Companies, specifying certain
terms of the transaction. Each merging company's board of directors and shareholders must approve the merger. Shares in one of the merging companies held by
the other merging company or certain of its affiliates are disenfranchised for purposes of voting on the merger. A merging company must inform its creditors of
the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving
company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 50 days have
passed from the time that the merger proposal was filed with the Israeli Registrar of Companies and at least 30 days have passed from the approval of the
shareholders of each of the merging companies.
Finally, in general, Israeli tax law treats stock-for-stock acquisitions less favorably than does U.S. tax law. Israeli tax law provides for tax deferral in
specified acquisitions, including transactions where the consideration for the sale of shares is the receipt of shares of the acquiring company. Nevertheless,
Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation or to taxation before his
investment in the foreign corporation becomes liquid, although in the case of shares of a foreign corporation that are traded on a stock exchange, the tax may be
postponed subject to certain conditions.
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Insurance, Indemnification and Exculpation of Directors and Officers; Limitations on Liability
Insurance of Office Holders
The Companies Law permits a company, if permitted by its articles of association, to insure an office holder in respect of liabilities incurred by the
office holder as a result of:
· breach of the duty of care owed to the company or a third party;
· breach of the fiduciary duty owed to the company, provided that the office holder acted in good faith and had reasonable grounds
to believe that his action would not harm the company’s interests;
· monetary liability imposed on the office holder in favor of a third party; and
· reasonable litigation expenses, including attorney fees, incurred by the office holder as a result of an administrative enforcement
proceeding instituted against him (without limiting from the generality of the foregoing, such expenses will include a payment imposed on the office
holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israel Securities Law, 5728-1968, as amended (the "Israeli Securities
Law"), and expenses that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Israeli Securities Law,
including reasonable legal expenses, which term includes attorney fees).
Indemnification of Office Holders
Under the Companies Law, a company can, if permitted by its articles of association, indemnify an office holder for any of the following obligations or
expenses incurred in connection with his or her acts or omissions as an office holder:
award confirmed by a court;
· monetary liability imposed on an office holder in favor of a third party in a judgment, including a settlement or an arbitral
· reasonable legal costs, including attorney’s fees, expended by an office holder as a result of:
o
an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation
or proceeding concludes without the filing of an indictment against the office holder, and either:
§
no financial liability was imposed on the office holder in lieu of criminal proceedings, or
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§
financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense
does not require proof of criminal intent;and (y) in connection with an administrative enforcement proceeding or
a financial sanction (without derogating from the generality of the foregoing, such expenses will include a
payment imposed on the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the
Israeli Securities Law, and expenses that the Office Holder incurred in connection with a proceeding under
Chapters H'3, H'4 or I'1 of the Israeli Securities Law, including reasonable legal expenses, which term includes
attorney fees); and
· reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a
court:
o
o
o
in an action brought against the office holder by or on behalf of the company or a third party, or
in a criminal action in which the office holder is found innocent, or
in a criminal action in which the office holder is convicted and in which a proof of criminal intent is not required.
·
A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a
company undertakes to indemnify an office holder in advance of an event, the indemnification, other than legal costs, must be
limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and
reasonable amounts or standards, as determined by the board of directors.
Exculpation of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, also exculpate an office holder in advance, in whole or in part,
from liability for damages sustained by a breach of duty of care to the company, other than in connection with distributions.
Limitations on Exculpation, Insurance and Indemnification
Under the Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office
holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify,
insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the
intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
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Our articles of association allow us to insure, indemnify and exculpate office holders to the fullest extent permitted by law, provided such insurance or
indemnification is approved in accordance with law. Pursuant to the Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking
to indemnify or indemnification of, our office holders must be approved by our audit committee and our board of directors and, if the office holder is a director,
also by our shareholders.
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them to the full extent permitted by
law against some types of claims, subject to dollar limits and other limitations. These agreements have been ratified by our audit committee, board of directors
and shareholders. We have acquired directors’ and officers’ liability insurance covering our officers and directors and the officers and directors of our
subsidiaries against certain claims.
C.
MATERIAL CONTRACTS
In September 2011, we entered into loan agreements with First International Bank of Israel that provided for loans in the total principal amount of
$6.75 million. The Loans bear interest at LIBOR+2.1% with respect to one-half of the principal amount of the loans and LIBOR plus 3.1% with respect to the
other half of the principal amount of the loan. The principal amount borrowed is repayable in 20 equal quarterly installments from September 2012 through
September 2017. The bank has a lien on our assets and we are required to maintain compensating balances with the bank equal to 50% of the principal amount
of the loan. The agreement requires us, among other things, to maintain shareholders' equity, cash balance and liabilities to banks at specified levels and to
achieve certain levels of operating income. The agreement also restricts us from paying dividends.
In September 2011, we entered into loan agreements with Bank Leumi in Israel that provided for loans in the total amount of $12.0 million. The loans
bear interest at LIBOR+3.4% with respect to one-half of the principal amount of the loans and LIBOR plus 2.75% with respect to the other half of the loans.
According to the loan agreement we are required to maintain compensating balances as a bank deposit in an amount equal to 50% of the principal amount of the
loan. This bank deposit bears interest at LIBOR plus 2.38%. The principal amount borrowed is repayable in 20 equal quarterly installments from December
2011 through September 2017.
In December 2011, we entered into loan agreements with bank Mizrahi in Israel that provided for loans in the total amount of $5.0 million. The loans
bear interest at LIBOR+3.6% with respect to $1.1 million of the loans. According to the loan agreement, we are required to maintain a $3.9 million
compensating balance as a bank deposit. This $3.9 million loan bears interest at 0.5% above the bank deposit interest rate. Of the amount borrowed, $1.1
million is repayable in 20 equal quarterly installments and the remaining $3.9 million is repayable in 10 equal semiannual payments through September 2017.
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The other terms of the loan with Bank Leumi and Bank Mizrahi are the same as the loan agreement with First International Bank described in the
preceding paragraph. Bank Leumi, Bank Mizrahi and First International Bank share the lien on our assets.
D.
EXCHANGE CONTROLS
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares,
whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of
exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Since January 1, 2003, all exchange control restrictions on transactions in foreign currency in Israel have been eliminated, although there are still
reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls may be imposed by
administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to subjects
of countries that are in a state of war with Israel.
E
TAXATION
The following is a summary of the material Israeli and United States federal tax consequences, Israeli foreign exchange regulations and certain Israeli
government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question.
The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should
not be relied upon for tax planning purposes. Potential investors are urged to consult their own tax advisors as to the Israeli tax, United States federal income tax
and other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on taxable income at the rate of 24% for the 2011 tax year. The corporate tax rate applicable
for 2010 was 25% and for 2009 was 26%.
In December 2010, the "Knesset" (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which
prescribes, among other matters, amendments in the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the
benefit tracks in the Investment Law were modified and a flat tax rate applies to the Company's entire preferred income. The Company will be able to opt to
apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates that are: 2011 and 2012 - 15%, 2013 and 2014 -
12.5% and in 2015 and thereafter - 12%.
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On December 5, 2011, the Israeli Parliament enacted the Law for Tax Burden Reform (Legislative Amendments), 2011 (the “Law") which, among
other things, cancels effective from 2012, the scheduled progressive reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in
2012. In view of this increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate were also increased
accordingly.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
Our facilities have been granted approved enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959 or the Investment
Law, which provides certain tax and financial benefits to investment programs that have been granted such status.
The Investment Law provides that a proposed capital investment in eligible facilities may be designated as an “approved enterprise.” Until 2005, the
designation required advance approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor (the Investment Center). Each certificate
of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its
physical characteristics, such as the equipment to be purchased and utilized pursuant to the program. The tax benefits under the Investment Law are not
available for income derived from products manufactured outside of Israel.
A company owning an approved enterprise may elect to receive either governmental grants or an alternative package of tax benefits. Under the
alternative package, a company’s undistributed income derived from an approved enterprise will be exempt from corporate tax for a period of two to ten years
(depending on the geographic location of the approved enterprise within Israel). The exemption commences in the first year of taxable income, and the
company is taxed at a reduced corporate rate of 10% to 25% for the following five to eight years, depending on the extent of foreign shareholders’ ownership of
the company’s ordinary shares. The benefits period is limited to twelve years from completion of the investment under the approved plan or fourteen years from
the date of approval, whichever is earlier (these limits do not apply to the exemption period). A Foreign Investors Company, or FIC, defined in the Investment
Law as a company of which more than 25% of its shareholders are non-Israeli residents, may enjoy benefits for a period of up to ten years, or twelve years if it
complies with certain export criteria stipulated in the Investment Law (the actual length of the benefits period is graduated based on the percentage of foreign
ownership).
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We have elected the alternative package of tax exemptions and reduced tax rates for our production facilities that have received Approved Enterprise
status. Accordingly, income derived from these facilities is generally entitled to a tax-exemption period of two years and a reduced corporate tax rate of 10% to
25% for an additional period of five to eight years, based on our percentage of foreign investment. The tax benefits for our existing Approved Enterprise
programs are scheduled to gradually expire by 2018. The period of tax benefits for each capital investment plan expires upon the earlier of: (1) twelve years
from completion of the investment under the approved plan, or (2) fourteen years from receipt of approval (these limits do not apply to the exemption period).
Out of our retained earnings as of December 31, 2011, approximately $540,000 are tax-exempt. If we were to distribute this tax-exempt income before
our complete liquidation, it would be taxed at the reduced corporate tax rate applicable to these profits (10% to 25%), and an income tax liability of up to
approximately $135,000 would be incurred. Our board of directors has currently determined that we will not distribute any amounts of our undistributed tax
exempt income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income
taxes have been provided on income attributable to our Approved Enterprise.
If we fail to meet the requirements of an Approved Enterprise we would be subject to corporate tax in Israel at the regular statutory rate. We could also
be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index.
The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company
has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the
applicable rates.
Our production facilities have been granted the status of approved enterprise. Income arising from our approved enterprise facilities is tax-free under
the alternative package of benefits described above and entitled to reduced tax rates based on the level of foreign ownership for specified periods. We have
derived, and expect to continue to derive, a substantial portion of our operating income from our approved enterprise facilities. The tax benefits attributable to
our current approved enterprises are scheduled to expire gradually until 2018.
Distribution of earnings derived from approved enterprise which were previously taxed at reduced tax rates, would not result in additional tax
consequences to us. However, if retained tax-exempt income is distributed in a manner, we would be taxed at the reduced corporate tax rate applicable to such
profits (between 10%-25%). We are not obliged to distribute exempt retained earnings under the alternative package of benefits, and may generally decide from
which source of income to declare dividends. We currently intend to reinvest the amount of our tax-exempt income and not to distribute such income as a
dividend. Dividends from approved enterprises are generally taxed at a rate of 15% (which is withheld and paid by the company paying the dividend) if such
dividend is distributed during the benefits period or within twelve years thereafter. The twelve-year limitation does not apply to an FIC.
In addition, the benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investment Law and
related regulations and the criteria set forth in the specific certificate of approval. In the event that a company does not meet these conditions, it will be subject
to corporate tax at the rate then in effect under Israeli law for such tax year. As of December 31, 2011, management believes that we meet all of the
aforementioned conditions.
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On April 1, 2005, an amendment to the law came into effect (the “Amendment”) and has significantly changed the provisions of the law. The
Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary
Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise’s income will be derived from export. Additionally, the
Amendment enacted major changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center
approval in order to qualify for tax benefits.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more
than 25% of their business income from export. In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment in the
Beneficiary Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of
no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Beneficiary Enterprise, or the Year
of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a
Beneficiary Enterprise and the company’s effective tax rate will be the result of a weighted average of the applicable rates. In this case, the minimum
investment required in order to qualify as a Beneficiary Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production
assets at the end of the year before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of seven to ten years from the Commencement Year, or twelve years from the first
day of the Year of Election. The Commencement Year is defined as the later of (a) the first tax year in which a company had derived income for tax purposes
from the Beneficiary Enterprise or (b) the year in which a company requested to have the tax benefits apply to the Beneficiary Enterprise – Year of Election.
The tax benefits granted to a Beneficiary Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new
tax routes, which may be applicable to us:
·
Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years,
depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the
remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to
ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the
Beneficiary Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the gross amount of the dividend that we may be distributed. The company is required to withhold tax at the source at a rate of 15%
from any dividends distributed from income derived from the Beneficiary Enterprise; and
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·
A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of
11.5% on income of the Beneficiary Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to
withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum
sum of $20 million in the Beneficiary Enterprise as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years,
depending on the rate of its income that is derived in foreign currency.
The 2005 Amendment changed the definition of “foreign investment” in the Investments Law so that the definition requires a minimal investment of
NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that
the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from
2003.
The 2005 Amendment applies to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such
programs received approval from the Investment Center on or prior to December 31, 2004, in which case the 2005 Amendment provides that terms and benefits
included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.
In addition, the law provides that terms and benefits included in any certificate of approval granted prior to December 31, 2004 will remain subject to
the provisions of the law as they were on the date of such approval. Therefore, our existing “Approved Enterprises” will generally not be subject to the
provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the law as amended, will subject us to taxes
upon distribution or liquidation and we may be required to record a deferred tax liability with respect to such tax-exempt income. We elected 2008 as "year of
election" under the Investments Law after the Amendment. We expect that a substantial portion of any taxable operating income that we may realize in the
future will be derived from our approved enterprise status.
Recently, new legislation amending the law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of
certain industrial companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises and Privileged Enterprises
during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in
Israel during 2011-2012, 7% in Development Zone A and 12.5% elsewhere in Israel in 2013-2014, and 6% in Development Zone A and 12% elsewhere in
Israel thereafter. The profits of these industrial companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an
applicable tax treaty). AudioCodes is not located in Zone A
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Under the transition provisions of the new legislation, we may decide to irrevocably implement the new law during 2011-2012 while waiving benefits
provided under the current law or to remain subject to the current law.
Law for the Encouragement of Industrial Research and Development, 1984
Under the Law for the Encouragement of Industrial Research and Development, 1984 and the related regulations, or the Research Law, research, development
and pre-manufacturing programs that meet specified criteria and are approved by a governmental committee (the Research Committee) of the Office of Chief
Scientist (OCS) are eligible for grants of up to 50% of the expenditures on the program. Each application to the OCS is reviewed separately, and grants are
based on the program approved by the Research Committee. Expenditures supported under other incentive programs are not eligible for OCS grants. As a
result, we cannot be sure that applications to the OCS will be approved or, if approved, that we will receive the amounts for which we apply.
Recipients of these grants are required to pay royalties on the revenues derived from the sale of product developed in accordance with the program.
The royalties are payable at the rate of 3% to 6% of revenues, with the total royalties not to exceed 100% of the dollar value of the OCS grant.
The terms of the Israeli government participation require that products developed with OCS grants must generally be manufactured in Israel. If we
receive OCS approval for any portion of this manufacturing to be performed outside of Israel, the royalty rate would be increased and the repayment schedule
would be accelerated, based on the extent of the manufacturing conducted outside of Israel. Depending upon the extent of the manufacturing volume that is
performed outside of Israel, the ceiling on royalties would increase to 120%, 150% or 300% of the grant. Under an amendment to the Research Law effective
since 2003, the authority of the Research Committee to approve the transfer of manufacture outside of Israel was expanded.
The technology developed pursuant to the terms of these grants may not be transferred to third parties without the prior approval of the Research
Committee. This approval is required only for the export of the technology, and not for the export of any products that incorporate the sponsored technology.
Approval of the transfer of technology may be granted only if the recipient agrees to abide by all the provisions of the Research Law, including the restrictions
on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. The 2005 amendment to the Research Law granted
authority to the Research Committee to approve the transfer of sponsored technology outside of Israel, subject to various conditions.
We have received grants from the OCS, and therefore we are subject to various restrictions under the Research Law on the transfer of technology or
manufacturing. These restrictions do not terminate upon the full payment of royalties.
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In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of
Israel about our Israeli operations. From time to time the conduct of our Israeli operations has deviated from our representations. If we fail to meet the
conditions to grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the
Israeli government, we could be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an
interest factor) and would likely be ineligible to receive OCS grants in the future.
Tax Benefits Under the Law for the Encouragement of Industry (Taxation), 1969
According to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry Encouragement Law, an “industrial company” is a company
resident in Israel, that at least 90% of its income, in any tax year (determined in Israeli currency, exclusive of income from certain government loans, capital
gains, interest and dividends) is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a
given tax year is industrial production activity. We currently believe that we qualify as an industrial company within the definition of the Industry
Encouragement Law. Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits:
·
·
·
·
deduction of purchases of know-how and patents over an eight-year period for tax purposes;
the right to elect, under specified conditions, to file a consolidated tax return with related Israeli industrial companies;
accelerated depreciation rates on equipment and buildings; and
deductions over a three-year period of expenses involved with the issuance and listing of shares on the Tel Aviv Stock Exchange or,
on or after January 1, 2003, on a recognized stock market outside of Israel.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. The
Israeli tax authorities may determine that we do not qualify as an industrial company, which would entail our loss of the benefits that relate to this status. In
addition, no assurance can be given that we will continue to qualify as an industrial company, in which case the benefits described above will not be available in
the future.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income tax regulation (Determination of Market Terms), 2006, promulgated under Section 85A of the Israeli Tax Ordinance,
came into force (the “Transfer Pricing Regulations”). Section 85A of the Israeli Tax Ordinance and the Transfer Pricing Regulations generally require that all
cross-border transactions carried out between related parties will be conducted on an arm’s length basis and will be taxed accordingly.
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Special Provisions Relating to Measurement of Taxable Income
We elected to measure our taxable income and file our tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of
Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Accordingly, commencing
taxable year 2003, results for tax purposes are measured in terms of earnings in dollars.
Capital Gains Tax
Israeli law generally imposes a capital gains tax on the sale of publicly traded securities. Pursuant to changes made to the Israeli Income Tax Ordinance
in January 2006, capital gains on the sale of our ordinary shares will be subject to Israeli capital gains tax, generally at a rate of 20% on the “real capital gain” as
determined under the Israeli Tax Ordinance unless the holder holds 10% or more of our voting power during the 12 months preceding the sale, in which case it
will be subject to a 25% tax rate on the real capital gain. However, as of January 1, 2003, non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, provided such gains do not derive from a permanent establishment of such shareholders in
Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel and
that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to the
exemption with respect to gains derived from the sale of shares of Israeli companies publicly traded on the TASE, if an Israeli resident (i) has a controlling
interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
In some instances where our shareholders may be subject to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
United States-Israel Tax Treaty
Pursuant to the Convention Between the Government of the United States of America and the Government of Israel with respect to Taxes on Income,
as amended, or the United States-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a person who holds the ordinary shares as a capital
asset and who qualifies as a resident of the United States within the meaning of the United States- Israel Tax Treaty and who is entitled to claim the benefits
afforded to such person by the United States-Israel Tax Treaty, or a Treaty United States Resident, generally will not be subject to the Israeli capital gains tax
unless such Treaty United States Resident holds, directly or indirectly, shares representing 10% or more of the voting power of our company during any part of
the twelve-month period preceding such sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of shares by a Treaty
United States Resident who holds, directly or indirectly, shares representing 10% or more of the voting power of our company at any time during such
preceding twelve-month period would be subject to such Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, such Treaty
United States Resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed with respect to such sale,
exchange or disposition, subject to the limitations in United States laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to
state or local taxes.
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Tax on Dividends
Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in Israel or received in Israel. These sources of
income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. Generally, on
distributions of dividends, other than bonus shares and stock dividends, income tax at the rate of 25% is withheld at the source (except that dividends distributed
on or after January 1, 2006 to an individual who is deemed “a non-substantial shareholder” are subject to tax at the rate of 20%), unless a different rate is
provided in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder
of ordinary shares who is a Treaty United States Resident will be 25%, however that tax rate is reduced to 12.5% for dividends not generated by an approved
enterprise to a corporation which holds 10% or more of the voting power of our company during a certain period preceding distribution of the dividend.
Dividends derived from an approved enterprise will still be subject to 15% tax withholding.
Foreign Exchange Regulations
Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted
into freely repatriable dollars at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid or withheld on such
amounts.
United States Tax Considerations
United States Federal Income Taxes
The following summary describes the material U.S. federal income tax consequences to “U.S. Holders” (as defined below) arising from the
acquisition, ownership and disposition of our ordinary shares. This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” the
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date
hereof and all of which are subject to change (possibly with retroactive effect) or different interpretations. For purposes of this summary, a “U.S. Holder” will
be deemed to refer only to any of the following holders of our ordinary shares:
·
an individual who is either a U.S. citizen or a resident of the U.S. for U.S. federal income tax purposes;
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·
·
·
a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws
of the U.S. or any political subdivision thereof;
an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and
a trust, if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S.
Treasury Regulations to be treated as a U.S. person.
This summary does not consider all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders by reason of their particular
circumstances, including potential application of the U.S. federal alternative minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S.
federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that hold our ordinary shares as “capital
assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to particular classes of U.S. Holders,
including financial institutions, regulated investment companies, real estate investment trusts, pension funds, insurance companies, broker-dealers, tax-exempt
organizations, grantor trusts, partnerships or other pass-through entities, partners or other equity holders in partnerships or other pass-through entities, holders
whose functional currency is not the U.S. dollar, holders who have elected mark-to-market accounting, holders who acquired our ordinary shares through the
exercise of options or otherwise as compensation, holders who hold our ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” holders
selling our ordinary shares short, holders deemed to have sold our ordinary shares in a “constructive sale,” and holders, directly, indirectly or through
attribution, of 10% or more (by vote or value) of our outstanding ordinary shares.
