UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐
x
☐
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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 7019900, 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 7019900 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, 2013, the Registrant had outstanding 38,733,989 Ordinary Shares, nominal value NIS 0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes ☐
No
x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934:
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
x
Yes
x
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
x
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):
☐ Item 17 ☐ Item 18
Yes ☐
No
x
TABLE OF CONTENTS
Page
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.
CODE OF ETHICS
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
ITEM 16G.
CORPORATE GOVERNANCE
ITEM 16H.
MINE SAFETY DISCLOSURE
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
-i-
1
1
1
25
51
51
66
78
80
80
83
106
106
106
106
106
108
108
108
108
109
109
109
109
110
110
110
110
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.
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A.
SELECTED FINANCIAL DATA
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
2009 through 2013. The selected consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013, and the selected
consolidated balance sheet data as of December 31, 2012 and 2013, 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, 2009 and 2010, and the selected consolidated
balance sheet data as of December 31, 2009, 2010 and 2011, 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.
1
Statement of Operations Data:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expense:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial expenses (income), net
Income (loss) before taxes on income
Income tax expense (benefit), net
Equity in losses of affiliated companies
Net income (loss)
Net loss attributable to a non- controlling interest
Net income (loss) attributable to AudioCodes’ shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted average number of ordinary shares used in computing basic
earnings (loss) per share
Weighted average number of ordinary shares used in computing
diluted earnings (loss) per share
2009
Year Ended December 31,
2010
2012
2011
(In thousands, except per share data)
2013
$
114,871 $
11,023
125,894
132,662 $
17,378
150,040
135,827 $
20,025
155,827
103,651 $
23,839
127,490
111,750
25,482
137,232
53,004
3,190
56,194
62,155
3,983
66,138
59,917
4,228
64,145
48,371
5,923
54,294
51,996
6,568
58,564
69,700
83,902
91,682
73,196
78,668
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 $
28,677
40,040
8,214
76,931
(3,735)
(453)
(3,282)
541
354
(4,177) $
- $
(4,177) $
(0.11) $
(0.11) $
28,194
39,279
8,456
75,929
2,739
(96)
2,835
(1,404)
21
4,218
-
4,218
0.11
0.11
40,208
40,560
41,438
39,125
38,241
40,208
40,961
41,935
39,125
39,097
$
$
$
$
$
2
Balance Sheet Data:
Cash and cash equivalents
Short-term and restricted bank deposits, marketable securities and
accrued interest
Working capital
Long-term and restricted bank deposits and long-term marketable
securities
Total assets
Bank loans
Long term senior convertible notes
Shareholders’ equity
Non-controlling interest
Total equity
Capital stock (*)
2009
2010
December 31,
2011
2012
2013
$
38,969 $
50,311 $
28,257 $
15,219 $
30,763
13,902
54,557
13,825
66,537
14,353
55,083
18,296
46,598
24,807
64,859
-
147,533
21,750
403
84,129
(244)
83,885
170,062
-
173,644
15,750
353
99,180
-
99,180
172,263
32,943
192,677
33,155
353
106,019
-
106,019
176,998
25,013
165,789
22,913
353
98,297
-
98,297
178,623
6,697
174,304
14,477
-
104,809
-
104,809
182,220
(*) 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).
2009
2010
December 31,
2011
2012
2013
3.775
3.549
3.821
3.733
3.471
The high and low exchange rates for each month during the previous six months are as follows (NIS per United States $1.00):
Month
September 2013
October 2013
November 2013
December 2013
January 2014
February 2014
High
Low
3.632
3.567
3.569
3.530
3.507
3.549
3.504
3.518
3.519
3.471
3.483
3.496
3
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
2009
4.256
3.690
3.923
3.775
Year Ended December 31,
2011
2010
2012
2013
3.894
3.549
3.732
3.549
3.821
3.363
3.579
3.821
4.084
3.700
3.858
3.733
3.791
3.471
3.609
3.471
Unless otherwise indicated, in this Annual Report all references herein are to United States dollar.
The exchange rate on March 20, 2014, 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 3.484.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
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 2008, 2009 and 2012. We may report additional losses in the future.
We reported a net loss of $85.8 million in 2008, $2.8 million in 2009 and $4.2 million in 2012. We reported net income of $12.1 million in 2010,
$7.2 million in 2011 and $4.2 million in 2013. 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. As a result, we may report additional losses in the future.
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 has decreased in the past and is currently decreasing. Our gross profit percentage decreased in 2008, 2009, 2012 and 2013. Our
gross profit percentage has been negatively affected in the past and could continue to be negatively affected by amortization expenses in connection with
acquisitions, expenses related to equity based compensation, increases in manufacturing costs, a shift in our sales mix towards our less profitable products,
increased customer demand for longer product warranties, fixed expenses that are applied to a lower revenue base and increased cost pressures as a result of
increased competition. Acquisitions of new businesses could also negatively affect our gross profit percentage. A decrease in our gross profit percentage
could cause an adverse effect on our results of operations.
4
We have depended, and expect to continue to depend, on a small number of large customers. The loss of one or more of our 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. Our top three customers accounted for approximately 25.5% of our
revenue in 2011, 25.3% of our revenues in 2012 and 27.8% of our revenues in 2013. Sales to ScanSource Communications Inc., our largest customer,
accounted for 17.8% of our revenues in 2013, compared to 13.9% of our revenues in 2012, and 14.4% of our revenues in 2011. 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.
We have invested significant resources in developing products compatible with Microsoft Lync related solutions. If Microsoft abandons this solution,
decides to promote products of our competitors instead of our products, is unwilling to continue to recognize AudioCodes as its partner or fails to
achieve the expected growth of Lync, our results of operations will be adversely affected.
We have invested significant resources in complying with Microsoft’s requirements for the purpose of becoming a Microsoft recognized partner for
their unified communication solutions for the enterprise market, which are known as Microsoft Lync. We have adapted some of our gateway products, IP
phones, session border controllers, survivable branch applications, value added applications and professional services to operate in the Microsoft Lync
environment. We believe that recognition as a Microsoft partner enhances our access to and visibility in markets relevant to our products. We are dependent
on the users of Microsoft Lync to recognize the utility of our compatible products and purchase them. If Microsoft were to abandon Lync, decide to promote
the products of our competitors instead of our products, is unwilling to continue to recognize AudioCodes as a Lync partner or fails to achieve the expected
growth of Lync, our results of operations will be adversely affected.
Recent and future economic conditions may adversely affect our business.
The uncertain 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 uncertain or may be subject to
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 allowance for doubtful accounts and write-offs of accounts receivable could increase.
5
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.
We could be forced to repay our bank debt if we are unable to satisfy the covenants in our loan agreements.
In 2011, we borrowed $23.8 million, of which $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. During 2011 and 2012, we were not in compliance with some of the financial covenants contained in our
loan agreements. Each of our lenders agreed to waive compliance with these covenants, subject to compliance with revised financial covenants during the
remainder of 2012 and 2013. We are currently in compliance with our covenants, but if we are unable to comply with these revised financial covenants in the
future, our lenders could require us to repay all of our outstanding loans.
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 continue to 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 continued development of packet networks and the continued commercialization of VoIP
services. If this market develops more slowly than we expect, we may not be able to sell our products in a significant enough volume to be profitable.
We may expand our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt our business and
affect our results of operations.
Part of our strategy is to pursue acquisitions of, or investments in, businesses and technologies or to establish joint ventures to expand our business.
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.
6
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. For example, 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.
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 routers (MSBRs), our software
solutions and value added application products, our services 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
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.
7
Our industry is rapidly evolving and we may not be able to keep pace with technological changes, which could adversely affect our business.
The transmission of multimedia over data networks is rapidly evolving. Short product life cycles place a premium on our ability to manage the
transition from current products to new products. Our future success in generating revenues will depend on our ability to enhance our existing products and to
develop and introduce new products and product features. These products and features must keep pace with technological developments and address the
increasingly sophisticated needs of our customers. The development of new technologies and products is increasingly complex and uncertain. This increases
the difficulty in coordinating the planning and production process and can result in delay in the introduction of new technologies and products.
The increase in the number of IP networks may adversely affect the demand for media gateway products.
Media gateway products are primarily intended to transcode voice from traditional telephony networks to IP networks and 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.
8
We have a limited order backlog. If revenue levels for any quarter fall below our expectations, our results of operations will be adversely affected.
We have a limited order backlog, which makes revenues in any quarter substantially dependent on orders received and delivered in that quarter. A
delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a given period. We base
our decisions regarding our operating expenses on anticipated revenue trends, and our expense levels are relatively fixed, or require some time for adjustment.
Because only a small portion of our expenses varies with our revenues, if revenue levels fall below our expectations, our results of operations will be
adversely affected.
Generally, we sell to original equipment manufacturers, or OEMs, network equipment providers or system integrator customers, as well as to
distributors. As a result, we have less information with respect to the actual requirements of end-users and their utilization of equipment. We also
have less influence over the choice of equipment by these end-users.
We typically sell to OEM customers, network equipment providers, and system integrators, as well as to distributors. Our customers usually purchase
equipment from several suppliers and may be trying to fulfill one of their customers’ specific technical specifications. We rely heavily on our customers for
sales of our products and to inform us about market trends and the needs of their customers. We cannot be certain that this information is accurate. If the
information we receive is not accurate, we may be manufacturing products that do not have a customer or fail to manufacture products that end-users want.
Because we are selling products to OEMs, system integrators and distributors rather than directly to end-users, we have less control over the ultimate
selection of products by end-users.
The markets we serve are highly competitive and many of our competitors have much greater resources, which may make it difficult for us to
maintain profitability.
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide
similar benefits to those that we sell. There has been a significant amount of merger and acquisition activity and strategic alliances, frequently involving
major telecommunications equipment manufacturers acquiring smaller companies, and we expect that this will result in an increasing concentration of market
share among these companies, many of whom are our customers.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Linksys, Mediatrix Telecom, Inc., Vega
Stream Limited, Innovaphone AG, NET (acquired by Sonus Networks), Tainet Communication System Corp., D-Link Systems, Inc., Patton, Sangoma,
Dialogic and Edgewater.
In the area of low and mid density digital gateways we face competition from companies such as Nokia-Siemens, Huawei, and from Cisco, Dialogic,
Genband, Sonus Networks, NET (acquired by Sonus Networks), Patton, Ferrari and Sangoma.
Our competitors in the area of multi service business routers are companies such as Cisco, Juniper, Adtran, One-Access, Patton, Huawei, HP/3COM,
Alcatel-Lucent and more.
Specifically in the area of enterprise class session border controller technology we compete with ACME Packet (acquired by Oracle), Cisco, SIPera
(acquired by Avaya), Sonus Networks, NET (acquired by Sonus Networks), Ingate and Edgewater.
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Our competitors in the Microsoft Lync certified gateways, session border controller and IP Phone markets include NET (acquired by Sonus
Networks), Dialogic, Cisco, Ferrari, ACME Packet (acquired by Oracle) and Polycom.
Some of our competitors are also customers of our products and technologies.
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 sale of signal processing chips are Broadcom, Octasic and Mindspeed. Other indirect competition is arriving from
the integration of VoIP functionality into processors (running VoIP signal processing on generic ARM/MIPS cores), thus decreasing the need for dedicated
signal processing chips in the VoIP product. Examples of such manufacturers are Cavium, Texas Instruments and more. Our principal competitors in the
communications board market are Dialogic, 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, HP, Yealink and SNOM. End-to-end IP telephony vendors sell IP phones that only work in their proprietary systems. These
competitors include Cisco, Avaya, Alcatel-Lucent, Siemens, Aastra, NEC and more.
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.
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.
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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 several 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 and Cavium Networks manufacture all of the communications and network
processors currently used on our embedded communications boards and network products.
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.
An unexpected termination of the supply of the chips provided by Texas Instruments or the communications processors supplied by Motorola or
Cavium Networks or disruption in their timely delivery would require us to make a large investment in capital and personnel to shift to using chips or 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.
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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 will need to write-off all or a part of the inventory value of these products. Write-offs could
adversely affect our operating results and financial condition. We wrote off inventory in an aggregate amount of $644,000 in 2011, $2.3 million in 2012 and
$1.7 million in 2013. We have incurred write-offs as a result of slow moving items, excess inventories, discontinued products and products with market prices
lower than cost.
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, 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.
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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.
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 if 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. We have
been sued a number of times in recent years for alleged patent infringement. The holders of patents 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.
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.
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Compliance with these directives, especially with respect to the requirement that products eliminate lead solders, has required 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. While we have not experienced any significant reliability issues
as a result of using non-lead components, the incorporation of these new components could 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.
A significant portion of our revenues is generated outside of the Americas 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.
Revenues generated outside of the Americas and Israel represented approximately 37% of our revenues in 2011, 42% of our revenues in 2012 and
42% of our revenues in 2013. 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;
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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.
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 2013 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 2013 were
incurred in New Israeli Shekels (NIS). During 2013, the NIS appreciated against the U.S. dollar, which resulted in an increase in the U.S. dollar cost of our
operations in Israel. As a result of this differential, from time to time we may experience increases in the costs of our operations outside the United States, as
expressed in U.S. dollars. If there is a significant increase in our expenses, we may be required to increase the prices of our products and may be less
competitive. 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.
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 2013, the U.S. dollar depreciated against the Euro, which resulted in a decrease in the prices of our products that are denominated in
Euros. If the U.S. dollar appreciates against the Euro, we may be required to increase the prices of our products that are denominated in Euros.
We may be unable to attract sales representatives who will market our products effectively.
A significant portion of our marketing and sales involves the aid of independent sales representatives that are not under our direct control. We cannot
be certain that our current independent sales representatives will continue to distribute our products or that, even if they continue to distribute our products,
they will do so successfully. These representatives are not subject to any minimum purchase requirements and can discontinue marketing our products at any
time. In addition, these representatives often market products of our competitors. Accordingly, we must compete for the attention and sales efforts of our
independent sales representatives.
Our products could contain defects, which would reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us and our customers, undetected errors or defects may be found in existing or new
products. The introduction of products with reliability, quality or compatibility problems could result in reduced revenues, additional costs, increased product
returns and difficulty or delays in collecting accounts receivable. The risk is higher with products still in the development stage, where full testing or
certification is not yet completed. This could result in, among other things, a delay in recognition or loss of revenues, loss of market share or failure to achieve
market acceptance. We could also be subject to material claims by customers that are not covered by our insurance.
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Obtaining certification of our products by national regulators may be time-consuming and expensive. We may be unable to sell our products in
markets in which we are unable to obtain certification.
Our customers may expect us to obtain certificates of compliance with safety and technical standards set by national regulators, especially standards
set by U.S. or European regulators. There is no uniform set of standards, and each national regulator may impose and change its own standards. National
regulators may also prohibit us from importing products that do not conform to their standards. If we make any change in the design of a product, we are
usually required to obtain recertification of the product. The process of certification may be time-consuming and expensive and may affect the length of the
sales cycle for a product. If we are unable to obtain certification of a product in a market, we may be unable to sell the product in that market.
We depend on a limited number of key personnel who would be difficult to replace.
Because our products are complex and our market is evolving, the success of our business depends in large part upon the continuing contributions of
our management and key personnel. Specifically, we rely heavily on the services of Shabtai Adlersberg, our Chief Executive Officer and President, and Lior
Aldema, our Chief Operating Officer and Head of Global Sales. If our Chief Executive Officer or our Chief Operating Officer are 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 key personnel.
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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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.
Financial, political, economic and other uncertainties following terrorist attacks throughout the world may negatively impact the global economy. As
a result, many of our customers and potential customers have become much more cautious in setting their capital expenditure budgets, thereby restricting their
telecommunications procurement. Uncertainties related to the threat of terrorism have had a negative effect on global economy, causing businesses to
continue slowing spending on telecommunications products and services and further lengthen already long sales cycles. Any escalation of these threats or
similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business, financial
condition and results of operations.
We are subject to taxation in several countries.
Because we operate in several countries, 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, such as the hostilities
along Israel's border with the Gaza Strip and the missiles fired from the Gaza Strip into Israel in 2012 and 2013. 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.
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Recent political events in various countries in the Middle East, such as Syria, Iran and Egypt, have weakened the stability of those countries. This
instability may lead to deterioration of the geo-political conditions in the Middle East. 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.
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.
A number of countries and organizations continue to restrict or ban business with Israel or Israeli companies or companies doing business with Israel
or Israeli companies, which may limit our ability to make sales in those countries. In addition, there have been increased efforts by activists to cause
companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may
adversely impact our ability to sell our products.
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 most of our revenues in U.S. dollars and, in 2013, 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 2010, 2012 and
2013, 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. 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. 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 decrease in value 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 2010, 2012 and 2013. This could happen again if the U.S. dollar were to
decrease in value 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 and put and
call options contracts 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.
19
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 2013, the value of the U.S. dollar decreased in relation to the NIS by 7.0% and the inflation
rate in Israel was 1.9%. In 2012, the value of the U.S. dollar decreased in relation to the NIS by 2.3% and the inflation rate in Israel was 1.4%. 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 2.2%. Our results of operations may be adversely affected
in case of a decrease in the value of the U.S. dollar to the NIS.
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 there are four programs under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, that 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. Additionally, some of
these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time. We could also be
required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index. See Note 15 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 Ministry of Economy, 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 outside of Israel if
OCS grants funded the development of the products or technology, without special approvals from the OCS. Furthermore, the consideration available to our
shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar
transaction) may be reduced by any amounts that we are required to pay the OCS. These restrictions may limit our ability to enter into agreements for such
transactions 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.
20
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 and, in certain cases, may be subject to criminal charges. 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 2013, 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, 2013, we have a contingent obligation to pay royalties in
the amount of approximately $34.0 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. Most 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 and provisions in our articles of association 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.
21
The rights and responsibilities of our shareholders are governed by Israeli law which may differ in some respects from the rights and responsibilities
of shareholders of U.S. corporations.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli
law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States corporations. In particular, a
shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the
company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of
shareholders on certain matters, such as an amendment to a company’s articles of association, an increase of a company’s authorized share capital, a merger of
a company and approval of related party transactions that require shareholder approval. In addition, a controlling shareholder or a shareholder who knows that
it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in a company or has
another power with respect to a company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of
fairness. Some of the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined. These provisions may
be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
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 March 20, 2014, our share price has fluctuated from a low of $0.92 to a high of $9.12. The following factors may cause significant fluctuations in the
market price of our ordinary shares:
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fluctuations in our quarterly revenues and earnings or those of our competitors;
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;
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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.
22
Our quarterly results of operations have fluctuated in the past and we expect these fluctuations to continue. Fluctuations in our results of operations
may disappoint investors and result in a decline in our share price.
We have experienced and expect to continue to experience significant fluctuations in our quarterly results of operations. In some periods, our
operating results may be below public expectations or below revenue levels and operating results reached in prior quarters or in the corresponding quarters of
the previous year. If this occurs, the market price of our ordinary shares could decline.
The following factors have affected our quarterly results of operations in the past and are likely to affect our quarterly results of operations in the
future:
·
·
·
·
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size, timing and pricing of orders, including order deferrals and delayed shipments;
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 generally 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 generally 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.
23
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 or the chief executive officer, in which case they also require
compensation 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, 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 Tel Aviv Stock Exchange (“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.
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, 2011, 2012 and 2013, 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 were a PFIC in each of 2001, 2002 and 2003. There can be no assurance that
we will not become a PFIC in 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 cease to be a PFIC in such succeeding years. 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 with respect
to such holder.
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We urge U.S. holders of our ordinary shares to carefully review Item 10E. – “Taxation - U.S. Federal Income Tax Considerations” 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, United States Securities and Exchange Commission (“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.
The new conflict minerals disclosure rules in the United States are complex and compliance with the rules could be difficult.
We are subject to recently adopted SEC disclosure obligations relating to our use of so-called “conflict minerals”-columbite-tantalite, cassiterite (tin),
wolframite (tungsten) and gold. These minerals are present in a significant number of our products. The disclosure obligations are complex, and there is little
formal guidance with respect to their application. Under the rules as adopted, the first reports under these disclosure obligations are due to be filed with the
SEC no later than May 2014 with respect to our activities during 2013, unless a current legal challenge to the validity of these rules is upheld.
Although we expect to be able to file the required report on time if required to do so, the preparation of our report is dependent upon the
implementation of new systems and processes and information supplied by our suppliers of products that contain, or potentially contain, conflict minerals. To
the extent that the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the
SEC's requirements, we could face both reputational and SEC enforcement risks. In addition, our efforts to comply with the disclosure rules and to otherwise
implement conflict-free sourcing policies could result in changes to our supply chain that could disrupt existing supply sources or cause more uncertainty with
respect to our supply chain.
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, 7019900 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.
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Major Developments since January 1, 2013
In March 2014, we sold in a public offering 4,025,000 of our ordinary shares, including 525,000 shares sold pursuant to the exercise in full of an
over-allotment option granted to the underwriters, at a purchase price of $8.00 per share. We realized from this offering net proceeds of approximately $29.7
million, after deducting underwriting commissions and other estimated offering expenses.
MailVision Ltd. is an Israeli company which develops, markets and licenses VoIP solutions for mobile, PC, web and tablet devices for telecom
operators and service providers. We resell and market MailVision’s products and services. Since 2006, we have extended loans and convertible loans to
MailVision in the aggregate principal amount of $2,306,000, including loans in the principal amount of $211,000 in 2011, $183,000 in 2012 and $1,242,000
in 2013. These loans bear interest at the rate of LIBOR plus 0.5%-5% per annum and are convertible into shares of MailVision. In November 2010, June 2011
and May 2013, an aggregate of $935,000 in principal amount of these loans was converted by us into shares of MailVision. As of December 31, 2012, we
owned 26.4% of the outstanding share capital of MailVision, or 24.1% of the share capital of this company on a diluted basis, compared to owning 26.6% of
the outstanding share capital as of December 31, 2011, or 24.8% of the share capital of MailVision on a diluted basis. As of December 31, 2012, there was
$398,000 in principal amount of these loans outstanding.