Each U.S. Holder should consult with its own tax advisor as to the particular tax consequences to it of the acquisition, ownership and
disposition of our ordinary shares, including the effects of applicable tax treaties, state, local, foreign or other tax laws and possible changes in the tax
laws.
Distributions With Respect to Our Ordinary Shares
For U.S federal income tax purposes, the amount of a distribution with respect to our ordinary shares will equal the amount of cash distributed, the fair
market value of any property distributed and the amount of any Israeli taxes withheld on such distribution as described above under “Israeli Tax Considerations
– Tax on Dividends.” Other than distributions in liquidation or in redemption of our ordinary shares that are treated as exchanges, a distribution with respect to
our ordinary shares to a U.S. Holder generally will be treated as a dividend to the extent of our current and accumulated earnings and profits, as determined for
U.S. federal income tax purposes. The amount of any distribution that exceeds these earnings and profits will be treated first as a non-taxable return of capital,
reducing the U.S. Holder’s tax basis in its ordinary shares (but not below zero), and then generally as capital gain from a deemed sale or exchange of such
ordinary shares. Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares
and thus will be subject to tax at the rate applicable to their taxable income. Currently, a noncorporate U.S. Holder’s “qualified dividend income” generally is
subject to tax at a reduced rate of 15%, although the rate applicable to dividend income currently is scheduled to return to the rate applicable to ordinary income
for tax years beginning after December 31, 2012. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if,
among other things, the noncorporate U.S. Holder meets certain minimum holding period requirements and either (a) the stock of such corporation is readily
tradable on an established securities market in the U.S., including the NASDAQ Global Select Market, or (b) such corporation is eligible for the benefits of a
comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of
the Treasury. The U.S. Secretary of the Treasury has indicated that the income tax treaty between the U.S. and Israel is satisfactory for this purpose. Dividends
paid by us will not qualify for the 15% U.S. federal income tax rate, however, if we are treated, for the tax year in which the dividends are paid or the preceding
tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. See the discussion below under the heading “Passive Foreign
Investment Company Status.” U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of
any distributions with respect to our ordinary shares.
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A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of
exchange in effect on the date of receipt or deemed receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. U.S.
Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion
of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated as
U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the deductibility of passive
activity losses and, therefore, generally may not be offset by passive activity losses. Dividends received with respect to our ordinary shares also generally will
be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and as foreign-source
passive income for U.S. foreign tax credit purposes or, in the case of a U.S. Holder that is a financial services entity, financial services income. Subject to
certain limitations, U.S. Holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability any Israeli income tax withheld from
distributions with respect to our ordinary shares which constitute dividends under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign tax
credit may instead claim a deduction for Israeli income tax withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such
year. In addition, special rules may apply to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. The calculation of
foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign income taxes, the availability of deductions involve the application of complex
rules that depend on a U.S. Holder’s particular circumstances. U.S. Holders are urged to consult their own tax advisors regarding the availability to them of
foreign tax credits or deductions in respect of any Israeli tax withheld or paid with respect to any dividends which may be paid with respect to our ordinary
shares.
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Disposition of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Holder’s sale, exchange or other taxable disposition of
our ordinary shares generally will result in the recognition by such U.S. Holder of capital gain or loss in an amount equal to the difference between the U.S.
dollar value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (measured in U.S. dollars). This gain or loss will be long-
term capital gain or loss if such ordinary shares have been held or are deemed to have been held for more than one year at the time of the disposition. Individual
U.S. Holders currently are subject to a maximum tax rate of 15% on long-term capital gains recognized during tax years beginning on or before December 31,
2012. Beginning in 2013, the maximum tax-rate applicable to long-term capital gains currently is scheduled to rise to 20%. If the U.S. Holder’s holding period
on the date of the taxable disposition is one year or less, such gain or loss will be a short-term capital gain or loss. Short-term capital gains generally are taxed at
the same rates applicable to ordinary income. See “Israeli Tax Considerations – Capital Gains Tax” for a discussion of taxation by Israel of capital gains realized
on sales of our ordinary shares. Any capital loss realized upon the taxable disposition of our ordinary shares generally will be deductible only against capital
gains and not against ordinary income, except that noncorporate U.S. Holders generally may deduct annually from ordinary income up to $3,000 of net capital
losses. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary shares will be treated as U.S.-source income
or loss for U.S. foreign tax credit purposes, although the tax treaty between the United States and Israel may permit gain derived from the taxable disposition of
ordinary shares by a U.S. Holder to be treated as foreign-source income for U.S. foreign tax credit purposes under certain circumstances.
A U.S. Holder’s tax basis in its ordinary shares generally will be the U.S. dollar purchase price paid by such U.S. Holder to acquire such ordinary
shares. The U.S. dollar cost of ordinary shares purchased with foreign currency generally will be the U.S. dollar value of the purchase price on the date of
purchase or, in the case of ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date
for the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of
the U.S. Internal Revenue Service. The holding period of each ordinary share owned by a U.S. Holder will commence on the day following the date of the U.S.
Holder’s purchase of such ordinary share and will include the day on which the ordinary share is sold by such U.S. Holder.
In the case of a U.S. Holder who uses the cash basis method of accounting and who receives NIS in connection with a taxable disposition of ordinary
shares, the amount realized will be based on the “spot rate” of exchange on the settlement date of such taxable disposition. If such U.S. Holder subsequently
converts NIS into U.S. dollars at a conversion rate other than the spot rate in effect on the settlement date, such U.S. Holder may have a foreign currency
exchange gain or loss treated as ordinary income or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting may
elect the same treatment required of cash method taxpayers with respect to a taxable disposition of ordinary shares, provided that the election is applied
consistently from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder
does not elect to be treated as a cash method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency transactions), such U.S. Holder
may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the
U.S. dollar value of the NIS on the date of the taxable disposition and the settlement date. Any such currency gain or loss generally would be treated as U.S.-
source ordinary income or loss and would be subject to tax in addition to any gain or loss recognized by such U.S. Holder on the taxable disposition of ordinary
shares.
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Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for any tax year if,
in such tax year, either (i) 75% or more of its gross income (including its pro rata share of the gross income of any company in which it is considered to own
25% or more of the shares by value) is passive in nature (the “Income Test”), or (ii) the average percentage of its assets during such tax year (including its pro
rata share of the assets of any company in which it is considered to own 25% or more of the shares by value) which produce, or are held for the production of,
passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of such
year) is 50% or more (the “Asset Test”). Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities and
commodities transactions.
There is no definitive method prescribed in the Code, U.S. Treasury Regulations or relevant administrative or judicial interpretations for determining
the value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test. The legislative history of the U.S. Taxpayer Relief Act of 1997 (the
“1997 Act”) indicates that for purposes of the Asset Test, “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to
the sum of the aggregate value of its outstanding stock plus its liabilities.” It is unclear whether other valuation methods could be employed to determine the
value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test.
Based on the composition of our gross income and the composition and value of our gross assets during each of 2004, 2005, 2006, 2007, 2008, 2009,
2010 and 2011, we do not believe that we were a PFIC during any of such tax years. It is likely, however, that under the asset valuation method described in the
legislative history of the 1997 Act, we would have been classified as a PFIC for each of 2001, 2002 and 2003 primarily because (a) a significant portion of our
assets consisted of the remaining proceeds of our two public offerings of ordinary shares in 1999, and (b) the public market valuation of our ordinary shares
during such years was relatively low. There can be no assurance that we will not be deemed a PFIC in any future tax year.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and the U.S.
Holder does not make a QEF Election or a “mark-to-market” election (both as described below):
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·
·
·
(i) the U.S. Holder would be required to (a) report as ordinary income any “excess distributions” (as defined below) allocated
to the current tax year, (b) pay tax on amounts allocated to each prior tax year in which we were a PFIC at the highest rate on
ordinary income in effect for such prior year, and (c) pay an interest charge on the resulting tax at the rate applicable to deficiencies
of U.S. federal income tax. “Excess distributions” with respect to any U.S. Holder are amounts received by such U.S. Holder with
respect to our ordinary shares in any tax year that exceed 125% of the average distributions received by such U.S. Holder from us
during the shorter of (i) the three previous years, or (ii) such U.S. Holder’s holding period of our ordinary shares before the then-
current tax year. Excess distributions must be allocated ratably to each day that a U.S. Holder has held our ordinary shares.
(ii) the entire amount of any gain realized by the U.S. Holder upon the sale or other disposition of our ordinary shares also
would be treated as an “excess distribution” subject to tax as described above.
(iii) the tax basis in ordinary shares acquired from a decedent who was a U.S. Holder generally would not receive a step-up to
fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis, if lower.
Although we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year during the U.S. Holder’s holding period, if we
cease to be a PFIC, the U.S. Holder may avoid the consequences of PFIC classification for subsequent years by electing to recognize gain based on the
unrealized appreciation in such U.S. Holder’s ordinary shares through the close of the tax year in which we cease to be a PFIC.
A U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service Form 8621 (Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for each tax year in which such U.S. Holder recognizes gain
upon a disposition of our ordinary shares, receives certain distributions from us or makes the QEF Election or mark-to-market election described below.
For any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat its ordinary shares as an interest in a qualified electing fund (a
“QEF Election”), in which case the U.S. Holder would be required to include in income currently its proportionate share of our earnings and profits in years in
which we are a PFIC regardless of whether distributions of our earnings and profits are actually made to the U.S. Holder. Any gain subsequently recognized by
the U.S. Holder upon the sale or other disposition of its ordinary shares, however, generally would be taxed as capital gain and the denial of the basis step-up at
death described above would not apply.
A U.S. Holder may make a QEF Election with respect to a PFIC for any tax year. A QEF Election is effective for the tax year for which the election is
made and all subsequent tax years of the U.S. Holder. Procedures exist for both retroactive elections and the filing of protective statements. A U.S. Holder
making the QEF Election must make the election on or before the due date, as extended, for the filing of its U.S. federal income tax return for the first tax year
to which the election will apply. A U.S. Holder must make a QEF Election by completing U.S. Internal Revenue Service Form 8621 and attaching it to its U.S.
federal income tax return, and must satisfy additional filing requirements each year the election remains in effect. Upon a U.S. Holder’s request, we will provide
to such U.S. Holder the information required to make a QEF Election and to make subsequent annual filings.
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As an alternative to a QEF Election, a U.S. Holder generally may elect to mark its ordinary shares to market annually, recognizing ordinary income or
loss (subject to certain limitations) equal to the difference, as of the close of the tax year, between the fair market value of its ordinary shares and the adjusted
tax basis of such shares. If a mark-to-market election with respect to ordinary shares is in effect on the date of a U.S. Holder’s death, the normally available
step-up in tax basis to fair market value generally will not be available. Rather, the tax basis of ordinary shares in the hands of a U.S. Holder who acquired them
from a decedent will be the lesser of the decedent’s tax basis or the fair market value of the ordinary shares. Once made, a mark-to-market election generally
continues unless revoked with the consent of the U.S. Internal Revenue Service.
The implementation of many aspects of the Code’s PFIC rules requires the issuance of Treasury Regulations which in many instances have yet to be
promulgated and which may have retroactive effect when promulgated. We cannot be sure that any of these regulations will be promulgated or, if so, what form
they will take or what effect they will have on the foregoing discussion. For example, under legislation enacted by the U.S. in 2010, U.S. Holders will be
required to file a special information return for each year in which we are treated as a PFIC. The U.S. Internal Revenue Service has announced that it is
developing guidance for filing this annual information return and intends to revise U.S. Internal Revenue Service Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or a Qualified Electing Fund) to implement this guidance, but until such guidance is issued and the revised Form 8621 is
issued, the new annual reporting requirement is suspended for PFIC shareholders not otherwise required to file Form 8621.
Due to the complexity of the PFIC rules and the uncertainty of their application in many circumstances, U.S. Holders should consult their own
tax advisors regarding our status as a PFIC and, if we are treated as a PFIC, compliance with the applicable reporting requirements and the eligibility,
manner and advisability of making a QEF Election or a mark-to-market election.
Information Reporting and Backup Withholding
Payments in respect of our ordinary shares that are made in the U.S. or by certain U.S.-related financial intermediaries may be subject to information
reporting requirements and U.S. backup withholding tax at a rate which currently is 28%. The information reporting requirements will not apply, however, to
payments to certain U.S. Holders, including corporations and tax-exempt organizations. In addition, the backup withholding tax will not apply to a U.S. Holder
that furnishes a correct taxpayer identification number on U.S. Internal Revenue Service Form W-9 (or substitute form). The backup withholding tax is not an
additional tax. Amounts withheld under the backup withholding tax rules may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S.
Holder may obtain a refund of any excess amounts withheld under the backup withholding tax rules by filing the appropriate claim for refund with the U.S.
Internal Revenue Service. U.S. Holders should consult their own tax advisors regarding their qualification for an exemption from the backup withholding tax
and the procedures for obtaining such an exemption, if applicable.
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The foregoing discussion of certain U.S. federal income tax considerations is a general summary only and should not be considered as income
tax advice or relied upon for tax planning purposes. Accordingly, each U.S. Holder should consult with its own tax advisor regarding U.S. federal,
state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of our ordinary shares.
F
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill
the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission, or SEC. You may read and copy any
document we file, including any exhibits, with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549.
Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also available to the public at the SEC’s website at
http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as
promptly as United States companies whose securities are registered under the Exchange Act. However, we file with the Securities and Exchange Commission
an annual report on Form 20-F containing consolidated financial statements audited by an independent accounting firm. We also furnish reports on Form 6-K
containing unaudited financial information after the end of each of the first three quarters. We intend to post our Annual Report on Form 20-F on our website
(www.audiocodes.com) promptly following the filing of our Annual Report with the Securities and Exchange Commission.
I.
SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risk associated with changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial
instruments. The majority of our revenues and expenses are generated in U.S. dollars. A portion of our expenses, however, is denominated in NIS. In order to
protect ourselves against the volatility of future cash flows caused by changes in foreign exchange rates, we use currency forward contracts and currency
options. We hedge the part of our forecasted expenses denominated in NIS. If our currency forward contracts and currency options meet the definition of a
hedge, and are so designated, changes in the fair value of the contracts will be offset against changes in the fair value of the hedged assets or liabilities through
earnings. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Our
hedging program reduces, but does not eliminate, the impact of foreign currency rate movements and due to the general economic slowdown along with the
devaluation of the dollar, our results of operations may be adversely affected. Without taking into account the mitigating effect of our hedging activity, a 10%
decrease in the U.S. dollar exchange rates in effect for the year ended December 31, 2011 would cause a decrease in net income of approximately $4 million.
We are subject to market risk from exposure to changes in interest rates relating to borrowings under our loan agreements. The interest rate on these
borrowings is based on LIBOR. Based on our the scheduled amount of these borrowings to be outstanding in 2011, we estimate that each 100 basis point
increase in our borrowing rates would result in additional interest expense to us of approximately $150,000.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
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ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in 13a-15(e) under the Securities Exchange Act) as of December 31, 2011. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were (i) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made known to our management, including our Chief Executive Officer and Chief
Financial Officer, by others within those entities, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which
this report was being prepared and (ii) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and our Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over our financial reporting, as defined in Rules 13a-15(f) of the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes
policies and procedures that:
·
·
·
·
pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with
generally accepted accounting principles;
provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and board of
directors (as appropriate); and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework for Internal
Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment under
that framework and the criteria established therein, our management concluded that the Company’s internal control over financial reporting were effective as of
December 31, 2011.
124
Attestation Report of the Registered Public Accounting Firm
This annual report includes an attestation report of our registered public accounting firm regarding internal control over financial reporting on page F-3
of our audited consolidated financial statements set forth in “Item 18 - Financial Statements”, and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered
by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in Item 16A of Form 20-F and is
“independent” as defined in the applicable regulations.
ITEM 16B.
CODE OF ETHICS
We have adopted a Code of Conduct and Business Ethics that applies to our chief executive officer, chief financial officer and other senior financial
officers. This Code has been posted on our website, www.audiocodes.com.
125
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as our independent public accountants for each of the years in the
three-year period ended December 31, 2011. The following table presents the aggregate fees for professional audit services and other services rendered by Kost
Forer Gabbay & Kasierer in 2010 and 2011.
Audit Fees
Audit Related Fees
Tax Fees
Total
Year Ended December 31
(Amounts in thousands)
2010
2011
$
$
340 $
40
52
432 $
340
84
65
489
Audit Fees consist of fees billed for the annual audit of the company’s consolidated financial statements and the statutory financial statements of the
company. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include
services rendered for the integrated audit over internal controls as required under Section 404 of the Sarbanes-Oxley Act applicable in 2010 and 2011, the
provision of consents and the review of documents filed with the SEC.
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the
company’s financial statements and include operational effectiveness of systems.
Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund; tax consultations, such as
assistance and representation in connection with tax audits and appeals, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax
planning services; and expatriate tax compliance, consultation and planning services.
Audit Committee Pre-approval Policies and Procedures
The Audit Committee of AudioCodes’ Board of Directors is responsible, among other matters, for the oversight of the external auditor subject to the
requirements of Israeli law. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our
independent auditors (the “Policy”).
Under the Policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case services as
“general pre-approval”; or (ii) require the specific pre-approval of the Audit Committee as “specific pre-approval”. The Audit Committee may delegate either
type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have
received the general pre-approval of the Audit Committee, including those described in the footnotes to the table, above; these services are subject to annual
review by the Audit Committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the Audit Committee.
126
The Audit Committee pre-approves fee levels annually for the audit services. Non-audit services are pre-approved as required. The Chairman of the
Audit Committee may approve non-audit services of up to $25,000 and then request the Audit Committee to ratify his decision.
During 2011, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer were approved by the Audit Committee pursuant to the de
minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In 2011, we repurchased a total of approximately 1.2 million ordinary shares at a total cost of $4.0 million, as set forth below:
Period
October 3 – October 31
November 1 – November 30
December 1 – December 31
Total
(a) Total Number of
Ordinary Shares
Purchased (1)
(b) Average Price per
Ordinary Share
(c) Total Number of
Ordinary Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
(d) Maximum
Number of Shares
Available for
Repurchase
under the Plans
or Programs
(in thousands)
441,667
451,489
311,601
1,204,757
3.08
3.33
3.74
3.39
441,667
451,489
311,601
1,204,757
3,558,333
3,106,844
2,795,243
2,795,243
(1) On October 3, 2011, we announced that our Board had authorized a program to repurchase our shares. The program provides for purchases of up to
4,000,000 of our ordinary shares.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
Not applicable.
ITEM 16G.
CORPORATE GOVERNANCE
127
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the NASDAQ Marketplace Rules.
We do not comply with the NASDAQ requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice which permits the establishment or amendment of certain
equity based compensation plans approved by our board of directors without the need for a shareholder vote, unless such arrangements are for the compensation
of directors, in which case they also require audit committee and shareholder approval.
We may elect in the future to follow Israeli practice with regard to, among other things, executive officer compensation, director nomination,
composition of the board of directors and quorum at shareholders’ meetings. In addition, we may follow Israeli law, instead of the NASDAQ Marketplace
Rules, which require that we obtain shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a
public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company.
A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance a
written statement from an independent counsel in its home country certifying that its practices are not prohibited by the home country’s laws. In addition, a
foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission or on its website each such requirement that it does
not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded
the same protection as provided under NASDAQ’s corporate governance rules.
For a discussion of the requirements of Israeli law with respect to these matters, see Item 6.C. "Directors, Senior Management and Employees –Board
Practices," and Item 10.B. "Additional Information – Memorandum and Articles of Association."
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
Reference is made to pages F-1 to F-52 hereto.
PART III
128
ITEM 19.
EXHIBITS
The following exhibits are filed as part of this Annual Report:
Exhibit No.
Document
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Memorandum of Association of Registrant.(1)†
Articles of Association of Registrant, as amended. *
Indenture, dated November 9, 2004, between AudioCodes Ltd. and U.S. Bank National Association, as Trustee, with respect to the 2.00%
Senior Convertible Notes due 2024.(2)
AudioCodes Ltd. 1997 Key Employee Option Plan (C).(1)
AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (D).(1)
License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6, 1999.(1)†
AudioCodes Ltd. 1997 Key Employee Option Plan (D).(1)
AudioCodes Ltd. 1997 Key Employee Option Plan (E).(1)
AudioCodes Ltd. 1999 Key Employee Option Plan (F), as amended.(3)
AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (E).(1)
AudioCodes Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (F).(3)
AudioCodes Ltd. 2001 Employee Stock Purchase Plan—Global Non U.S., as amended.(4)
AudioCodes Ltd. 2001 U.S. Employee Stock Purchase Plan, as amended.(4)
AudioCodes Ltd. 2007 U.S. Employee Stock Purchase Plan.(5)
Sublease Agreement between AudioCodes USA, Inc. and Continental Resources, Inc., dated December 30, 2003.(6)
Employment Agreement between AudioCodes Ltd. and Shabtai Adlersberg. (7)
Building and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport City Ltd. and AudioCodes Ltd.(8) †
129
Exhibit No.
Document
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
8.1
12.1
12.2
13.1
Letter Agreements, dated April 30, 2008 between First International Bank of Israel, as lender, and AudioCodes Ltd., as borrower. (9) †
Waiver dated November 24, 2008 to Letter Agreement, dated April 30, 2008, between First International Bank of Israel, as lender, and
AudioCodes Ltd., as borrower. (10) †
Amendment dated February 16, 2009 to Letter Agreements, dated April 30, 2008, between First International Bank of Israel, as lender, and
AudioCodes Ltd., as borrower. (10) †
Letter Agreements, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower. (10) †
Amendment dated November 2, 2008 to Letter Agreement, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as lender, and
AudioCodes Ltd., as borrower. (10) †
Amendment dated April 1, 2009 to Letter Agreement, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as lender, and AudioCodes
Ltd., as borrower. (10) †
AudioCodes Ltd. 2008 Equity Incentive Plan. (10)
Amendment to AudioCodes Ltd. 2008 Equity Incentive Plan. (11)
Loan Agreement, dated September 27, 2011, between Bank Benleumi, First International Bank of Israel Ltd., as lender, and the Registrant,
as borrower. *†
Loan Agreement, dated September 27, 2011, between Bank Leumi Israel Ltd., as lender, and the Registrant, as borrower. *†
Loan Agreements, dated December 25, 2011, between Bank Mizrahi Tefahot Ltd., as lender, and the Registrant, as borrower. *†
Subsidiaries of the Registrant.
Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
Certification of Guy Avidan, Chief Financial Officer, pursuant to Section 302 of the Sarbanes –Oxley Act of 2002. *
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *
130
Exhibit No.
Document
13.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *
15.1
101.1
†
*
#
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. *
Interactive Data Files (XBRL-Related Documents). * #
English summary of Hebrew original.
Filed herewith.
Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the
Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections and shall not be incorporated by
reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by
specific reference in such filing..
Incorporated by reference to Registrant’s Registration Statement on Form F-1 (File No. 333-10352).
Incorporated by reference to Registrant’s Registration Statement on Form F-3 (File No. 333-123859).
Incorporated by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2002.
Incorporated by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-144823)
Incorporated by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-144825).
Incorporated by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2003.
Incorporated by reference to Exhibit 1 to Registrant’s Form 6-K filed on November 12, 2009.
Incorporated by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2006.
Incorporated by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2007.
Incorporated by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2008
Incorporated by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-170676).
131
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on Form 20-F on its behalf.
SIGNATURES
Date: April 18, 2012
AUDIOCODES LTD.
By:
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and Chief Executive Officer
132
AUDIOCODES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011
IN U.S. DOLLARS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - -
Page
2 - 4
5 - 6
7
8
9 - 10
11 - 52
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AUDIOCODES LTD.
We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. ("AudioCodes" or "the Company") and subsidiaries as of December
31, 2010 and 2011, and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended
December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries at December 31, 2010 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the
period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company and
subsidiaries' internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 18, 2012 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
April 18, 2012
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-2
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AUDIOCODES LTD.
We have audited AudioCodes Ltd's ("AudioCodes" or "the Company") internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). AudioCodes' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting. 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 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, AudioCodes maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of AudioCodes and subsidiaries as of December 31, 2010 and 2011 and the related consolidated statements of operations, changes in equity and cash
flows for each of the three years in the period ended December 31, 2011 and our report dated April 18, 2012 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
April 18, 2012
/s/ KOST FORER GABBAY & KASIERER
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
Short-term and restricted bank deposits
Trade receivables (net of allowance for doubtful accounts of $ 918 and $ 1,461 at December 31, 2010 and
$
2011, respectively)
Other receivables and prepaid expenses
Deferred tax assets
Inventories
Total current assets
LONG-TERM ASSETS:
Long-term and restricted bank deposits
Long-term marketable securities
Investment in an affiliated company
Deferred tax assets
Severance pay funds
Total long-term 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
AUDIOCODES LTD.
December 31,
2010
2011
50,311 $
13,825
26,321
4,896
2,287
16,279
28,257
14,008
30,923
4,822
2,600
20,415
113,919
101,025
-
-
1,317
2,261
15,039
18,617
3,703
5,310
9,120
23,823
1,251
2,600
15,410
52,204
3,368
3,985
32,095
32,095
$
173,644 $
192,677
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term loan and current maturities of long-term bank loans
Trade payables
Other payables and accrued expenses
Deferred revenues
Total current liabilities
LONG-TERM LIABILITIES:
Accrued severance pay
Senior convertible notes
Long-term banks loans
Deferred revenues and other liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
EQUITY:
AudioCodes equity:
Share capital -
Ordinary shares of NIS 0.01 par value -
AUDIOCODES LTD.
December 31,
2010
2011
$
6,000 $
13,519
24,168
3,695
47,382
15,821
353
9,750
1,158
27,082
10,243
12,362
18,102
5,235
45,942
16,106
353
22,912
1,345
40,716
Authorized: 100,000,000 shares at December 31, 2010 and 2011; Issued: 48,595,373 shares at December
31, 2010 and 49,159,897 shares at December 31, 2011; Outstanding: 41,203,017 shares at December 31,
2010 and 40,562,784 shares at December 31, 2011
Additional paid-in capital
Treasury stock - 7,392,356 shares as of December 31, 2010 and 8,597,113 shares at December 31, 2011
Accumulated other comprehensive income (loss)
Accumulated deficit
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-6
128
191,277
(25,057 )
822
(67,990 )
119
196,021
(29,055 )
(240 )
(60,826 )
99,180
106,019
$
173,644 $
192,677
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except per share data
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial income (expenses), net
Income (loss) before taxes on income
Income tax benefit (expense), net
Equity in losses of affiliated company, net
Net income (loss)
Net loss attributable to non-controlling interest
AUDIOCODES LTD.
2009
Year ended December 31,
2010
2011
125,894
56,194
150,040
66,138
155,827
64,145
69,700
83,902
91,682
29,952
32,111
7,821
30,189
35,024
8,252
69,884
73,465
(184 )
(2,744 )
(2,928 )
(290 )
(76 )
10,437
(94 )
10,343
1,885
(213 )
(3,294 )
12,015
472
111
32,150
43,248
9,028
84,426
7,256
423
7,679
(238 )
(277 )
7,164
-
7,164
0.17
Net income (loss) attributable to AudioCodes' shareholders
$
(2,822 ) $
12,126 $
Basic and diluted net earnings (loss) per share attributable to AudioCodes shareholders $
(0.07 ) $
0.30 $
The accompanying notes are an integral part of the consolidated financial statements.
F-7
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands
Balance as of January 1, 2009
$
125
$
186,998
$
(25,057 ) $
(912 ) $
(77,294 ) $
228
$
84,088
Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
income
Retained
earnings
(accumulated
deficit)
Treasury
stock
Non-
controlling
interests
Total
comprehensive
income (loss)
Total
equity
AUDIOCODES LTD.
Issuance of shares upon exercise of options
Stock compensation related to options granted to employees
Comprehensive loss, net:
Unrealized profit on foreign currency cash flow hedges
Net loss
Total comprehensive loss, net
Balance as of December 31, 2009
Issuance of shares upon exercise of options
Stock compensation related to options granted to employees
Acquisition of NSC non-controlling interest
Comprehensive loss, net:
Unrealized profit on foreign currency cash flow hedges
Net income (loss)
Total comprehensive income, net
Balance as of December 31, 2010
Purchase of treasury stock
Issuance of shares upon exercise of options and employee stock
purchase plan
Stock compensation related to options granted to employees
Comprehensive loss, net:
Unrealized loss on foreign currency cash flow hedges
Net income
Total comprehensive income, net
Balance as of December 31, 2011
-
-
-
-
90
1,991
-
-
-
-
-
-
-
-
1,010
-
-
-
-
-
(2,822 )
$
-
(472 )
$
1,010
(3,294 )
(2,284 )
125
189,079
(25,057 )
98
(80,116 )
(244 )
3
-
-
-
-
2,553
1,370
(1,725 )
-
-
-
-
-
-
-
128
191,277
(25,057 )
(11 )
-
(3,998 )
2
-
-
-
1,703
3,041
-
-
-
-
-
-
-
-
-
-
-
355
$
-
(111 )
$
724
12,015
12,739
-
-
-
724
-
822
-
-
-
-
12,126
(67,990 )
-
-
-
(1,062 )
-
-
7,164
$
$
(1,062 )
7,164
6,102
-
-
-
-
-
-
-
90
1,991
1,010
(3,294 )
83,885
2,556
1,370
(1,370 )
724
12,015
99,180
(4,009 )
1,705
3,041
(1,062 )
7,164
$
119
$
196,021
$
(29,055 ) $
(240 ) $
(60,826 ) $
$
106,019
The accompanying notes are an integral part of the consolidated financial statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income (loss)
Adjustments required to reconcile net income (loss) to net cash provided by operating
$
activities:
Depreciation and amortization
Amortization of marketable securities premiums and accretion of discounts, net
Equity in losses of affiliated company, net
Stock-based compensation expenses
Amortization of senior convertible notes discount and deferred charges and gain
from redemption
Decrease (increase) in accrued interest on loans, marketable securities, bank
deposits and structured notes
Increase in deferred tax assets, net
Decrease (increase) in trade receivables, net
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Increase (decrease) in trade payables
Increase (decrease) in other payables and accrued expenses and other liabilities
Increase (decrease) in deferred revenues
Decrease in accrued severance pay, net
AUDIOCODES LTD.
2009
Year ended December 31,
2010
2011
(3,294) $
12,015 $
7,164
4,969
252
76
1,991
2,930
2,312
-
11,042
1,770
6,245
(3,052)
(1,760)
(1,731)
(776)
4,359
-
213
1,370
-
(20)
(2,321)
(7,799)
(218)
(3,963)
4,910
6,324
1,851
(319)
Net cash provided by (used in) operating activities
20,974
16,402
Cash flows from investing activities:
Investment in affiliated company
Purchase of property and equipment
Purchase of marketable securities
Short-term bank deposits, net
Investment in long-term bank deposits
Proceeds from redemption of marketable securities upon maturity
(341)
(1,271)
-
45,885
-
16,000
-
(1,569)
-
77
-
-
Net cash provided by (used in) investing activities
60,273
(1,492)
(35,495)
The accompanying notes are an integral part of the consolidated financial statements.
F-9
3,239
416
277
2,323
-
(182)
(652)
(4,602)
(403)
(4,136)
(1,157)
(5,464)
1,978
(86)
(1,285)
(211)
(1,579)
(24,402)
(183)
(9,120)
-
AUDIOCODES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Purchase of treasury stock
Redemption of senior convertible notes
Proceeds from long-term bank loans
Repayment of long-term bank loans
Payment for acquisition of NSC non controlling interest
Proceeds from issuance of shares upon exercise of options and employee stock
purchase plan
2009
Year ended December 31,
2010
2011
-
(73,147)
-
(6,000)
-
-
(50)
-
(6,000)
(74)
90
2,556
Net cash provided by (used in) financing activities
(79,057)
(3,568)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
2,190
36,779
11,342
38,969
(3,812)
-
24,005
(6,600)
(278)
1,411
14,726
(22,054)
50,311
Cash and cash equivalents at the end of the year
Supplemental disclosure of cash flow activities:
Cash paid during the year for income taxes
Cash paid during the year for interest
Supplemental disclosures of non cash operational, financing and investing activities
Net change in profit (loss) on foreign currency cash flow hedges
Total commitment for future payments for NSC acquisition which reduced the
Company's shareholders' equity
Total commitment in respect of treasury stock purchasing
Conversion of Employees Stock Purchase Plan liability to equity upon issuance of
shares
The accompanying notes are an integral part of the consolidated financial statements.
F-10
$
$
$
$
$
$
$
38,969 $
50,311 $
28,257
363 $
2,238 $
261 $
317 $
848
356
1,010 $
724 $
(1,062)
- $
- $
- $
1,296 $
- $
- $
-
197
294
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
a.
Business overview:
AUDIOCODES LTD.
AudioCodes Ltd. ("the Company") and its subsidiaries (together the "Group") design, develop and market products and services for voice,
data and video over IP networks to service providers and channels (such as distributors), OEMs, network equipment providers and systems
integrators.
The Company operates through its wholly-owned subsidiaries in the United States, Europe, Asia, Latin America and Israel.
b.
Acquisition of Natural Speech Communication Ltd.:
Through December 31, 2009, the Company had invested an aggregate of $ 8,418 in Natural Speech Communication Ltd. ("NSC"), a
privately-held company engaged in speech recognition. As of December 31, 2009, the Company owned 59.74% of the outstanding share
capital of NSC, which has been consolidated into the financial results of the Company since December 2008.
In January 2010, the Company entered into an agreement to acquire all of the outstanding equity of NSC that it did not own as of
December 31, 2009. The closing of the transaction occurred in May 2010. Pursuant to the agreement, the Company purchased the
remaining 40.26% of the shares from NSC's non-controlling shareholders for a maximum total consideration of $ 1,733, which includes
payments to employees, who were also former NSC's shareholders, that exceeded the fair value of NSC's shares. As a result, the payments
in excess of fair value were treated as payroll expenses. The payment of the total consideration can be made, at the Company's option, in
any combination of cash and the Company's shares. In accordance with the agreement, $ 224 in 2010 and $ 278 in 2011 were paid in cash.
An additional amount of $ 731 is payable in two annual installments commencing in March 2012. Additional consideration of up to $ 500
is payable in 2013, if certain aggregate revenue milestones are met for 2010, 2011 and 2012. The obligation to pay the total consideration
to the former NSC shareholders is recorded as a liability.
The liability recorded is comprised of two components: (1) The contingent payments for which the Company recorded a contingent
consideration liability of $ 329 based on its estimated fair value as of the closing of the transaction. Thia amount was estimated by utilizing
an income approach, taking into account the potential cash payments based on the Company's expectation as to NSC's future revenues in
each of the years from 2010 to 2012, and was discounted to arrive at a present value amount. The discount rate was based on the market
interest rate and NSC's estimated operational capitalization rate. The contingent consideration liability is marked to market at fair value at
each reporting date based on the Company's policy with subsequent changes in the value of the liability recorded in the statement of
operations in finance expenses, and (2) A liability with respect to the commitment for future payments was recorded at present value
which amounted to $ 967. Such obligation is not re-measured at subsequent periods and only adjusted to changes in time value. As this
was an equity transaction between AudioCodes and NSC's non-controlling shareholders, the Company reduced its shareholders' equity by
$ 1,370 for the excess costs over book value related to the minority interest in NSC, as required in accordance with Accounting Standards
Codification (“ASC”) 810, "Consolidation".
F-11
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
As of December 31, 2010 and 2011, the contingent consideration liability estimated fair value amounted to $ 355 and $ 412, respectively,
and the liability with regards to the commitment for future payments amounted to $ 958 and $ 707, respectively. Of the total liability, an
aggregate amount equal to $ 1,038 and $ 778 was classified as long-term liabilities as of December 31, 2010 and 2011, respectively.
The Group is dependent upon sole source suppliers for certain key components used in its products, including certain digital signal
processing chips. Although there are a limited number of manufacturers of these particular components, management believes that other
suppliers could provide similar components at comparable terms. A change in suppliers, however, could cause a delay in manufacturing
and a possible loss of sales, which could adversely affect the operating results of the Group and its financial position.
The Group's major customer in 2009, accounting for 15.6% of the Group's revenues in that year, filed for bankruptcy in January 2009. The
Group's major customer in 2011, accounted for 14.4% of the Group's revenues in that year. No other customer accounted for more than
10% of the Group's revenues in those periods. See also Note 12e.
c.
d.
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S.
GAAP").
a.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and
assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's management believes
that the estimates, judgment and assumptions used are reasonable based upon information available at the time they are made. As
applicable to these consolidated financial statements, the most significant estimates and assumptions relate to revenue recognition and
allowance for sales returns, allowance for doubtful accounts, inventories, intangible assets, goodwill, income taxes and valuation
allowance: stock-based compensation and contingent liabilities. Actual results could differ from those estimates.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b.
Financial statements in U.S. dollars:
AUDIOCODES LTD.
A majority of the Group's revenues is generated in U.S. dollars. In addition, most of the Group's costs are denominated and determined in
U.S. dollars and in new Israeli shekels. The Company's management believes that the U.S. dollar is the currency in the primary economic
environment in which the Group operates. Thus, the functional and reporting currency of the Group is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with ASC
830, "Foreign Currency Matters". All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the
statements of operations as financial income or expenses, as appropriate.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions
and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
The Group accounts for non-controlling interest in a subsidiary in accordance with ASC 810, "Consolidation". According to ASC 810,
non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a separate component
of equity in the consolidated financial statements. As such, changes in the parent's ownership interest with no change of control are treated
as equity transactions, rather than step acquisitions or gain or loss resulting from dilution in the holdings of a subsidiary. ASC 810 clarifies
that losses of partially-owned consolidated subsidiaries will continue to be allocated to the non-controlling interest even when the
investment has already been reduced to zero.
According to the Company's policy, contingent consideration is presented at fair value in subsequent periods and changes in fair value of
the liability will be recorded as financial income/ expense.
d.
Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or
less, at the date acquired.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
e.
Short-term bank deposits:
AUDIOCODES LTD.
Short-term bank deposits are deposits with maturities of more than three months but less than one year. The deposits are mainly in U.S.
dollars and bear interest at an average rate of 1.01% and 1.50% for 2010 and 2011, respectively. Short-term deposits are presented at their
cost, including accrued interest. In connection with the long term bank loans, and with the office lease agreement, the banks have a lien on
the Company's assets and the Company is required to maintain compensating balances with the banks (see also Note 11 and Note 12a).
The Company is required to maintain deposits in the same banks that provided the loans. Out of the short-term bank deposits, a total of
$ 13,825 and $ 12,934 are restricted short-term deposits as of December 31, 2010 and 2011, respectively.
f.
Marketable securities:
The Company accounts for investments in debt securities in accordance with ASC 320, "Investments-Debt and Equity Securities".
Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and
reevaluates such determinations at each balance sheet date. For the year ended December 31, 2011, all securities are classified as held-to-
maturity since the Company has the intent and ability to hold the securities to maturity and, accordingly, debt securities are stated at
amortized cost.
For the year ended December 31, 2011, all securities covered by ASC No. 320 were designated by the Company's management as held-to-
maturity.
The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity and any
other than temporary impairment losses. Such amortization and interest are included in the consolidated statement of operations as
financial income or expenses, as appropriate. The accrued interest on short-term and long-term marketable securities is included in other
receivables and prepaid expenses.
For the years ended December 31, 2009 and 2011, no other than temporary impairment losses have been identified. During the year ended
December 31, 2010, the Group did not hold any marketable securities.
g.
Inventories:
Inventories are stated at the lower of cost or market value. Cost is determined as follows:
Raw materials - using the "weighted average cost" method.
Finished products - using the "weighted average cost" method with the addition of direct manufacturing costs.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The Group periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales
volume and technological obsolescence. Based on these evaluations, inventory write-offs are taken based on slow moving items,
technological obsolescence, excess inventories, discontinuation of products lines and for market prices lower than cost.
h.
Long-term bank deposits:
Bank deposits with maturities of more than one year are included in long-term investments and presented at their cost. Accrued interest is
included in other receivables and prepaid expenses. The deposits are in U.S dollars and bear interest at an average rate of 2.52% for 2011.
In connection with the long term bank loans, the Company is required to maintain compensating balances with the banks (see also Note
11). Out of the long-term bank deposits, a total of $ 8,820 are restricted long-term deposits as of December 31, 2011. The Company is
required to maintain deposits in the same banks that provided the loans.
i.
Investment in an affiliated company:
The Company accounts for investment in affiliated company in which it has the ability to exercise significant influence over the operating
and financial policies using the equity method of accounting in accordance with the requirements of ASC 323, "Investments - Equity
Method and Joint Ventures".
Investment in affiliated company represents investment in ordinary shares, preferred shares and convertible loans. According to ASC 323,
additional losses of such company in excess of the carrying amount of the equity investment are recognized based on the seniority level
(priority in liquidation) of the particular type of investment held by the Company.
The Company's investment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
the investment may not be recoverable in accordance with ASC 323. As of December 31, 2009, 2010 and 2011, no impairment losses had
been identified.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j.
Property and equipment:
AUDIOCODES 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:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
k.
Impairment of long-lived assets:
%
33
6 - 20 (mainly 15%)
Over the shorter of the term of
the lease or the life of the asset
The Group's long-lived assets are reviewed for impairment in accordance with ASC 360-10-35, "Property, Plant and Equipment -
Subsequent Measurement", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset if such assets are considered to be impaired. The impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The loss is allocated
to the long-lived assets of the Group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to
an individual long-lived asset of the Group will not reduce the carrying amount of that asset below its fair value whenever that fair value is
determinable As of December 31, 2009, 2010 and 2011, no impairment losses had been identified for property and equipment since the
fair value of those assets was higher than its carrying amounts.
Intangible assets are comprised of acquired technology, customer relations, trade names, existing contracts for maintenance and backlog.
Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over their estimated
useful lives, which range from one to ten years. Recoverability of these assets is measured by a comparison of the carrying amount of the
asset to the undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the amount
of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.
During 2009, 2010 and 2011, no impairment losses were identified.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l.
Goodwill:
AUDIOCODES LTD.
Goodwill and certain other purchased intangible assets have been recorded in the Company's financial statements as a result of
acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and
intangible assets acquired. Under ASC 350, "Intangible, Goodwill and Other", goodwill is not amortized, but rather is subject to an annual
impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances,
and written down when impaired.
The Company performs an annual impairment analysis of goodwill at December 31 of each year, or more often as applicable. The
provisions of ASC 350 require that a two-step impairment test be performed on goodwill at the level of the reporting units. In the first step,
the Company compares the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net
assets, goodwill is considered not impaired, and no further testing is required to be performed. If the carrying value of the net assets
exceeds the fair value, then the Company must perform the second step of the impairment test in order to determine the implied fair value
of goodwill. If the carrying value of goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to
the difference.
The Company believes that its business activity and management structure meet the criterion of being a single reporting unit for
accounting purposes. The Company performed an annual impairment analysis as of December 31, 2009, 2010 and 2011 using market
capitalization.
During 2009, 2010 and 2011, no impairment losses were identified.
m.
Revenue recognition:
The Group generates its revenues primarily from the sale of products through a direct sales force and sales representatives. The Group's
products are delivered to its customers, which include original equipment manufacturers, network equipment providers, systems
integrators and distributors in the telecommunications and networking industries, all of whom are considered end-users.
Revenues from products and services are recognized in accordance with Staff Accounting Bulletin ("SAB") No. 104), "Revenue
Recognition", when the following criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the
fee is fixed or determinable, and collectability is probable. The Group has no remaining obligation to customers after the date on which
products are delivered other than pursuant to warranty obligations and right of return.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
In 2011, the Company adopted, on a prospective basis, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2009-13, Topic 605 - Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). ASU 2009-13 changes the
requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement
consideration to each deliverable to be based on the relative selling price.
The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if
VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on
each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price
charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices
fall within a narrow range based on stand alone rates. TPE of selling price is established by evaluating largely interchangeable competitor
products or services in stand-alone sales to similarly situated customers. However, as the Company's products contain a significant element
of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with
similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products'
selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The ESP is established considering multiple
factors including, but not limited to, pricing practices in different geographical areas and through different sales channels, gross margin
objectives, internal costs, competitors' pricing strategies, and industry technology lifecycles. The selling price of the products was based on
ESP. Maintenance selling price was based on VSOE.
The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of
products or services or subject to customer-specific return or refund privileges. The Company evaluates each deliverable in an arrangement
to determine whether they represent separate units of accounting.
Prior to 2011, the Company allocated revenue to each element using the residual method when the VSOE of fair value of the undelivered
items for arrangements with multiple elements, such as sales of products that include services and software, exists. Under the residual
method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of
any undelivered elements. If VSOE of one or more undelivered items did not exist, revenue from the entire arrangement was deferred and
recognized at the earlier of: (i) delivery of those elements or (ii) when fair value could be established unless maintenance was the only
undelivered element, in which case, the entire arrangement fee was recognized ratably over the contractual support period.
The adoption of ASU 2009-13 did not have a significant impact on the Company's net revenues for the year ended December 31, 2011,
compared to the net revenues that would have been recorded under the previous accounting rules.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Revenues from services recorded during the years 2009, 2010 and 2011, amounted to $ 11,023, $ 17,378 and $ 20,025 and the related cost
of services amounted to $ 3,190, $ 3,983 and $ 4,228, respectively.
The Group grants to certain customers a right of return or the ability to exchange a specific percentage of the total price paid for products
they have purchased over a limited period for other products. The Group maintains a provision for product returns and exchanges and
other incentives based on its experience with historical sales returns, analysis of credit memo data and other known factors, in accordance
with SAB 104. The provision was deducted from revenues and amounted to $ 1,387 and $ 823 as of December 31 2010 and 2011,
respectively.
Revenues from the sale of products which were not yet determined to be final sales due to acceptance provisions were deferred and
included in deferred revenues. In cases where collectability is not probable, revenues are deferred and recognized upon collection.
n.
Warranty costs:
The Group generally provides a warranty period of 12 months at no extra charge. The Group estimates the costs that may be incurred
under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that
affect the Group's warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per
claim. The Group periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. As of
December 31, 2010 and 2011, the provision for warranty amounted to $ 870 and $ 707, respectively.
o.
Research and development costs:
Research and development costs, net of government grants received, are charged to the statement of operations as incurred. The total
government grants presented as a reduction from research and development costs during the years 2009, 2010 and 2011 are $ 2,417,
$ 3,912 and $ 2,776, respectively.
p.
Income taxes:
The Group accounts for income taxes in accordance with ASC 740, "Income Taxes". ASC 740 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax
bases of assets and liabilities and for carryforward losses. Deferred taxes are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Group provides a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
In addition, ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The first step is to evaluate the tax position taken or expected to be taken in a
tax return. This is done by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of
the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
The Group accrues interest and penalties, if any, related to unrecognized tax benefits in tax expenses.
q.
Comprehensive income (loss):
The Group accounts for comprehensive income (loss) in accordance with ASC 220 "Comprehensive Income". ASC 220 establishes
standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. The Group determined that its items of comprehensive income (loss) relates to gains and losses on
hedging derivatives instruments.
r.
Concentrations of credit risk:
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents,
bank deposits, trade receivables and foreign currency derivative contracts.
The majority of the Group's cash and cash equivalents and bank deposits are invested in U.S. dollar instruments with major banks in Israel
and the United States. Such investments in the United States may be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Group's investments are in corporations with high credit standing.
Accordingly, management believes that low credit risk exists with respect to these financial investments.
Marketable securities include investments in debentures of U.S corporations. Marketable securities consist of highly liquid debt
instruments of corporations with high credit standing. Management believes that the portfolio is well diversified, and accordingly, minimal
credit risk exists with respect to these marketable debt securities.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The trade receivables of the Group are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe.
However, under certain circumstances, the Group may require letters of credit, other collateral, additional guarantees or advance payments.
Regarding certain credit balances, the Group is covered by foreign trade risk insurance. The Group performs ongoing credit evaluations of
its customers and establishes an allowance for doubtful accounts based upon a specific review. Allowance for doubtful accounts amounted
to $ 918 and $ 1,461 as of December 31, 2010 and 2011, respectively
s.
Senior convertible notes:
The Group accounts for senior convertible notes in accordance with ASC 470-20, "Debt with Conversion and Other Options". ASC 470-
20 specifies that issuers of such instruments should separately account for the liability and equity components on the issuance day in a
manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. See also
Note 10.
The Company presents the outstanding principal amount of its senior convertible notes as a long-term liability, in accordance with ASC
210-10-45 (based on its expected redemption, taking into consideration redemption options of the holders). The debt is classified as a long-
term liability until the date of conversion on which it would be reclassified to equity, or within one year of the first contractual redemption
date, on which it would be reclassified as a short-term liability. Accrued interest on the senior convertible notes is included in "other
payables and accrued expenses".
According to ASC 470-20, if an instrument within its scope is repurchased, an issuer shall allocate the consideration transferred and
related transaction costs incurred, to the extinguishment of the liability component and the reacquisition of the equity component. See also
Note 10.
t.
Basic and diluted net earnings (loss) per share:
Basic net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted
net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus potential
dilutive ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share".
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Senior convertible notes and certain outstanding stock options and warrants have been excluded from the calculation of the diluted net
earnings per ordinary share since such securities are anti-dilutive for all years presented. The total weighted average number of shares
related to the senior convertible notes and outstanding options and warrants that have been excluded from the calculations of diluted net
income per share was 8,768,909, 3,848,284 and 2,727,374 for the years ended December 31, 2009, 2010 and 2011, respectively.
u.
Accounting for stock-based compensation:
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation". ASC 718
requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the
Company's consolidated statement of operations.
The Company recognizes compensation expenses for the value of its awards based on the accelerated method over the requisite service
period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-
vesting forfeitures.
The Company applies ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees" with respect to options and warrants
issued to non-employees. Accordingly, the Company uses option valuation models to measure the fair value of the options and warrants at
the measurement date as defined in ASC 505-50.
During the year ended December 31, 2009, the Company extended the exercise period of certain options granted to employees by a period
of 1-2 years and modified the exercise price with respect to certain employees' awards.
The Company accounted for these changes as modification in accordance with ASC 718. A modification to the terms of an award should
be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the
original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on
the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured
immediately before its terms are modified based on current circumstances.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2009, 2010 and 2011,
was $ 1.22, $ 1.96 and $ 2.69 per share, respectively, using the Black-Scholes option pricing formula. Fair values were estimated using the
following weighted-average assumptions (annualized percentages):
Dividend yield
Expected volatility
Risk-free interest
Expected life
Forfeiture rate
2009
0%
46.24%-50.73%
1.76%-2.93%
4.6-5.6 years
7.0%
Year ended
December 31,
2010
2011
0%
48.68%-53.2%
1.02%-2.46%
0%
53.5%-59.6%
0.8%-2.04%
4.67-5.69 years
4.67-5.69 years
10.0%
10.0%
The Company used its historical volatility in accordance with ASC 718. The computation of volatility uses historical volatility derived
from the Company's exchange traded shares. The expected term of options granted is estimated based on historical experience and
represents the period of time that options granted are expected to be outstanding. The risk free interest rate assumption is the implied yield
currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company's
options. The dividend yield assumption is based on the Company's historical experience and expectation of no future dividend payouts and
may be subject to substantial change in the future. The Company has historically not paid cash dividends and has no foreseeable plans to
pay cash dividends in the future.
The total equity-based compensation expenses relating to all of the Company's equity-based awards recognized for the years ended
December 31, 2009, 2010 and 2011 was included in items of the consolidated statements of income as follows:
2009
Year ended
December 31,
2010
2011
Cost of revenues
Research and development, net
Selling and marketing expenses
General and administrative expenses
Total equity-based compensation expenses
$
$
117 $
642
913
319
$
62
393
1,180
453
130
526
964
703
1,991 $
2,088*) $
2,323
*)
Includes also equity-based compensation that was classified as 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.)
v.
Treasury stock:
AUDIOCODES LTD.
The Company has repurchased its ordinary shares from time to time in the open market and holds such shares as treasury stock. The
Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity. See also note 13a.
w.
Severance pay:
The liability for severance pay for Israeli employees is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary
of the employees multiplied by the number of years of employment as of the balance sheet date for all employees in Israel. Employees
who have been employed for more than one year period, are entitled to one month's salary for each year of employment, or a portion
thereof. The Group's liability for all of its Israeli employees is fully provided for by monthly deposits with severance pay funds, insurance
policies and by an accrual. The value of these deposits is recorded as an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements.
Severance pay expenses for the years ended December 31, 2009, 2010 and 2011, amounted to approximately $ 1,136, $ 1,733 and $ 2,162,
respectively.
x.
Employee benefit plan:
The Group has 401(k) defined contribution plans covering employees in the U.S. All eligible employees may elect to contribute a portion
of their annual compensation to the plan through salary deferrals, subject to the IRS limit of $ 16.5 during 2011 ($ 22 including catch-up
contributions for participants age 50 or over). The Group matches employee contributions to the plan up to a limit of 3% of their eligible
compensation, subject to IRS limits. In 2009, 2010 and 2011, the Group matched contributions in the amount of $ 280, $ 240 and $ 301,
respectively.
y.
Advertising expenses:
Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31,
2009, 2010 and 2011 amounted to $ 139, $ 374 and $ 442, respectively.
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.
Fair value of financial instruments:
AUDIOCODES LTD.
The estimated fair value of financial instruments has been determined by the Group using available market information and valuation
methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the
amounts the Company could realize in a current market exchange.
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables, trade payables, other receivables and other
payables approximate their fair value due to the short-term maturity of such instruments. The fair value of long-term bank loans and senior
convertible loans also approximates their carrying value, since they bear interest at rates close to the prevailing market rates.
The fair value of foreign currency contracts (used for hedging purposes) is estimated by obtaining current quotes from banks and market
observable data of similar instruments.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820,
"Fair Value Measurements and Disclosures" establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data
Level 3 - Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the assets
and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. See also Note 8.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa.
Variable interest entities:
AUDIOCODES LTD.
ASC 810-10, "Consolidation" provides a framework for identifying Variable Interest Entities ("VIEs") and determining when a company
should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
The Company's assessment of whether an entity is a VIE and the determination of the primary beneficiary is judgmental in nature and
involves the use of estimates and assumptions. The assumptions include, among others, forecasted cash flows, their respective
probabilities and the economic value of certain preference rights. In addition, such assessment also involves estimates of whether a group
entity can finance its current activities, until it reaches profitability, without additional subordinated financial support.
The Company's approach for identifying which enterprise should consolidate a variable interest entity is the qualitative approach, based on
which enterprise has both (1) the power to direct the economically significant activities of the entity and (2) the obligation
to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the variable interest entity.
Determination about whether an enterprise should consolidate a variable interest entity is required to be evaluated continuously as changes
to existing relationships or future transactions occur.
ab.
Derivatives and hedging:
The Group accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging".
The Group 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. The changes in fair value of such
instruments are included as earnings in "Financial income (expenses)" at each reporting period.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the
effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income
(loss) in equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is
classified as payroll and rent expenses. The ineffective portion of the gain or loss on the derivative instrument is recognized in current
earnings and classified as financial other income or expenses. To receive hedge accounting treatment, cash flow hedges must be highly
effective in offsetting changes to expected future cash flows on hedged transactions.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
During 2010, the Group recorded accumulated other comprehensive income in the amount of $ 724 from its forward exchange contracts
with respect to payroll and rent expenses expected to be incurred during 2011. Such amount was reclassified into earnings during 2011.
During 2011, the Group recorded accumulated other comprehensive loss in the amount of $ 1,062 from its forward exchange contracts
with respect to payroll and rent expenses expected to be incurred during 2012. Such amount will be reclassified into earnings during 2012.
See also Note 18.
ac.
Impact of recently issued accounting pronouncements:
In May 2011, the FASB issued ASU No. 2011-04, Topic 820 - Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"), which amends current fair value measurement and disclosure guidance to
converge with International Financial Reporting Standards ("IFRS") and provides increased transparency around valuation inputs and
investment categorization. This guidance is effective for fiscal years and interim periods, beginning after December 15, 2011. Early
application by public companies is not permitted. The Group's adoption of ASU 2011-04 will not have a significant impact on its
consolidated results of operations or financial condition.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220 - Presentation of Comprehensive Income ("ASU 2011-05"), which requires
an entity to present total comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and
eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.
This guidance is effective for fiscal years and interim periods, beginning after December 15, 2011.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other ("ASU 2011-08"), which amends
Topic 350 to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based
the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for
annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12, Topic 220 - Comprehensive Income ("ASU
2011-12"), which indefinitely deferred certain provisions of ASU 2011-05, including the requirement to present reclassification
adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the
statement in which other comprehensive income is presented. This amendment is effective for both annual and interim financial statements
for fiscal years beginning after December 15, 2011.
In December 2011, the FASB issued ASU No. 2011-11, Topic 2010 - Balance Sheet ("ASU 2011-11"), which contains new disclosure
requirements regarding the nature of an entity's rights of set off and related arrangements associated with its financial instruments
and derivative instruments. Under U.S. GAAP, certain derivative and repurchase agreement arrangements are granted exceptions from the
general off-setting model. To facilitate comparison between financial statements prepared under U.S. GAAP and IFRS, the new disclosure
requirement will provide financial statement users information regarding both gross and net exposures. This guidance is effective for
annual and interim financial statements beginning on or after January 1, 2013. Retrospective application is required. The Group is still
considering the impact of the adoption of ASU 2011-11 on its consolidated results of operations or financial condition.
ad.
Reclassification:
Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- MARKETABLE SECURITIES AND ACCRUED INTEREST
The following is a summary of held to maturity marketable securities:
AUDIOCODES LTD.
Maturing within one to three years
Corporate debentures
Accrued interest
Amortized
cost
December 31, 2011
Unrealized
gains
Unrealized
losses
Fair
Value
$
23,823 $
345
$
24,168 $
46 $
-
46 $
(736) $
23,133
-
345
(736) $
23,478
These investments were issued by highly rated corporations. Accordingly, it was expected that the securities would not be settled at a price less
than the amortized cost of the Company's investment. As of December 31, 2011, the Group did not have any investment in marketable securities
that was in an unrealized loss position for twelve months period or greater. Since the Company had the ability and intent to hold these investments
until an anticipated recovery of fair value, which may be until maturity, the Company did not consider these investments to be other-than-
temporarily impaired as of December 31, 2011. Unrealized gains (losses) are valued using alternative pricing sources and models utilizing market
observable inputs.
NOTE 4:-
INVENTORIES
Raw materials
Finished products
December 31,
2010
2011
$
$
6,872 $
9,407
6,977
13,438
16,279 $
20,415
In the years ended December 31, 2009, 2010 and 2011, the Group wrote-off inventories in a total amount of $ 3,421, $ 1,113 and $ 644,
respectively.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
INVESTMENT IN AN AFFILIATED COMPANY
As of December 31, 2010 and 2011, the Company owned 25.61% and 26.56% of MailVision's outstanding share capital, respectively.
In November 2010, the Company converted $588 of convertible loans made to MailVision into equity and its holding increased to 25.61%.
In June 2011, the Company converted $ 74 of convertible loans made to MailVision into equity and its holding increased to 26.56%.
AUDIOCODES LTD.
Invested in equity
Loans
Accumulated net loss
Total investment
Balances and transactions with MailVision were as follows:
a.
Balances:
December 31,
2010
2011
$
$
1,581 $
74
(338)
1,317 $
1,655
211
(615)
1,251
December 31,
2010
2011
Other receivables and prepaid expenses
$
100 $
116
b.
Transactions:
Amounts charged - cost of revenues
$
94 $
417 $
2,164
Year ended
December 31,
2010
2011
2009
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:-
PROPERTY AND EQUIPMENT
Cost:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
AUDIOCODES LTD.
December 31,
2010
2011
$
20,424 $
10,151
2,291
21,844
10,299
2,302
32,866
34,445
19,213
8,665
1,285
20,305
9,169
1,603
29,163
31,077
Depreciated cost
$
3,703 $
3,368
Depreciation expenses amounted to $ 3,159, $ 2,822 and $ 1,914 for the years ended December 31, 2009, 2010 and 2011, respectively.
NOTE 7:-
INTANGIBLE ASSETS, DEFERRED CHARGES
a.
Impaired Cost:
Acquired technology
Customer relationship
Trade name
Existing contracts for maintenance
Accumulated amortization:
Acquired technology
Customer relationship
Trade name
Existing contracts for maintenance
Useful life
(years)
December 31,
2010
2011
$
5-10
9
3
3
15,517 $
4,172
415
181
15,517
4,172
415
181
20,285
20,285
11,554
2,825
415
181
12,575
3,129
415
181
14,975
16,300
Amortized cost
$
5,310 $
3,985
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:-
INTANGIBLE ASSETS, DEFERRED CHARGES (Cont.)
AUDIOCODES LTD.
b.
c.
Amortization expenses related to intangible assets amounted to $ 1,810, $ 1,537 and $ 1,325 for the years ended December 31, 2009, 2010
and 2011, respectively.
Expected amortization expenses are as follows
Year ending December 31,
2012
2013
2014
2015
2016
$
$
$
$
$
$
1,124
933
869
717
342
3,985
NOTE 8:-
FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, "Fair Value Measurements and Disclosures", the Group measures its foreign currency derivative instruments
and the contingent consideration to NSC's former shareholders at fair value. Investments in foreign currency derivative instruments are classified
within Level 2 value hierarchy. This is because these assets are valued using alternative pricing sources and models utilizing market observable
inputs. The contingent consideration to NSC's former shareholders is classified within Level 3 value hierarchy because the liability is based on
present value calculations and external valuation models whose inputs include market interest rates, estimated operational capitalization rates,
volatilities and illiquidity. Unobservable inputs used in these models are significant.
The Group's financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments as of the
following dates:
December 31, 2010
Fair value measurements using input type
Level 3
Total
Level 2
Financial assets related to foreign currency derivative contracts
Contingent consideration related to NSC's former shareholders
Liability related to equity based compensation
Total financial liabilities
$
$
$
822 $
- $
-
- $
(355) $
(718)
822
(355)
(718)
- $
(1,073) $
(1,073)
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:-
FAIR VALUE MEASUREMENTS (Cont.)
AUDIOCODES LTD.
December 31, 2011
Fair value measurements using input type
Level 3
Total
Level 2
Foreign currency derivative contracts
Contingent consideration related to NSC's former shareholders
Total financial liabilities
$
$
(240) $
(240) $
- $
(412)
(412) $
(240)
(412)
(652)
Fair value measurements using significant unobservable inputs (Level 3):
Balance at January 1, 2011
Classification of liability to quity
Adjustment due to time change value
Balance at December 31, 2011
NOTE 9:- OTHER PAYABLES AND ACCRUED EXPENSES
Vacation accrual
Royalties provision
Other employees and payroll accruals
Government authorities
Accrued expenses
Others
F-33
$
$
$
(1,073)
718
(57)
(412)
December 31,
2010
2011
3,139 $
596
6,531
1,153
12,241
508
3,030
517
3,879
574
9,596
506
$
24,168 $
18,102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SENIOR CONVERTIBLE NOTES
AUDIOCODES LTD.
In November 2004, the Company issued an aggregate of $ 125,000 principal amount of its 2% Senior Convertible Notes due November 9, 2024
(the "Notes"). The Company is obligated to pay interest on the Notes semi-annually on May 9 and November 9 of each year.
The Notes are convertible, at the option of the holders at any time before the maturity date, into ordinary shares of the Company at a conversion
rate of 53.4474 ordinary shares per $ 1 principal amount of Notes, representing a conversion price of approximately $ 18.71 per share. Upon such
conversion in lieu of the delivering of ordinary shares, the Company may elect to pay the holders cash or a combination of cash and ordinary
shares. The Notes are subject to redemption at any time on or after November 9, 2009, in whole or in part, at the option of the Company, at a
redemption price of 100% of the principal amount plus accrued and unpaid interest. The Notes are subject to repurchase, at the holders' option, on
November 9, 2009, November 9, 2014 or November 9, 2019, at a repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest, if any, on such repurchase date. The Company may choose to settle in cash upon conversion. The holders of almost all of the
principal amount of the Notes outstanding in November, 2009 elected to have the Company repurchase the Notes held by them.
Effective January 1, 2009, the Company adopted the amendment to ASC 470-20 "Debt with Conversion and Other Options". The amendment
specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. As a result, the Company recorded an additional
$ 2,775 of interest expense in 2009.