In May 2013, we acquired certain assets of MailVision Ltd., for the following consideration: (i) $233,000 to be payable 12 months following the
closing date, and (ii) an additional earn out payment subject to the achievement of a certain level of net revenues from the sale of MailVision’s products. The
purchase price can be made, at our discretion, in either cash or our ordinary shares. As additional consideration for the transaction, we waived repayment of
any outstanding loans made by us to MailVision and assumed specified liabilities of MailVision in the aggregate amount of approximately $2.4 million.
Under certain limited circumstances, if we were to sell the acquired assets and assumed liabilities of MailVision to a third party during a period of 12 months
following the closing date (“Option Period”), the proceeds in excess of a specified amount would be payable to the sellers. In addition, if the purchase price
offered by a third party during the Option Period exceeds a specified amount, subject to a number of conditions, we would be required to sell the acquired
assets and assumed liabilities. If this were to occur, we would not be required to pay the earn out amounts. We have no current intention to sell our MailVision
business and believe that, even if a sale were to occur during the Option Period, none of the proceeds would be required to be paid to the sellers.
Since January 1, 2013, AudioCodes has invested in the following key product lines and solutions to address the following market segments:
·
One Voice for Enterprise Mobility: We expanded our One Voice offering with a new cloud-based enterprise mobility solution suite for business
customers. This solution includes mobile clients coupled with a delivery platform for secure connectivity, management and monitoring and enables
service providers to offer their business customers mobile communications services over data networks while reducing the total cost of ownership.
The first applications in the Enterprise Mobility solution suite include MobilityPlus Business Edition (BE) and VocaNOM. MobilityPlus BE is based
on home-grown technologies, which include a proven Voice Engine and connectivity to social networks and over public cloud architecture. This
application leverages the MobilityPlus Consumer Edition (CE) , formerly known as VMAS. The MobilityPlus BE enables employees of a customer
to communicate with their colleagues seamlessly from their smartphone devices by initiating VoIP calls over Wi-Fi and cellular data networks.
Connecting with the enterprise’s PBX or IP-PBX, the application allows enterprises to reduce their cellular communications charges and streamline
mobile collaboration between their employees through features such as advanced dialing, smart contacts, enhanced presence, instant messaging and
one-number reach. MobilityPlus BE supports high-definition voice quality and leverages AudioCodes session border controller products and core
voice engine technologies to provide end-to-end HD VoIP. Deployed as an add-on to the existing IP-PBX or PBXs of a business customer, the
solution reduces the need for costly replacement of equipment. VocaNOM, a speech-enabled directory search and dial solution, allows mobile or
office callers to state the name of the person or department they wish to call and can automatically be transferred to the requested party, thus,
relieving the hassle of searching for phone numbers or waiting to speak to an operator. VocaNOM leverages our voice recognition technology.
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Extended Connectivity, Survivability and Applications for Microsoft Lync Deployments: An additional extension of our product range specifically
designed for the Microsoft Lync unified communications environment includes the Mediant 800-N survivable branch appliance (SBA) for very small
sites (up to 30 seats), and the Mediant 9000 SBC, which supports very large enterprise customers that need high capacity, highly available session
border controllers for centralized SIP Trunk connectivity and Office365D, the Microsoft dedicated hosted solution for large corporations. Mediant
9000 is based on our software session border controller (SBC), supporting up to 16,000 concurrent sessions, running on a standard Intel-based server.
Both the Mediant 9000 and the Mediant software SBC (server or virtualized editions) are certified for Microsoft Lync 2010 and 2013. Our Lync
applications suite is now enhanced with fax2mail and mail2fax thus enabling fax conversion and distribution within Lync deployments. It can be
integrated into the AudioCodes SBA for branch solutions or deployed at the headquarters. We also announced IVR/AA for Lyc, a speech recognition
enabled auto attendant solution for Lync environments, integrated with the corporate users’ directory (ActiveDirectory) and supporting advanced call
distribution capabilities such as group calling, hunt group and interactive voice response with localization and multi-language support. These
products and applications are intended to further extend our value proposition to our growing network of Microsoft voice specialized partners
(VSPs) with whom we work closely.
Extended Connectivity and Survivability for Hosted Services: In 2013 we enhanced our SBC and Multi Service Business Router (MSBR) portfolio
specifically to enable them to serve as demarcation devices for hosted services deployments. This was designed to address the needs of service
providers’ to provide secure, high voice quality, uninterrupted business communications, in case of loss of data connection to the cloud and smooth
migration from on-premise to hosted unified communications services. In 2013, we also launched the AudioCodes’ Cloud Resilience Package (CRP)
solution which enhances cloud-based or hosted communications environments by ensuring survivability, high voice quality and security at cloud
service customer premises. CRP is available as a software option for AudioCodes field-proven CPE media gateway and MSBR hardware platforms.
Our offering for hosted services was further enhanced in 2013 for Broadsoft Hosted Services environments, with local survivability supporting
advanced user features and embedded PacketSmart agent for integration with the BroadSoft Quality of Experience solution.
Software Enterprise Session Border Controller: In March, 2012, we announced the launch of our Software Enterprise Session Border Controller
(SBC), a software only member of our SBC product family. Enterprises deploying the software SBC benefit from connectivity to SIP trunking
services, high VoIP quality and network security. As a software only solution, the Software SBC smoothly integrates into data center environments,
and addresses the needs for scalability and connectivity of unified communications and contact center deployments. In 2012, we also announced the
virtualized version of the Mediant Software SBC which allows end customers the flexibility of running the SBC on their virtualized server
environment. In 2013 we announced our Software SBC strategy for use in the cloud, data centers and hosted services environments, with plans for
capacity increase and software based media processing. Our Software SBC can support 16,000 concurrent sessions and 12,000 encrypted sessions,
addressing the scale and availability needs of the biggest enterprises, while at the same time our virtualized SBC integrates smoothly with virtualized
environments and provides cost-effective low to medium SBC capacities. Our Software and hardware SBCs share the same code base, thereby
providing feature parity and same configuration methodologies and interfaces, saving on operational costs.
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Session Experience Manager (SEM): In 2013, we increased the scale of our SEM to monitor thousands of devices and added multi-tenancy support,
addressing large enterprise and service provider deployments.
IP Phones for Microsoft Lync and Contact Centers: To further open up opportunities at Microsoft Lync and contact center deployments, we launched
the HD4XX family of IP Phones, featuring updated design and improved voice quality. These phones support interoperability with Microsoft Lync
and provide advanced security, resiliency and login capabilities for the Contact Center space. Our HD4XX IP Phones offer multiple hardware
configurations and capabilities at a competitive price. In 2013, we achieved formal qualification for the HD4XX IP Phones in Genesys contact center
solution, as well as for Microdoft Lync 2013 and Microsoft Lync 2010.
· Mediant 9000 Session Border Controller (SBC): In January 2014, we launched a high capacity scalable SBC product intended for very large
enterprise deployments, as well as hosted and access environments, of up to 16,000 concurrent sessions, supporting enhanced security,
interoperability and advanced monitoring of voice quality. This new SBC meets the connectivity, security and reliability needs of large-scale unified
communications solutions and IP contact center deployments, as hosted, managed or owned services. The Mediant 9000 SBC is also available as a
software-only version for deployment on Common-Off-The-Shelf (COTS) platforms or within fully virtualized environments.
· Multi-Service-Business-Routers: We have added two new products to our Multi-Service-Business-Routers portfolio to cost effectively address
different business sizes and deployment scenarios. The Mediant500L addresses the pure hosted and cloud deployments, while the Mediant850B
targets the larger SIP trunk installations. Both provide a wide choice of broadband WAN interfaces featuring sustained high capacity routing
performance and support optional WiFi integration and enhanced data resiliency with WAN backup. The Mediant MSBR includes integrated SBC
for secure and interoperable IP-PBX to SoftSwitch SIP trunking and advanced VoIP resiliency for cloud installations.
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Remote Monitoring Services. During 2013, we introduced a remote monitoring service that allows our customers to monitor mission critical devices
using our monitoring infrastructure. Our monitoring infrastructure is based on proprietary AudioCodes technology and allows our customers to
receive detailed feedback on device performance.
Professional Services. We continue to place increasing focus on professional services to support today’s complex multi-service networks. In 2013,
we launched a professional services program “The Voice Experts @ Your Service” to enhance our professional services offering to our partners.
AudioCodes has a comprehensive professional services program intended to provide responsive, preventive, and consultative support of AudioCodes
networking products. AudioCodes professional services support networking devices, applications and infrastructures, allowing large organizations
and service providers to realize the potential of a high-performance multi-service network. The foundation for AudioCodes professional services is a
network life-cycle model based on the four basic phases of planning, design, implementation and optimization . The result is a specially designed
portfolio of complementary and synergistic service components.
One Voice Operations Centre. Our One Voice operations center offers management applications for large scale cloud or premise-based unified
communications deployments. It monitors, manages and operates AudioCodes’ session border controllers (SBC), media gateways, Microsoft
survivable branch appliances (SBA), multi-service business routers (MSBR) and IP phones.
28
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):
Year Ended
December 31
2011
2012
2013
Computers and peripheral equipment
$
1,420 $
1,619 $
1,478
Office furniture and equipment
Leasehold improvements
Total
B.
BUSINESS OVERVIEW
Introduction
148
11
353
34
101
7
$
1,579 $
2,006 $
1,586
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, IP phones, media gateways and session border controllers (SBC). Our
products primarily provide the media gateway and SBC 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 routers 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, media gateways evolved into SBC, now also
connect between different VoIP networks, providing security, interoperability, resiliency and voice quality functionality.
Voice over IP gateway and SBC equipment can be generally segmented into three classes: service providers’ gateways and SBCs for use in central
office facilities, enterprise gateways and SBCs 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 data networks.
The need to re-route voice and fax traffic from the traditional circuit-switched networks onto 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 created a need for a new functionality to
mediate between different VoIP networks. This includes protocol translation as well as security services, business continuity and voice quality enforcement
and is provided by stand-alone SBCs as well as Enterprise SBC (E-SBC) functionality integrated into the gateway.
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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 communications 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, 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 routers, or MSBRs, combine all the capabilities of media gateways and session border controllers with the support of native data
switching and routing. The MSBR enables enterprise customers to connect their branch office networks into the corporate headquarters, and service providers
to connect their customers into their network data and voice services. Some MSBRs also include an integrated server which can run off-the-shelf applications
such as unified communications. This combination enables system integrators and service providers 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 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.
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.
30
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, LTE, WiFi, data over cable, digital subscriber line technologies and fiber networks
(FTTx). Packet technologies enable delivery of real time and non-real time services by different service providers that do not necessarily own the
access network or the part of the network through which the subscriber accesses the network. This allows for the growth of alternative or virtual
service providers that do not own an access network.
Competition by alternative service providers with incumbent and traditional service providers. Competition by alternative service providers is
causing incumbents to deploy advanced broadband access technologies and increase their competitiveness by offering bundled services to their
subscribers, such as voice, video and data, and online gaming. In addition, the emergence of wide band vocoders that use a higher sampling rate than
used in legacy time domain multiplexing, or TDM, networks allows service providers to offer higher quality voice and music over their newly
established IP network.
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, has been penetrating 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.
· 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.
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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.Software and Network
Function Virtualization (NFV). The significance of software only products for the telecommunications market is increasing as operators and
enterprises are seeking to move away from dedicated hardware platforms onto common generic computing platforms that are enabling data centers.
NFV aims to leverage standard IT virtualization technology to consolidate many network equipment types (including SBC’s) onto industry standard
high volume servers, switches and storage, which could be located in datacenters, network nodes and on end user premises. There are a number of
challenges that NFV needs to address, including performance, scale, resilience, management and automation. These and other technical challenges
are being addressed in a network operator-led Industry Specification Group (ISG) under the auspices of ETSI, an industry standards setting body.
·
·
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. The rapid adoption of VoIP and unified
communications in enterprise and contact centers intensifies voice quality and quality of service challenges. Enterprise and contact center data
networks are typically not properly engineered or configured to support carrying high quality real time communication services in enterprise and
contact centers. Such assessment typically requires high load simulations and advanced voice quality monitoring systems.
Service Reliability. In order for a packet network to be efficient for voice or fax transmission, the VoIP equipment that is installed in core networks
and enterprises must be able to deliver a high level of performance and reliability to ensure continuous service. Since data networks are more
susceptible to outages compared to traditional voice networks, businesses relying on centralized or hosted communication services need to ensure
resiliency in their headquarters and remote branches in case of data network failure.
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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 interoperability 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 and security
expertise, and voice communications system design expertise, our products address interoperability challenges, quality of service problems, security problems
and reliability problems facing the VoIP industry. As a result, we enable our customers to build voice over 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, unified communications, contact centers and carrier soft switches. Our interoperability teams test our products against a
variety of other products for interoperability, focusing on the leading standard VoIP protocols: Session Initiation Protocol, or SIP, and MEGACO/H.248.
We believe that the following strengths have enabled us to develop our products and provide services to our customers:
·
Leadership in voice compression technology. We are a leader in voice compression technology. Voice compression exploits redundancies within a
voice signal to reduce the bit rate of data required to digitally represent the voice signal while still maintaining acceptable voice quality. Our key
development personnel have significant experience in developing voice compression technology. We were involved in the development of the ITU
G.723.1 voice coding standard that was adopted by the VoIP Forum and the International Telecommunications Union as the recommended standard
for use in voice over IP gateways. We implement industry voice compression standards and work directly with our customers to design state-of-the-
art proprietary voice compression algorithms that satisfy specific network requirements. We believe that our significant knowledge of the basic
technology permits us to optimize its key elements and positions us to address further technological advances in the industry. We also believe that
our technological expertise has resulted in us being sought out by leading equipment manufacturers to work with them in designing their systems and
provision of solutions to their customers.
33
·
·
·
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.
· Media gateway and session border control protocols design expertise. We have extensive experience in developing media gateway and session
border control standard protocols and keep ourselves up to date with new requests for comments. As a result, we are able to adjust our features
according to customer requirements. In addition, interoperability testing allows us to provide our customers with a single gateway or session border
control platform that can interface with most of the leading PBX, IP-PBX and unified communications solution providers and provide seamless
connectivity to SIP trunk services.
·
·
·
Close technology relationships with market leaders. Our continuing efforts with respect to testing and certifying our systems for compatibility with
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.
VoIP professional services. Based on our extensive expertise in VoIP network and technology we offer services intended to enhance customer’s VoIP
network capabilities, by offering network assessment services and other professional services.
34
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 session border controllers target unified communication, SIP trunking, IP centrex and contact
center networks. Our IP phones and VoIP mobile clients target the enterprise and service provider hosted solutions markets.
·
·
·
·
·
Extensive feature set. Our products incorporate an extensive set of signal processing functions and features (such as coders, fax processing and echo
cancellation), functionalities (such as session initiation protocol, or SIP, H.248, or Megaco, 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, VoIP security mechanisms, 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 and session border controller platforms.
35
Business Strategy
AudioCodes’ vision is to become a leading strategic supplier of VoIP and converged VoIP and data solutions for service providers and enterprises
worldwide. The following are key elements of our strategy:
· Maintain and extend technological leadership. We intend to capitalize on our expertise in voice compression technology and voice signaling
protocols and proficiency in designing voice communications systems. We continually upgrade our product lines with additional functionalities,
interfaces and densities. We have invested heavily and are committed to continued investment in developing technologies that are key to providing
high performance voice, data and fax transmission over packet networks and to be at the forefront of technological evolution in our industry.
·
·
·
Strengthen and expand strategic relationships with key partners and customers. We sell our products to leading enterprise channels, regional system
integrators, global equipment manufacturers and value-added resellers, or VARs, in the telecommunications and networking industries and establish
and maintain long-term working relationships with them. We work closely with our customers to engineer products and subsystems that meet each
customer’s particular needs. The long development cycles usually required to build equipment incorporating our products frequently results in close
working relationships with our customers. By focusing on leading equipment manufacturers with large volume potential, we believe that we reach a
substantial segment of our potential customer base while minimizing the cost and complexity of our marketing efforts.
Expand and enhance the development of highly-integrated products. We plan to continue designing, developing and introducing new product lines
and product features that address the increasingly sophisticated needs of our customers. We believe that our knowledge of core technologies and
system design expertise enable us to offer better solutions that are more complete and contain more features than competitive alternatives. We
believe that the best opportunities for our growth and profitability will come from offering a broad range of highly-integrated network product lines
and product features, the integration of data services into our VoIP products, and the expansion into the unified communications and contact center
markets.
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 application-
specific products and solutions. Key segments that we focus on are unified communications, contact centers, SIP trunking and hosted services
markets that have been adopting VoIP solutions.
· 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.
·
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.
36
·
·
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.
Engage enterprise customers in direct sales effort. We are pursuing a strategy of engaging large enterprise customers on a global level, as part of the
AudioCodes product fit within leading enterprise solutions, mainly with Microsoft and Genesys. Our ability to engage these enterprises directly
enhances our ability to influence procurement decisions. This, in turn, is designed to increase demand, which is expected to allow our business
partners to fulfill this demand based on their relationship with AudioCodes.
Products
Our products facilitate the transmission of voice, data and fax over packet networks. We have incorporated our algorithms, technologies and systems
design expertise in both our networking and technology product lines.
We typically categorize our revenues from products and services into two main business lines: network and technology. 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 and ESBCs. Complementing our media gateways and session border gateways as network products are our
multi-service business routers (MSBR). IP phones, media servers, mobile VoIP solutions and value added application products. Sales of network products
accounted for approximately 62% of our revenues in 2012 and approximately 66% of our revenues in 2013. Network services accounted for approximately
18% of our revenues in 2012 and approximately 18% of our revenues in 2013.
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. Sales of technology products accounted for approximately 19% of our products revenues in 2012 and approximately 15% of our
products revenues in 2013. Technology services accounted for approximately 1% of our revenues in 2012 and 2013.
Networking products
This line of products includes products that are network level 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. We offer analog media gateways for toll bypass, residential gateways, hosted, access and enterprise
applications; and digital media gateways with various capacities for wireless, wireline, cable, enterprise, fixed mobile convergence, and unified
communications;
Our enterprise session border controller (E-SBC) for service providers and enterprise connecting to SIP trunk and hosted services and between
unified communications and IP PBX systems. Our E-SBCs provide security, interoperability, local 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.
37
·
·
·
Our multi-service business routers 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.
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 One Voice for enterprise mobility. This solution includes mobile clients coupled with a delivery platform for secure connectivity, management
and monitoring, speech enabled directory and enables service providers to offer their business customers mobile communications services over data
networks while reducing the total cost of ownership.
· We offer a variety of products that are tailored for Microsoft unified communication environments. These products include connectivity platforms
that are based on our Mediant gateway and SBC devices, as well as survivable branch appliances (SBAs), enhanced gateways, E911 gateways and E-
SBCs. Other products for the Microsoft Lync environment include IP phones and applications such as faxing solutions, call recording solutions
(SmartTAP) and Speech Recognition Auto Attendant solutions.
·
Our media servers enable conferencing, multi-language announcement functionality, and other applications for voice over packet networks.
· We offer a professional service module of VoIP network assessment for enterprises (VNA). The VNA is provided to enterprises seeking a smooth
and high quality transition to deployment of unified communications (e.g., Microsoft Lync) and IP contact centers. The VNA provides the customer
with an understanding of its current IP network capability and readiness to carry high quality VoIP traffic on top of data services.
·
Value added applications for unified communications.
We support our networking products with a range of professional services.
Technology Products
This line of products serves as a building block for network level products. Our technology products are enabling products that are part of our own or
our customers’ products.
·
·
Our signal processor chips process and compress voice, data and fax and enable connectivity between traditional telephone networks and packet
networks;
VoIP communications boards;
· Media processing boards for enhanced services and functionalities; and
38
·
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 comprises 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.
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 and MP-262 multimedia home gateways. 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. In addition to including the same features as the MP-252,
the Media Pack MP-262 also supports VDSL2 and Gigabit access. 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 (ESBC’s) and
Multi-Service Business Routers for Service Provider Access and Enterprise Applications (MediantTM 600, 800, 1000, 2000, 3000 Media Gateways and
ESBC’s and Mediant 500, 800, 850 and 1000TM MSBR’s),as well as higher capacity Media and Transcoding Gateways for Wireless, Wireline and Cable
Service Provider networks (Mediant, 5000 and 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 unified communications, IP-PBX, SIP application and
softswitch controlled environments. This product family is compatible with popular voice over IP voice coders and protocols, including code-division
multiple access, or CDMA, global system for mobile communications, or GSM, CDMA2000, universal mobile telecommunications service, or UMTS, and
Long Term Evolution (LTE), as well as popular narrowband and wideband voice coders used in enterprise and Over the Top networks, such as SILK, RTA,
SPEEX, G.722 and more. 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.
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The MediantTM family provides customers with a comprehensive line of different sized gateways and E-SBCs. 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, contact center and service provider VoIP 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 16,000 concurrent
calls/sessions.
Our Mediant 1000, Mediant 800 and Mediant 500 have three different configurations. The first two are a modular VoIP media gateway and
enterprise session border controllers. The other includes multi-service business routers, or MSBRs, 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 survivability. The MSBR
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 500, Mediant 800 and Mediant 1000 MSBR include a variety of voice and data (WAN) interfaces.
Our product line specifically designed for the Microsoft unified communications environment, known as Lync, is constantly upgraded to support the
latest Microsoft unified communications specifications. These products include Lync qualified IP Phones, enhanced gateways, enterprise session border
controllers and survivable branch appliances based on our Mediant family, as well as faxing solutions, auto attendant solutions 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.