During 2009 and 2010, the Company repurchased $ 73,100 and $ 50, respectively, in principal amount of the Notes for a total cost, including
accrued interest, of $ 73,147 and $ 50, respectively. As of December 31, 2010 and 2011, there are $ 353 in principal amount of the Notes
outstanding. The effective interest rate for the years ended December 31, 2009, 2010 and 2011 amounted to 3.35%, 2% and 2%, respectively.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- LONG-TERM BANK LOANS
AUDIOCODES LTD.
In April and July 2008, the Company entered into loan agreements with Israeli commercial banks that provided for loans in the total principal
amount of $ 30,000 (the "2008 Loans"). The 2008 Loans bear interest at LIBOR plus 1.3%-1.5% with respect to $ 23,000 of the principal amount
of 2008 Loans and LIBOR plus 0.5%-0.65% with respect to the remaining $ 7,000 of principal amount. The principal amount borrowed is
repayable in 20 equal quarterly payments through July 2013.
In September and December 2011, the Company entered into loan agreements with banks in Israel that provided for loans in the total principal
amount of $ 23,750 (the "2011 Loans"). The 2011 Loans bear interest at LIBOR+2.1%-3.6% with respect to $ 19,850 of the principal amount of
the 2011 Loans. The other $ 3,900 of principal amount is required to be maintained as a compensating bank deposit. This portion of the loan bears
interest at 0.5% above the interest rate paid on the bank deposit. Of these borrowings, $ 19,850 of the principal amount borrowed is repayable in
20 equal quarterly installments and the remaining $3,900 of principal amount is repayable in 10 equal semiannual payments through September
2017.
As of December 31, 2010 and 2011, the banks have a lien on the Company's assets that secures both the 2008 and 2011 Loans. As of December
31, 2010 and 2011, the Company is required to maintain a total of $ 7,000 and $ 16,450 in compensating balances with the banks, respectively, to
secure the 2008 and 2011 Loans. As of December 31, 2010 and 2011, the compensating balances are included in $ 7,000 and $ 7,630 of short-
term deposits and $ 0 and $ 8,820 of long-term deposits, respectively. The amount of the compensation balances are allowed to decrease as the
Company repays these Loans. The agreements with respect to the 2008 and 2011 Loans require the Company, among other things, to meet certain
covenants as to maintaining shareholders' equity, cash balances and liabilities to banks at specified levels and achieving certain levels of operating
income.
As of December 31, 2010, the Company was in compliance with its covenants to the banks. As of December 31, 2011 the Company was in
compliance with its covenants to the banks except for the covenant not to exceed a certain amount of liabilities to the banks. The Company
received a waiver from the banks with respect to this covenant until June 30, 2012. The Company expects to be in compliance with this covenant
by the end of the waiver period.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
AUDIOCODES LTD.
The Group's facilities are rented under several lease agreements in Israel, Europe and the U.S. for periods ending in 2017.
Future minimum rental commitments under non-cancelable operating leases, are as follows:
Year ending December 31,
2012
2013
2014
2015
2016
Thereafter
$
5,609
5,691
5,487
5,118
5,099
4,677
Total minimum lease payments *)
$
31,681
*)
Minimum payments have been reduced by minimum sublease rental of $ 1,425 due in the future under non-cancelable subleases.
In connection with the Company's offices lease agreement in Israel, the lessor has a lien of approximately $ 5,000 which is included in
short-term bank deposits.
Rent expenses for the years ended December 31, 2009, 2010 and 2011, were approximately $ 4,558, $ 4,790 and $ 5,327, respectively.
b.
Inventory commitments:
The Group is obligated under certain agreements with its suppliers to purchase specified items of excess inventory which is expected to be
utilized in 2012. As of December 31,2011, non- cancelable obligations were approximately $ 1,233.
c.
Royalty commitment to the Office of the Chief Scientist of Israel ("OCS"):
Under the research and development agreements of the Company and its Israeli subsidiaries with the OCS and pursuant to applicable laws,
the Company is required to pay royalties at the rate of 3%-5% of sales to the end customer of products developed with funds provided by
the OCS, up to an amount equal to 100% of the OCS research and development grants received, linked to the U.S. dollar plus interest on
the unpaid amount received based on the 12-month LIBOR rate (from the year the file has been approved) applicable to dollar deposits.
The Company is obligated to repay the Israeli Government for the grants received only to the extent that there are sales of the funded
products.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
AUDIOCODES LTD.
The place of manufacturing of a product that was developed with the support of the OCS, or based on know-how developed with the
support of the OCS, shall be according to the supported company's declaration in the application for support (including manufacturing
abroad). In case a company wishes to transfer manufacturing activity abroad, additional to its statement in the application for support, it
will be required to receive approval from the OCS research committee. The committee is entitled to increase both the royalty liability and
the rate of the royalty payments. The increased repayment is calculated according to the percentage of the manufacturing activities that are
intended to be carried out outside Israel, and can reach up to 300% of the original sum. When the manufacturing of the product is being
done outside of Israel, the Company is required to pay an increased royalty rate of an additional 1% (instead of paying 3-5%, the company
will pay 4-6%).
As of December 31, 2010 and 2011, the Company and its Israeli subsidiaries have a contingent obligation to pay royalties in the amount of
approximately $ 23,357 and
$ 24,062, respectively.
As of December 31, 2011, the Company and its subsidiaries have paid or accrued royalties to the OCS in the amount of $ 1,475, which
was recorded as cost of revenues.
d.
Royalty commitments to third parties:
The Group has entered into technology licensing fee agreements with third parties. Under the agreements, the Group agreed to pay the
third parties royalties, based on sales of relevant products. See also Note 9.
e.
Legal proceedings:
1.
2.
The Group's major customer in 2008 and 2009 has filed an action asserting that the Group received approximately $ 3.2 million in
payments from them during the ninety day period prior to their bankruptcy filing in January 2009 that constitute avoidable
preferential transfers. The Group is currently engaged in settlement discussions with the customer with respect to these claims and
has reached a settlement in principle whereby all claims by the parties would be settled and the Group would be required to pay $
20 to the customer. The parties are in the process of documenting the settlement. Upon execution of the settlement agreement, the
customer will submit the settlement for court approval. Until the settlement agreement is executed and the court approves the
settlement, there can be no certainty that a settlement will occur. If a settlement does not occur, management believes that it has
valid defenses to these claims.
In May 2007, the Company entered into an agreement with respect to property adjacent to its headquarters in Israel, pursuant to
which a building of approximately 145,000 square feet has been erected and was expected to be leased to the Company for a period
of eleven years.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
AUDIOCODES LTD.
This new building was substantially completed in May 2010. The landlord claimed that the Company should have taken delivery
of the building at that time and started paying rent. The Company disagreed with the landlord's interpretation of the relevant
agreement. As a result, the landlord terminated the agreement and leased the property to a third party. This dispute has been
referred to arbitration where the Company claims that due to the landlord's failure the Company lost significant potential revenues.
The landlord counterclaimed alleging that it sustained losses equal to approximately one year's rent and management fees in the
amount of approximately NIS 14 million (approximately $ 3.7 million). It is not possible at this stage to predict the outcome of
these proceedings. The Company believes that it has valid defenses to the counterclaim.
3.
4.
5.
In July 2011, the Company received notification from a successor in interest of one of the Company's former customers
("Customer") that it had been served with a complaint in an action commenced in Federal Court in California alleging that certain
of the Company's products infringe intellectual property rights of the plaintiff. The complaint alleged that certain of the Customer’s
products infringe patent rights of the plaintiff. The Customer claimed that a feature in its products that allegedly infringes the patent
rights was supplied by the Company, and that, based on the purchase agreement with the Company, it should indemnify the
Customer with respect to this proceeding. On February 3, 2012, the case was dismissed with prejudice. The Company has not
received any further communication from the Customer with respect to this matter.
In September 2011, an action was commenced against the Company's subsidiary, AudioCodes Inc. and numerous other defendants,
in Federal Court in Delaware alleging that AudioCodes Inc. and the other defendants, infringed the plaintiff's intellectual property
rights in four patents. The claims made are being reviewed and an answer to the claims has not yet been filed. The proceeding is at
an early stage and it is not possible at this time to predict the outcome of these proceedings. The Company believes that it has valid
defenses to the claims.
In November 2011, an action was commenced against AudioCodes Inc., in Federal Court in Texas alleging that AudioCodes Inc.
infringed the plaintiff's intellectual property rights in one patent. Audiocodes Inc. filed an answer to the complaint asserting its
position of non-infringement and other defenses. The Company believes that it has valid defenses to the claims.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- EQUITY
a.
Treasury stock:
AUDIOCODES LTD.
In October 2011, the Company's Board of Directors approved a share repurchase plan pursuant to which the Company was authorized to
purchase up to 4,000,000 of its outstanding ordinary shares. During the year ended December 31, 2011, the Company purchased 1,204,757
of its outstanding ordinary shares under this share repurchase plan, at a weighted average price per share of $ 3.33.
b.
Warrants issued to nonemployees:
During the years ended December 31, 2008, 2010 and 2011, the Company granted warrants to purchase 10,000, 25,000 and 2,500 shares at
a weighted average exercise price of $ 4.82, $ 2.92 and $ 3.57 per share, respectively, in each case expiring seven years from the date of
grant. The Company recorded immaterial compensation expenses with respect to the grant of these warrants in accordance with ASC 505.
During 2010, 5,000 warrants were exercised. As of December 31, 2010 and 2011, 30,000 and 32,500 warrants issued to consultants are
outstanding, out of which 10,000 and 17,500 warrants are exercisable, respectively.
c.
Employee Stock Purchase Plan:
In May 2001, the Company's Board of Directors adopted the Employee Stock Purchase Plan ("ESPP" or "the Purchase Plan"), which was
amended, in July 2007. The Purchase Plan, as amended, provides for the issuance of up to 6,500,000 ordinary shares. As of December 31,
2011, 1,761,317 shares were available for future issuance under the Purchase Plan. Eligible employees can have up to 10% of their wages,
up to certain maximums, used to purchase ordinary shares. The Purchase Plan is implemented with purchases every six months. The price
of the ordinary shares purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the ordinary shares on the
commencement date of each offering period or on the semi-annual purchase date. The Purchase Plan is considered a compensatory plan.
Therefore, the Company records compensation expense in accordance with ASC 718, "Compensation - Stock Compensation", with respect
to purchases under the Purchase Plan.
During the year ended December 31, 2011, 288,515 shares were issued under the Purchase Plan for aggregate consideration of $ 1,187. As
of December 31, 2011, the Company's Board of Directors decided to suspend the Purchase Plan for the employees of the Company's U.S
subsidiary and the Purchase Plan for the Company and its non-U.S subsidiaries has expired.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- EQUITY (Cont.)
d.
Employee Stock Option Plans:
AUDIOCODES LTD.
In the year ended December 31, 2008, the Board of Directors approved the 2008 Equity Incentive Plan that became effective in January
2009. As of December 31, 2011, the total number of shares authorized for grant under this Plan is 1,327,445.
Stock options granted under the abovementioned plan are exercisable at the fair market value of the ordinary shares at the date of grant and
usually expire seven or ten years from the date of grant. The options generally vest over four years from the date of grant. Any options that
are forfeited or cancelled before expiration become available for future grants.
The following is a summary of the Group's stock option activity and related information for the year ended December 31, 2011:
Weighted
average
remaining
contractual
term (in
years)
Aggregate
intrinsic
value
Amount
of options
Weighted
average
exercise
price
4,612,530 $
7.32
667,201 $
(112,737) $
(454,438) $
(818,000) $
5.18
4.58
6.38
12.27
Outstanding at beginning of year
Changes during the year:
Granted
Exercised
Forfeited
Expired
Options outstanding at end of year
3,894,556 $
6.10
Vested and expected to vest
3,505,100 $
6.10
Options exercisable at end of year
2,355,134 $
7.44
4.2 $
4.2 $
2.4 $
1,824
1,642
845
The weighted-average grant-date fair value of options granted during the years ended December 31, 2009, 2010 and 2011 was $ 1.22,
$ 1.96 and $ 2.69, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between
the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-
money options) that would have been received by the option holders had all option holders exercised their options on the last trading day
of the fiscal year. This amount changes based on the fair market value of the Company's shares.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- EQUITY (Cont.)
AUDIOCODES LTD.
Total intrinsic value of options exercised for the twelve months ended December 31, 2009, 2010 and 2011 was $ 130, $ 2,946 and $ 44,
respectively. As of December 31, 2011, there was $ 2,750 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-
average period of 1.55 years.
The options outstanding as of December 31, 2011, have been separated into ranges of exercise prices, as follows:
Range of
exercise
price
Options
outstanding
as of
December 31,
2011
Weighted
average
remaining
contractual
life
(Years)
Weighted
average
exercise
price
Options
exercisable
as of
December 31,
2011
Weighted
average
exercise price
of exercisable
options
$
$
$
$
$
$
0.00-1.10
1.50-2.51
2.57-4.00
4.08-6.49
6.51-9.24
9.32-14.76
54,316
630,625
690,259
1,089,456
220,500
1,209,400
3,894,556
5.66 $
4.49 $
8.47 $
4.48 $
5.41 $
1.17 $
4.2 $
0.01
2.09
3.22
5.41
7.28
10.52
20,408 $
328,875 $
162,712 $
594,739 $
39,000 $
1,209,400 $
6.10
2,355,134 $
0.01
2.07
2.89
5.68
6.70
10.52
7.44
The following is a summary of the Group's restricted share units ("RSUs") activity and related information for the year ended December
31, 2011:
Outstanding at beginning of year
Changes during the year:
Granted
Exercised
Forfeited
RSUs outstanding at end of year
Number of
shares
Weighted
average grant
date fair value
172,354 $
257,600 $
(162,270) $
(3,000) $
264,684 $
4.59
5.66
5.84
5.66
4.89
During the years ended December 31, 2010 and 2011, the share based compensation expenses related to the RSUs granted amounted to
$ 678 and $ 786, respectively.
As of December 31, 2010, the Company recorded a liability based on its fair value in the amount of $ 500 relating to a commitment to
grant RSUs that were granted in January 2011. In addition, the Company recorded a liability in its fair value in the amount of $ 160
relating to a commitment to grant RSUs subject to the Company's share price achieving a specified level in the period in between the grant
date and January 1, 2013. On January 26, 2011, 141,666 RSUs were granted.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- EQUITY (Cont.)
AUDIOCODES LTD.
e.
During 2008 and 2009, the Company extended the exercise period of 895,138 and 231,400 options, respectively, granted to employees by a
period of 1-2 years and re-priced the exercise price to certain employees. Total options that were re-priced in 2008 and 2009, were 100,000
and 50,000, respectively. The exercise price was adjusted in 2008 from a range of $ 5.7-$ 6.7 to $ 4.17 and in 2009 from a range of
$ 4.17-$ 14.76 to $ 0.00.
The Company accounted for these changes as modifications in accordance with ASC 718. The Company calculated the incremental value
of these modifications and recorded compensation cost in a total amount of $ 208, $ 14 and $ 0 for the years ended December 31, 2009,
2010 and 2011, respectively.
f.
Dividends:
In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash
dividends in the foreseeable future. (See also Note 13a.)
NOTE 14:- TAXES ON INCOME
a.
Israeli taxation:
1.
Measurement of taxable income:
The Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations (Principles
Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination
of Their Taxable Income), 1986. Accordingly, results for tax purposes are measured in terms of earnings in dollars.
2.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 ("the Investment Law"):
The Company's production facilities in Israel have been granted the status of an "Approved Enterprise" in accordance with the
Investment Law under four separate investment programs. According to the provisions of such Israeli Investment Law, the
Company has been granted the "Alternative Benefit Plan", under which the main benefits are tax exemptions and reduced tax rates.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
Therefore, the Company's income derived from the Approved Enterprise will be entitled to a tax exemption for a period of two
years and to an additional period of five to eight years of reduced tax rates of 10% - 25% (based on the percentage of foreign
ownership). The duration of tax benefits of reduced tax rates is subject to a limitation of the earlier of 12 years from commencement
of production, or 14 years from the approval date. The Company utilized tax benefits from the first program in 1998 and has been
no longer eligible for benefits since 2007. Tax benefits from the remaining programs are scheduled to gradually expire through
2013.
As of December 31, 2011, retained earnings included approximately $ 540 in tax-exempt income earned by the Company's
"Approved Enterprise". The Company's Board of Directors has decided not to declare dividends out of such tax-exempt income.
Accordingly, no deferred income taxes have been provided on income attributable to the Company's "Approved Enterprise".
Tax-exempt income attributable to the "Approved Enterprise" cannot be distributed to shareholders without subjecting the
Company to taxes except upon complete liquidation of the Company. If such retained tax-exempt income is distributed in a manner
other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if
the Company had not elected the alternative tax benefits (currently between 10% - 25%) and an income tax liability of
approximately up to $ 135 would be incurred by the Company.
The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above Investment
Law, regulations published thereunder and the letters of approval for the specific investments in "Approved Enterprises". In the
event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest. As of December 31, 2011, management believes that the Company is
in compliance with all of the aforementioned conditions.
Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the regular tax rate
prevailing at that time.
On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") that significantly changed the
provisions of the Investment Law. The Amendment limits the scope of enterprises that may be approved by the Investment Center
by setting criteria for the approval of a facility as a Beneficiary Enterprise including a provision generally requiring that at least
25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in
the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center
approval in order to qualify for tax benefits.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain
subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, the Company's existing
"Approved Enterprises" will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-
exempt income generated under the provisions of the Investment Law, as amended, will subject the Company to taxes upon
distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt
income. As of December 31, 2011, there was no taxable income attributable to the Beneficiary Enterprise.
In December 2010, the "Knesset" (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended
Legislation), 2011, which prescribes, among others, amendments in the Investment Law. These amendments became effective as of
January 1, 2011. According to the amendments, the benefit tracks in the Investment Law were modified and a flat tax rate applies to
the Company's entire preferred income. The Company can elect to have this amendment apply to it. Once an election is made, the
Company will be subject to the amended tax rates as follows: 2011 and 2012 - 15%, 2013 and 2014 - 12.5% and in 2015 and
thereafter - 12%.
The Company does not currently intend to implement the amendment, and intend to continue to comply with the Investment Law
as in effect prior to enactment of the amendment until the earlier of such time that compliance with the Investment Law prior to
amendment is no longer in the Company's interests or until the expiration of the Company's current investment programs. The
Company is required to comply with the amendment subsequent to the expiration of its current investment programs and for any
new qualified investment program, after a transitional period. As a result, the amendment may increase the Company's average tax
rate in future years.
3.
Net operating loss carryforward:
As of December 31, 2011, the Company has cumulative losses for tax purposes in the amount of approximately $ 24,000, which
can be carried forward and offset against taxable income in the future for an indefinite period. As of December 31, 2011, the
Company recorded a deferred tax asset of $ 3,714 in respect of such carryforward tax losses.
As of December 31, 2011, the Company's Israeli subsidiaries have estimated total available carry forward tax losses of
approximately $ 67,000. The net operating losses may be claimed and offset against taxable income in the future for an indefinite
period.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
4.
Tax benefits under the law for the Encouragement of Industry (taxes), 1969 ("the Encouragement Law"):
The Encouragement Law, provides several tax benefits for industrial companies. An industrial company is defined as a company
resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified Government loans,
capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production activity.
Management believes that the Company is currently qualified as an "industrial company" under the Encouragement Law and, as
such, enjoys tax benefits, including: (1) deduction of purchase of know-how and patents and/or right to use a patent over an eight-
year period; (2) the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli
industrial companies and an industrial holding company; (3) accelerated depreciation rates on equipment and buildings; and (4)
expenses related to a public offering on the Tel-Aviv Stock 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, that
the Company will continue to qualify as an industrial company or that the benefits described above will be available to the
Company in the future.
5.
Tax rates:
Taxable income of Israeli companies is subject to tax at the rate of 26%, 25% and 24% in 2009, 2010 and 2011, respectively.
On December 5, 2011, the Israeli Parliament (the Knesset) enacted the Law for Tax Burden Reform (Legislative Amendments),
2011 ("the Law") which, among others, cancels effective from 2012, the scheduled progressive reduction in the corporate tax rate.
The Law also increases the corporate tax rate to 25% in 2012. In view of this increase in the corporate tax rate to 25% in 2012, the
real capital gains tax rate and the real betterment tax rate were also increased accordingly.
The adoption of the legislative amendments effected the calculation of deferred income taxes.
The effective tax rate payable by a company which is taxed under the Investment Law may be considerably lower (see also Note 14
a2).
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
b.
Income (loss) before taxes on income is comprised as follows:
Domestic
Foreign
c.
Taxes on income are comprised as follows:
Current taxes
Deferred taxes
Domestic
Foreign
d.
Deferred income taxes:
AUDIOCODES LTD.
Year ended
December 31,
2010
2011
2009
(5,963) $
3,035
9,277 $
1,066
(2,928) $
10,343 $
5,632
2,047
7,679
Year ended
December 31,
2010
2011
2009
290 $
-
436 $
(2,321)
290 $
(1,885) $
484 $
(194)
(1,617) $
(268)
290 $
(1,885) $
890
(652)
238
151
87
238
$
$
$
$
$
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group's deferred tax liabilities
and assets are as follows:
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
Deferred tax assets:
Net operating loss carry forward
Reserves and allowances
Net deferred tax assets before valuation allowance
Valuation allowance
Deferred tax asset
Domestic:
Short-term deferred tax asset
Long-term deferred tax asset
Foreign:
Short-term deferred tax asset
Long-term deferred tax asset
AUDIOCODES LTD.
December 31,
2010
2011
50,826 $
6,798
57,624
(53,076)
52,485
8,283
60,768
(55,568)
4,548 $
5,200
1,860 $
1,353
3,213 $
427 $
908
1,857
1,857
3,714
743
743
1,335 $
1,486
$
$
$
$
$
$
The Company's U.S. subsidiary has estimated total available carry forward tax losses of approximately $ 82,000 to offset against future
taxable income that expire between 2020 and 2029. As of December 31, 2011, the Company's U.S subsidiary recorded a deferred tax asset
of $ 1,486 relating to the available net carry forward tax losses.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses
before utilization.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
e.
Reconciliation of the theoretical tax expenses:
AUDIOCODES LTD.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the
Company, and the actual tax expense (benefit) as reported in the statement of operations is as follows:
Year ended
December 31,
2010
2011
2009
Income (loss) before taxes, as reported in the consolidated statements
of operations
Statutory tax rate
$
(2,928) $
10,343
$
7,679
26%
25%
24%
Theoretical tax benefits on the above amount at the Israeli statutory tax
rate
Income tax at rate other than the Israeli statutory tax rate
Tax advanaces and non-deductible expenses including equity based
compensation expenses
Deferred taxes on losses for which a valuation allowance was provided
Valuation allowance recorded to APIC
Utilization of operating losses carry forward
Tax adjustment in respect of different tax rates
Taxes in respect to prior years
State and Federal taxes
Foreign exchange
Other individually immaterial income tax item
$
(761) $
337
$
2,586
327
1,425
382
-
(1,469)
-
90
21
251
14
646
(3,855)
181
(2,846)
-
41
90
760
185
1,843
275
1,373
2,492
(266)
(3,233)
(1,219)
(54)
93
(901)
(165)
Actual tax expense (benefit)
$
290
$
(1,885) $
238
f.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Gross unrecognized tax benefits as of January 1, 2011
Increase in tax position for current year
Gross unrecognized tax benefits as of December 31, 2011
F-48
$
$
158
32
190
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
The Company recognizes interest and penalties related to unrecognized tax benefits in tax expenses. The liability for unrecognized tax
benefits does not include accrued interest and penalties of $ 180 and $ 189 at December 31, 2010 and 2011, respectively.
The Company has received final tax assessment through the year 2006.
NOTE 15:- BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Numerator:
Net income (loss) attributed to Audiocodes shareholders
$
(2,822) $
12,126 $
7,164
Year ended
December 31,
2010
2009
2011
Denominator:
Denominator for basic earnings per share - weighted average number of
ordinary shares, net of treasury stock
Effect of dilutive securities:
Employee stock options and ESPP
Senior convertible notes
Denominator for diluted net earnings per share - adjusted weighted average
number of shares
*) Antidilutive.
F-49
40,207,923
40,559,759
41,437,927
*) -
*) -
401,240
*) -
497,170
*) -
40,207,923
40,960,999
41,935,097
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- FINANCIAL INCOME (EXPENSES), NET
Financial expenses:
Interest
Amortization of marketable securities premiums and accretion of discounts,
$
net
Exchange rate
Others
Financial income:
Interest and others
Exchange rate
NOTE 17:- GEOGRAPHIC INFORMATION
a.
Summary information about geographic areas:
AUDIOCODES LTD.
Year ended
December 31,
2010
2009
2011
(4,739) $
(318) $
(253)
-
(232)
-
(99)
(228)
(346)
(416)
(612)
(133)
(5,224)
(645)
(1,507)
2,376
104
2,480
551
-
551
$
(2,744) $
(94) $
1,930
-
1,930
423
The Group manages its business on a basis of one reportable segment (see Note 1 for a brief description of the Group's business). The data
is presented in accordance with ASC 280, "Segment Reporting". Revenues in the table below are attributed to geographical areas based on
the location of the end customers.
The following presents total revenues for the years ended December 31, 2009, 2010 and 2011 and long-lived assets as of December 31,
2009, 2010 and 2011.
2009
2010
2011
Total
revenues
Long-
lived
assets
Total
revenues
Long-
lived
assets
Total
revenues
Long-
lived
assets
Israel
Americas
Europe
Far East
$
10,410 $
69,960
27,101
18,423
20,938 $
22,799
87
74
19,223 $
71,538
32,566
26,713
19,867 $
21,128
66
47
11,887 $
85,630
36,322
21,988
$
125,894 $
43,898 $
150,040 $
41,108 $
155,827 $
19,364
19,914
125
45
39,448
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17:- GEOGRAPHIC INFORMATION (Cont.)
b.
Product lines:
Total revenues from external customers divided on the basis of the Company's product lines are as follows:
AUDIOCODES LTD.
Technology
Networking
NOTE 18:- DERIVATIVE INSTRUMENTS
Year ended
December 31,
2010
2011
2009
$
$
34,995 $
90,899
45,266 $
104,774
35,017
120,810
125,894 $
150,040 $
155,827
The Group enters into hedge transactions with a major financial institution, using derivative instruments, primarily forward contracts and options
to purchase and sell foreign currencies, in order to reduce the net currency exposure associated with anticipated expenses (primarily salaries and
rent expenses) in currencies other than the U.S. dollar. The Company currently hedges such future exposures for a maximum period of one year.
However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons, including but not limited
to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the
hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
The Group records all derivatives in the consolidated balance sheet at fair value. The effective portions of cash flow hedges are recorded in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portions of cash flow hedges are adjusted to fair value
through earnings in financial other income or expense. The Company does not enter into derivative transactions for trading purposes.
The Group had a net deferred gain (loss) associated with cash flow hedges of $ 822 and $ (240) recorded in other comprehensive income as of
December 31, 2010 and 2011, respectively. As of December 31, 2011, the hedged transactions are expected to occur within twelve months.
The Group entered into forward contracts to hedge the fair value of assets denominated in New Israeli Shekels that did not meet the requirement
for hedge accounting. The Company measured the fair value of the contracts in accordance with ASC 820 at level 2. The net gains recognized in
"financial and other expenses, net" during 2010 and 2011 were $ 200 and $ 187, respectively.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- DERIVATIVE INSTRUMENTS (Cont.)
AUDIOCODES LTD.
As of December 31, 2010 and 2011, the Group had outstanding forward contracts in the amount of $ 13,125 and $ 19,100, respectively.
The fair value of the Group's outstanding derivative instruments and the effect of derivative instruments in cash flow hedging relationship on
other comprehensive income for the years ended December 31, 2010 and 2011, are summarized below:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2010
2011
Fair value of foreign exchange forward
"Other receivables and prepaid expenses"
contracts
"Other payables and accrued expenses"
Gains (losses) recognized in OCI (effective
"Other comprehensive income"
portion)
$
$
$
822 $
$
(240)
724 $
(1,062)
The effect of derivative instruments in cash flow hedging relationship on income for the years ended December 31, 2010 and 2011 is summarized
below:
Foreign exchange forward and
options contracts
Statements of
operations
Gain (loss) on derivatives recognized in OCI
"Operating expenses"
Gain recognized in income on derivatives
"Operating expenses"
(effective portion)
Year ended
December 31,
2010
2011
$
$
1,316 $
(205)
592 $
857
- - - - - - - - - - -
F-52
Exhibit No.
EXHIBIT INDEX
Document
1.2
4.23
4.24
4.25
8.1
12.1
12.2
13.1
13.2
15.1
101.1
†
*
Articles of Association of Registrant, as amended.
Loan Agreement, dated September 27, 2011, between Bank Benleumi, First International Bank of Israel Ltd., as lender, and the Registrant,
as borrower. †
Loan Agreement, dated September 27, 2011, between Bank Leumi Israel Ltd., as lender, and the Registrant, as borrower. †
Loan Agreements, dated December 25, 2011, between Bank Mizrahi Tefahot Ltd., as lender, and the Registrant, as borrower. †
Subsidiaries of the Registrant.
Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Guy Avidan, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
Interactive Data Files (XBRL-Related Documents). *
English summary of Hebrew original.
In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of
1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other
document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
Exhibit 1.2
THE COMPANIES ORDINANCE
A COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
OF
AUDIOCODES LTD.
(the “Company”)
PRELIMINARY
1. Table “A” Excluded
The regulations contained in the second schedule to the Companies Ordinance (New Version), 5743-1983 (the “Companies Ordinance”) shall
not apply to the Company.
2. Public Company
This Company is a Public Company, as such term is defined in the Companies Ordinance.
SHARE CAPITAL
3. Share Capital
(a) The authorized share capital of the Company is NIS 1,025,000, divided into 100,000,000 (One Hundred Million) Ordinary Shares,
nominal value NIS 0.01 per share and 2,500,000 (Two Million, Five Hundred Thousand) Preferred Shares, nominal value NIS 0.01 per share.
(b) The Preferred Shares may be issued from time to time as shares of one or more series, with such distinctive serial designations as may be
stated or expressed in the resolution or resolutions providing for the issuance of such shares from time to time adopted by the Board of Directors of the
Company. In the resolution or resolutions providing for the issuance of such shares, the Board of Directors of the Company is expressly authorized, without the
need for shareholder action, to fix the terms and preferences of the shares of such series, including without limitation the dividend rate, the redemption price,
the voting rights, the right or obligation of the Company to redeem the shares, and the terms upon which the shares are convertible into or exchangeable for
shares of any other class or classes.
(c) The Ordinary Shares all rank pari passu.
4. Increase of Authorized Share Capital
(a) The Company may, from time to time, by Special Resolution, whether or not all the shares then authorized have been issued, and whether
or not all the shares previously issued have been called up for payment, increase its authorized share capital. Any such increase shall be in such amount and
shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such
Special Resolution shall provide.
(b) Except to the extent otherwise provided in such Special Resolution, any new shares included in the authorized share capital so increased
shall be subject to all the provisions of these Articles which are applicable to shares of such class included in the existing share capital without regard to class
(and, if such new shares are of the same class as a class of shares included in the existing share capital, to all of the provisions which are applicable to shares of
such class included in the existing share capital).
5. Special Rights; Modification of Rights
(a) Subject to the provisions of the Memorandum of Association of the Company, and without prejudice to any special rights previously
conferred upon the holders of existing shares in the Company, the Company may, from time to time, by Special Resolution, provide for shares with such
preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in regard to dividends, voting repayment of share
capital or otherwise, as may be stipulated in such Special Resolution.
2
(b) (i) If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by
these Articles, may be modified or abrogated by the Company, by Special Resolution, subject to the consent in writing of the holders of seventy-five percent
(75%) of the issued shares of such class.
(ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of
the holders of the shares of a particular class; provided, however, that the requisite quorum at any such separate General Meeting shall be two or more members
present in person or proxy and holding not less than seventy-five percent (75%) of the issued shares of such class.
(iii) Unless otherwise provided by these Articles, the enlargement of an authorized class of shares, or the issuance of additional
shares thereof out of the authorized and unissued share capital, shall not be deemed, for purposes of this Article 5(b), to modify or abrogate the rights attached
to previously issued shares of such class or of any other class.
6. Consolidation, Subdivision, Cancellation and Reduction of Share Capital
(a) The Company may, from time to time, by Special Resolution (subject, however, to the provisions of Article 5(b) hereof and to applicable
law):
which is larger than the per share nominal value of its existing shares;
(i) consolidate and divide all or any part of its issued or unissued authorized share capital into shares of a per share nominal value
of Association (subject, however, to the provisions of Section 144(4) of the Companies Ordinance);
(ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by the Memorandum
person, and diminish the amount of its share capital by the amount of the shares so cancelled; or
(iii) cancel any shares which, at the date of the adoption of such Special Resolution, have not been taken or agreed to be taken by any
(iv) reduce its share capital in any manner, subject to any consent required by law.
(b) With respect to any consolidation of issued shares of a larger nominal value per share, and with respect to any other action which may
result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, and in connection with any such
consolidation or other action which would result in fractional shares may, without limiting its power:
value per share;
(i) determine, as to the holder of the shares so consolidated, which issued shares shall be consolidated into a share of a larger nominal
3
remove fractional share holdings;
(ii) allot, in contemplation of or subsequent to such consolidation or other action, shares or fractional shares sufficient to preclude or
remove fractional share holdings;
(iii) redeem, in the case of redeemable preference shares and subject to applicable law, such fractional shares sufficient to preclude or
(iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders so as to most expediently
preclude or remove any fractional shareholdings, and cause the transferees of such fractional shares to pay the transferors thereof the fair value thereof, and the
Board of Directors is hereby authorized to act in connection with such transfer as agent for the transferors and transferees of any such fractional shares, with full
power of substitution, for the purposes of implementing the provisions of this sub-Article 6(b)(iv).
7. Issuance of Share Certificates; Replacement of Lost Certificates
SHARES
(a) Share certificates shall be issued under the corporate seal of the Company and shall bear the signature of one Director, or of any other
person or persons authorized by the Board of Directors.
(b) Each member shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board of
Directors so approves, to several certificates, each for one or more of such shares. Each certificate shall specify the serial numbers of the shares represented
thereby and may also specify the amount paid up thereon.
(c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of Members
in respect of such co-ownership.
(d) A share certificate which has been defaced, lost or destroyed may be replaced, and the Company shall issue a new certificate to replace
such defaced, lost or destroyed certificate, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board
of Directors in its discretion deems fit.
4
8. Registered Holder
Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of each share as the absolute owner
thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by statute, be obligated to recognize any equitable or
other claim to, or interest in, such share on the part of any other person.
9. Allotment of Shares
The unissued shares from time to time shall be under the control of the Board of Directors. The Board of Directors shall have the power to
allot, issue or otherwise dispose of shares to such persons, on such terms and conditions (including terms relating to calls as set forth in Article 11(f) hereof),
and either at par or at a premium, or, subject to the provisions of the Companies Ordinance, at a discount and/or with payment of commission, and at such
times, as the Board of Directors deems fit. The Board of Directors shall also have the power to give to any person the option to acquire from the Company any
shares, either at par or at a premium, or, subject as aforesaid, at a discount and/or with payment of commission, during such time and for such consideration as
the Board of Directors deems fit.
10. Payment in Installments
If, pursuant to the terms of the allotment or issue of any share, all or any portion of the price thereof shall be payable in installments, every
such installment shall be paid to the Company on the due date thereof by the then registered holder(s) of the share or the person(s) then entitled thereto.
11. Calls on Shares
(a) The Board of Directors may, from time to time, as it in its discretion deems fit, make calls for payment upon members in respect of any
sum which has not been paid up in respect of shares held by such members and which is not, pursuant to the terms of allotment or issue of such shares or
otherwise, payable at a fixed time, and each member shall pay the amount of every call so made upon him (and of each installment thereof if the same is
payable in installments) to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended
and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each
payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares in respect of which such call was made.
5
(b) Notice of any call for payment by a member shall be given in writing to such member not less than fourteen (14) days prior to the time of
payment fixed in such notice, and shall specify the time and place of payment, and the person to whom such payment is to be made. Prior to the time for any
such payment fixed in a notice of a call given to a member, the Board of Directors may in its absolute discretion, by notice in writing to such member, revoke
such call in whole or in part, or stipulate different place of payment or person to whom payment is to be made. In the event of a call payable in installments,
only one notice thereof need be given.
(c) If, pursuant to the terms of allotment or issue of a share or otherwise, an amount is made payable at a fixed time (whether on account of
such share or by way of premium), such amount shall be payable at such time as if it were payable by virtue of a call made by the Board of Directors and for
which notice was given in accordance with paragraphs (a) and (b) of this Article 11, and the provisions of these Articles with regard to calls (and the non-
payment thereof) shall be applicable to such amount (and the non-payment thereof).
(d) Joint holders of a share shall be jointly and severally liable to pay all calls for payment in respect of such share and all interest payable
thereon.
(e) Any amount called for payment which is not paid when due shall bear interest from the date fixed for payment until actual payment
thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel) and payable at such time(s) as the Board of
Directors may prescribe.
(f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amounts and
times for payment of calls for payment in respect of such shares.
12. Prepayment
With the approval of the Board of Directors, any member may pay to the Company any amount not yet payable in respect of his shares, and
the Board of Directors may approve the payment by the Company of interest on any such amount until the same would be payable if it had not been paid in
advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any
part of the money so advanced, without premium or penalty. Nothing in this Article 12 shall derogate from the right of the Board of Directors to make any call
for payment before or after receipt by the Company of any such advance.
6
13. Forfeiture and Surrender
(a) If any member fails to pay an amount payable by virtue of a call, or interest thereon as provided for in these Articles, on or before the day
fixed for payment of the same, the Board of Directors may, at any time after the day fixed for such payment, so long as such amount (or any portion thereof) or
interest thereon (or any portion thereof) remains unpaid, forfeit all or any of the shares in respect of which such payment was called. All expenses incurred by
the Company in attempting to collect any such amount or interest thereon, including without limitation attorneys’ fees and costs of legal proceedings, shall be
added to, and shall for all purposes (including the accrual of interest thereon) constitute a part of, the amount payable to the Company in respect of such call.
(b) Upon the adoption of a resolution as to the forfeiture of a member’s share, the Board of Directors shall cause notice thereof to be given to
such member, which notice shall state that, in the event of the failure to pay the entire amount so payable by a date specified in the notice (which date shall be
not less than fourteen (14) days after the date such notice is given and which may be extended by the Board of Directors), such shares shall be ipso facto
forfeited; provided, however, that prior to such date, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall stop the
Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount.
(c) Without derogating from Articles 54 and 59 hereof, whenever shares are forfeited as herein provided, all dividends, if any, previously
declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.
(d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.
(e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions
of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.
(f) Any member whose shares have been forfeited or surrendered shall cease to be a member in respect of the forfeited or surrendered shares,
but shall nevertheless be liable to pay, and shall immediately pay to the Company, all calls, interest and expenses owing on or in respect of such shares at the
time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 11(e)
above. The Board of Directors in its discretion may, but shall not be obligated to, enforce the payment of such moneys or any part thereof. In the event of such
forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing to the
Company by the member in question (but not yet due) in respect of all shares owned by such member, solely or jointly with another.
(g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise
disposed of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall stop the Board of Directors from re-exercising
its powers of forfeiture pursuant to this Article 13.
7
14. Lien
(a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the
shares registered in the name of each member (without regard to any equitable or other claim or interest in such shares on the part of any other person), and
upon the proceeds of the sale thereof, for his debts, liabilities and obligations to the Company arising from any amount payable by such member in respect of
any unpaid or partly paid share, whether or not such debt, liability or obligation has matured. Such lien shall extend to all dividends from time to time declared
or paid in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of
the Company of the lien (if any) existing on such shares immediately prior to such transfer.
(b) The Board of Directors may cause the Company to sell a share subject to such a lien when the debt, liability or obligation giving rise to
such lien has matured, in such manner as the Board of Directors deems fit, but no such sale shall be made unless such debt, liability or obligation has not been
satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such member, his executors or administrators.
(c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or
obligations of such member in respect of such share (whether or not the same have matured), and the residue (if any) shall be paid to the member, his executors,
administrators or assigns.
15. Sale after Forfeiture or Surrender or in Enforcement of Lien
Upon any sale of a share after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint any person to execute an
instrument of transfer of the share so sold and cause the purchaser’s name to be entered in the Register of Members in respect of such share. The purchaser shall
be registered as the shareholder and shall not be bound to see to the regularity of the sale proceedings, or to the application of the proceeds of such sale, and
after his name has been entered in the Register of Members in respect of such share the validity of the sale shall not be impeached by any person and the
remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.
16. Redeemable Shares
The Company may, subject to applicable law, issue redeemable shares and redeem the same.
8
17. Conversion of Shares into Stock
stock, and may with like sanction reconvert any stock into paid-up shares of any denomination.
(a) The Board of Directors may, with the sanction of the members previously given by Special Resolution, convert any paid-up shares into
(b) The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations as the shares from
which the stock arose might have been transferred prior to conversion, or as near thereto as circumstances admit; provided, however, that the Board of Directors
may from time to time fix the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall
not exceed the nominal value of each of the shares from which such stock arose.
(c) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards the
minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value
of each of the shares from which such stock arose.
(d) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards dividends,
voting at meetings of the Company and other matters as if they held the shares from which such stock arose, but no such right or privilege except participation
in the dividends and profits of the Company shall be conferred by any such aliquot part of such stock as would not, if existing in shares, have conferred that
right or privilege.
(e) Such of the Articles of the Company as are applicable to paid-up shares shall apply to stock, and the words “share” and “shareholder” (or
“member”) therein shall include “stock” and “stockholder.”
18. Registration of Transfer
TRANSFER OF SHARES
(a) No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form
satisfactory to the Board of Directors) has been submitted to the Company (or its transfer agent), together with the share certificate(s) and such other evidence
of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Members in respect of the shares so
transferred, the Company may continue to regard the transferor as the owner thereof.
9
(b) The Board of Directors may, in its discretion to the extent it deems necessary, close the Register of Members for registrations of transfers
of shares during any year for a period determined by the Board of Directors, and no registrations of transfers of shares shall be made by the Company during
any such period during which the Register of Members is so closed.
19. Record Date for Notices of General Meetings
Notwithstanding any other contrary provision of these Articles, the Board of Directors may fix a date, not exceeding ninety (90) days prior to
the date of any General Meeting, as the date as of which shareholders entitled to notice of and to vote at such meetings shall be determined, and all persons who
were holders of record of voting shares on such date and no others shall be entitled to notice of and to vote at such meeting.
20. Decedent’s Shares
TRANSMISSION OF SHARES
(a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof
unless and until the provisions of Article 21(b) have been effectively invoked.
(b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or
letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient), shall be registered as a
member in respect of such share, or may, subject to the regulations as to transfer contained in these Articles, transfer such share.
21. Receivers and Liquidators
(a) The Company may recognize any receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate
member, and a trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, or similar
proceeding with respect to, a member or its properties, as being entitled to the shares registered in the name of such member.