Security and DoS attack prevention protects the enterprise from fraud 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 gateway line, 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.
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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 as unified communications, interactive voice response, call-centers, conferencing and voice-activated
personal assistants.
300HD and 400HD Series of High Definition IP Phones
AudioCodes 300 and 400 Series of HD VoIP-enabled IP phones offer 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 and 400 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. Our IP phones are widely interoperable with numerous IP-PBXs, soft switches and IP-
Centrex solutions.
One Voice for Enterprise Mobility:
This solution includes mobile clients coupled with a delivery platform for secure connectivity, management and monitoring and enables service
providers to offer their business customers mobile communications services over data networks while reducing the total cost of ownership.
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 and session border
controllers, MSBR and IP Phones.
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 and session border controllers deployed, either as
customer premises equipment, access or core network platforms.
Session Experience Manager (SEM):
Our Session Experience Manager, or SEM, is a 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) by providing comprehensive
configuration, monitoring and performance solutions for IT managers and service providers deploying a network of AudioCodes network products.
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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.
Services
To support today’s complex multi-service networks, AudioCodes has developed a comprehensive professional services program intended to provide
responsive, preventive, and consultative support of AudioCodes networking products. AudioCodes professional services support networking devices,
applications and infrastructures, allowing large organizations and service providers to realize the potential of a high-performance multi-service network. The
foundation for AudioCodes professional services is a network life-cycle model based on the four basic phases of planning, design, implementation and
operations. The result is a specially designed portfolio of complementary and synergistic service components. Services accounted for approximately 13% of
our revenues in 2011 and approximately 19% of our revenues in 2012 and 2013.
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.
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.
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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.
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.
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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. ScanSource Communications, our largest customer, accounted for 14.4% of our revenues in 2011, 13.7% of our revenues in 2012 and 17.8% of
our revenues in 2013. Our top three customers accounted for approximately 22.5% of our revenues in 2011, 25.3% of our revenues in 2012 and 27.8% of our
revenues in 2013.
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 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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In 2013 we continued to enhance our field marketing efforts with direct touch enterprise engagements, along with channel recruitments and generic
marketing activities including tradeshows, webinars, seminars, on-line and social marketing. The AudioCodes One Voice positioning is strongly emphasized
in our marketing efforts.
In January 2013, we introduced the One Voice marketing message which positions AudioCodes as a one-stop-vendor for the voice connectivity
needs of various enterprise applications. The marketing campaign started with the positioning of One Voice for Lync, which presented the AudioCodes value
proposition as a vendor of comprehensive voice networking for Microsoft Lync unified communications. Additionally, One Voice for Lync positions
AudioCodes as a vendor that can deliver end-to-end support and that offers value-added professional services including design, implementation, and network
readiness assessment, among others. We later also introduced One Voice for Hosted Services which similarly positions AudioCodes as a one-stop vendor for
Operators hosted services, mainly in collaboration with Broadsoft. AudioCodes believes it can deliver a full suite of voice and networking equipment that is
required to connect business customers to an operator’s network.
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 to purchase excess inventory. Aggregate non-cancellable
obligations under these agreements as of December 31, 2013 were approximately $14.4 million.
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Industry Standards and Government Regulations
Our products must comply with industry standards relating to telecommunications equipment. Before completing sales in a country, our products
must comply with local telecommunications standards, recommendations of quasi-regulatory authorities and recommendations of standards-setting
committees. In addition, public carriers require that equipment connected to their networks comply with their own standards. Telecommunication-related
policies and regulations are continuously reviewed by governmental and industry standards-setting organizations and are always subject to amendment or
change. Although we believe that our products currently meet applicable industry and government standards, we cannot be sure that our products will comply
with future standards.
We are subject to telecommunication industry regulations and requirements set by telecommunication carriers that address a wide range of areas
including quality, final testing, safety, packaging and use of environmentally friendly components. We comply with the European Union’s Restriction of
Hazardous Substances Directive (under certain exemptions) that requires telecommunication equipment suppliers to not use some materials that are not
environmentally friendly. These materials include cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and polybrominatel diphenyl
ethers. Under the directive, an extension for compliance was granted 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, Innovaphone AG, NET (acquired by Sonus Networks), Tainet Communication System Corp., D-Link
Systems, Inc., Patton, Sangoma, Dialogic and Edgewater.
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 and mid density digital gateways we face competition from companies such as Nokia-Siemens, Huawei and from Cisco, Dialogic,
Genband, Sonus Networks, NET (acquired by Sonus Networks), Patton, Ferrari and Sngoma.
Our competitors in the area of multi-service business gateways are companies such as Cisco, Juniper, Adtran, One Access, Patton, Huawei,
HP/3Com, Alcatel and more.
Specifically in the enterprise class session border controller technology we compete with ACME Packet (acquired by Oracle), Cisco, SIPera
(acquired by Avaya), Sonus Networks, NET (acquired by Sonus Networks), Ingate and Edgewater.
Our competitors in the Microsoft Lync certified gateway and session border controller markets include NET (acquired by Sonus Networks), Sonus,
Dialogic, Cisco, Ferrari, HP, Ingate and ACME Packet (acquired by Oracle).
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Some of our competitors are also customers of our products and technologies.
Our principal competitors in the sale of signal processing chips are Broadcom, Octasic and Mindspeed. Other indirect competition is arriving from
the integration of VoIP functionality into processors (running the VoIP signal processing on generic ARM/MIPS cores), thus decreasing the need for dedicated
signal processing chips in a VoIP product, Examples to such manufacturers are Cavium, Texas Instruments and more. Our principal competitors in the
communications board market are Dialgic, 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 systems. These
competitors include Polycom, HP, Yaelink and SNOM. End-to-end IP telephony vendors sell IP phones that only work in their proprietary systems. These
competitors include Cisco, Avaya, Alcatel-Lucent, Siemens, Aastra, NEC and more.
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.
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.
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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.
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.
49
Legal Proceedings
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 was referred to arbitration where we claimed 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 aggregate amount of approximately NIS
14.0 million (approximately $4.0 million based on the December 31, 2013 exchange rate). In September 2013, the parties reached a settlement agreement
pursuant to which each party withdrew its claims.
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 plaintiff’s intellectual property rights in five patents. In December 2013, AudioCodes Inc. and the
plaintiff entered into a settlement agreement that provided for a dismissal of the action and a nominal payment by AudioCodes Inc. to the plaintiff.
In January 2013, one of our former senior executives sent a letter of demand claiming an amount of approximately NIS 4 million (approximately
$1.2 million) relating to the termination of his employment. We have denied allegations and believe that we have valid defenses to this claim.
In February 2013, a patent infringement action was commences by AIM IP, LLC in the United States District Court of Central District of California
Southern Division against our subsidiary, AudioCodes Inc. and other defendants alleging that AudioCodes Inc. infringed the plaintiff’s intellectual property
rights in one patent. One of the other defendants is a customer of ours that has informed us that it believes it is entitled to indemnification from us with respect
to this litigation. AudioCodes Inc. has filed an answer to the complaint and the parties have exchanged a first set of discovery requests. We believe that we
have valid defenses to these claims.
In October 2013, we filed a claim in the High Court of the Hong Kong Special Administrative Region Court of First Instance against a customer of
ours and one of its employees for damages in connection with the breach of a supply agreement, infringement of intellectual property and breach of
confidentiality. In January 2014, that customer filed its defense and a counter claim for an unspecified amount.
In November 2013, AudioCodes Brasil Equipamentos Voz Sobre IP Ltda., our Brazilian subsidiary, was served with proceedings in the Labor Court
of Sao Paulo, Brazil by a former employee alleging that he is entitled to approximately $600,000 as a result of the termination of his employment by our
subsidiary. We have denied allegations and believe that we have valid defenses to this claim.
C.
ORGANIZATIONAL STRUCTURE
List of Significant Subsidiaries
AudioCodes Inc., our wholly-owned subsidiary, is a Delaware corporation.
50
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 of
approximately $5.2 million (including management fees). In September 2013, this lease was extended by an additional 10 years, and is scheduled to expire on
January 31, 2024.
Our U.S. subsidiary, AudioCodes Inc., leases approximately 28,000 square foot facility in Somerset, New Jersey which was recently extended for
five years until December 31 2018. AudioCodes Inc. also leases offices in Plano, Texas, San Jose, California, Raleigh, North Carolina, Boston,
Massachusetts. The annual lease payments in 2013 (including management fees) for all our offices in the United States were approximately $640,000.
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 our Consolidated
Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by U.S. 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;
51
·
·
·
·
·
Intangible assets;
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 $823,000 in 2011, $1.2 million in 2012 and $1.3 million in 2013.
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.
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 standalone 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 and professional services was based on ESP. Maintenance selling price was based on VSOE.
52
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.
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 $644,000 in 2011, $2.3 million in 2012 and $1.7 million in 2013.
Intangible assets
As a result of our acquisitions, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $4.0 million as of
December 31, 2011, $2.9 million as of December 31, 2012 and $4.3 million as of December 31, 2013.
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.
53
Intangible assets are reviewed for impairment in accordance with the FASB 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 2011, 2012 and 2013 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, 2011 and 2012 and $33.7 as of December 31, 2013. 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.
ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if
necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such
case, the second phase is then performed, and we measure impairment by comparing the carrying amount of the reporting unit's goodwill to the implied fair
value of that goodwill. An impairment loss is recognized in an amount equal to the excess. We have an option to perform a qualitative assessment to
determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill
impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is
greater than its carrying amount, the two-step goodwill impairment test is not required.
In addition, pursuant to ASC 350, an entity is allowed to perform a qualitative impairment assessment. If the entity determines that it is not more
likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of indefinite-lived intangible assets for impairment is
not required and the entity would not need to calculate the fair value of the asset and perform a quantitative impairment test.
During 2011, 2012 and 2013, 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.
54
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 might be subject to audit by the respective tax authorities.
Although the ultimate outcome is unknown, we believe that adequate amounts have been provided for and any adjustments that may result from tax return
audits are not likely to materially adversely affect our consolidated results of operations, financial condition or cash flows.
Stock-based compensation
We account for stock-based compensation in accordance with ASC 718, “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 $2.3 million in 2011, $1.5 million 2012 and $1.7 million 2013. As of December 31, 2013, there was approximately $3.4
million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted by us. As of
December 31, 2013, that expense is expected to be recognized over a weighted-average period of 1.1 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 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, 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.
55
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.
We have invested significant development resources in complying with Microsoft’s requirements for the purpose of becoming a Microsoft
recognized partner for their unified communication solutions for the enterprise market, which are known as Microsoft Lync. We have adapted some of our
gateway products, IP phones, session border controllers, survivable branch applications, value added applications and professional services to operate in the
Microsoft Lync environment. Our products to the Lync Unified Communications market are sold primarily to our channel partners that distribute and
integrate the Lync solution to enterprises.
AudioCodes offers a comprehensive professional services program intended to provide responsive, preventive, and consultative support of
AudioCodes networking products. AudioCodes professional services support networking devices, applications and infrastructures, allowing large
organizations and service providers to realize the potential of a high-performance multi-service network.
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.
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 limited number of original equipment manufacturers, or OEMs, and network equipment
providers, or NEPs, systems integrators and distributors. ScanSource Communications, our largest customer, accounted for 14.4% of our revenues in 2011,
13.7% of our revenues in 2012 and 17.8% of our revenues in 2013. Our top five customers accounted for 33.4% of our revenues in 2011, 31.4% of our
revenues in 2012 and 34.2% of our revenues in 2013. 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
Year Ended December 31,
2011
55.0%
14.1
23.3
7.6
100.0%
2012
52.1%
13.7
28.1
6.1
100.0%
2013
52.1%
15.0
27.2
5.7
100.0%
56
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.
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
allowance 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:
57
Statement of Operations Data:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total 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, 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,
2011
2012
2013
87.1%
12.9%
100.0%
81.3%
18.7%
100.0%
81.4%
18.6%
100.0%
28.5
2.7
41.2
58.8
20.6
27.8
5.8
54.2
4.6
0.3
4.9
(0.1)
(0.2)
4.6%
38.0
4.6
42.6
57.4
22.5
31.4
6.4
60.3
(2.9)
0.4
(2.5)
(0.4)
(0.3)
37.9
4.8
42.7
57.3
20.5
28.6
6.2
55.3
2.0
0.1
2.1
1.0
(0.0)
(3.2)%
3.1%
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues. Revenues increase 7.6% to $137.2 million in 2013 from $127.5 million in 2012. The increase in revenues was due to an increase in
revenues from our networking product line as described below.
Our revenues from products in 2013 increased by 7.8% to $111.8 million, or approximately 81% of total revenues, from $103.7 million, or 81% of
total revenues, in 2012. The increase in revenues from products was primarily attributable to the increase in our networking product line, particularly with
respect to our Session Boarder Controller product line, as well as due to the growing demand for our networking product line in the Unified Communications
market.
Our revenues from services in 2013 increased by 6.9% to $25.5 million, or approximately 19% of total revenues, from $23.8 million, or 19% of total
revenues, in 2012. The increase in revenues from services was driven by the growth in support services related to the increase in revenues from products.
Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to manufacturing activity,
technology licensing and royalty fees payable to third parties and royalties payables to the Office of the OCS. Gross profit increased to $78.7 million in 2013
from $73.2 million in 2012. Gross profit as a percentage of revenues was 57.3% in 2013, compared to 57.4% in 2012.
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Cost of revenues from products increased by 7.5% to $52.0 million in 2013 from $48.4 million in 2012. This increase is primarily attributable to an
increase in the procurement of materials, in line with the increase in revenues from products. Gross margin percentage for sales of products was
approximately 53% in both 2013 and 2012.
Cost of revenues from services increased by 10.9% to $6.6 million from $5.9 million in 2012. This increase is primarily attributable to higher
support personnel expenses associated with providing services and implementation of our products with service providers as well as enterprise customers. In
2013, the gross margin for sales of services decreased to 74% from 75% in 2012. In 2013, expenses included in cost of revenues related to stock-based
compensation were $62,000 compared to $61,000 in 2012
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries 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 $28.2 million in 2013 and $28.7 million in 2012. As a percentage of total revenues, these expenses were 20.5% in
2013 and 22.5% in 2012. Research and development expenses decreased primarily as a result of our cost reduction plan which was implemented during 2012
and reduced the number of our research and development personnel. We expect that research and development expenses will increase on an absolute dollar
basis in 2014, as a result of adding personnel in connection with our continued development of new products. In 2013, expenses included in research and
development expenses related to stock-based compensation were $408,000, compared to $430,000 in 2012. Grants recognized from the OCS were $2.8
million in 2013, compared to $2.7 million in 2012.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel,
as well as exhibition, travel and related expenses. Selling and marketing expenses decreased 1.9% in 2013 to $39.3 million from $40.0 million in 2012 and
decreased as a percentage of total revenues to 28.6% in 2013 from 31.4% in 2012. These expenses decreased on an absolute basis primarily as a result of our
cost reduction plan which was implemented during 2012. We expect that selling and marketing expenses will increase on an absolute dollar basis in 2014, as a
result of an expected increase in our sales force and marketing activities. In 2013, expenses included in selling and marketing expenses related to stock-based
compensation were $625,000 compared to $427,000 in 2012.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human
resources and general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses.
General and administrative expenses increased 2.9% to $8.5 million in 2013 from $8.2 million in 2012. As a percentage of revenues, general and
administrative expenses decreased to 6.2% in 2013 from 6.4% in 2012. In 2013, expenses included in general and administrative expenses related to stock-
based compensation were $606,000, compared to $601,000 in 2012.
Financial Income, Net. Financial income, net consists primarily of interest earned on cash and cash equivalents, marketable securities and bank
deposits, net of interest accrued on our bank loans as well as on our remaining senior convertible notes outstanding, and bank charges. Financial income, net,
in 2013 was $96,000, compared to $453,000 in 2012. The decrease in financial income, net in 2013 was primarily due to lower interest income recorded with
respect to our bank deposits, as a result of a decrease in market interest rates.
Taxes on Income. We had a net income tax benefit of $1.4 million in 2013 compared to net income tax expenses of $541,000 in 2012. The net
income tax benefit in 2013 is a result of a tax benefit of $1.8 million relating to the available net carry forward tax losses based on expectations of generating
taxable income in the foreseeable future and an increase of tax rates.
59
Equity in Losses of Affiliated Companies, Net. Equity in losses of affiliated company, net was $21,000 in 2013, compared to $354,000 in 2012. In
May 2013, we acquired certain assets of our affiliated company, Mailvision. After the closing of this acquisition, Mailvision ceased operations and, as a
result, our losses in this company decreased.
Year Ended December 31, 2012, Compared to Year Ended December 31, 2011
Revenues. Revenues decreased 18.2% to $127.5 million in 2012 from $155.8 million in 2011. The decrease in revenues was due to a decrease in
revenue from products, offset by a slight increase in revenues from services.
Our revenues from products in 2012 decreased by 24% to $103.7 million, or approximately 81% of total revenues, from $135.8 million, or 87% of
total revenues, in 2011. The decrease in revenues from products was the result of a weakness in sales in North America primarily as a result of a decline in
OEM business and lower than anticipated government sales.
Our revenues from services in 2012 increased by 19% to $23.8 million, or approximately 19% of total revenues, from $20.0 million, or 13% of total
revenues, in 2011. The increase in revenues from services was the result of an increase in our delivery of support services and professional services, mainly in
North America.
Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to manufacturing activity,
technology licensing fees payable to third parties and rent. Gross profit decreased to $73.2 million in 2012 from $91.7 million in 2011. Gross profit as a
percentage of revenues decreased to 57.4% in 2012 from 58.8% in 2011. The decrease in our gross profit percentage was primarily attributable to the decrease
in total revenues because the decrease in indirect operating expenses was insignificant compared to the decrease in total revenues.
Cost of revenues from services increased by $1.7 million, or 40%, to $5.9 million in 2012 from $4.2 million in 2011. This increase is primarily
attributable to higher support personnel expenses associated with providing services and implementations of our products with service providers as well as
enterprise customers. In 2012, services gross margin decreased to 75% from 79% in 2011.
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries 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 and rent.
Research and development expenses were $28.7 million in 2012 and $32.2 million in 2011. As a percentage of total revenues, these expenses were 22.5% in
2012 and 20.6% in 2011. Research and development expenses decreased primarily as a result of our cost reduction plan which was implemented during 2012
and reduced the number of our research and development personnel.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel,
as well as exhibition, travel and related expenses. Selling and marketing expenses decreased 7.4% in 2012 to $40.0 million from $43.2 million in 2011,
primarily due to a decrease in the number of employees and due to decrease in expenses related to stock-based compensation to employees. As a percentage
of total revenues, these expenses increased to 31.4% in 2012 from 27.8% in 2011. These expenses decreased on an absolute basis primarily as a result of our
cost reduction plan which was implemented during 2012.
60
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human
resources, general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses. General
and administrative expenses decreased 9.0% to $8.2 million in 2012 from $9.0 million in 2011. The decrease was primarily due to a decrease in payroll
related expenses and expenses related to stock-based compensation to employees. As a percentage of total revenues, general and administrative expenses
increased to 6.4% in 2012 from 5.8% in 2011.
Financial Income, Net. Financial income, net consist primarily of interest earned on cash and cash equivalents, marketable securities and bank
deposits, net of interest on our bank loans as well as on our remaining senior convertible notes outstanding, and bank charges. Financial income, net, in 2012
was $453,000, compared to $423,000 in 2011. The increase in financial income, net in 2012 was primarily due to fluctuations in the NIS/U.S. dollar exchange
rate which were partially offset by interest expenses on bank loans.
Taxes on Income. We had net income tax expenses of $541,000 in 2012, compared to $238,000 in 2011. The increase in net income tax expenses was
due to taxes paid with respect to a transfer of funds from our U.S. subsidiary which was considered a dividend distribution by the U.S. Internal Revenue
Service.
Equity in Losses of Affiliated Company, Net. Equity in losses of affiliated company, net was $354,000 in 2012, compared to $277,000 in 2011. The
increase in this amount is attributable to an increase in losses of our affiliated company.
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 may 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,
2011
2012
2013
Israeli
inflation
Rate
%
NIS
devaluation
rate
%
Israeli inflation
adjusted for
devaluation
%
2.2
1.4
1.9
7.7
(2.3)
(7.0)
(5.5)
3.7
(8.9)
61
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Topic 740, " Income Taxes", which limits the situations in which unrecognized tax benefits are offset
against a deferred tax asset for a net operating loss carryforward, similar tax loss or tax credit carry forward. ASU 2013-11 is effective for reporting periods
beginning after December 15, 2013. We intend to adopt this standard in 2014 and do not expect the adoption will have a material impact 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.
As of December 31, 2013, we had $62.2 million in cash and cash equivalents, marketable securities and bank deposits, an increase of $3.7 million
from $58.5 million at December 31, 2012. As of December 31, 2013, we were restricted with respect to using approximately $13.7 million of our cash as a
result of provisions in our loan agreements, a lease agreement and foreign exchange derivatives transactions.
Public Offering
In March 2014, we sold in a public offering 4,025,000 of our ordinary shares, including 525,000 shares sold pursuant to the exercise in full of an
over-allotment option granted to the underwriters, at a purchase price of $8.00 per share. Our net proceeds from this offering were approximately $29.7
million, after deducting underwriting commissions and other estimated offering expenses.
Senior Convertible Notes
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, 2013, 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 January 2014, we repurchased for $285,000 Notes in the principal amount of $300,000.
Bank Loans
In April and July 2008, we entered into loan agreements with two Israeli banks 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 was repayable in 20 equal quarterly payments from August 2008 through July 2013. As of
December 31, 2013, this loan had been paid in full.