10
(b) Such receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate member and such trustee,
manager, receiver, liquidator, or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceedings with respect to, a
member or its properties, upon producing such evidence as the Board of Directors may deem sufficient to his authority to act in such capacity or under this
Article, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a member
in respect of such shares, or may, subject to the regulations as to transfer contained in these Articles, transfer such shares.
22. Business Combinations with Interested Shareholders
BUSINESS COMBINATIONS
(a) Notwithstanding any other provision of these Articles, the Company shall not engage in any business combination with any interested
shareholder for a period of three years following the time that such shareholder became an interested shareholder, unless:
resulted in the shareholder becoming an interested shareholder, or
(1) prior to such time the Board of Directors of the Company approved either the business combination or the transaction which
shareholder owned at least 75% of the voting shares of the Company outstanding at the time the transaction commenced.
(2) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested
(b) As used in this Article only, the term:
common control with another person.
(1) “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under
(2) “associate,” when used to indicate a relationship with any person, means (i) any corporation, partnership, unincorporated
association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting
share, (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
11
(3) “business combination,” when used in reference to the Company and any interested shareholder of the Company, means:
(A) an interested shareholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused
by an interested shareholder and as a result of such merger or consolidation subsection (a) of this Article is not applicable to the surviving entity;
(i) any merger or consolidation of the Company or any direct or indirect majority owned subsidiary of the Company with
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions),
except proportionately as a shareholder of such Company to or with the interested shareholder, whether as part of a dissolution or otherwise, of assets of the
Company or of any direct or indirect majority owned subsidiary of the Company, which assets have an aggregate market value equal to 10% or more of either
the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all of the outstanding shares
of the Company;
(iii) any transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned
subsidiary of the Company of any shares of the Company or of such subsidiary to the interested shareholder, except (A) pursuant to the exercise, exchange or
conversion of securities exercisable for or convertible into shares of the Company or any such subsidiary, which securities were outstanding prior to the time
that the interested shareholder became such, (B) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities
exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary, which security is distributed pro rata to all holders of a class
or series of shares of the Company subsequent to the time the interested shareholder became such, (C) pursuant to an exchange offer by the Company to
purchase shares made on the same terms to all holders of said shares or, (D) any issuance or transfer of shares by the Company; provided, that in no case under
(B)-(D) above shall there be an increase in the interested shareholder’s proportionate share of the shares of any class or series of the Company or of the voting
shares of the Company;
(iv) any transaction involving the Company or any direct or indirect majority owned subsidiary of the Company which has
the effect directly or indirectly of increasing the proportionate share of the shares of any class or series or securities convertible into the shares of any class or
series of the Company or of any such subsidiary which is owned by the interested shareholder except as a result of immaterial changes due to fractional share
adjustments or as a result of any purchase or redemption of any shares not caused, directly or indirectly, by the interested shareholder; or
12
such Company), of any loans, advances, guarantees, pledges or any other financial benefits (other than those expressly permitted in subparagraphs (i)-(iv)
above) provided by or through the Company or any direct or indirect majority owned subsidiary.
(v) any receipt by the interested shareholder of the benefit, directly or indirectly (except proportionately as a shareholder of
(4) “control” including the term “controlling,” “controlled by” and “under common control with,” means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract
or otherwise. A person who is the owner of 20% or more of the outstanding voting shares of any corporation, partnership, unincorporated association or other
entity shall be presumed to have control of such entity. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting
shares in good faith and not for the purpose of circumventing this Article as an agent, bank, broker, nominee, custodian or trustee for one or more owners who
do not individually or as a group have control of such entity.
(5) “interested shareholder” means any person (other than the Company and any direct or indirect majority owned subsidiary of the
Company) that (i) is the owner of 15% or more of the outstanding voting shares of the Company, or (ii) is an affiliate or associate of the Company and was the
owner of 15% or more of the outstanding voting shares of the Company at any time within the three year period immediately prior to that date on which it is
sought to be determined whether such person is an interested shareholder and the affiliates and associates of such person. For the purpose of determining
whether a person is an interested shareholder, the voting shares of the Company deemed to be outstanding shall include shares deemed to be owned by the
person through application of paragraph (8) of this subsection but shall not include any other unissued shares of the Company which may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(6) “person” means any individual, corporation, partnership, unincorporated association or other entity.
(7) “share” means with respect to any corporation shares of its capital and with respect to any other entity any equity interest.
(8) “voting shares” means with respect to any corporation shares of any class or series entitled to vote generally in the election of
directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such
entity.
or through any of its affiliates or associates:
(9) “owner,” including the terms “own” and “owned,” when used with respect to any share, means a person that individually or with
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(i) beneficially owns such share, directly or indirectly: or
(ii) has (A) the right to acquire such share (whether such right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, warrants or options, or otherwise; provided, however, that a
person shall not be deemed the owner of share tendered pursuant to a tender or exchange; or (B) the right to vote such share pursuant to any agreement,
arrangement or understanding; provided, however, that a person shall not be deemed the owner of any share because of such person’s right to vote such share if
the agreement, arrangement, or understanding to vote such share arises solely from a recoverable proxy or consent given in response to a proxy or consent
solicitation made to 10 or more persons: or
(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant
to a revocable proxy or consent as described in item (B) of clause (ii) of this paragraph) or disposing of such share with any other person that beneficially owns
or whose affiliates or associates beneficially own, directly or indirectly, such share.
23. Annual General Meeting
GENERAL MEETINGS
An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after
the last preceding Annual General Meeting) and at such place, either within or out of the State of Israel, as may be determined by the Board of Directors.
24. Extraordinary General Meetings
All General Meetings other than Annual General Meetings shall be called “Extraordinary General Meetings.” The Board of Directors may,
whenever it thinks fit, convene an Extraordinary General Meeting, at such time and place, within or out of the State of Israel, as may be determined by the
Board of Directors, and shall be obliged to do so upon a request in writing in accordance with Section 109 of the Companies Ordinance.
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25. Notice of General Meetings; Omission to Give Notice
(a) Not less than seven (7) days’ prior notice shall be given of every General Meeting; provided, however, that a Special Resolution shall not
be passed unless at least twenty-one (21) days’ prior notice shall have been given of the meeting at which it is proposed to pass the same. Each such notice shall
specify the place and the day and hour of the meeting and the general nature of each item to be acted upon, such notice to be given to all members who would
be entitled to attend and vote at such meeting. Anything herein to the contrary notwithstanding, with the consent of all members entitled to vote thereon a
resolution may be proposed and passed at such meeting although a lesser notice than prescribed above has been given.
(b) The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not invalidate
the proceedings at such meeting.
26. Quorum
PROCEEDINGS AT GENERAL MEETINGS
(a) No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the quorum required under these Articles for
such General Meeting or such adjourned meeting, as the case may be, is present when the meeting proceeds to business.
(b) In the absence of contrary provisions in these Articles, two or more members (not in default in payment of any sum referred to in Article
32(a) hereof), present in person or by proxy and holding shares conferring in the aggregate more than fifty percent of the voting power of the Company, shall
constitute a quorum of General Meetings.
(c) If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon request under
Section 109 of the Companies Ordinance, shall be dissolved, but in any other case it shall be adjourned to the same day in the next week, at the same time and
place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the shares present in person or
by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been
transacted at the meeting as originally called. At such adjourned meeting (other than an adjourned separate meeting of a particular class of shares as referred to
in Article 5 of these Articles), any two (2) members (not in default as aforesaid) present in person or by proxy shall constitute a quorum.
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27. Chairman
The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If at any meeting the
Chairman is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the Co-Chairman shall
preside at the meeting. If at any such meeting both the Chairman and the Co-Chairman are not present or are unwilling to act as Chairman, members present
shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor
shall it entitle such holder to a second or casting vote (without derogating, however from the rights of such Chairman to vote as a shareholder or proxy of a
shareholder if, in fact, he is also a shareholder or such proxy).
28. Adoption of Resolutions at General Meetings
(a) (i) An Ordinary Resolution shall be deemed adopted if approved by the holders of a majority of the voting power represented at the
meeting in person or by proxy and voting thereon.
of the voting power represented at the meeting in person or by proxy and voting thereon.
(ii) A Special or Extraordinary Resolution shall be deemed adopted if approved by the holders of not less then seventy-five per cent (75%)
(b) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any member
present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the
proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot
is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written
ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another member may then demand such
written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which
the written ballot has been demanded.
(c) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost,
and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes
recorded in favor of or against such resolution.
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28A. Requisite Majority at General Meetings
approved by the holders of the majority of voting power representing at the meeting in person or by proxy and voting thereon.
Notwithstanding anything to be contrary in these Articles, any resolutions at the General Meetings of shareholders shall be deem adopted if
29. Resolutions in Writing
A resolution in writing signed by all members of the Company then entitled to attend and vote at General Meetings or to which all such
members have given their written consent (by letter, telegram, telex, facsimile or otherwise) shall be deemed to have been unanimously adopted by a General
Meeting duly convened and held.
30. Power to Adjourn
The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power
represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time
and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting
as originally called.
31. Voting Power
Subject to the provisions of Articles 3(b) and 32(a) and subject to any other provision conferring special rights as to voting, or restricting the
right to vote, every member shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote thereon is
conducted by a show of hands, by written ballot or by any other means.
32. Voting Rights
(a) No member shall be entitled to vote at any General Meeting (or be counted as a part of the quorum) unless all calls then payable by him in
respect of his shares in the Company have been paid, but this Article 32(a) shall not apply to separate General Meetings of the holders of a particular class of
shares pursuant to Article 5(b).
(b) A company or other corporate body being a member of the Company may duly authorize any person to be its representative at any
meeting of the Company or to execute or deliver a proxy on its behalf. Any person so authorized shall be entitled to exercise on behalf of such member all the
power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such
authorization (in form acceptable to the Chairman) shall be delivered to him.
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(c) Any member entitled to vote may vote either in person or by proxy (who need not be a member of the Company) or, if the member is a
company or other corporate body, by a representative authorized pursuant to Article 32(b).
(d) If two or more persons are registered as joint holders of any shares, the vote of the senior who tenders a vote, in person or by proxy, shall
be accepted to the exclusion of the vote(s) of the other joint holder(s). For the purpose of this Article 32(d), seniority shall be determined by the order of
registration of the joint holders in the Register of Members.
33. Instrument of Appointment
PROXIES
(a) An instrument appointing a proxy shall be in writing and shall be substantially in the following form:
“I_______________________
(Name of Shareholder)
of __________________________________
(Address of Shareholder)
being a member of AudioCodes Ltd. hereby appoint
_______________________
of _____________________________
(Name of Proxy)
(Address of Proxy)
as my Proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the _________ day of ___________, ________
and at any adjournment(s) thereof.
Signed this _____________ day of _______________, ____________.
(Signature of Appointor)”
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or in any usual or common form or in such other form as may be approved by the Board of Directors. Such proxy shall be duly signed by the appointor or such
person’s duly authorized attorney or, if such appointor is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized
agent(s) or attorney(s).
(b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed)
shall either be delivered to the Company (at its registered office, at its principal place of business, at the offices of its registrar or transfer agent, or at such place
as the Board of Directors may specify) not less than 24 hours before the time fixed for the meeting at which the person named in the instrument proposes to
vote, or presented to the Chairman at such meeting.
34.
Effect of Death of Appointor or Transfer of Share and/or Revocation of Appointment
(a) A vote cast in accordance with an instrument appointing a proxy shall be valid notwithstanding the prior death or bankruptcy of the
appointing member (or of his attorney-in-fact, if any, who signed such instrument), or the transfer of the share in respect of which the vote is cast, unless written
notice of such matters shall have been received by the Company or by the Chairman of such meeting prior to such vote being cast.
(b) An instrument appointing a proxy shall be deemed revoked (i) upon receipt by the Company or the Chairman, subsequent to receipt by the
Company of such instrument, of written notice signed by the person signing such instrument or by the member appointing such proxy cancelling the
appointment thereunder (or the authority pursuant to which such instrument was signed) or of an instrument appointing a different proxy (and such other
documents, if any, required under Article 33(b) for such new appointment), provided such notice of cancellation or instrument appointing a different proxy were
so received at the place and within the time for delivery of the instrument revoked thereby as referred to in Article 33(b) hereof, or (ii) if the appointing member
is present in person at the meeting for which such instrument of proxy was delivered, upon receipt by the Chairman of such meeting of written notice from such
member of the revocation of such appointment, or if and when such member votes at such meeting. A vote cast in accordance with an instrument appointing a
proxy shall be valid notwithstanding the revocation or purported cancellation of the appointment, or the presence in person or vote of the appointing member at
a meeting for which it was rendered, unless such instrument of appointment was deemed revoked in accordance with the foregoing provisions of this Article
34(b) at or prior to the time such vote was cast.
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35. Powers of Board of Directors
(a) In General
BOARD OF DIRECTORS
The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all
such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company by action
of its members at a General Meeting. The authority conferred on the Board of Directors by this Article 35 shall be subject to the provisions of the Companies
Ordinance, these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company by action of its members at
a General Meeting; provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of
Directors which would have been valid if such regulation or resolution had not been adopted.
(b) Borrowing Power
The Board of Directors may from time to time, at its discretion, cause the Company to borrow or secure the payment of any sum or sums of
money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms
and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or
other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid
capital for the time being.
(c) Reserves
The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any
purpose(s) which the Board of Directors, in its absolute discretion, shall deem fit, and may invest any sum so set aside in any manner and from time to time deal
with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without
being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds
therein for another purpose, all as the Board of Directors may from time to time think fit.
(d) Charitable Contributions
To the extent permitted by the Companies Law, the Company may elect to contribute reasonable amounts to worthy causes. The Board of
Directors may determine the causes to which the Company should contribute and the amounts of any such contributions.
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36.
Exercise of Powers of Board of Directors
(a) A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretion
vested in or exercisable by the Board of Directors.
(b) A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present
when such resolution is put to a vote and voting thereon.
(c) A resolution in writing signed by the majority of Directors then in office and lawfully entitled to vote thereon or to which a majority of the
Directors have given their written consent (by letter, telegram, telex, facsimile, electronic mail, telephone or otherwise) shall be deemed to have been
unanimously adopted by a meeting of the Board of Directors duly convened and held.
37.
Delegation of Powers
(a) The Board of Directors may, subject to the provisions of the Companies Ordinance, delegate any or all of its powers to committees, each
consisting of one or more persons (who are Directors), and it may from time to time revoke such delegation or alter the composition of any such committee.
Any Committee so formed (in these Articles referred to as a “Committee of the Board of Directors”), shall, in the exercise of the powers so delegated, conform
to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis
mutandis, be governed by the provisions contained in these Articles for regulating the meetings of the Board of Directors, so far as not superseded by any
regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a
Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.
(b) Without derogating from the provisions of Article 50, the Board of Directors may from time to time appoint a Secretary to the Company,
as well as officers, agents, employees and independent contractors, as the Board of Directors deems fit, and may terminate the service of any such person. The
Board of Directors may, subject to the provisions of the Companies Ordinance, determine the powers and duties, as well as the salaries and emoluments, of all
such persons, and may require security in such cases and in such amounts as it deems fit.
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(c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons
to be the attorney or attorneys of the Company at law or in fact for such purpose (s) and with such powers, authorities and discretion, and for such period and
subject to such conditions, as it deems fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience
of persons dealing with any such attorney as the Board of Directors deems fit, and may also authorize any such attorney to delegate all or any of the powers,
authorities and discretions vested in him.
38.
Number of Directors
The Board of Directors shall consist of a maximum of ten (10) directors; provided, that the number of directors may be changed from time to
time by resolution adopted by the affirmative vote of a majority of the Continuing Directors (as defined below). The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the
entire Board of Directors.
39.
Election and Removal of Directors
(a) At the Annual Meeting of shareholders held in the year 2000,Class I directors shall be elected for a one-year term, Class II directors for a
two-year term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term, subject to the provisions of Article 42. A director shall hold office until the annual meeting
for the year in which his term expires and until his successor shall be elected and qualified. If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. The holders of a majority of the voting
power represented at a General Meeting in person or by proxy and voting thereon at such Meeting shall be entitled to remove any Director(s) from office whose
term expires within twelve months of that General Meeting. The removal of any Director who has twelve months or more remaining of his term, shall only be
carried out by Special Resolution.
(b) Notwithstanding the foregoing and the provisions of Article 41, whenever the holders of any one or more classes or series of shares issued
by the Company throughout the Articles shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of
shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms applicable at that time to
such class or series, and such directors so elected shall not be divided into classes pursuant to this Article, and the number of such directors shall not be counted
in determining the maximum number of directors permitted under the foregoing provision of this Article, in each case unless expressly provided by such terms.
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40.
Qualification of Directors
No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as
a Director in the past.
41.
Continuing Directors in the Event of Vacancies
Any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of the class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Any vacancy
on the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors of the Board of Directors, may be filled
by a decision of the majority of the Board of Directors then in office, even where less than a quorum, and any directors so chosen shall hold office until the next
election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified.
42.
Vacation of Office
(a) The office of a Director shall be vacated, ipso facto, upon his death, or if he be found lunatic or become of unsound mind, or if he becomes
bankrupt, or if the Director is a company upon its winding-up.
(b) The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or
upon the delivery thereof to the Company, whichever is later.
43.
Remuneration of Directors
by a General Meeting of the Company and in accordance with the Companies Ordinance.
A Director shall be paid remuneration by the Company for his services as Director to the extent such remuneration shall have been approved
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44.
Conflict of Interests
Subject to the provisions of the Companies Ordinance, no Director shall be disqualified by virtue of his office from holding any office or
place of profit under the Company or under any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the
Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which
any Director shall be in any way interested, be avoided, nor, other than as required under the Companies Ordinance, shall any Director be liable to account to
the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such Director’s
holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by
him at the meeting of the Board of Directors at which the contract or arrangement is first considered, if his interest then exists, or, in any other case, no later
than at the first meeting of the Board of Directors after the acquisition of his interest.
45.
Alternate Directors
(a) A Director, who in spite of reasonable efforts is unable to attend a meeting of the Board, may by written notice to the Company given in
the manner set forth in Article 45(b) below, appoint any individual (whether or not such person is then a member of the Board of Directors) as an alternate for
himself for that meeting (in these Articles referred to as “Alternate Director”). Such notice shall specify the meeting for which the Alternate Director has been
appointed.
(b) Any notice to the Company pursuant to Article 45(a) shall be given in person to, or by sending the same by mail to the attention of, the
General Manager of the Company at the principal office of the Company, to such other persons or place as the Board of Directors shall have determined for
such purpose, and shall become effective on the date fixed therein or upon the receipt thereof by the Company, whichever is later.
(c) An Alternate Director shall have all the rights and obligations of the Director who appointed him; provided, however, that (i) he may not in
turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides), (ii) an Alternate Director shall have no standing at
any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present, and (iii) the Alternate Director is not entitled
to remuneration.
(d) Any individual, whether or not he be a member of the Board of Directors, may act as an Alternate Director. One person may act as
Alternate Director for several Directors, and in such event he shall have a number of votes (and shall be treated as the number of persons for purposes of
establishing a quorum) equal to the number of Directors for whom he acts as Alternative Director. If an Alternate Director is also a Director in his own right, his
rights as an Alternate Director shall be in addition to his rights as a Director.
(e) An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director(s) who
appointed him.
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(f) The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis, set forth in Article 42, and such office shall
ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.
46
Meetings
PROCEEDINGS OF THE BOARD OF DIRECTORS
(a) The Board of Directors may meet and adjourn its meeting and otherwise regulate such meetings and proceedings as the Directors think fit.
(b) Any Director may at any time, and the Secretary, upon the request of such Director, shall, convene a meeting of the Board of Directors,
but not less than seven (7) days’ notice shall be given of any meeting so convened. Notice of any such meeting may be given orally, by telephone, in writing or
by mail, electronic mail, telex, cablegram or facsimile. Notwithstanding anything to the contrary herein, failure to deliver notice to a Director of any such
meeting in the manner required hereby may be waived by such Director, and a meeting shall be deemed to have been duly convened notwithstanding such
defective notice if such failure or defect is waived prior to action being taken at such meeting by all Directors entitled to participate at such meeting to whom
notice was not duly given as aforesaid.
47.
Quorum
Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the
presence in person or by telephone conference of more than sixty percent (60%) of the Directors then in office who are lawfully entitled to participate in the
meeting. No business shall be transacted at a meeting of the Board of Directors unless the requisite quorum is present (in person or by telephone conference)
when the meeting proceeds to business.
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48.
Chairman of the Board of Directors
The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors and another of its
members to be the Co-Chairman, remove such Chairman and Co-Chairman from office, and appoint others in their place. The Chairman of the Board of
Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15)
minutes of the time fixed for the meeting or if he is unwilling to take the chair, the Co-Chairman shall preside. If both the Chairman and the Co-Chairman are
not present or are unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting.
49.
Validity of Acts Despite Defects
All acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any person (s) acting as
Director (s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or
any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect of disqualification.
50.
Chief Executive Officer and President
CHIEF EXECUTIVE OFFICER AND PRESIDENT
The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as Chief Executive Officer or Officers,
General Manager or Managers, or President of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) and
such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of
Directors may from time to time prescribe. Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall have authority with
respect to the management of the Company in the ordinary course of business. Such appointment (s) may be either for a fixed term or without any limitation of
time, and the Board of Directors may from time to time (subject to the provisions of the Companies Ordinance and of any contract between any such person and
the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places.
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51.
Minutes
MINUTES
(a) Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for
that purpose, and shall be held by the Company at its registered office or such other place as shall have been determined by the Board of Directors. Such
minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.
(b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting,
shall constitute prima facie evidence of the matters recorded therein.
52.
Declaration of Dividends
DIVIDENDS
The Board of Directors may from time to time declare, and cause the Company to pay, such interim dividend as may appear to the Board of
Directors to be justified by the profits of the Company. The final dividend in respect of any fiscal period shall be proposed by the Board of Directors and shall
be payable only after the same has been approved by Ordinary Resolution of the Company, but no such resolution shall provide for the payment of an amount
exceeding that proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall
affect any interim dividend previously declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final,
and the record date for determining the shareholders entitled thereto.
53.
Funds Available for Payment of Dividends
No dividend shall be paid otherwise than out of the profits of the Company.
54.
Amount Payable by Way of Dividends
(a) Subject to the rights of the holders of shares as to dividends, any dividend paid by the Company shall be allocated among the members
entitled thereto in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective holdings of the shares in respect of
which such dividend is being paid, without taking into account the premium paid up for the shares. The amount paid up on account of a share which has not yet
been called for payment or fallen due for payment and upon which the Company pays interest to the shareholder shall not be deemed, for the purposes of this
Article, to be a sum paid on account of the share.
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(b) Whenever the rights attached to any shares or the terms of issue of the share do not provide otherwise, shares which are fully paid up or
which are credited as fully or partly paid within any period in respect of which dividends are paid shall entitle the holders thereof to a dividend in proportion to
the amount paid up or credited as paid up in respect of the nominal value of such shares and to the date of payment thereof (pro rata temporis).
55.
Interest
No dividend shall carry interest as against the Company.
56.
Payment in Specie
Upon resolution by the Board of Directors, the Company (i) may cause any moneys, investments, or other assets forming part of the
undivided profits of the Company, standing to the credit of a reserve fund, to the credit of a reserve fund for the redemption of capital or in the hands of the
Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to
be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same
proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such
shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the
Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or debenture stock;
and (ii) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum.
57.
Implementation of Powers under Article 56
For the purpose of giving full effect to any resolution under Article 56, and without derogating from the provisions of Article 6(b) hereof, the
Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issued fractional
certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any member upon the footing
of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the right of all parties, and may
vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund
as may seem expedient to the Board of Directors. Where requisite, a proper contract shall be filed in accordance with Section 130 of the Companies Ordinance,
and the Board of Directors may appoint any person to sign such contract on behalf of the persons entitled to the dividend or capitalized fund.
28
58.
Dividends on Unpaid Shares
Without derogating from Article 54 hereof, the Board of Directors may give an instruction which shall prevent the distribution of a dividend
to the holders of shares whose full nominal amount has not been paid up.
59.
Retention of Dividends
(a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the
Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities or obligations in respect of which the lien exists.
(b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of
which any person is, under Articles 20 or 21, entitled to become a member, or which any person is, under said Articles, entitled to transfer, until such person
shall become a member in respect of such share or shall transfer the same.
60.
Unclaimed Dividends
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors
for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not
constitute the Company a trustee in respect thereof. The principal (and only the principal) of an unclaimed dividend or such other moneys shall be, if claimed,
paid to a person entitled thereto.
61.
Mechanics of Payment
Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the
registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint
holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to the joint holder whose name is
registered first in the Register of Members of his bank account or the person who the Company may then recognize as the owner thereof or entitled thereto
under Article 20 or 21 hereof, as applicable, or such person’s bank account), or to such person and at such other address as the person entitled thereto may be
writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto
as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company.
29
62.
Receipt from a Joint Holder
If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of
the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such
shares.
63.
Books of Account
ACCOUNTS
The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Ordinance and of
any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors
may think fit, and they shall always be open to inspection by all Directors. No member, not being a Director, shall have any right to inspect any account or book
or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by Ordinary Resolution of the Company.
64.
Audit
At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance
sheet certified by one or more duly qualified auditors.
65.
Auditors
The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by applicable law; provided, however, that
in exercising its authority to fix the remuneration of the auditor(s), the members in General Meeting may, by Ordinary Resolution, act (and in the absence of any
action in connection therewith shall be deemed to have so acted) to authorize the Board of Directors to fix such remuneration subject to such criteria or
standards, if any, as may be provided in such Ordinary Resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an
amount commensurate with the volume and nature of the services rendered by such auditor(s).
30
66.
Branch Registers
BRANCH REGISTERS
Subject to and in accordance with the provisions of Sections 71 to 80, inclusive, of the Companies Ordinance and to all orders and regulations
issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all
applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping
of such branch registers.
67.
Audit Committee
(a) For purposes of these Articles the terms “Office Holder,” “Personal Interest” and “Relative” shall be defined as set forth in Section 96(24)
of the Companies Ordinance.
(b) The Board of Directors shall appoint an Audit Committee which shall be composed of three members, none of whom shall be Chairman or
Co-Chairman of the Board of Directors, the Chief Executive Officer, Controller, Secretary or any other Office Holder who is an employee of the Company, and
the majority of whom shall not be shareholders of the Company holding more than 5% (five percent) of the issued and outstanding share capital of the
Company, or their relatives.
(c) All of the following matters shall be brought before the Audit Committee, and no action in respect thereof shall be taken prior to receiving
the Audit Committee’s and the Board of Director’s approval. Approval of the Board of Directors may be given only following the Audit Committee’s approval:
Interest;
(i) proposed transactions to which the Company intends to be a party in which an Officer Holder has a direct or indirect Personal
of the Companies Ordinance, of an Office Holder of the Company;
(ii) actions which may otherwise be deemed to constitute a breach of fiduciary duty or the duty of care, as defined in Section 96(27)
31
(iii) agreements with directors as to the terms of their services; and
(iv) indemnification of Office Holders.
(d) Approval by the majority of the Members of the Audit Committee shall be deemed approval of the Audit Committee for the purposes of
this Article.
(e) The Audit Committee shall meet upon receiving at least seven days’ prior written notice from the Board of Directors of a meeting. Such
prior written notice shall contain details of the action in respect of which the meeting will be convened.
(f) Should a majority of the Audit Committee of the Board of Directors have a Personal Interest in any of the matters detailed in Section 67(c)
above, the action shall be raised at the next General Meeting, and shall be subject to approval of the General Meeting.
(g) Any Office Holder whose interest is brought before the Audit Committee and the Board of Directors for approval shall not be present nor
shall he have a vote at any meeting at which his interest shall be discussed or voted upon.
68.
Insurance, Indemnification and Exculpation
INDEMNITY AND INSURANCE
The Company may insure, indemnify and exculpate its Office Holders to the fullest extent permitted by law, from time to time. Without
limiting the generality of the foregoing:
(i) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of its Office Holders, for act or
omissions in their capacity as Office Holders, in whole or in part, against any of the following:
(a) breach of the duty of care owed to the Company or a third party;
(b) breach of the fiduciary duty owed to the Company, provided that the Office Holder acted in good faith and had reasonable
grounds to believe that his action would not harm the Company’s interests;
(c) monetary liability imposed on the Office Holder in favor of a third party; and
32
(d) reasonable litigation expenses, including attorney fees, incurred by the Office Holder as a result of an administrative enforcement
proceeding instituted against him (without limiting from the generality of the foregoing, such expenses will include a payment imposed on the Office
Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israel Securities Law, 5728-1968, as amended (the "Securities Law"),
and expenses that the Office Holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, including
reasonable legal expenses, which term includes attorney fees).
(ii) Subject to the provisions of the Companies Law, the Company is entitled retroactively to indemnify any Office Holder, or to provide a
prior undertaking to indemnify an Office Holder, where such prior undertaking is limited (1) to categories of events that the Board believes are
foreseeable in light of the Company’s activities on the date of grant of the undertaking to indemnify, and (2) to an amount or in accordance with
guidelines determined by the Board to be reasonable in the circumstances (and such undertaking includes the categories of events that the Board
believes are foreseeable in light of the Company’s activities on the date of grant of the undertaking to indemnify and to an amount or in accordance
with guidelines determined by the Board to be reasonable in the circumstances), for an act that the Office Holder performed by virtue of being an
Office Holder of the Company, for monetary liability imposed on the Office Holder in favor of a third party in a judgment, including a settlement or an
arbitral award confirmed by a court.
(iii) Subject to the provisions of the Companies Law, the Company is entitled retroactively to indemnify any Office Holder, or to provide a
prior undertaking to indemnify an Office Holder for:
(a) monetary liability imposed on an Office Holder in favor of a third party in a judgment, including a settlement or an arbitral award
confirmed by a court;
(b) reasonable legal costs, including attorney’s fees, expended by an Office Holder as a result of (x) an investigation or proceeding
instituted against the Office Holder by a competent authority, provided that such investigation or proceeding concludes (i) without the filing of an
indictment against the Office Holder, and either (A) no financial liability was imposed on the Office Holder in lieu of criminal proceedings, or
(B) financial liability was imposed on the Office Holder in lieu of criminal proceedings but the alleged criminal offense does not require proof of
criminal intent; and (y) in connection with an administrative enforcement proceeding or a financial sanction (without derogating from the generality of
the foregoing, such expenses will include a payment imposed on the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of
the Securities Law, and expenses that the Office Holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law,
including reasonable legal expenses, which term includes attorney fees); and
33
(c) reasonable legal costs, including attorneys’ fees, expended by the Office Holder or for which the Office Holder is charged by a
court, (i) in an action brought against the Office Holder by or on behalf of the Company or a third party, or (ii) in a criminal action in which the Office
Holder is found innocent, or (iii) in a criminal action in which the Office Holder is convicted and in which a proof of criminal intent is not required.
(iv) Subject to the provisions of the Companies Law, the Company may exculpate an Office Holder in advance from liability, or any part of
liability, for damages sustained by virtue of a breach of duty of care to the Company.
69.
Winding up
WINDING UP
If the Company is wound up, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the
assets of the Company available for distribution among the members shall be distributed to them in proportion to the nominal value of their respective holdings
of the shares in respect of which such distribution is being made.
70.
Rights of Signature, Stamp and Seal
RIGHTS OF SIGNATURE, STAMP AND SEAL
(a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the
Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the
scope of his or their authority.
(b) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof.
Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company,
who shall sign every instrument to which such seal is affixed.
34
(c) The Company may exercise the powers conferred by Section 102 of the Companies Ordinance regarding a seal for use abroad, and such
powers shall be vested in the Board of Directors.
71.
Notices
NOTICES
(a) Any written notice or other document may be served by the Company upon any member either personally or by sending it by prepaid mail
(airmail if sent internationally) addressed to such member at his address as described in the Register of Members or such other address as he may have
designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any member upon the Company
by tendering the name in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid
registered mail (airmail if posted outside Israel) to the Company at its registered office. Any such notice or other document shall be deemed to have been served
forty-eight (48) hours after it has been posted (seven (7) business days if sent internationally), or when actually received by the addressee if sooner than forty-
eight hours or seven days, as the case may be, after it has been posted, or when actually tendered in person, to such member (or to the Secretary) or the General
Manager). Notice sent by cablegram, telex, facsimile or electronic mail shall be deemed to have been served when actually received by such member (or by the
Company). If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received, notwithstanding that it was defectively
addressed or failed, in some other respect, to comply with the provisions of this Article 71(a).
(b) All notices to be given to the members shall, with respect to any share to which persons are jointly entitled, be given to whichever of such
persons is named first in the Register of Members, and any notice so given shall be sufficient notice to the holders of such share.
(c) Any member whose address is not described in the Register of Members, and who shall not have designated in writing an address for the
receipt of notices, shall not be entitled to receive any notice from the Company.
(d) Notwithstanding anything to the contrary contained herein, notice by the Company of a General Meeting which is published in at least two
daily newspapers in the State of Israel within the time otherwise required for giving notice of such meeting under Article 25 hereof and containing the
information required to be set forth in such notice under such Article shall be deemed to be a notice of such meeting duly given, for purposes of these Articles,
to any member whose address as registered in the Register of Members is located in the State of Israel.
35
Loan Agreement, dated September 27, 2011, between Bank Benleumi, First
International Bank of Israel Ltd., as lender, and the Registrant, as borrower.
(English Summary of Documents in Hebrew)
Exhibit 4.23
Date: September 27, 2011
Parties: Bank Benleumi, First International Bank of Israel Ltd. (Lender)
AudioCodes Ltd. (Borrower)
Loan No. 1:
Principal Amount: $3,375,000
Currency: U.S. Dollar
Interest Rate: LIBOR + 2.1% per year.
Maturity: September 27, 2017.
Principal Repayment: 24 equal quarterly payments.
Interest Repayment: Quarterly with repayment of principal.
Loan No. 2:
Principal Amount: $3,375,000
Currency: U.S. Dollar
Interest Rate: LIBOR + 3.1% per year.
Maturity: September 27, 2017.
Principal Repayment: 24 equal quarterly payments.
Interest Repayment: Quarterly with repayment of principal.
Pledge
First ranking charge on all the Borrower's rights and future incomes arising from its financial deposits at the Lender's bank accounts.
Covenants
Current covenants in other loan provided by Lender to Borrower shall continue to exist, except for the following amendments:
Shareholders' equity:
-
Not less than $ 40,000,000 and ratio of Shareholders' equity to the total balance sheet no less than 25%.
Cash and investments:
-
-
Investments defined as long-term deposits up to 2 years and trading bonds with A or greate rating maturing in less than 3 years.
Following repayment of 2% Senior Convertible Notes Due 2024, accounts receivable and cash and investments not less than $50,000,000; cash and
investments not less than $30,000,000 and cash balance not less than $15,000,000.
Borrower not permitted to declare dividends, pay management fees, interest or other payments to shareholders, or repay loans to shareholders until Borrower's
liabilities to Lender pursuant to the loans are repaid in full.
-
The limitation does not prohibit dividends or repurchase of shares of up to $25,000,000.
Loan Agreement, dated September 27, 2011, between Bank Benleumi, First
International Bank of Israel Ltd., as lender, and the Registrant, as borrower.
(English Summary of Documents in Hebrew)
Exhibit 4.24
Date: September 27, 2011
Parties: Bank Benleumi, First International Bank of Israel Ltd. (Lender)
AudioCodes Ltd. (Borrower)
Loan No. 1:
Principal Amount: $3,375,000
Currency: U.S. Dollar
Interest Rate: LIBOR + 2.1% per year.
Maturity: September 27, 2017.
Principal Repayment: 24 equal quarterly payments.
Interest Repayment: Quarterly with repayment of principal.
Loan No. 2:
Principal Amount: $3,375,000
Currency: U.S. Dollar
Interest Rate: LIBOR + 3.1% per year.
Maturity: September 27, 2017.
Principal Repayment: 24 equal quarterly payments.
Interest Repayment: Quarterly with repayment of principal.
Pledge
First ranking charge on all the Borrower's rights and future incomes arising from its financial deposits at the Lender's bank accounts.
Covenants
Current covenants in other loan provided by Lender to Borrower shall continue to exist, except for the following amendments:
Shareholders' equity:
-
Not less than $ 40,000,000 and ratio of Shareholders' equity to the total balance sheet no less than 25%.
Cash and investments:
-
-
Investments defined as long-term deposits up to 2 years and trading bonds with A or greate rating maturing in less than 3 years.
Following repayment of 2% Senior Convertible Notes Due 2024, accounts receivable and cash and investments not less than $50,000,000; cash and
investments not less than $30,000,000 and cash balance not less than $15,000,000.
Borrower not permitted to declare dividends, pay management fees, interest or other payments to shareholders, or repay loans to shareholders until Borrower's
liabilities to Lender pursuant to the loans are repaid in full.
-
The limitation does not prohibit dividends or repurchase of shares of up to $25,000,000.
Loan Agreements, dated December 25, 2011, between Bank Mizrahi Tefahot Ltd., as
lender, and the Registrant, as borrower.
(English Summary of Documents in Hebrew)
Exhibit 4.25
Date: December 25, 2011
Parties: Bank Mizrahi Tefahot Ltd, (Lender)
AudioCodes Ltd. (Borrower)
Loan No. 1:
Principal Amount: $1,100,000
Currency: U.S. Dollar
Interest Rate: LIBOR + 3.6% per year.
Maturity: January 2017.
Principal Repayment: 20 equal quarterly payments.
Interest Repayment: Quarterly with repayment of principal.
Loan No. 2:
Principal Amount: $3,900,000
Currency: U.S. Dollar
Interest Rate: 0.50% per year above the interest paid by the Lender to the Borrower for its cash deposits.
Maturity: 10% of the loan maturing every six months commencing June 2012 and ending December 2016
Principal and Interest Repayment: Upon maturity of each loan tranche.
Pledge
First ranking charge on all the Borrower's rights and future incomes arising from its financial deposits at the Lender's bank accounts.
Financial Covenants
Shareholders' equity:
Not less than $ 40,000,000 and ratio of Shareholders' equity to the total balance sheet no less than 25%.
Aggregate short term and long term liabilities to banks and financing institutions as presented in the financial statements:
-
Not greater than $36,000,000.
Operating income (US GAAP):
-
-
At least $3,000,000 for each consecutive four fiscal quarters.
Operating income excludes up to $3,000,000 resulting from stock-based compensation related to option grants to employees under SFAS 123R and
intangible assets loss.
Cash and investments:
-
-
-
Cash defined as cash and cash equivalents and short term deposits up to one year.
Investments defined as long-term deposits up to 2 years and trading bonds with A or greater rating maturing in less than 3 years.
During the loan agreement term, accounts receivable and cash and investments not less than $50,000,000; cash and investments not less than $30,000,000
and cash balance not less than $15,000,000.
Lender confirms that it complies with the financial covenants as of the date of the loans.
Other Covenants
Undertake to comply with the Lender new financial covenants criteria, if Borrower changes its accounting principles, and after Lender gives a proper notice.
Current and/or future loans of Shabtai Adlersberg to the Borrower ("Owner Loans") will be subordinated to Borrower's liabilities to Lender.
Borrower not permitted to declare dividends, pay management fees, interest or other payments to shareholders, or repay Owner Loans until Borrower's
liabilities to Lender pursuant to the loans are repaid in full.
-
The limitation does not prohibit (i) permitted distributions within the meaning of the Companies Law, including through the repurchase of shares, up to
$25,000,000 or (ii) other payments to interested parties in compensation for directors and officers services.
The Borrower undertakes not to dispose of assets in excess of $1 million during a consecutive 12 month period, without Lender's prior written consent other
than in ordinary course of business in arms' length transactions.
The Borrower undertakes not to acquire or invest in excess of $10 million during a consecutive 12 month period, without prior notice to the Lender, which
notice shall not be made prior to a public notice, if required.
The Borrower undertakes to provide ongoing reports to Lender about Borrower's business and financial position, including copies of financial statements,
outstanding collectibles, investment portfolio, litigation, and any violation of covenants, and Lender shall be entitled to meet at any time with Borrower's
accountants to confirm Borrower's financial position.
Covenant of Shabtai Aldersberg:
Shabtai Aldersberg agrees not to reduce his ownership percentage below 5% without the Lender's prior written consent, and not to request repayment of any
loans he made to the Borrower, and agrees to repay any amounts received in violation thereof.
-2-
AudioCodes Inc. (incorporated in the US)
AudioCodes National Inc. (incorporated in the US)Nuera Communications Singapore Pte Ltd. (incorporated in Singapore)
Subsidiaries of AudioCodes Ltd.
AudioCodes Singapore Pte Ltd (incorporated in Singapore)
AudioCodes Europe Ltd. (incorporated in the UK)
AudioCodes Brasil Equipamentos de Voz sobre IP Ltda (incorporated in Brazil)
Exhibit 8.1
AudioCodes Korea Co. Ltd. (incorporated in Korea)
AudioCodes Germany GmbH (incorporated in Germany)
AudioCodes Argentina SA (incorporated in Argentina)
AudioCodes India Private Ltd. (incorporated in India)
AudioCodes Russ Ltd. (incorporated in Russia)
AudioCodes France SAS (incorporated in France)
AudioCodes Mexico S.A. DE C.V. (incorporated in Mexico)
AudioCodes Hong Kong Limited (incorporated in Hong Kong)
AudioCodes Italy S.r.l (incorporated in Italy)
Nuera communications Inc. (incorporated in the US)
CTI Squared Ltd.(incorporated in Israel)
Natural Speech Communication Ltd. (incorporated in Israel)
Exhibit 12.1
I, Shabtai Adlersberg, certify that:
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of AudioCodes Ltd.;
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;
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;
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)
(b)
(c)
(d)
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 annual report is being prepared;
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;
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
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 company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
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
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: April 18, 2012
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
Chief Executive Officer
Exhibit 12.2
I, Guy Avidan, certify that:
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of AudioCodes Ltd.;
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;
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;
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)
(b)
(c)
(d)
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 annual report is being prepared;
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;
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
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 company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
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
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: April 18, 2012
/s/ GUY AVIDAN
Guy Avidan
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of AudioCodes Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2011 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Shabtai Adlersberg, Chief Executive Officer of the Company, 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:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: April 18, 2012
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of AudioCodes Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2011 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Avidan, Chief Financial Officer of the Company, 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:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: April 18, 2012
/s/ GUY AVIDAN
Guy Avidan
Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-11894, 333-13268, 333-105473, 333-144825, 333-160330
and 333-170676) and Form F-3 (No. 333-172268) of our reports dated April 18, 2012 with respect to the consolidated financial statements of AudioCodes Ltd.
for the year ended December 31, 2011, and the effectiveness of internal control over financial reporting of AudioCodes Ltd. included in this Annual Report on
Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
Tel Aviv, Israel
April 18, 2012
/s/ KOST, FORER, GABBAY AND KASIERER
KOST, FORER, GABBAY AND KASIERER
A member of Ernst & Young Global
Exhibit 15.1