In September and December 2011, we entered into another loan agreements with two Israeli banks 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%-4.35% with respect to $19.9 million of these loans. The remaining $3.9
million principal amount of these loans was required to be maintained as a compensating bank deposit that decreases as the loans are repaid. This portion of
the loans bears interest at 0.5% above interest paid with respect to 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, 2013, there was $14.5 million principal amount of these loans outstanding.
As of December 31, 2013, we were required to maintain an aggregate of $7.2 million of compensating bank deposits with respect to our bank loans.
The amount of the compensating balances we are required to keep decreases over time as we repay these loans.
62
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 and provide the banks with a lien on our assets as security with respect to their loans to us.
During 2012, we were not in compliance with some of the financial covenants contained in our loan agreements. Each of our lenders agreed to waive
compliance with these covenants, subject to compliance with revised financial covenants during the remainder of 2012 and 2013, an increase in the interest
rate with respect to one of the loans and an increase in required compensating balances. As of December 31, 2012 and 2013, we were in compliance with the
financial covenants in our loan agreements. If we are unable to comply with our financial covenants in the future, our lenders could require us to repay all of
our outstanding loans.
Share Repurchase Program
In October 2011, our Board of Directors 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. In 2011 and 2012, we
repurchased a total of 3,964,351 ordinary shares at a total cost of $10.7 million. As of October 2012, the authorized share repurchase program was completed.
Cash from Operating Activities
Our operating activities provided cash in the amount of $14.1 million in 2013, primarily due to our net income of $4.2 million, a decrease of $3.0
million in inventories and an increase of $2.6 million in other payables and accrued expenses, and $3.1 million in deferred revenues, as well as non-cash
charges of $3.2 million for depreciation and amortization and $1.7 million for stock-based compensation expenses, offset in part by an increase of $2.3
million in trade receivables and $1.9 million in deferred tax assets. The deferred tax assets increased as a result of an increase in our net income tax benefit in
2013, relating to the available net carry forward tax losses based on expectations of generating taxable income in the foreseeable future. Our deferred
revenues increased due to the increase in the revenues from services and our trade receivables increased primarily because of our higher sales volume in 2013,
compared to 2012.
Our operating activities provided cash in the amount of $3.0 million in 2012, primarily due to a decrease of $6.5 million in trade receivables and $3.6
million in inventories, as well as non–cash charges of $2.9 million for depreciation and amortization and $1.5 million for stock-based compensation expenses,
offset in part by our net loss of $4.2 million and decreases of $5.5 million in trade payables and $3.1 million in other payables and accrued expenses. Our
trade receivables and our inventories decreased primarily because of our lower sales volume in 2012, compared to 2011.
Our operating activities used 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.
Cash from Investing Activities
In 2013, our investing activities provided cash in the amount of $8.6 million, primarily due to the proceeds from marketable securities of $7.6
million and from long-term bank deposits of $2.6 million, as well as from a decrease in short-term deposits, net of $1.2 million, offset in part by capital
expenditures of $1.6 million and an investment in an affiliated company of $1.2 million.
63
In 2012, our investing activities provided cash in the amount of $1.4 million, primarily due to the net proceeds of $3.7 million from short-term bank
deposits, offset in part by $2.0 million in purchases of property and equipment.
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.
Cash from Financing Activities
In 2013, we used $7.2 million of cash in financing activities primarily as a result of $8.4 million used for repayment of bank loans offset, in part, by
$1.8 million in proceeds from issuance of shares upon exercise of stock options and purchases of shares under our employee stock purchase plan.
In 2012, we used $17.4 million of cash in financing activities as a result of $10.2 million used for repayment of bank loans and $6.9 million used to
repurchase our shares.
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
$3.8 million to repurchase our shares and $6.6 million to repay 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.
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 routers 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, 2013, 248 of our employees were engaged primarily in research and
development on a full-time basis.
Our research and development expenses were $28.2 million in 2013, compared to $28.7 million in 2012. From time to time we have received
royalty-bearing grants from 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, 2013, we had obtained grants from the OCS aggregating $27.4 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. As of December 31, 2013, we have contingent obligation to pay royalties in the amount of approximately $34 million.
In March 2014, the OCS informed us that it had approved, in principle, our application to participate in a special three year OCS program. If we
participate in this program, the amount of the grants that we would receive each year from the OCS would increase. We are reviewing the terms of this
approval. If we decided to accept the proposed terms, the program is expected to commence in 2014.
64
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.
While the growth in demand for VoIP services helped create demand for our products and services, there is an ongoing transition in network
architectures that could adversely affect the demand for our products. The growth of services over Internet Protocol (IP) and data usage services over legacy
voice using TDM is driving the transition in network architecture. The demand for our media gateway products is based on the need to interconnect VoIP
networks with traditional non-packet based networks. The demand for our Enterprise Session Border Control (ESBC) products is based on the need to
interconnect LAN and WAN voice over packet networks with each other. The migration from traditional TDM networks to pure IP networks is gradually
increasing. This could positively affect the demand for our ESBC products, but negatively affect the demand for our media gateway products.
We are experiencing decreasing demand for our technology products from customers who previously manufactured network equipment products
based on our enabling technology. These customers are migrating from AudioCodes’ enabling technology products to diverse integrated comprehensive
solutions and, as a result, the demand for our technology products is being adversely affected.
We continue 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 products very close to the time, if not simultaneously with the time, they plan to sell their products. 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 which restricts 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.
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2013, our contractual obligations were as follows (dollars in thousands):
LESS THAN
1 YEAR
PAYMENTS DUE BY PERIOD
1-3
YEARS
Senior convertible notes
Bank loans
Rent and lease commitments, net (1)
Accrued severance pay (2)
Uncertain tax positions (3)
Payment to MailVision
Office of the Chief Scientist
Other commitments
$
- $
8,771
12,924
-
-
446
-
-
353 $
4,686
6,386
-
-
228
-
14,357
65
3-5
YEARS
MORE THAN
5 YEARS
TOTAL
- $
1,020
12,675
-
-
-
-
-
- $
-
36,032
-
-
-
34,034
-
353
14,477
68
296
402
674
34,034
14,357
(1) Our obligation for rent and lease commitments as of December 31, 2013 was approximately $69.3 million. We have rent and lease income in the amount
of approximately $1,297,000, leaving a net obligation of approximately $68.0 million.
(2) Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2013 was $19.8 million. This obligation is payable only
upon termination, retirement or death of the respective employee. We have funded $19.5 million through deposits into severance pay funds, leaving a net
obligation of approximately $296,000.
(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 15f in our Consolidated Financial Statements for further information regarding
our liability under ASC 740.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to our directors, senior executive officers and key employees at March 20, 2014:
Age
57
61
51
48
49
56
55
46
43
44
45
47
58
54
58
55
Position
Chairman of the Board of Directors
President, Chief Executive Officer and Director
Vice President of Finance and Chief Financial Officer
Chief Operating Officer and Head of Global Sales
Vice President, Research and Development
Chief Strategy Officer
Vice President, Operations
Vice President, Products
Vice President, Marketing
Vice President, Human Resources
Vice President, Global Services
Vice President Business Development
Director
Director
Director
Director
Name
Stanley B. Stern
Shabtai Adlersberg
Guy Avidan
Lior Aldema
Yair Hevdeli
Jeffrey Kahn
Eyal Frishberg
Yehuda Herscovici
Nimrod Borovsky
Tal Dor
Ofer Nimtsovich
Shaul Weissman
Joseph Tenne(1)(2)(3)
Dr. Eyal Kishon(1)(2)(3)(4)
Doron Nevo(1)(2)(3)(4)
Zehava Simon
(1) Member of Audit Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
(4) Outside Director
66
Stanley Stern became a director and our Chairman of the Board in December 2012. From 2004 until 2013 Mr. Stern served in various positions at
Oppenheimer & Co., including as a Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. Since 2013, Mr. Stern has
served as the president of Alnitak Capital, a private merchant bank and strategic advisory firm. From 2002 until 2004, he was a Managing Director and the
Head of Investment Banking at C.E. Unterberg, Towbin where he focused on technology and defense related sectors. From January 2000 until January 2002,
Mr. Stern was the President of STI Ventures Advisory USA Inc., a venture capital firm focusing on technology investments. Prior to his term at STI Ventures,
he spent over 20 years at CIBC Oppenheimer in the investment banking department and started the technology banking group in 1990. From 2002 until 2012,
Mr. Stern served as the Chairman of the Board of Directors of Tucows, Inc., an internet service provider that is public traded company on AMEX, and, from
2012 until 2013, he served as a Director of Tucows. From 2012 until February 2014, he served as a director of Given Imaging Ltd., a manufacturer of medical
devices, until Given Imaging was acquired by another company. From 2004 until 2009, he served as a director of Odimo Inc. (DBA Diamond.com), an online
jewelry vendor. From 2005 until its sale in 2011, he served as a director and Chairman of the Audit Committee of Fundtech Ltd. Mr. Stern received his MBA
from Harvard Business School and a BS from Queens College.
Shabtai Adlersberg co-founded AudioCodes in 1993, and has served as our President, Chief Executive Officer and a director since inception. Until
December 2012, Mr. Adlersberg also served as the Chairman of our Board of Directors. 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 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.
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 (“COO) since January 2010, and as our COO and Head of Global Sales since April 2012.
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.
Yair Hevdeli joined AudioCodes in July 2013 as Vice President, Research and Development. From 2003 until 2013, Mr. Hevdeli served in various
executive positions at Veraz/Dialogic, including Global Vice President, Research and Development and, most recently, as Senior Vice President, Research and
Development and General Manager, Bandwidth Optimization BU. From 1998 until 2003, Mr. Hevdeli worked for ECI Ltd, where he held various technical
and management positions. Mr. Hevdeli has over 20 years of experience leading large multidisciplinary global research and development teams in the telecom
industry. Mr. Hevdeli graduated in 1995 with an M.B.A. in Business Management from Bar Ilan University, Israel and in 1992 received his B.A. in Computer
Science and Economics, from Bar Ilan University.
67
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.
Yehuda Herscovici has served as our Vice President, Products, overlooking Product Management and Product Marketing since 2010. From 2003 till
2010, Mr. Herscovici served as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr. Herscovici served as our Vice President, Advanced
Products. From 2000 to 2001, Mr. Herscovici served as our Director of Advanced Technologies. From 1994 to 1998 and during 1999, Mr. Herscovici 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. Herscovici was engaged in developing
various wireless communication algorithms at Comsys, a telecommunications company. Mr. Herscovici 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.
Nimrod Borovsky has served as our Vice President, Marketing since October 2013 and heads the strategic global marketing and business
development efforts with AudioCodes partners and channels. From January 2013 until October 2013, Mr. Borovsky served as our Vice President of Unified
Communications . Mr. Borovsky has been with AudioCodes since 2005 and has served in numerous product, marketing and business development positions
with us. He has worked in telecom and VoIP markets for approximately 20 years. Prior to joining AudioCodes, Mr. Borovsky spent eight years at VocalTec
Communications where he served in several positions in research and development, product management and marketing. Mr. Borovsky holds a B.Sc. degree
in Electrical Engineering from the New Jersey Institute of Technology, and a M.Sc. degree in Biomedical engineering from Tel Aviv University.
Ofer Nimtsovich joined AudioCodes in March 2013 as Vice President, Global Services. From 2000 until February 2013, Mr. Nimtsovich served in
various executive positions at Retalix, including Chief Information Officer, Executive Vice President of Global Services and, most recently as the head of the
Software as a Service division of Retalix. From 1994 till 2000, Mr. Nimtsovich worked for Scitex Corporation Ltd., where he held various technical and
management positions, including as the Global Microsoft Infrastructure manager for Scitex. Mr. Nimtsovich graduated from the Business Administration
College in Israel in 1997 with a B.A. in Business administration and marketing, and also holds an MBA degree from the University of Texas.
Shaul Weissman has served as our Vice President, Business Development since January 2014. Mr. Weissman has been with AudioCodes since 1994,
serving in various positions. From 2007 until 2014, Mr. Weissman served as our Residential Business Line Manager. In addition Mr. Weissman has served as
our Vice President and Manager of our chip business line since 2006. From 2001 until 2005, Mr. Weissman served as our Support and Professional Services
Manager for our chip business line; and from 1994 until 2000 he served as a digital signal processing engineer. Prior to joining AudioCodes, Mr. Weissman
served as Captain in the Israeli Air Force. Mr. Weissman holds an M.Sc. and a B.Sc., from the Technion, both in the area of telecommunications.
68
Joseph Tenne has served as one of our directors since June 2003. Since September 2013, Mr. Tenne has served as a director at Enzymotec Ltd., an
Israeli company listed on NASDAQ, which develops and manufactures nutritional ingredients and medical foods based on proprietary technologies. From
March 2005 until April 2013, Mr. Tenne served as 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. From January 2006 until April 2013, Mr. Tenne 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. From 1991 to 1992, Dr. Kishon was a Research Fellow in
the Multimedia Department of IBM Science & Technology. From 1989 to 1991, Dr. Kishon worked in the Robotics Research Department of AT&T Bell
Laboratories. Dr. Kishon holds a B.A. in Computer Science from the Technion - Israel Institute of Technology and an M.Sc. and a Ph.D. in Computer Science
from New York University.
Doron Nevo has served as one of our directors since 2000. Mr. Nevo is President and CEO of KiloLambda Technologies Ltd., an optical 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.
Zehava Simon was appointed a director in February 2014. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until September
2013, most recently as Vice President, Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC
Software in Israel. Prior to joining BMC Software, Ms. Simon held a number of executive positions at Intel Corporation. In her last position at Intel, she led
Finance and Operations and Business Development for Intel in Israel. Ms. Simon has served as a board member of various companies, including Tower
Semiconductor from 1999-2004, M-Systems from 2005-2006 and InSightec from 2005-2012. Ms. Simon holds a bachelor’s degree in social sciences from the
Hebrew University, a law degree (LL.B.) from the Interdisciplinary Center in Herzlia and a master's degree in business and management from Boston
University.
69
B.
COMPENSATION
The aggregate direct remuneration paid during the year ended December 31, 2013 to the 15 persons who served in the capacity of director, senior
executive officer or key employee during 2013 was approximately $3.1 million, including approximately $389,000 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.
We currently pay each of our non-employee directors an annual fee of $37,000 and a fee of $1,100 for each board meeting or committee meeting
attended. In the event that a director attends a meeting by phone or a resolution is adopted by written consent, then the fee is reduced to 60% and 50% of the
regular meeting fee, respectively. Such fees are in accordance with the rates prescribed by the Israeli Companies Law Regulation for fees of outside directors.
Only directors who are not officers receive compensation for serving as directors. Our director, Mr. Adlersberg, who also serves as our President and Chief
Executive Officer, does not receive board meeting fees. Instead, he receives compensation in accordance with the terms of his employment agreement, a copy
of which is filed as an exhibit to this Annual Report.
Upon election or reelection to the board of directors for a term of three years, each non-employee director is granted options to purchase 22,500
ordinary shares, of which 7,500 vest on each of the first, second and third anniversary of the grant date. Each grant is subject to the approval of the
compensation committee, board of directors and shareholders. All options to directors are granted at an exercise price equal to 100% of the closing price of
the ordinary shares on the NASDAQ Global Select Market on the date of grant.
Options to purchase our ordinary shares granted under our 2008 Equity Incentive Plan 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 seven years from the date of grant. The options generally vest in four
equal annual installments, commencing one year from the date of grant.
A summary of our stock option and restricted share units (“RSUs”) activity and related information for the years ended December 31, 2011, 2012
and 2013 for the persons who served in the capacity of director, senior executive or key employee officer during those years is as follows:
Number
of
Options and
RSUs
2011
Weighted
Average
Exercise
Price
Number
of
Options and
RSUs
2012
Weighted
Average
Exercise
Price
2013
Number
of
Options and
RSUs
Weighted
Average
Exercise
Price
Outstanding at the beginning of
the year
Granted
Cancelled
Exercised
1,710,620 $
6.07
1,314,449 $
3.94 (*)
1,548,496 $
349,601 $
(577,500)
(168,272) $
1.76
0.66
396,835 $
(150,000)
(56,788) $
2.20
0.56
594,702 $
(160,000)
(280,285) $
Outstanding at the end of the year
1,314,449 $
3.94
1,504,496 $
3.60
1,702,913 $
3.66
4.13
1.95
3.71
(*) Including outstanding options granted to new executive officer in previous years, prior to joining management.
70
As of December 31, 2013, options to purchase 652,344 ordinary shares were exercisable by the 14 persons who served as an officer or director
during 2013 at an average exercise price of $4.09 per share. As of December 31, 2013, the 14 persons who served as an officer, director or key employee
during 2013 held an aggregate of 166,541 RSUs.
C.
BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the
Companies Law, relating to such matters as outside directors, the audit committee, the internal auditor and approvals of interested party transactions. These
matters are in addition to the ongoing listing conditions of the NASDAQ Global Select Market and other relevant provisions of U.S. securities laws. Under
the NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ
requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further
information, see Item 16G – “Corporate Governance.”
Independent Directors
Under the 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, Zehava Simon 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.
71
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.
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 and compensation committee
(including one outside director serving as the chair of the audit committee and one outside director serving as the chair of the compensation 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.
72
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, with Doron Nevo serving as the chairman of the audit committee. 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 rules, NASDAQ rules and provisions of
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.
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, with Doron Nevo serving as the chairman of the Nominating Committee. All
members of the Nominating Committee are independent under the applicable NASDAQ rules and provisions of the Companies Law.
73
Compensation Committee
Under the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee
must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the compensation committee),
and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. Similar to the rules
that apply to the audit committee, the compensation 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 primary income is dependent on a controlling shareholder, and may not
include a controlling shareholder or any of its relatives. Individuals who are not permitted to be compensation committee members may not participate in the
committee's meetings other than to present a particular issue; provided, however, that an employee that 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.
The compensation committee's duties include recommending to the board of directors a compensation policy for executives and monitor its
implementation, approve compensation terms of executive officers, directors and employees affiliated with controlling shareholders, make recommendations
to the board of directors regarding the issuance of equity incentive awards under our equity incentive plan and exempt certain compensation arrangements
from the requirement to obtain shareholder approval under the Companies Law. The compensation committee meets at least twice a year, with further
meetings to occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee or its chairperson.
The compensation committee consists of: Dr. Eyal Kishon, Doron Nevo and Joseph Tenne, with Doron Nevo serving as the chairman of the
compensation committee. All members of the compensation committee are independent under the applicable Securities and Exchange Commission rules,
NASDAQ rules and provisions of 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 his or her current term of office are as follows:
Zehava Simon
Class I
2014
Joseph Tenne
Class II
2014
Shabtai Adlersberg
Class III
2015
Stanley B. Stern
Class III
2015
74
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. Dr. Kishon’s term ends in 2014 and Mr. Nevo’s term ends in 2015.
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.
EMPLOYEES
We had the following number of employees as of December 31, 2011, 2012 and 2013 in the areas set forth in the table below:
Research and development
Sales and marketing, technical service and support
Operations
Management and administration
Our employees were located in the following areas as of December 31, 2011, 2012 and 2013.
Israel
United States
Europe
Far East
Latin America
2011
As of December 31,
2012
2013
266
238
88
42
634
225
231
83
40
579
2011
As of December 31,
2012
2013
402
135
28
55
14
634
352
118
28
69
12
579
248
248
84
37
617
382
121
31
69
14
617
The increase in the number of employees in 2013 was primarily attributable to the acquisition of certain assets of MailVision, pursuant to which we
added 22 employees. The decrease in the number of employees in 2012 was primarily attributable to our plan to restructure our operations in order to better
align our resources and assets to our core networking and enterprise telephony businesses.
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 6.75% to 18.75% of wages up to specified wage levels, of which the employee contributes approximately 55% and the employer contributes
approximately 45%.
75
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 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 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.
D.
SHARE OWNERSHIP
The following table sets forth the share ownership and outstanding number of options of our directors and officers as of March 20, 2014.
Shabtai Adlersberg
Stanley B. Stern
Guy Avidan
Lior Aldema
Yair Hevdeli
Jeffrey Kahn
Eyal Frishberg
Yehuda Herscovici
Nimrod Borovsky
Tal Dor
Ofer Nimtsovich
Shaul Weissman
Joseph Tenne
Dr. Eyal Kishon
Doron Nevo
Zehava Simon
* Less than one percent.
Name
Total Shares
Beneficially Percentage of
Owned
Ordinary Shares
Number of
Options
4,887,369
*
*
*
11.3%
332,685
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
76
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 20, 2014.
Number of
Options
Grant Date
Exercise
Price
Exercised
Cancelled
Vesting
Expiration Date
120,808
123,456
122,201
113,876
116,031
December 14, 2009
December 14, 2010
December 14, 2011
December 14, 2012
December 14, 2013
$
$
$
$
$
2.57
5.83
3.66
3.02
6.69
-
-
-
-
-
-
-
-
-
-
4 years
4 years
4 years
4 years
4 years
December 14, 2016
December 14, 2017
December 14, 2018
December 14, 2019
December 14, 2020
The following table sets forth information with respect to the RSUs granted to Mr. Adlersberg as of March 20, 2014. 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
37,959
38,671
Employee Share Plans
Grant Date
December 14, 2009
December 14, 2010
December 14, 2011
December 14, 2012
December 14, 2013
Issued
40,269
33,436
22,912
11,867
2,417
We have Employee Share Purchase Plans for the sale of shares to our employees and an Equity Incentive Plan for the granting of options, RSUs and
restricted shares to our employees, officers, directors and consultants. Our 2008 Equity Incentive Plan is 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 Option Plans
2008 Equity Incentive Plan. We 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 stock-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 is available for grant under the
2008 Plan is 6,009,122. This number is reduced by one share for each equity grant we make under the 2008 Plan. During 2013, options to purchase 817,531
ordinary shares and 175,841 restricted share units were granted under the 2008 Plan. As of December 31, 2013, 1,720,232 ordinary shares remained available
for grant under the 2008 Plan. As of December 31, 2013 there are 3,193,543 options to purchase ordinary shares and 272,461 restricted share units
outstanding under the plan.
77
The Israeli Tax Authority approved the 2008 Plan under the capital gains tax track of Section 102. Based on Israeli law currently in effect and the
election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the
underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers
and directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying ordinary shares are sold, and (ii) subject to capital
gains tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares’ market value at the date of grant, the 25%
capital gains tax rate will apply only with respect to capital gains in excess of the underlying shares’ market value at the date of grant and the remaining
capital gains will be taxed at the grantee’s regular tax rate. We may not recognize a tax benefit pertaining to the employees’ restricted shares, restricted share
units and options for tax purposes except in the events described above under which the gain is taxed at the grantee’s regular tax rate.
Restricted shares, restricted share units and options granted under the 2008 Plan will generally vest over four years from the grant date. If the
employment of an employee is terminated for any reason, the employee (or in the case of death, the designated beneficiary) may exercise his or her vested
options within ninety days of the date of termination (or within twelve months of the date of termination in the case of death or disability) and shall be entitled
to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date
his or her employment terminates. Directors are generally eligible to exercise his or her vested options within twelve months from the date the director ceases
to serve on the board of directors.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the
options are based on the fair value of the ordinary shares at the time of grant as determined by our board of directors. The current practice of our board of
directors is to grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
To our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date result in a change in control of AudioCodes. The following table sets forth, as of
March 20, 2014 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 Senvest Management, LLC(3)
All directors and senior executive officers as a group (16 persons) (4)
Amount Owned Percent of Class
5,220,054
3,924,002
2,464,126
5,517,760
12.1%
9.1%
5.7%
12.8%
78
(1) Includes options to purchase 332,685 shares, exercisable within 60 days of March 20, 2014.
(2) The information is derived from a statement on Schedule 13G/A, dated February 10, 2014 of Leon Bialik filed with the Securities and Exchange
Commission.
(3) The information is derived from a statement on Schedule 13G/A, dated February 13, 2014, of Rima Senvest Management, LLC and Richard Mashaal
filed with the Securities and Exchange Commission.
(4) Includes 627,266 ordinary shares which may be purchased pursuant to options exercisable within sixty days following March 20, 2014 and 2,500
ordinary shares issuable pursuant to restricted share units that vest within 60 days of March 20, 2014..
Mr. Adlersberg held 13.4% of our ordinary shares as of December 31, 2013 as compared to 14.4% of our ordinary shares as of December 31, 2012
and 12.9% of our ordinary shares as of December 31, 2011.
Mr. Bialik held 10.1% of our ordinary shares as of December 31, 2013 as compared to 10.7% of our ordinary shares as of December 31, 2012 and
10.0% of our ordinary shares as of December 31, 2011.
Rima Management, LLC held 6.4% of our ordinary shares as of December 31, 2013 as compared to 10.5% of our ordinary shares as of December
31, 2012 and 9.5% of our ordinary shares as of December 31, 2011.
As of March 20, 2014, there were approximately 19 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
In May 2013, we acquired certain assets of MailVision Ltd., an Israeli company which develops, markets and licenses VoIP solutions for mobile, PC
and tablet devices for telecom operators and service providers. As of the date of the acquisition, we owned 29.2% of the shares of MailVision. The
consideration for the purchase of the MailVision assets included: (i) $233,000 to be payable 12 months following the closing date, and (ii) an additional earn
out payment subject to the achievement of a certain level of net revenues from the sale of MailVision’s products. The purchase price can be made, at our
discretion, in either cash or our ordinary shares. As additional consideration for the transaction, we waived repayment of outstanding loans made by us to
MailVision and assumed specified liabilities of MailVision in the aggregate amount of approximately $2.4 million. Under certain limited circumstances, if we
were to sell the acquired assets and assumed liabilities of MailVision to a third party during a period of 12 months following the closing date (“Option
Period”), the proceeds in excess of a specified amount would be payable to the sellers. In addition, if the purchase price offered by a third party during the
Option Period exceeds a specified amount, subject to a number of conditions, we would be required to sell the acquired assets and assumed liabilities. If this
were to occur, we would not be required to pay the earn out amounts. We have no current intention to sell our MailVision business and believe that, even if a
sale were to occur during the Option Period, none of the proceeds would be required to be paid to the sellers.
79
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, 2013, except as otherwise disclosed in this Annual Report.
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 TASE 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
2013
2012
2011
2010
2009
Price Per Share
High
Low
$
$
$
$
$
7.62 $
4.25 $
8.07 $
6.51 $
3.06 $
3.02
1.20
2.28
2.31
0.92
80
Calendar Period
2014
First quarter (through March 20, 2014)
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
Calendar Month
2014
February
January
2013
December
November
October
September
Price Per Share
High
Low
9.12 $
6.60
7.62 $
7.34 $
4.60 $
4.75 $
3.35 $
3.20 $
2.77 $
4.25 $
Price Per Share
High
Low
9.12 $
8.07 $
7.40 $
6.93 $
7.62 $
7.34 $
5.46
4.29
3.02
3.20
2.18
1.20
1.70
2.58
7.00
6.60
6.15
5.46
5.90
6.04
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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, 2013, the exchange rate was equal to approximately NIS 3.471 per
U.S. $1.00.
81
Calendar Year
2013
2012
2011
2010
2009
Calendar Period
2014
Price Per Share
High
Low
NIS
NIS
NIS
NIS
NIS
26.48 NIS
15.99 NIS
29.51 NIS
23.25 NIS
11.55 NIS
11.37
5.44
8.65
9.20
4.26
Price Per Share
First quarter (through March 20, 2014)
NIS
32.24 NIS
23.40
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
Calendar Month
2014
February
January
2013
December
November
October
September
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
26.48 NIS
25.47 NIS
16.74 NIS
18.38 NIS
12.42 NIS
11.49 NIS
10.48 NIS
15.99 NIS
19.38
15.31
11.64
11.37
8.43
5.44
6.60
9.85
Price Per Share
High
Low
NIS
NIS
31.40 NIS
27.83 NIS
24.79
23.40
NIS
NIS
NIS
NIS
25.60 NIS
24.43 NIS
26.48 NIS
25.47 NIS
21.58
19.38
20.87
21.75
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.
82
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes
We were incorporated in 1992 under the laws of the State of Israel. Our registration number with the Israeli Registrar of Companies is 520044132.
Our objects and purposes, set forth in Section 2 of our memorandum of association, are:
·
·
·
·
to plan, develop and market voice signal systems;
to purchase, import, market and wholesale and retail distribute, in Israel and abroad, consumption goods and accompanying products;
to serve as representatives of bodies, entrepreneurs and companies from Israel and abroad with respect to their activities in Israel and abroad; and
to carry out any activity as determined by the lawful management.
Share Capital
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000
preferred shares, nominal value NIS 0.01 per share. As of March 20, 2014, we had 43,199,474 ordinary shares outstanding (which does not include
11,356,707 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.
83
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.
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.
84
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless
otherwise provided by the articles of association, by a resolution approved by the holders of 75% voting power represented at the meeting in person or by
proxy and voting thereon, subject to the consent in writing of the holders of 75% of the issued shares of that class.
The provisions of our articles of association relating to general meetings also apply to any separate general meeting of the holders of the shares of a
particular class, except that two or more members holding not less than 75% of the issued shares of that class must be present in person or by proxy at that
separate general meeting for a quorum to exist.
Unless otherwise provided by our articles of association, the increase of an authorized class of shares, or the issuance of additional shares thereof out
of the authorized and unissued share capital, shall not be deemed to modify or abrogate the rights attached to previously issued shares of that class or of any
other class.
Shareholders Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in
Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special
shareholders meeting at the request of:
·
·
·
at least two directors;
at least one-quarter of the directors in office; or
one or more shareholders who hold at least 5% of the outstanding share capital and at least 1% of the voting rights, or one or more shareholders who
hold at least 5% of the outstanding voting rights.
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
Notice of General Meetings; Omission to Give Notice
The provisions of the Companies Law and the related regulations override the provisions of our articles of association, and provide for notice of a
meeting of shareholders to be sent to each registered shareholder at least 21 days or 35 days in advance of the meeting depending on the items included in the
meeting agenda. Notice of a meeting of shareholders must also be published in two Israeli newspapers at least five days prior to the record date for the
meeting.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed
resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and
telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
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.
85
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
Fiduciary duties. The Companies Law codifies the fiduciary duties that office holders, which under the Companies Law includes our directors and
executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, including to avoid any conflict of interest
between the office holder’s position in the company and personal affairs, and prohibits any competition with the company or the exploitation of any business
opportunity of the company in order to receive a personal advantage for himself or herself or for others. This duty also requires an office holder to reveal 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 as an office holder.
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 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 duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ 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.
Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or
she may have and all related material information or documents known to him or her, in connection with any existing or proposed transaction by the
company. “Personal interest,” as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including
a personal interest of his relative or of a corporation in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of
the voting rights, a director or general manager, or in which he or she 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. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary
transaction.” The Companies Law defines an “extraordinary transaction” as a transaction that is not in the ordinary course of business, not on market terms or
that is likely to have a material impact on the company’s profitability, assets or liabilities.
86
Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest
requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. Our articles of association do
not provide otherwise. The transaction may not be approved if it is adverse to our 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 compensation committee and the board of
directors are required, except if the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not
a director, in which case the approval of the compensation committee is sufficient. Exculpation, indemnification, insurance or compensation of a director or
the Chief Executive Officer also requires shareholder approval.
A 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
attend that meeting or vote on that 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 chair 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.
Shareholders
The Companies Law imposes on a controlling shareholder of a public company the same disclosure requirements described above as it imposes on
an office holder. For this purpose, a “controlling shareholder” is any shareholder who has the ability to direct the company’s actions, including any
shareholder holding 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.
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.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the terms of compensation or
employment 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.
Shareholder 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 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 extend for more than three years, except that in the case of 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 compensation
for employment or service, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a
period longer than three years is reasonable under the circumstances.
87
Compensation of Executive Officers and Directors; Executive Compensation Policy
In accordance with the Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is
to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed
by the Companies Law. In accordance with the Companies Law, the policy must be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation
policy. 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 other than our controlling shareholders or shareholders who
have a personal interest in the adoption of the compensation policy; or
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the
compensation policy does not exceed 2% of the aggregate voting rights of our company.
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the
approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our
executive compensation policy, the arrangement may only be approved by the compensation committee and the board of directors for special reasons to be
noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to
an existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the
compensation committee is sufficient.
Arrangements regarding the compensation of the Chief Executive Officer and directors require the approval of the compensation committee, the
board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved
without approval of the shareholders.
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:
·
·
·
·
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.
88
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.
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:
89
· 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;
·
reasonable legal costs, including attorney’s fees, expended by an office holder as a result of:
–
an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or
proceeding concludes without the filing of an indictment against the office holder, and either:
o
o
no financial liability was imposed on the office holder in lieu of criminal proceedings, or
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:
–
–
–
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.
o
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.
90
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, plus an additional $1 million in connection with a waiver granted by the bank that is described below. The additional $1 million of
compensating balance was to stay in place until such time as we are in compliance with the original covenants. As of December 31, 2013, this compensation
balance was released. 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 plus 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, plus an additional $1 million in connection with a waiver granted by the bank that is described below. The additional $1 million of
compensating balance was to stay in place until such time as we are in compliance with the original covenants. As of December 31, 2013, this compensation
balance was released. 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 plus 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, subject to reduction as this portion of the loan is repaid. This $3.9 million portion of the 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 December 2016.
As of December 31, 2012, the Bank Mizrahi loans bear interest at LIBOR plus 4.35% with respect to $935,000 of the loans. According to the loan
agreement, we are required to maintain a $3.1 million compensating balance as a bank deposit. This $3.1 million portion of the loan bears interest at 1.25%
above the bank deposit interest rate and reduces the compensating balance as it is repaid.
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The other terms of the loan with Bank Leumi and Bank Mizrahi are similar to the loan agreement with First International Bank described in the first
paragraph of this section. Bank Leumi, Bank Mizrahi and First International Bank share the lien on our assets.
During 2012, we were not in compliance with some of the financial covenants contained in our loan agreements. Each of Bank Leumi, Bank Mizrahi
and First International Bank agreed to waive compliance with these covenants, subject to compliance with revised financial covenants during the remainder of
2012 and 2013, an increase in the interest rate with respect to one of the loans and an increase in required compensating balances. As of December 31, 2013,
we were in compliance with the covenants in our loan agreements. If we are unable to comply with our revised financial covenants, our lenders could require
us to repay all of our outstanding loans.
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 and Government Programs
The following is a brief summary of the material Israeli income tax laws applicable to us, and certain Israeli Government programs that benefit us.
This section also contains a discussion of material Israeli income tax consequences concerning the ownership and disposition of our ordinary shares. This
summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances
or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who
are subject to special tax regimes not covered in this discussion. Several parts of this discussion are based on new tax legislation that has not yet been subject
to judicial or administrative interpretation.
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General Corporate Tax Structure in Israel
Israeli companies were generally subject to corporate tax at the rate of 25% of their taxable income in 2013 and 2012, and are subject to corporate
tax at the rate of 26.5% of their taxable income in 2014 and thereafter pursuant to a recent amendment adopted in July 2013. However, the effective tax rate
payable by a company that qualifies as an Industrial Company that derives income from an Approved Enterprise, a Preferred Enterprise or a Beneficiary
Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing corporate tax rate.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for
capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
The Investment Law was significantly amended effective April 1, 2005 (the “2005 Amendment”), and further amended as of January 1, 2011 (the
“2011 Amendment”). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by
the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 2011
Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011
Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to
enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and have the benefits of the 2011
Amendment apply.
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an
“Approved Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval
from the Investment Center of the Israeli Ministry of Industry, Trade and Labor, or the Investment Center. Each certificate of approval for an Approved
Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical
characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel and certain tax benefits under the “Grant Track” or an
alternative package of tax benefits under the “Alternative Track”. The tax benefits from any certificate of approval relate only to taxable profits attributable to
the specific Approved Enterprise. Income derived from activity that is not approved by the Investment Center or not integral to the activity of the Approved
Enterprise does not enjoy tax benefits.
The tax benefits include a tax exemption for at least the first two years of the benefit period (depending on the geographic location of the Approved
Enterprise facility within Israel) and the taxation of income generated from an Approved Enterprise at a reduced corporate tax rate of up to 25% for the
remainder of the benefit period. The benefit period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates
taxable income. The benefit period is limited to 12 years from the operational year as determined by the Investment Center or 14 years from the start of the
tax year in which approval of the Approved Enterprise is obtained, whichever is earlier. This limitation does not apply to the exemption period under the
Approved Enterprise status.
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A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors Company, or a FIC,
which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as
the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital,
that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company qualifies as a FIC is made on an
annual basis. A company that qualifies as a FIC and has an Approved Enterprise program is eligible for an extended ten-year benefit period. As specified
above, depending on the geographic location of the Approved Enterprise within Israel, income derived from the Approved Enterprise program may be exempt
from tax on its undistributed income for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefit period.
The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20%
if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.
If a company elects the Alternative Track and distributes a dividend out of income derived from the Approved Enterprise during the tax exemption
period, such dividend will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had the company
not elected the alternative package of benefits. This rate is generally 10%-25%, depending on the percentage of the company’s shares held by foreign
shareholders. The dividend recipient is subject to withholdings of tax at the source by the company at the reduced rate applicable to dividends from Approved
Enterprises, which is 15% if the dividend is distributed during the tax exemption period or within 12 years after the period. This limitation does not apply to
an FIC.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included
in an Approved Enterprise program during the first five years in which the equipment is used.
The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and
the criteria in the specific certificate of approval. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as
adjusted by the Israeli consumer price index, and interest.
Our production facilities in Israel have been granted the status of an Approved Enterprise in accordance with the Investment Law under four separate
investment programs. In accordance with the provisions of the Investment Law, we have elected the Alternative Track.
Therefore, our 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). As noted above, the benefit period is limited to 12
years from the operational year as determined by the Investment Center or 14 years from the start of the tax year in which the applicable approval of the
Approved Enterprise was obtained, whichever is earlier. This limitation does not apply to the exemption period under the Approved Enterprise status.
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment changed certain provisions of the Investment Law. As a result of the 2005 Amendment, a company was no longer obliged to
obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Track, and therefore generally there was no
need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking cash grants). Rather, the
Company may claim the tax benefits offered by the Investment Law directly in its tax returns by notifying the Israeli Tax Authority within 12 months of the
end of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. Companies are also granted the right to approach
the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005 Amendment.
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The 2005 Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not
apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval
that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the
date of such approval.
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 to specific markets with a population of at least 12 million (following an amendment which became
effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the
future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Beneficiary Enterprise”). In order to receive the tax
benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions, including exceeding a minimum investment
amount specified in the Investment 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 its Beneficiary Enterprise (the “Year of Election”).
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depend on, among other things,
the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period
for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten
years, depending on the geographic location of the Beneficiary Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder
of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits
under the 2005 Amendment which pays a dividend out of income derived by its Beneficiary Enterprise during the tax exemption period will be subject to
corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a
Beneficiary Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of
the Year of Election.
The benefits available to a Beneficiary Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a
company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest,
or other monetary penalties.
We have elected 2008 and 2011 as “Years of Election” under the Investment Law for our Beneficiary Enterprise status.
Tax Benefits under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced
new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of
January 1, 2011. Similarly to “Beneficiary Company”, a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain
conditions (including a minimum threshold of 25% export). However, under this new legislation the requirement for a minimum investment in productive
assets was cancelled.
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Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its
Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Under
the 2011 Amendment, such corporate tax rate will be reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013 and to 16% and 9% in
2014 and thereafter, respectively.
Dividends paid out of income attributed to a Preferred Enterprise during 2014 and thereafter are generally subject to withholding tax at the rate of
20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be
withheld (however, if afterward distributed to individuals or non-Israeli company a withholding of 20% or such lower rate as may be provided in an
applicable tax treaty, will apply).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law.
These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as
amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted
to an Approved Enterprise which chose to receive grants and certain tax benefits under the Grant Track before the 2011 Amendment became effective will
remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) terms and benefits
included in any certificate of approval that was granted to an Approved Enterprise under the Alternative Track before the 2011 Amendment became effective
will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a
Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain
conditions are met.
We have reviewed and evaluated the implications and effect of the benefits under the 2011 Amendment, and, while potentially eligible for such
benefits, we have not yet chosen to be subject to the tax benefits introduced by the 2011 Amendment.
From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or
substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
Tax Benefits and Funding for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction for research and development expenditures, including capital expenditures, relating
to scientific research and development projects, for the year in which they are incurred. Such expenditures must be approved by the relevant Israeli
government ministry, determined by the field of research, and the research and development must be for the promotion or development of the enterprise. The
amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and
development projects. Expenditures not approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a
three-year period.
The Government of Israel encourages research and development projects through the OCS pursuant to the Law for the Encouragement of Industrial
Research and Development, 5744-1984, and the regulations promulgated thereunder (the “Research and Development Law”). Under the Research and
Development Law, research and development programs that meet specified criteria and are approved by the research committee of the OCS are eligible for
funding of up to 50% of certain approved expenditures of such programs, as determined by such committee. The recipients of such funding are subject to the
Research and Development Law, which sets various limitations and obligation, including those described below.
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A recipient of OCS funding is required to pay the OCS royalties from the revenues derived from products incorporating know-how developed within
the framework of each such program or derived from such program, usually up to an aggregate of 100% of the dollar-linked value of the total funding
received in respect of such program (or, for funding received on or after January 1, 1999, until 100% of the dollar value plus LIBOR interest is repaid). The
royalty rates range generally from 3% to 6%, depending on the number of years that lapse between receipt of the funding and repayment, as well as on other
circumstances.
The Research and Development Law generally requires that a product developed under a program be manufactured in Israel unless the OCS
approves otherwise in writing in advance. Upon the approval of a governmental committee under the Research and Development Law, some of the
manufacturing volume may be performed outside of Israel, provided that the funding recipient pays royalties at an increased rate, which may be substantial
(and possibly higher than 6%), and the aggregate repayment amount is increased up to 300% of the funding and applicable LIBOR interest, depending on the
portion of the total manufacturing volume that is performed outside of Israel. A recent amendment to the Research and Development Law further permits the
OCS, among other things, to approve in certain conditions the transfer of manufacturing rights outside of Israel in exchange for the import of a different
manufactured product or manufacturing rights into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also allows for
the approval of funding in cases in which an applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents
and the research committee is convinced that doing so is essential for the execution of the program, subject to the payment of an increased royalty rate and an
aggregate royalty payment.
The technology and know-how developed in connection with the OCS funding or any rights therein must not be transferred to others (including
affiliated companies), including non-residents of Israel, without the prior approval of a governmental committee under the Research and Development Law,
which may require also a payment to the OCS according to the formulas and rules that are set in the Research and Development Law (which may reach up to
six times the amount of the OCS funding received plus the applicable LIBOR). The Research and Development Law authorizes the OCS to approve only
certain kind of transfer of know-how and in any case such approval is not guaranteed.
The OCS approval, however, is not required for the export of any products developed using the OCS funding. Approval of the transfer of technology
and know-how to residents of Israel may be granted in specific circumstances, only if the recipient abides by the provisions of the Research and Development
Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased.
The limitations and obligations under the Research and Development Law apply even after the payment of all royalties, or even if no production is
carried out based on the OCS-funded know-how. The Research and Development Law ceases to apply to an OCS-funded company only after the know-how
connected with the OCS funding is fully transferred to another entity with the approval of the OCS. Violation of the Research and Development Law may
result, among other things, in a requirement to repay the any OCS funding, including interest, differentials and penalties and criminal sanctions. As of this
date, there are no OCS audits, actions, claims, suits, proceedings or investigations against us.
The funds available for OCS funding out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the
future. We cannot predict whether, if at all, we would be entitled to any future funding or the amounts of any such funding. In return for the Israel
government’s participation payments in programs approved by the OCS, we are obligated to pay royalties at a rate of 3% to 6% of sales of developed products
until the OCS is repaid in full. As of December 31, 2013, we have and have a contingent obligation to pay royalties in the amount of approximately $34
million. We may, in the future, apply for additional OCS funding.
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Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 (the “Industry Encouragement Law”), generally referred to as the Industry
Encouragement Law, provides several tax benefits for “Industrial Companies.” We currently qualify as an Industrial Company within the meaning of the
Industry Encouragement Law.
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax
year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise
whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
·
·
·
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used
for the development or advancement of the company;
under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
expenses related to a public offering are deductible in equal amounts over a three-year period.
Eligibility for benefits under the Industry Encouragement Law is not contingent upon the approval of any governmental authority. The Israeli tax
authorities may determine that we do not qualify as an Industrial Company, which could entail our loss of the benefits that relate to this status. There can be
no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. A non-Israeli resident who derives capital gains from the sale of shares in an
Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so
long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be
entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation or (ii) are the
beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Additionally, such
exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax
treaty. For example, under the United States-Israel Tax Treaty, the disposition of shares by a shareholder who is a United States resident (for purposes of the
treaty) holding the shares as a capital asset is generally exempt from Israeli capital gains tax unless, among other things, (i) the capital gain arising from the
disposition is attributed to business income derived by a permanent establishment of the shareholder in Israel; (ii) the shareholder holds, directly or indirectly,
shares representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition; or (iii) such U.S. resident is an
individual and was present in Israel for 183 days or more during the relevant taxable year.
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In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents generally will be subject to Israeli income tax on the receipt of
dividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless relief is provided in a treaty between Israel and the
shareholder’s country of residence. With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or on any time during the
preceding twelve months, the applicable tax rate is 30%. A “substantial shareholder” is generally a person who alone or together with such person’s relative
or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the
corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation,
or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from
income attributed to an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise, unless a reduced tax rate is provided under an applicable tax
treaty. Pursuant to the Tax Amendment, effective January 1, 2014, if the dividend is being paid out of certain income attributable to an Preferred Enterprise ,
the dividend will be subject to tax at the rate of 20% (and not 15%). A different rate may be provided in a treaty between Israel and the shareholder’s country
of residence, as mentioned below.
In this regard, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our
ordinary shares who is a United States resident (for purposes of the United States-Israel Tax Treaty) is 25%. Consequently, distributions to U.S. residents of
income attributed to an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise will be subject to withholding tax at a rate of 15%. However,
generally, the maximum rate of withholding tax on dividends, not generated by an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise,
that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed
as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of
dividends and interest. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
U.S. Federal Income Tax Considerations
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 beneficial owners of our ordinary shares:
·
·
an individual who is either a U.S. citizen or a resident of the United States for U.S. federal income tax purposes;
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 United
States or any political subdivision thereof;
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·
·
an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and
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 U.S. expatriates, 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
We do not expect to pay cash dividends for the foreseeable future. In the event we do make a distribution with respect to our ordinary shares, subject
to the discussion below under “Passive Foreign Investment Company Status,” for U.S. federal income tax purposes, the amount of the distribution will equal
the U.S. Dollar value of the gross amount of cash and/or the fair market value of any property distributed, including the amount of any Israeli taxes withheld
on such distribution as described above under “Israeli Tax Considerations – Taxation of Non-Israeli Shareholders on Receipt of 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 rate of 20%. 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 United States that 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 United States and Israel is satisfactory for this purpose.
Dividends paid by us will not qualify for the 20% 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.” A noncorporate U.S. Holder may be subject to an additional tax based on its “net investment income,” (which
generally is computed as gross income from interest, dividends, annuities, royalties and rents and gain from the sale of property (other than property held in
the active conduct of a trade or business that does not regularly trade financial instruments or commodities), less the amount of deductions properly allocable
to such income or gain. Such tax is equal to 3.8% of the lesser of an individual U.S. Holder’s (i) net investment income or (ii) the excess of such U.S.
Holder’s “modified adjusted gross income” (adjusted gross income plus the amount of any foreign earned income excluded from income under Section 911(a)
(1) of the Code, net of deductions and exclusions disallowed with respect to such foreign earned income) over a specified threshold amount ($250,000 in the
case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return and $200,000 in any other case). In the case of a
U.S. Holder which is an estate or trust, the tax is equal to 3.8% of the lesser of (i) undistributed net investment income or (ii) the excess of adjusted gross
income (as defined in Section 67(e) of the Code) over the dollar amount at which the highest tax bracket applicable to an estate or trust begins.
100
U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any
distributions with respect to our ordinary shares.
A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of
exchange in effect on the date of receipt or deemed receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. U.S.
Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion
of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated
as U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the 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
generally as foreign-source passive income for U.S. foreign tax credit purposes. 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.
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 20% on long-term capital gains, also may be subject to the additional tax on “net
investment income” described above in “Distributions With Respect to Our Ordinary Shares.” 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 Taxes Applicable to Non-Israeli Resident Shareholders” 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.
101
A U.S. Holder’s tax basis in its ordinary shares generally will be equal to 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 equal to 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.
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. Cash is treated as generating passive income.
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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.
We must make a separate determination each taxable year as to whether we are a PFIC. As a result, our PFIC status may change from year to year.
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,
2011, 2012 and 2013, 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 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 treated as a PFIC with respect to a U.S. Holder for any tax year, the U.S. Holder
will be deemed to own ordinary shares in any of our subsidiaries that are also PFICs.
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), the U.S. Holder would be subject to the following rules:
(i)
(ii)
(iii)
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 and any period prior to the first day of the first tax year in which we were a PFIC, (b) pay tax on amounts allocated to each prior tax
year in which we were a PFIC at the highest rate for individuals or corporations as appropriate in effect for such prior year, and (c) pay an
interest charge on the tax due for prior tax years in which we were a PFIC 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.
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.
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.
If we are a PFIC for any tax year in which a U.S. Holder holds our ordinary shares, we generally will continue to be treated as a PFIC as to such U.S.
Holder for all subsequent years during the U.S. Holder’s holding period unless we cease to be a PFIC and the U.S. Holder elects 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. Thereafter, so long as we
do not again become a PFIC, such U.S. Holder’s ordinary shares for which an election was made will not be treated as shares in a PFIC.
103
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. The election is effective for the tax year for which it 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 QEF Election is made by
completing U.S. Internal Revenue Service Form 8621 and attaching it to a timely-filed (including extensions) U.S. federal income tax return for the first tax
year to which the election will apply. A U.S. Holder must satisfy additional filing requirements each year the election remains in effect. Upon a U.S. Holder’s
request, we will provide to such U.S. Holder the information required to make a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder generally may elect to mark its ordinary shares to market annually, recognizing ordinary income
or loss (subject to certain limitations) equal to the difference, as of the close of each 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.
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 with respect to the U.S. federal income tax risks related to owning and disposing of our ordinary shares, the consequence of 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 United States or by certain U.S.-related financial intermediaries may be subject to
information reporting requirements and U.S. backup withholding tax, currently at a rate of 28%. The information reporting requirements will not apply,
however, to payments to certain exempt U.S. Holders, including corporations and tax-exempt organizations. In addition, backup withholding 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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Foreign Asset Reporting
Pursuant to recently enacted legislation, a U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our
ordinary shares, unless such ordinary shares are held on such U.S. Holder’s behalf through a financial institution) may be required to file an information
report with the U.S. Internal Revenue Service if the aggregate value of all such assets exceeds $50,000 on the last day of the taxable year or $75,000 at any
time during the taxable year (or such higher dollar amount as may be prescribed by applicable U.S. Internal Revenue Service guidance). Each U.S. Holders
should consult with its own tax advisor regarding its obligation to file such information reports in light of its own particular circumstances.
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.
105
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, 2013 would cause a decrease in net income
of approximately $5 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 2013, we estimate that each 100 basis point
increase in our borrowing rates would result in additional interest expense to us of approximately $120,000.
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.
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, 2013. 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.
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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, 2013 based on the framework for Internal
Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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, 2013.
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
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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.
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, 2013. The following table presents the aggregate fees for professional audit services and other services rendered by
Kost Forer Gabbay & Kasierer in 2012 and 2013.
Audit Fees
Audit Related Fees
Tax Fees
Total
Year Ended December 31,
(Amounts in thousands)
2013
2012
$
$
320 $
4
97
421 $
340
45
80
465
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 2012 and 2013, 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”).
108
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.
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 2013, 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. We approve all such compensation by
the audit committee.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
ELIMINATE TABLE ABOVE
Not applicable.
ITEM 16G.
CORPORATE GOVERNANCE
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country
corporate governance practices instead of certain requirements of the NASDAQ Marketplace Rules.
We do not comply with the NASDAQ requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice which permits the establishment or amendment of certain
equity based compensation plans approved by our board of directors without the need for a shareholder vote, unless such arrangements are for the
compensation of directors and the chief executive officer, in which case they also require compensation committee and shareholder approval.
We may elect in the future to follow Israeli practice with regard to, among other things, 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.
109
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-49 hereto.
ITEM 19.
EXHIBITS
PART III
Exhibit
No.
1.1‡
1.2
2.1
4.1
4.2
4.3
4.4
The following exhibits are filed as part of this Annual Report:
Document
Incorporated by Reference
File No.
Date Filed
Form
Memorandum of Association of Registrant.
F-1
333-10352 5/13/1999
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.
AudioCodes Ltd. 1997 Key Employee Option Plan (C).
AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan-U.S.
Employees (D).
20-F
(2011)
000-30070 4/19/2012
F-3
333-123859 4/05/2005
F-1
F-1
333-10352 5/13/1999
333-10352 5/13/1999
License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6,
F-1
333-10352 5/22/1999
1999.
AudioCodes Ltd. 1997 Key Employee Option Plan (D).
F-1
333-10352 5/13/1999
110
Exhibit
No.
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.13
4.14
Document
Incorporated by Reference
File No.
Date Filed
Form
AudioCodes Ltd. 1997 Key Employee Option Plan (E).
F-1
333-10352 5/13/1999
AudioCodes Ltd. 1999 Key Employee Option Plan (F), as amended.
20-F
(2002)
000-30070 3/27/2002
AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan-U.S.
F-1
333-10352 5/13/1999
Employees (E).
AudioCodes Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan-U.S.
Employees (F).
AudioCodes Ltd. 2001 Employee Stock Purchase Plan-Global Non U.S., as amended.
AudioCodes Ltd. 2001 U.S. Employee Stock Purchase Plan, as amended.
AudioCodes Ltd. 2007 U.S. Employee Stock Purchase Plan.
Sublease Agreement between AudioCodes USA, Inc. and Continental Resources, Inc.,
dated December 30, 2003.
Addendum No. 2, dated November 6, 2013, to Sublease Agreement, dated December 30,
2003, between Continental Resources, Inc., as landlord, and AudioCodes USA Inc., as
tenant.
Employment Agreement between AudioCodes Ltd. and Shabtai Adlersberg.
Amendment No. 1 to Employment Agreement between AudioCodes Ltd. and Shabtai
Adlersberg.
20-F
(2002)
S-8
S-8
S-8
20-F
(2003)
000-30070 3/27/2002
333-144823 7/24/2007
333-144823 7/24/2007
333-144825 7/24/2007
000-30070 6/30/2004
6-K
000-30070 3/04/2014
6-K
6-K
20-F
(2006)
000-30070 11/12/2009
000-30070
8/8/2013
000-30070 6/27/2007
4.15†
Building and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport City
Ltd. and AudioCodes Ltd.
4.16†
English Summary of Addendum, dated September 23, 2013, to Lease and Construction
6-K
000-30070
1/6/2014
Agreement of November 14, 2000, between Airport City Ltd., as landlord and AudioCodes
Ltd., as tenant.
4.17
4.18
4.19
AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment to AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment No. 2 to AudioCodes Ltd. 2008 Equity Incentive Plan.
4.20‡
Loan Requests, dated May 13, 2008, between First International Bank of Israel, as lender,
and AudioCodes Ltd., as borrower.
20-F
(2008)
S-8
S-8
20-F
(2012)
000-30070 6/30/2009
333-170676 11/18/2010
333-190437 8/07/2013
000-30070 4/11/2013
111
Exhibit
No.
Document
4.21‡
Loan Requests, dated September 27, 2011, between First International Bank of Israel, as
lender, and AudioCodes Ltd., as borrower.
4.22‡
Restated Undertaking Letter to First International Bank of Israel, dated May 6, 2008.
4.23‡
Amendments to Undertaking Letter to First International Bank of Israel, dated September
15, 2009, February 16, 2009, September 26, 2011, December 29, 2011 and July 23, 2012.
4.24‡
Letter Agreement, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as lender, and
AudioCodes Ltd., as borrower.
4.25‡
Secured Bond, dated July 14, 2008, delivered by AudioCodes Ltd., as borrower, in favor of
Bank Mizrahi Tefahot Ltd., as lender.
4.26‡
Undertaking Letter to Bank Mizrahi Tefahot Ltd, dated December 12, 2011.
4.27‡
Deed of Pledge of Rights, dated December 12, 2011, delivered by AudioCodes Ltd., as
borrower, in favor of Bank Mizrahi Tefahot Ltd., as lender.
4.28‡
Amendment to Undertaking Letter to Bank Mizrahi Tefahot Ltd., dated July 23, 2012.
4.29‡
Loan Requests, dated September 27, 2011, between Bank Leumi Israel Ltd., as lender, and
AudioCodes Ltd., as borrower.
4.30‡
Undertaking Letter to Bank Leumi Israel Ltd., dated December 12, 2011.
4.31‡
Amendment to Undertaking Letter to Bank Leumi Israel Ltd., dated July 24, 2012.
Incorporated by Reference
File No.
Date Filed
Form
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
000-30070 4/11/2013
4.32
4.33
4.34
8.1
Form of Insurance, Indemnification and Exculpation Agreement between the Registrant
6-K
000-30070 11/10/2011
and each of its directors and executive officers.
AudioCodes Ltd. Executive Compensation Plan.
Underwriting Agreement, dated March 5, 2014, between AudioCodes Ltd. and William
Blair & Company, L.L.C., as representative of the Underwriters.
Subsidiaries of the Registrant.
6-K
6-K
20-F
(2012)
000-30070 11/10/2011
000-30070
3/5/2014
000-30070 4/11/2013
112
Incorporated by Reference
File No.
Date Filed
Form
Exhibit
No.
Document
12.1*
Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
12.2*
Certification of Guy Avidan, Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
13.1*
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.
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*
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
101.1*#
Interactive Data Files (XBRL-Related Documents).
†
‡
*
#
English summary of Hebrew original.
English translation 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.
113
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: March 25, 2014
AUDIOCODES LTD.
By:
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and Chief Executive Officer
114
AUDIOCODES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2013
IN U.S. DOLLARS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - -
F-1
Page
F-2 - F-3
F-4 - F-5
F-6
F-7
F-8
F-9 - F-10
F-11 - F-49
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AUDIOCODES LTD.
We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. (the "Company") as of December 31, 2012 and 2013, and the
related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2012 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2013, in conformity with United States generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 25, 2014 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
March 25, 2014
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-2
AUDIOCODES LTD.
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AUDIOCODES LTD.
We have audited AudioCodes Ltd's (the "Company") internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO
criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company as of December 31, 2012 and 2013 and the related consolidated statements of operations, comprehensive income (loss), changes in
equity and cash flows for each of the three years in the period ended December 31, 2013 and our report dated March 25, 2014 expressed an unqualified
opinion thereon.
Tel-Aviv, Israel
March 25, 2014
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-3
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term and restricted bank deposits
Short-term marketable securities and accrued interest
Trade receivables (net of allowance for doubtful accounts of $ 2,146 and $ 2,347 at December 31, 2012 and 2013,
$
respectively)
Other receivables and prepaid expenses
Deferred income tax assets, net
Inventories
Total current assets
LONG-TERM ASSETS:
Long-term and restricted bank deposits and accrued interest
Long-term marketable securities
Investment in an affiliated company
Deferred income tax assets, net
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-4
AUDIOCODES LTD.
December 31,
2012
2013
15,219 $
10,330
7,966
24,198
5,653
1,621
16,797
30,763
9,101
15,706
26,431
3,922
2,277
13,811
81,784
102,011
9,251
15,762
1,084
3,565
15,772
6,697
-
-
4,855
19,549
45,434
31,101
3,619
2,857
3,191
4,252
32,095
33,749
$
165,789 $
174,304
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term bank loan and current maturities of long-term bank loans
Trade payables
Senior convertible notes
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:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 100,000,000 shares at December 31, 2012 and 2013; Issued: 49,332,510 shares at and 50,090,696
shares at December 31, 2012 and 2013, respectively; Outstanding: 37,975,803 shares and 38,733,989 shares
at December 31, 2012 and 2013, respectively
Additional paid-in capital
Treasury stock at cost- 11,356,707 shares as of December 31, 2012 and 2013
Accumulated other comprehensive income
Accumulated deficit
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-5
AUDIOCODES LTD.
December 31,
2012
2013
$
8,436 $
6,817
-
15,062
4,871
4,686
7,215
353
17,958
6,940
35,186
37,152
16,284
353
14,477
1,192
19,845
-
9,791
2,707
32,306
32,343
112
197,653
(35,768)
1,303
(65,003)
114
201,248
(35,768)
-
(60,785)
98,297
104,809
$
165,789 $
174,304
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except per share data
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial income, net
Income (loss) before taxes on income
Income tax benefit (expense), net
Equity in losses of an affiliated company
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
AUDIOCODES LTD.
Year ended December 31,
2012
2011
2013
$
135,802 $
20,025
103,651 $
23,839
111,750
25,482
155,827
127,490
137,232
59,917
4,228
48,371
5,923
51,996
6,568
64,145
54,294
58,564
91,682
73,196
78,668
32,150
43,248
9,028
28,677
40,040
8,214
28,194
39,279
8,456
84,426
76,931
75,929
7,256
423
7,679
(238)
(277)
(3,735)
453
(3,282)
(541)
(354)
7,164 $
(4,177) $
0.17 $
0.17 $
(0.11) $
(0.11) $
2,739
96
2,835
1,404
(21)
4,218
0.11
0.11
$
$
$
Weighted average number of shares used in per share computations of earnings (loss):
Basic
Diluted
41,437,927
41,935,097
39,125,129
39,125,129
38,241,258
39,096,758
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands
AUDIOCODES LTD.
Year ended December 31,
2012
2011
2013
Net income (loss)
$
7,164 $
(4,177) $
4,218
Other comprehensive income (loss) (“OCI”),, related to:
Gain (loss) on derivatives recognized in OCI
Loss (gain) on derivatives (effective portion) recognized in income
Other comprehensive income (loss), related to unrealized gains (loss) on cash flow hedges
Total comprehensive income (loss)
The accompanying notes are an integral part of the consolidated financial statements.
F-7
(205)
(857)
(1,062)
1,211
332
1,543
6,102
(2,634)
1,292
(2,595)
(1,303)
2,915
AUDIOCODES LTD.
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands
Share
capital
Additional
paid-in
capital
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
equity
Balance as of January 1, 2011
$
128
$
191,277
$
(25,057) $
822
$
(67,990) $
99,180
Purchase of treasury stock
Issuance of shares upon exercise of options and employee stock purchase plan
Stock compensation related to options granted to employees
Other comprehensive loss
Net income
Balance as of December 31, 2011
Purchase of treasury stock
Issuance of shares upon exercise of options
Stock compensation related to options granted to employees
Other comprehensive income
Net loss
Balance as of December 31, 2012
Issuance of shares upon exercise of options
Stock compensation related to options granted to employees
Other comprehensive loss
Net income
Balance as of December 31, 2013
(11)
2
-
-
-
-
1,703
3,041
-
-
(3,998)
-
-
-
-
-
-
-
(1,062)
-
-
-
-
-
7,164
(4,009)
1,705
3,041
(1,062)
7,164
119
196,021
(29,055)
(240)
(60,826)
106,019
(7)
-
-
-
-
112
2
-
-
-
-
103
1,529
-
-
197,653
1,894
1,701
-
-
(6,713)
-
-
-
-
(35,768)
-
-
-
-
-
-
-
1,543
-
1,303
-
-
(1,303)
-
-
-
-
-
(4,177)
(65,003)
-
-
-
4,218
(6,720)
103
1,529
1,543
(4,177)
98,297
1,896
1,701
(1,303)
4,218
$
114
$
201,248
$
(35,768) $
-
$
(60,785) $
104,809
The accompanying notes are an integral part of the consolidated financial statements.
F-8
AUDIOCODES LTD.
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 or used in
operating activities:
Depreciation and amortization
Amortization of marketable securities premiums and accretion of discounts, net
Equity in losses of an affiliated company, net of interest on loans to an affiliated company
Stock-based compensation
Decrease (increase) in accrued interest on loans, marketable securities and bank deposits
Decrease (increase) in deferred income 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 in deferred revenues
Decrease in accrued severance pay, net
Year ended December 31,
2012
2011
2013
$
7,164 $
(4,177) $
4,218
3,239
416
277
2,323
(182)
(652)
(4,602)
(403)
(4,136)
(1,157)
(5,464)
1,978
(86)
2,883
436
350
1,529
4
14
6,725
127
3,618
(5,545)
(3,054)
270
(184)
3,207
349
21
1,701
73
(1,946)
(2,254)
110
2,986
403
2,577
3,138
(495)
Net cash provided by (used in) operating activities
(1,285)
2,996
14,088
Cash flows from investing activities:
Net loans provided to an affiliated company
Purchase of property and equipment
Purchase of marketable securities
Short-term and restricted bank deposits, net
Proceeds from redemption of marketable securities upon maturity
Proceeds from redemption of long-term bank deposits
Investment in long-term and restricted bank deposits
(211)
(1,579)
(24,402)
(183)
-
-
(9,120)
(183)
(2,006)
-
3,678
-
-
(131)
(1,211)
(1,586)
-
1,229
7,600
2,623
-
Net cash provided by (used in) investing activities
$
(35,495) $
1,358 $
8,655
The accompanying notes are an integral part of the consolidated financial statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
AUDIOCODES LTD.
Year ended December 31,
2012
2011
2013
Purchase of treasury stock
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, warrants and employee stock
$
purchase plan
(3,812) $
24,005
(6,600)
(278)
(6,917) $
-
(10,242)
(336)
1,411
103
-
-
(8,436)
(515)
1,752
Net cash provided by (used in) financing activities
14,726
(17,392)
(7,199)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
(22,054)
50,311
(13,038)
28,257
15,544
15,219
Cash and cash equivalents at the end of the year
$
28,257 $
15,219 $
30,763
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 gain (loss) on foreign currency cash flow hedges
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
$
$
$
$
$
848 $
356 $
313 $
789 $
429
583
(1,062) $
1,543 $
(1,303)
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. ("NSC"):
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 this transaction occurred in May 2010.
The liability recorded was 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 (the "Contingent Payment"). This
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 ended December 31, 2010, 2011 and 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 Payment liability was 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 financial expenses in the statement of operations, while changes due to changes in
estimates were recorded within operating income or expenses and (2) a liability with respect to the commitment for future payments was
recorded at present value which amounted to $ 967 (the "Committed Payment"). The Committed Payment liability is not re-measured at
subsequent periods and would only be adjusted for changes in time value.
As of December 31, 2012, the Committed Payment liability estimated fair value amounted to $ 391 and the Contingent Payment liability
amounted to $ 115. During 2013, $ 395 was paid with respect to the Committed Payment liability and $ 120 was paid in respect of the
Contingent Payment liability, since certain aggregate revenue milestones were met for the years ended December 31, 2010, 2011 and
2012.
c.
Asset Purchase Agreement with Mailvision Ltd ("Mailvision"):
In April 2013, the Company entered into an asset purchase agreement with Mailvision, an Israeli company which develops, markets and
licenses VoIP solutions for mobile, PC and tablet devices for telecom operators and service providers, in which the Company held 29.2%
of the outstanding share capital. Pursuant to the agreement, in May 2013, the Company acquired certain assets and assumed certain
liabilities of Mailvision, (see also Note 3).
F-11
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
d.
e.
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 the years ended December 31, 2011, 2012 and 2013, accounted for 14.4%, 13.7% and 17.8%,
respectively, of the total revenues in those years. No other customer accounted for more than 10% of the Group's revenues in those
periods.
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, judgments 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 related valuation
allowance, stock-based compensation and contingent liabilities. Actual results could differ from those estimates.
b.
Financial statements in U.S. dollars ("dollars"):
A majority of the Group's revenues is generated in dollars. In addition, most of the Group's costs are denominated and determined in
dollars and in new Israeli shekels. The Company's management believes that the 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 dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with
Accounting Standards Codification ("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.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
c.
Principles of consolidation:
AUDIOCODES LTD.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany
transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon
consolidation.
d.
Cash equivalents:
Cash equivalents represent short-term highly liquid investments that are readily convertible into cash with original maturities of three
months or less, at the date acquired.
e.
Short-term and restricted bank deposits:
Short-term and restricted bank deposits are deposits with maturities of more than three months, but less than one year. The deposits are
mainly in dollars and bear interest at an average rate of 0.81% and 0.97% for the years ended December 31, 2012 and 2013, respectively.
Short-term and restricted deposits are presented at their cost. Any accrued interest on these deposits is included in other receivables and
prepaid expenses.
In connection with the long-term bank loans and their related covenants, the Company is required to maintain compensating balances
with the banks and to maintain deposits in the same banks that provided the loans (see Note 12). In addition, the Company maintains
restricted deposits in connection with foreign exchange derivatives, guarantees for prepayment of account receivables and an office lease
agreement (see also Note 13a). Out of the short-term and restricted bank deposits, a total of $ 10,330 and $ 7,321 are restricted short-
term deposits as of December 31, 2012 and 2013, 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 years ended December 31, 2012 and 2013, 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.
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.
For the years ended December 31, 2011, 2012 and 2013, no other than temporary impairment losses have been identified.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g.
Inventories:
AUDIOCODES LTD.
Inventories are stated at the lower of cost or market value. Cost is determined as follows:
Raw materials - using the "weighted average cost" method.
Finished products - using the "weighted average cost" method with the addition of direct manufacturing costs.
The Group periodically evaluates the quantities on hand relative to current and historical selling prices, 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 and restricted bank deposits:
Bank deposits and the related accrued interest with maturities of more than one year are included in long-term investments and presented
at their cost. Accrued interest that is paid within a one year period is included in other receivables and prepaid expenses. The deposits
are denominated in dollars and bear interest at an average rate of 2.54% and 2.57% for the years ended December 31, 2012 and 2013,
respectively. In connection with the long-term bank loans, the Company is required to maintain compensating balances with the banks
(see also Note 12). Out of the total long-term bank deposits, a total of $ 9,251 and $ 6,596 are restricted long-term deposits as of
December 31, 2012 and 2013, respectively. 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, convertible loans and non-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. During the years ended December 31, 2011, 2012 and 2013, no
impairment losses had been identified. In May 2013, the Company acquired the activity of the affiliated company. (see also Note 3).
F-14
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
%
33
6 - 20 (mainly 15%)
Over the shorter of the term of
the lease or the useful 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 (or asset group)
may not be recoverable. Recoverability of assets (asset group) to be held and used is measured by a comparison of the carrying amount
of an asset (asset group) 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 (asset groups)
exceeds the fair value of the assets (asset groups). 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. During the years ended December 31, 2011,
2012 and 2013, no impairment losses had been identified for property and equipment since the fair value of those assets (asset groups)
was higher than its carrying amounts.
k.
Intangible assets:
Intangible assets are comprised of acquired technology, customer relations, trade names and existing contracts for maintenance.
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 three 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 the years ended December 31, 2011, 2012 and 2013, no impairment losses were 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.)
l.
Goodwill:
AUDIOCODES LTD.
Goodwill and certain other purchased intangible assets have been recorded 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. Goodwill is not
amortized, but rather is subject to an impairment test.
The Group performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators
are present. The Group operates in one operating segment, and this segment comprises its only reporting unit.
ASC 350, "Intangibles – Goodwill and Other", prescribes a two-phase process for impairment testing of goodwill. The first phase
screens for impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Group measures
impairment by comparing the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment
loss is recognized in an amount equal to the excess. The Group has an option to perform a qualitative assessment to determine whether it
is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill
impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a
reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
In addition, pursuant to ASC 350 an entity is allowed to perform a qualitative impairment assessment. If the entity determines that it is
not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of indefinite-lived
intangible assets for impairment is not required and the entity would not need to calculate the fair value of the asset and perform a
quantitative impairment test. The Group performed a quantitative impairment test during the year ended December 31, 2013.
For each of the three years in the period ended December 31, 2013, the Group performed an annual impairment analysis, using market
capitalization, and no impairment losses have been 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.)
m.
Revenue recognition:
AUDIOCODES LTD.
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.
In a multiple element arrangement, Accounting Standards Update ("ASU”) No. 2009-13, Topic 605 - "Multiple-Deliverable Revenue
Arrangements" 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 Group 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 Group 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 Group'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 Group is unable to reliably determine
what competitors products' selling prices are on a stand-alone basis, the Group 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 and professional services was based on ESP. Maintenance selling price was based on VSOE.
The Group 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 Group evaluates each deliverable in an arrangement
to determine whether they represent separate units of accounting.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
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 $ 1,232 and $ 1,288 as of December 31, 2012
and 2013, respectively.
Revenues from the sale of products which were not yet determined to be final sales due to acceptance provisions are 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, 2012 and 2013, the provision for warranty amounted to $ 497 and $ 406, 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 expenses during the years ended December 31, 2011, 2012
and 2013 were $ 2,776, $ 2,729 and $ 2,799, 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 carry forward 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 records 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-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.
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.
Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax
expense in the consolidated statements of operations..
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 (loss) 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) relate to gains and
losses on hedging derivatives instruments.
The Group presents total comprehensive income (loss) in accordance with ASU 2011-05, Topic 220. "Presentation of Comprehensive
Income" and ASU 2011-12, Topic 220 - Comprehensive Income. ASU 2011-05 requires an entity to present, 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. The Company chose to present the components of net income and other comprehensive
income in two separate but consecutive statements.
During the year ended December 31, 2013, the Company adopted ASU. 2013-02, Topic 350, "Comprehensive Income", which amends
Topic 220 to improve the reporting of reclassifications out of accumulated other comprehensive income to the respective line items in
net income. The adoption of ASU 2013-02, Topic 350 did not have a material impact on the consolidated financial statements.
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.
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.
The majority of the Group's cash and cash equivalents and bank deposits are invested in 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 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.
The trade receivables of the Group are derived from sales to customers located primarily in the Americas, the Far East, Israel and
Europe. However, under certain circumstances, the Group may require letters of credit, other collateral, additional guarantees or advance
payments. Regarding certain credit balances, the Group is covered by foreign trade risk insurance. The Group performs ongoing credit
evaluations of its customers and establishes an allowance for doubtful accounts based upon a specific review.
s.
Senior convertible notes:
The Company 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 11.
The Company presents the outstanding principal amount of its senior convertible notes as a long-term liability, in accordance with ASC
210-10-45, "Other Presentation Matters", (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 11.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t.
Basic and diluted earnings (loss) per share:
AUDIOCODES LTD.
Basic earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each year.
Diluted earnings (loss) 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".
Senior convertible notes and certain outstanding stock options, restricted share units ("RSUs") and warrants have been excluded from the
calculation of the diluted earnings per 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, RSUs and warrants that have been excluded from the
calculation of diluted earnings (loss) per share was 2,727,374, 4,072,517 and 1,545,867 for the years ended December 31, 2011, 2012
and 2013, 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.
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an
award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair
value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental
value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the
original award measured immediately before its terms are modified based on current circumstances.
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.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2011, 2012 and
2013, was $ 2.69, $ 1.35 and $ 3.00 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
2011
0%
53.5%-59.6%
0.8%-2.04%
4.67-5.69 years
10.0%
Year ended December 31,
2012
0%
56.6%-61.5%
0.54%-1.04%
4.79-5.70 years
5.5%
2013
0%
58.9%-61.9%
0.63%-1.78%
4.72-5.67 years
4.0%
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, 2011, 2012 and 2013 were included in items of the consolidated statements of operations as follows:
Cost of revenues
Research and development expenses, net
Selling and marketing expenses
General and administrative expenses
Year ended December 31,
2012
2011
2013
$
$
130
526
964
703
61 $
430
437
601
62
408
625
606
Total equity-based compensation expenses
$
2,323*) $
1,529 $
1,701
*)
Also includes equity-based compensation that was classified as a liability.
F-22
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 14a.
w.
Severance pay:
The liability for severance pay for Israeli employees is calculated pursuant to Israel's Severance Pay Law, 1963, 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.
Since March 2011, the Company's agreements with new employees in Israel are under Section 14 of the Israeli Severance Pay Law,
1963. The Company's contributions for severance pay have replaced its severance obligation. Upon contribution of the full amount of
the employee's monthly salary for each year of service, no additional calculations are conducted between the parties regarding the matter
of severance pay and no additional payments are made by the Company to the employee. The Company is legally released from the
obligations to employees once the deposit amounts have been paid.
Severance pay expenses for the years ended December 31, 2011, 2012 and 2013, amounted to $ 2,162, $ 1,850 and $ 1,878, 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 $ 17 and $ 17.5 during the years
ended December 31, 2012 and 2013, respectively, plus a catch-up contribution of $ 5.5 for participants age 50 or over. The Group
matches 50% of employees contributions, up to a maximum of 6% of the employees annual pay. In the years ended December 31, 2011,
2012 and 2013, the Group matched contributions in the amount of $ 301, $ 276 and $ 244, respectively.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
y.
Advertising expenses:
AUDIOCODES LTD.
Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31,
2011, 2012 and 2013 amounted to $ 442, $ 329 and $ 342, respectively.
z.
Fair value of financial instruments:
The estimated fair value of financial instruments has been determined by the Group using available market information and valuation
methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the
amounts the Group 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 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
F-24
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 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 9.
aa.
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, net" at each reporting year.
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 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.
During the year ended December 31, 2012, the Group recorded accumulated other comprehensive income in the amount of $ 1,543 from
its forward and options collar (cylinder) contracts with respect to payroll expenses which were expected to be incurred during the year
ended December 31, 2013. Such amount was classified into earnings during the year ended December 31, 2013. As of December 31,
2013, there are no outstanding forward and options collar (cylinder) contracts. See also Note 19.
ab.
Impact of recently issued accounting pronouncements:
In July 2013, the Financial Accounting Standards Board ("FASB") issued ASU. 2013-11, Topic 740, " Income Taxes", which limits the
situations in which unrecognized tax benefits are offset against a deferred tax asset for a net operating loss carryforward, similar tax loss
or tax credit carryforward. ASU 2013-11 is effective for reporting periods beginning after December 15, 2013. The Company intends to
adopt this standard in 2014 and does not expect the adoption will have a material impact on its consolidated results of operations or
financial condition.
ac.
Reclassification:
Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- ASSET PURCHASE AGREEMENT WITH MAILVISION LTD. ("MAILVISION")
AUDIOCODES LTD.
On May 13, 2013 (the "Closing Date"), pursuant to an Asset Purchase Agreement with Mailvision (the "APA"), the Company acquired certain
assets and assumed certain liabilities of Mailvision.
The APA also provides that, under certain limited circumstances, if the Company were to sell the acquired assets and assumed liabilities of
Mailvision to a third party prior to May 2014, the proceeds from such sale in excess of a specified amount would be payable to Mailvision, and,
if the purchase price offered by a third party prior to May 2014 exceeds a specified amount, subject to a number of conditions, the Company
would be required to sell the acquired assets and assumed liabilities (the "Sale Option").
The acquisition was accounted for using the purchase method. The $ 3,434 in consideration for the acquisition was composed of the following
amounts: (i) $ 221, which represented the present value of a payment of $ 233 payable on the anniversary date of the acquisition in 2014; (ii)
$ 432 , which represented the fair value of the estimated earn-out consideration, that is payable in 2015 and 2016, if certain milestones of
revenues from the sale of Mailvision’s product are met during the three annual periods following the Closing Date (the "Earn-Out"). (iii) waiver
of $ 1,472 of debt owed by Mailvision to the Company; and (iv) $ 376, which represented the fair value of the Sale Option. In addition, on the
Closing Date, the Company revalued its investment in Mailvision (see Note 7) to its fair value in the amount of $ 933 in accordance with ASC
805, "Business Combination". As a result of the revaluation of investment in Mailvision, the Company recognized a gain of $ 95 that was
recorded in equity in losses of affiliated company, net in the statement of operations.
The payment of the consideration can be made, at the Company's option, in any combination of cash and the Company's ordinary shares.
The following table summarizes, as of May 13, 2013, the estimated fair values of the assets acquired and liabilities assumed with respect to the
acquisition:
Core technology
Customer relationships
Goodwill
Total assets acquired
Net working capital
Other assumed liabilities
Total assumed liabilities
Net assets acquired
$
$
2,322
266
1,654
4,242
(529)
(279)
(808)
3,434
The fair values of the acquired core technology and customer relationships were valued using the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- ASSET PURCHASE AGREEMENT WITH MAILVISION LTD. ("MAILVISION") (Cont.)
AUDIOCODES LTD.
The excess of the purchase price over the preliminary assessment of the net tangible and intangible assets acquired resulted in goodwill of
$ 1,654. The acquired core technology and customer relationships are being amortized on a straight-line basis over a period of 5.5 and 4.5
years, respectively.
The fair value of the Earn-Out was estimated by utilizing the income approach, taking into account the potential cash payments discounted to
arrive at a present value amount, based on the Company's expectation as to future revenues of Mailvision’s products in the three subsequent
annual periods following the Closing Date. The discount rate was based on the market interest rate and estimated operational capitalization rate.
The fair value of the Sale Option granted was valued by using the Black-Scholes call option pricing model.
The fair value of the Sale Option was estimated using the following assumptions (annualized percentages):
Exercise price
Dividend yield
Expected volatility
Risk-free interest
Expected life
May 13,
2013
December 31,
2013
$
7,097
$
0%
60%
0.15%
1 year
7,124
0%
50%
0.1%
0.4 years
In accordance with ASC 815, "Derivatives and Hedging", the Company measured the Sale Option at fair value at each reporting date, based on
its fair value, with changes in the fair values being recognized in the Company's statement of operations as financial income or expense.
As of December 31, 2013, the Earn-Out and the Sale Option estimated fair value amounted to $ 446 and $ 110, respectively, of which an
aggregate amount equal to $ 446 was classified as a long-term liability.
The consolidated financial statements include the operating results of the Mailvision business since May 13, 2013. The related revenues and
expenses as well as the pro forma results were not presented as they were deemed immaterial.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES AND ACCRUED INTEREST
The following is a summary of held to maturity marketable securities:
AUDIOCODES LTD.
Corporate debentures:
Maturing within one year
Maturing between one to two years
Accrued interest
Corporate debentures:
Maturing within one year
Accrued interest
Amortized
cost
December 31, 2012
Unrealized
gains
Fair
Value
7,625 $
15,762
341
23,728 $
62 $
299
-
361 $
7,687
16,061
341
24,089
Amortized
cost
December 31, 2013
Unrealized
gains
Fair
Value
15,438 $
268
15,706 $
35 $
-
35 $
15,473
268
15,741
$
$
$
$
These investments were issued by highly rated corporations. Accordingly, it is 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, 2012 and 2013, the Group did not have any investment in marketable
securities that was in an unrealized loss position for a period of twelve months or greater. Unrealized gains are valued using alternative pricing
sources and models utilizing observable market inputs.
NOTE 5:-
INVENTORIES
Raw materials
Finished products
December 31,
2012
2013
$
$
7,684 $
9,113
5,931
7,880
16,797 $
13,811
In the years ended December 31, 2011, 2012 and 2013, the Group wrote-off inventories in a total amount of $ 644, $ 2,306 and $ 1,746,
respectively.
F-28
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:-
INVESTMENT IN AN AFFILIATED COMPANY
As of December 31, 2012, the Company owned 25.61% of Mailvision's outstanding share capital. The Company had an investment in equity in
the amount of $ 1,655, convertible and non-convertible loans in the principal amount of $ 398, and accumulated net loss in the amount of $ 969.
In April 2013, the Company entered into an asset purchase agreement with Mailvision, pursuant to which in May 2013, the Company acquired
certain assets and assumed certain liabilities of Mailvision (See also Note 3). As of December 31, 2013, the Company owned 29.6% of the
outstanding share capital of Mailvision.
Balances and transactions with MailVision were as follows:
a.
Balances:
December 31,
2012
2013
Other payables and accrued expenses
$
492 $
-
b.
Transactions:
Year ended December 31,
2012
2011
2013
Amounts charged - cost of revenues
$
2,164 $
1,414 $
432
NOTE 7:-
PROPERTY AND EQUIPMENT
December 31,
2012
2013
Cost:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
$
23,463 $
10,652
2,336
36,451
21,556
9,473
1,803
32,832
Depreciated cost
$
3,619 $
24,871
10,753
2,253
37,877
23,075
9,650
1,961
34,686
3,191
Depreciation expenses amounted to $ 1,914, $ 1,755 and $ 2,014 for the years ended December 31, 2011, 2012 and 2013, respectively.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:-
INTANGIBLE ASSETS AND 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
AUDIOCODES LTD.
Useful life
(years)
December 31,
2012
2013
$
5-10
4.5-9
3
3
15,517 $
4,172
415
181
17,839
4,438
415
181
20,285
22,873
13,399
3,433
415
181
14,255
3,770
415
181
17,428
18,621
b.
c.
Amortized cost
$
2,857 $
4,252
Amortization expenses related to intangible assets amounted to $ 1,325, $ 1,128 and $ 1,193 for the years ended December 31, 2011,
2012 and 2013, respectively.
Expected amortization expenses are as follows:
Year ending December 31,
2014
2015
2016
2017
2018
$
$
1,355
1,180
846
481
390
4,252
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- FAIR VALUE MEASUREMENTS
AUDIOCODES LTD.
In accordance with ASC 820, the Group measures its foreign currency derivative instruments, its contingent consideration to NSC's former
shareholders and its contingent consideration to Mailvision, 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 and the Earn Out and the Sale Option provided to Mailvision are classified
within Level 3 value hierarchy because these liabilities are based on present value calculations and an external valuation models whose inputs
include market interest rates, estimated operational capitalization rates and volatilities. 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:
Financial assets related to foreign currency derivative hedging contracts
Financial Liabilities:
Foreign currency derivative contracts
Contingent consideration related to NSC's former shareholders
Total Financial liability
Contingent consideration related to Mailvision
Total Financial liability
Fair value measurements using significant unobservable inputs (Level 3):
Balance at January 1, 2013
Liabilities incurred in relation to the APA with Mailvision
Repayment of NSC's contingent consideration
Adjustment due to time change value
Balance at December 31, 2013
F-31
$
$
$
$
$
December 31, 2012
Fair value measurements using input type
Level 3
Level 2
Total
1,303 $
- $
1,303
(362) $
-
- $
(115)
(362) $
(115) $
(362)
(115)
(477)
December 31, 2013
Fair value measurements using input type
Total
Level 3
Level 2
- $
- $
(556) $
(556) $
$
$
(556)
(556)
(115)
(808)
120
247
(556)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- OTHER PAYABLES AND ACCRUED EXPENSES
Vacation accrual
Royalties provision
Other employees and payroll accruals
Government authorities
Accrued expenses
Others
NOTE 11:- SENIOR CONVERTIBLE NOTES
AUDIOCODES LTD.
December 31,
2012
2013
$
2,476 $
420
3,542
385
7,877
362
2,990
500
4,112
667
9,351
338
$
15,062 $
17,958
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, 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, 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.
As of December 31, 2012 and 2013, there was $ 353 in principal amount of the Notes outstanding. The effective interest rate for the years
ended December 31, 2011, 2012 and 2013 amounted to 2% per year. In January 2014, the Company repurchased Notes in the principal amount
of $300.
F-32
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- LONG-TERM BANK LOANS
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"). As of December 31, 2013, the 2008 Loans were fully paid.
In September and December 2011, the Company entered into loan agreements with Israeli commercial banks that provided for loans in the total
principal amount of $ 23,750 (the "2011 Loans"). The 2011 Loans bear interest at LIBOR plus 2.1%-4.35% with respect to $ 19,850 of the
principal amount of the 2011 Loans. The remaining $ 3,900 of principal amount of the 2011 Loans was required to be maintained as a
compensating bank deposit that decreases as the loans are repaid. This portion of the 2011 Loans bear interest at 0.5% above the interest rate
paid on the bank deposit. Of these 2011 Loans, $ 19,850 of the principal amount 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, 2012 and 2013, the banks have a lien on the Company's assets that secures the 2011 Loans. As of December 31, 2012 and
2013, the Company is required to maintain a total of $ 13,456 and $ 7,239, respectively, in compensating balances with the banks, to secure the
2011 Loans. As of December 31, 2012 and 2013, the compensating balances are included in $ 4,205 and $ 2,343 of short-term and restricted
bank deposits and $ 9,251 and $ 4,896 of long-term and restricted bank deposits, respectively. The amount of the compensating balances that is
required decreases as the loan is repaid. The agreements with respect to the 2011 Loans require the Company, among other things, to meet
certain financial covenants such as maintaining shareholders' equity, cash balances, and liabilities to banks at specified levels, as well as
achieving certain levels of operating income.
As of December 31, 2012, the Company was in compliance with its bank covenants except for the requirement to achieve certain levels of
operating income. The Company received waivers from the banks with respect to these covenants until December 31, 2013, subject to
compliance with revised financial covenants in 2012 and 2013, an increase in the interest rate with respect to one of the loans and an increase in
required compensating balances. As of December 31, 2013, the Company was in compliance with all the financial covenants.
NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
The Group's facilities are leased under several lease agreements in Israel, Europe and the U.S. for periods ending in 2024.
In addition, the Company has various operating lease agreements with respect to motor vehicles. The terms of the lease agreements are
for 36 months, which expire on various dates, the latest of which is in 2016.
F-33
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
Future minimum rental commitments under non-cancelable operating leases are as follows:
Year ending December 31,
2014
2015
2016
2017
2018 and on
$
6,386
6,310
6,614
6,361
42,346
Total minimum lease payments *)
$
68,017
*)
Minimum payments have been reduced by minimum sublease rental of $ 1,297 due in the future under non-cancelable subleases.
In connection with the Company's facilities lease agreement in Israel, the lessor has a lien of approximately $ 5,500 on certain bank
deposits. These deposits are included in short-term and restricted bank deposits.
Rent expenses for the years ended December 31, 2011, 2012 and 2013, were approximately $ 5,327, $ 5,745 and $ 5,282, respectively.
b.
Inventory purchase 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 2014. As of December 31, 2013, non- cancelable obligations were approximately $ 14,357.
c.
Royalty commitment to the Office of the Chief Scientist of the Israeli Ministry of Economy ("OCS"):
Under the research and development agreements of the Company and its Israeli subsidiaries with the OCS and pursuant to applicable
laws, the Company and its Israeli subsidiaries are required to pay royalties at the rate of 3%-5% on sales to end customers 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 dollar plus interest on the unpaid amount received based on the 12-month LIBOR rate (from the year the grant was
approved) applicable to dollar deposits. The Company and its Israeli subsidiaries are obligated to repay the Israeli Government for the
grants received only to the extent that there are sales of the funded products.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- 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 the Company wishes to transfer its manufacturing activity abroad, in addition 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%).
As of December 31, 2012 and 2013, the Company and its Israeli subsidiaries have a contingent obligation to pay royalties in the amount
of approximately $ 29,413 and $ 34,034, respectively.
As of December 31, 2012 and 2013, the Company and its Israeli subsidiaries have paid or accrued royalties to the OCS in the amount of
$ 1,810 and $ 2,408, respectively, which were recorded in 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 10.
e.
Legal proceedings:
1.
2.
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 was erected and was expected to be leased to the Company for a period of
eleven years. 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
was referred to arbitration where the Company claimed 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 aggregate amount of approximately NIS 14 million (approximately $ 4,000). In September 2013, the parties reached a
settlement agreement in which each party withdrew its claim.
In September 2011, an action was commenced against the Company's U.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 five patents. In December 2013, AudioCodes Inc. and the plaintiff reached a settlement agreement
that provided for a dismissal of the action and a nominal payment by AudioCodes Inc. to plaintiff.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
AUDIOCODES LTD.
3.
4.
5.
6.
7.
In January 2013, one of the Company’s former senior executives sent a letter of demand claiming an amount of NIS 4 million
(approximately $ 1,200) relating to the termination of his employment. The Company has denied all of his allegations and
believes that it has valid defenses to this claim. At this point, the Company cannot predict the outcome of this demand.
In February 2013, a patent infringement action was commenced against AudioCodes Inc. and other defendants, in Federal Court
in California alleging that AudioCodes Inc. infringed the plaintiff’s intellectual property rights in one patent. One of the other
defendants is a customer of the Group that has informed the Group that it believes it is entitled to indemnification from the Group
with respect to this litigation. AudioCodes Inc. has filed an Answer to the Complaint and the parties have exchanged a first set of
discovery requests. The Group believes it has valid defenses against this claim. This proceeding is at an early stage and it is not
possible at this time to predict its outcome.
In May 2013, the Company received letters from two of its customers who have been sued for alleged patent infringement. The
customers seek to be indemnified by the Company. At this early stage, the Company cannot predict the outcome of these
demands.
In October 2013, the Company filed a claim against a customer and one of its employees in Hong Kong for damages in
connection with a breach of a supply agreement, infringement of intellectual property and breach of confidentiality. In January
2014, a counterclaim was filed by that customer against the Company for an indeterminate amount. At this early stage, the
Company cannot predict the outcome of this claim.
In November 2013, a former employee filed a claim against the Company’s subsidiary in Brazil alleging that he is entitled to
approximately $ 600 as a result of the termination of his employment by the subsidiary. The Company has denied all of his
allegations and believes that it has valid defenses to this claim. At this early stage, the Company cannot predict the outcome of
this claim.
NOTE 14:- EQUITY
a.
Treasury stock:
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, 2012, the Company purchased
2,759,594 of its outstanding ordinary shares under this share repurchase plan, at a weighted average price per share of $ 2.44. As of
October 2012, the authorized stock repurchase program was completed.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- EQUITY (Cont.)
b.
Warrants issued to non-employees:
Outstanding at beginning of year
Changes during the year:
Granted
Forfeited
Warrants outstanding at end of year
Warrants exercisable at end of year
AUDIOCODES LTD.
Number of
shares
Weighted
average exercise
price
26,500 $
63,500 $
(10,000) $
80,000 $
13,500 $
4.12
4.36
3.65
4.37
4.52
The Company recorded immaterial compensation expenses with respect to the grants of these warrants in accordance with ASC 505.
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, 2013, the Purchase Plan for the Company and its non-U.S subsidiaries has expired.
d.
Employee Stock Option Plans:
In 2008, the Company's Board of Directors approved the 2008 Equity Incentive Plan that became effective in January 2009. As of
December 31, 2013, the total number of shares authorized for grant under this Plan is 1,720,232.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- EQUITY (Cont.)
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 Company's stock option activity and related information for the year ended December 31, 2013:
AUDIOCODES LTD.
Outstanding at beginning of year
Changes during the year:
Granted
Exercised
Forfeited
Expired
Weighted
average
exercise
price
Amount
of options
Weighted
average
remaining
contractual
term (in
years)
Aggregate
intrinsic
value
3,777,032 $
4.74
4.0 $
1,477
817,531 $
(672,645) $
(194,375) $
(534,000) $
4.66
2.82
5.16
10.78
Options outstanding at end of year
3,193,543 $
4.09
4.5 $
9,845
Vested and expected to vest
3,065,801 $
4.09
4.5 $
9,451
Options exercisable at end of year
1,446,182 $
4.25
3.1 $
4,279
The weighted-average grant-date fair value of options granted during the years ended December 31, 2011, 2012 and 2013 was $ 2.69,
$ 1.35 and $ 3.00, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference
between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last
trading day of the fiscal year. This amount changes based on the fair market value of the Company's shares.
Total intrinsic value of options exercised for the years ended December 31, 2011, 2012 and 2013 was $ 44, $ 63 and $ 2,052,
respectively.
During the year ended December 31, 2013, the Company granted 100,000 performance based options. The Company currently expects
that the performance targets will not be met and therefore no equity based compensation expenses related to these options were
recognized.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- EQUITY (Cont.)
AUDIOCODES LTD.
The options outstanding as of December 31, 2013, have been separated into ranges of exercise prices, as follows:
Range of
exercise
price
Options
outstanding
as of
December 31,
2013
Weighted
average
remaining
contractual
life
(Years)
Weighted
average
exercise
price
Options
exercisable
as of
December 31,
2012
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
52,316
363,500
1,404,365
1,086,331
251,031
36,000
3,193,543
3.85 $
4.22 $
5.15 $
3.83 $
5.14 $
0.10 $
4.5 $
0.01
2.06
3.21
5.23
7.02
9.75
46,566 $
190,250 $
525,732 $
571,134 $
76,500 $
36,000 $
4.09
1,446,182 $
0.01
2.11
3.08
5.63
7.24
9.75
4.25
The following is a summary of the Company's RSUs activity and related information for the year ended December 31, 2013:
Outstanding at beginning of year
Changes during the year:
Granted
Exercised
RSUs outstanding at end of year
Number of
shares
Weighted
average grant
date fair value
182,161 $
175,841 $
(85,541) $
272,461 $
3.79
4.93
3.74
4.54
During the years ended December 31, 2011, 2012 and 2013, the share based compensation expenses related to the RSUs granted
amounted to $ 786, $ 435 and $ 371, respectively.
As of December 31, 2013, there was $ 3,380 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
1.14 years.
e.
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 15a.)
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME
a.
Israeli taxation:
1.
Measurement of taxable income in U.S. dollars:
AUDIOCODES LTD.
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 the Investment Law, the Company has
been granted the "Alternative Benefit Plan", under which the main benefits are tax exemptions and reduced tax rates.
Therefore, the Company's income derived from the Approved Enterprise will be entitled to a tax exemption for a period of two
years and to an additional period of five to eight years of reduced tax rates of 10% - 25% (based on the percentage of foreign
ownership). The duration of tax benefits of reduced tax rates is subject to a limitation of the earlier of 12 years from
commencement of production, or 14 years from the approval date. The Company utilized tax benefits from the first program in
1998 and has been no longer eligible for benefits since 2007.
As of December 31, 2013, 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".
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, 2013, management
believes that the Company is in compliance with all of the aforementioned conditions.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
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 2005 Amendment") that significantly changed the
provisions of the Investment Law. The 2005 Amendment limits the scope of enterprises that may be approved by the Investment
Center by setting criteria for the approval of a facility as a Beneficiary Enterprise including a provision generally requiring that at
least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major
changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits.
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain
subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, the Company's existing
"Approved Enterprises" are generally not subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt
income generated under the provisions of the 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, 2013, there was no taxable income attributable to the Beneficiary Enterprise.
In December 2010, an amendment to the Investment Law came into effect ("the 2010 Amendment"). The 2010 Amendment
became effective as of January 1, 2011. According to the 2010 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 may elect to adopt the 2010
Amendment. Once an election is made, the Company will be subject to the amended tax rate of 16% from 2014 and thereafter.
The Company does not currently intend to adopt the 2010 Amendment, and intends to continue to comply with the Investment
Law as in effect prior to enactment of the 2010 Amendment.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
3.
Net operating loss carry-forward:
AUDIOCODES LTD.
As of December 31, 2013, the Company has cumulative losses for tax purposes in the amount of approximately $ 22,000, which
can be carried forward and offset against taxable income in the future for an indefinite period. As of December 31, 2013, the
Company recorded a deferred tax asset of $ 4,350 in respect of such carry-forward tax losses, since it believes it is more likely
than not it will utilize carry-forward tax losses.
As of December 31, 2013, the Company's Israeli subsidiaries have estimated total available carry-forward tax losses of
approximately $ 68,000. The net operating losses may be claimed and offset against taxable income in the future for an indefinite
period.
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 24% and 25% in the years ended December 31, 2011 and
2012, respectively.
F-42
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
On July 30, 2013, the Israeli Parliament passed a law, which, among other things, was designated to increase the tax levy for
2014 and thereafter (the "New Law"). The New Law increases the Israeli corporate tax rate from 25%, which was the tax rate in
effect for the year ended December 31, 2013, to 26.5%.
The effective tax rate payable by a company which is taxed under the Investment Law may be considerably lower (see also a2
above).
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
F-43
Year ended December 31,
2012
2011
2013
5,632 $
2,047
(2,555) $
(727)
475
2,360
7,679 $
(3,282) $
2,835
Year ended December 31,
2012
2011
2013
890 $
(652)
527 $
14
542
(1,946)
238 $
541 $
(1,404)
151 $
87
283 $
258
(634)
(770)
238 $
541 $
(1,404)
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
d.
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group's deferred tax
liabilities and assets are as follows:
AUDIOCODES LTD.
Deferred tax assets:
Net operating loss carry-forward
Reserves and allowances
Net deferred tax assets before valuation allowance
Less - 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
December 31,
2012
2013
52,035 $
7,016
52,976
7,843
59,051
(53,865)
60,819
(53,687)
5,186 $
7,132
1,157 $
2,547
1,397
2,953
3,704 $
4,350
463 $
1,019
880
1,902
1,482 $
2,782
$
$
$
$
$
$
The Company's U.S. subsidiary has estimated total available carry-forward tax losses of approximately $ 80,000 to offset against future
federal taxable income and $ 20,000 to offset against state federal taxable income. These carry-forward tax losses expire between 2020
and 2032. As of December 31, 2013, the Company's U.S subsidiary recorded a deferred tax asset of $ 2,782 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-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- 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:
Income (loss) before taxes, as reported in the consolidated statements of
operations
Statutory tax rate
Year ended
December 31,
2012
2011
2013
$
7,679
$
(3,282) $
2,835
24%
25%
25%
Theoretical tax expense (benefit) on the above amount at the Israeli statutory
tax rate
Income tax at rate other than the Israeli statutory tax rate
Tax advances, withholding tax and non-deductible expenses, including equity
based compensation expenses
Deferred taxes on losses for which a valuation allowance was provided
Tax adjustment in respect of different tax rates
Taxes in respect to prior years
State and Federal taxes
Foreign exchange
Impairment of tax advances
Other
$
$
1,843
275
(821) $
(55)
1,373
(1,083)
(1,219)
(54)
93
(901)
-
(89)
807
755
-
(162)
48
89
-
(120)
709
310
518
(2,929)
(148)
-
163
(20)
64
(71)
Actual tax expense (benefit)
$
238
$
541
$
(1,404)
f.
Unrecognized tax benefits:
The Company's unrecognized tax benefits as of December 31, 2012 and 2013 is $ 198.
The Company recognized interest and penalties related to unrecognized tax benefits in tax expenses in the amount of $ 16, $ 9 and $ 8
for the years ended December 31, 2011, 2012 and 2013, respectively. The liability for unrecognized tax benefits does not include the
liability recorded for accrued interest and penalties of $ 196 and $ 204 at December 31, 2012 and 2013, respectively.
The Company has received final tax assessment through the year 2008.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Numerator:
Net income (loss)
Denominator:
Denominator for basic earnings (loss) 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 earnings (loss) per share - adjusted weighted average
number of shares
*) Antidilutive.
NOTE 17:- FINANCIAL INCOME, NET
AUDIOCODES LTD.
Year ended
December 31,
2012
2011
2013
$
7,164
$
(4,177) $
4,218
41,437,927
39,125,129
38,241,258
497,170
-*)
-*)
-*)
855,500
-*)
41,935,097
39,125,129
39,096,758
Year ended
December 31,
2012
2011
2013
Financial expenses:
Interest
Amortization of marketable securities premiums and accretion of discounts, net
Exchange rate
Others
$
(346) $
(416)
(612)
(133)
(900) $
(436)
(4)
(201)
(617)
(349)
-
(229)
Financial income -
Interest and others
Exchange rate
(1,507)
(1,541)
(1,195)
1,930
-
1,994
-
1,930
1,994
$
423 $
453 $
1,103
188
1,291
96
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- GEOGRAPHIC INFORMATION
a.
Summary information about geographic areas:
AUDIOCODES LTD.
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, 2011, 2012 and 2013 and long-lived assets as of December 31,
2011, 2012 and 2013.
2011
2012
2013
Long-
Total
lived
revenues assets revenues assets revenues assets
Long-
lived Total
Long-
lived Total
Israel
Americas
Europe
Far East
b.
Product lines:
$ 11,887 $ 2,884 $
85,630
36,322
21,988
314 66,443
125 35,876
45 17,398
230 71,527
119 37,310
43 20,508
7,887 $ 2,941
147
74
29
7,773 $ 3,227 $
$155,827 $ 3,368 $127,490 $ 3,619 $137,232 $ 3,191
Total revenues from external customers divided on the basis of the Company's product lines are as follows:
Technology
Networking
NOTE 19:- DERIVATIVE INSTRUMENTS
Year ended
December 31,
2012
2011
2013
$
35,017 $
120,810
24,673 $
102,817
22,048
115,184
$
155,827 $
127,490 $
137,232
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 dollar. The Group currently hedges such future exposures for a maximum period of one
year. However, the Group may choose not to hedge certain foreign currency exchange exposures for a variety of reasons, including but not
limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no
assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- DERIVATIVE INSTRUMENTS (Cont.)
AUDIOCODES LTD.
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 income or expense.
The Group had a net deferred gain (loss) associated with cash flow hedges of $ 1,303 recorded in other comprehensive income as of
December 31, 2012. As of December 31, 2013, there was no deferred gain associated with cash flow hedges recorded in other comprehensive
income.
The Group entered into forward and options contracts that did not meet the requirement for hedge accounting. The Group measured the fair
value of the contracts in accordance with ASC 820, at Level 2. The net gains (losses) recognized in "financial and other expenses, net" during
the years ended December 31, 2011, 2012 and 2013 were $ 187, $ 452 and $ (191), respectively.
As of December 31, 2012, the Group had outstanding forward and options collar (cylinder) contracts in the amount of $ 33,600 which were
designated as salary hedging contracts. As of December 31, 2013, the Group had no outstanding forward and options collar (cylinder) contracts.
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, 2012 and 2013, are summarized below:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2012
2013
Fair value of foreign exchange forward and options
collar (cylinder) contracts
"Other receivables and prepaid expenses"
Gains (losses) recognized in OCI (effective portion) "Other comprehensive income"
$
$
1,303 $
-
1,543 $
(1,303)
The effect of derivative instruments in cash flow hedging relationship on income for the years ended December 31, 2012 and 2013 is
summarized below:
Foreign exchange forward and
options contracts
Statements of
operations
Gain on derivatives recognized in OCI
"Operating expenses"
Loss (gain) recognized in income on derivatives
(effective portion)
"Operating expenses"
Year ended
December 31,
2012
2013
1,211 $
1,292
332 $
(2,595)
$
$
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- SUBSEQUENT EVENT
On March 10, 2014, the Company sold in a public offering 4,025,000 of its ordinary shares, including 525,000 shares sold pursuant to the
underwriters’ full exercise of their over-allotment option, at a price of $ 8.00 per share. The Company’s net proceeds from this offering were
approximately $ 29,700, after deducting underwriting discounts, commissions and other estimated offering expenses.
AUDIOCODES LTD.
- - - - - - - - - - -
F-49
EXHIBIT INDEX
Document
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.
Exhibit No.
12.1
12.2
13.1
13.2
15.1
101.1#
Interactive Data Files (XBRL-Related Documents).
#
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.
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: March 25, 2014
/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: March 25, 2014
/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, 2013 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 25, 2014
/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, 2013 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 25, 2014
/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, 333-170676 and 333-190437) and Form F-3 (No. 333-193209) of our reports dated March 25, 2014 with respect to the consolidated financial
statements of AudioCodes Ltd. for the year ended December 31, 2013, 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, 2013, filed with the Securities and Exchange Commission.
Tel Aviv, Israel
March 25, 2014
/s/ KOST, FORER, GABBAY AND KASIERER
KOST, FORER, GABBAY AND KASIERER
A member of Ernst & Young Global
Exhibit 15.1