FORM F-1
As filed with the Securities and
Exchange Commission on October 31, 2006
Registration
No. 333-
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form F-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
ALLOT COMMUNICATIONS
LTD.
(Exact Name of Registrant as
Specified in its Charter)
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State of Israel
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3576
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Not Applicable
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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Allot
Communications Ltd.
22 Hanagar Street
Neve Neeman Industrial Zone B
Hod-Hasharon 45240
Israel
+972
(9) 761-9200
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Allot
Communications, Inc.
7664 Golden Triangle Drive
Eden Prairie, MN 55344
(952) 944-3100
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies
of Communications to:
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Joshua G. Kiernan, Esq.
White & Case LLP
5 Old Broad Street
London EC2N 1DW
England
Tel:
+44 (20) 7532-1408
Fax:
+44 (20) 7532-1001
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Ori Rosen, Adv.
Oren Knobel, Adv.
Ori Rosen & Co.
One Azrieli Center
Tel Aviv 67021
Israel
Tel: +972 (3) 607-4700
Fax: +972 (3) 607-4701
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James R. Tanenbaum, Esq.
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York
Tel: (212) 468-8000
Fax: (212) 468-7900
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Ehud Sol, Adv.
Herzog, Fox & Neeman
Asia House
4 Weizman Street
Tel Aviv 64239, Israel
Tel: +972 (3) 692-2020
Fax: +972 (3) 696-6464
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Approximate
date of commencement of proposed sale to the public:
As soon as practicable after effectiveness of this registration
statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earliest effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434 under the Securities Act, check the following
box. o
CALCULATION
OF REGISTRATION FEE
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Proposed
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Title of Each Class of Securities to be Registered
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Maximum Aggregate Offering Price(1)
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Amount of Registration Fee
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Ordinary shares, par value NIS 0.10
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U.S.$82,225,000
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U.S.$8,799
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(1)
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Estimated solely for the purpose of
computing the amount of the registration fee pursuant to
Rule 457 under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information contained in this prospectus is not complete and may
be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to
sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
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Subject to
Completion, dated October 31, 2006
PROSPECTUS
6,500,000 Shares
Ordinary Shares
We are offering 6,500,000 ordinary shares. No public market
currently exists for our ordinary shares.
We have applied to have our ordinary shares approved for
quotation on The Nasdaq Global Market under the symbol
ALLT. We anticipate that the initial public offering
price will be between $9.00 and $11.00 per ordinary share.
Investing in our ordinary
shares involves risks. See Risk Factors beginning on
page 8.
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Per Share
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Total
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Public Offering Price
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$
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$
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Underwriting Discount
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$
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$
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Proceeds to Allot Communications
(before expenses)
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$
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$
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We have granted the underwriters a
30-day
option to purchase up to an additional 975,000 ordinary
shares on the same terms and conditions as set forth above if
the underwriters sell more than 6,500,000 ordinary shares
in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Lehman Brothers, on behalf of the underwriters, expects to
deliver the ordinary shares on or
about ,
2006.
Lehman
Brothers
Deutsche
Bank Securities
CIBC
World Markets
RBC
Capital Markets
,
2006
TABLE OF
CONTENTS
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Page
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1
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8
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21
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22
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25
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27
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30
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48
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63
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80
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85
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89
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94
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97
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106
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111
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111
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111
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113
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F-1
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Until ,
2006, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our ordinary shares, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by or on our
behalf. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
This prospectus is not an offer to sell or a solicitation of an
offer to buy our ordinary shares in any jurisdiction where it is
unlawful. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of
ordinary shares.
i
PROSPECTUS
SUMMARY
You should read the following summary together with the
entire prospectus, including the more detailed information in
our consolidated financial statements and related notes
appearing elsewhere in this prospectus. You should carefully
consider, among other things, the matters discussed in
Risk Factors.
Allot
Communications Ltd.
We are a leading designer and developer of broadband service
optimization solutions using advanced deep packet inspection, or
DPI, technology. Our solutions provide broadband service
providers and enterprises with real-time, highly granular
visibility into, and control of, network traffic, and enable
them to efficiently and effectively manage and optimize their
networks. Our carrier-class products are used by service
providers to offer subscriber-based and application-based tiered
services that enable them to optimize their service offerings,
reduce churn rates and increase average revenue per user, or
ARPU. The rapid growth of broadband networks, such as cable, DSL
and wireless, and the proliferation in the number and complexity
of broadband applications have led broadband service providers
to demand new ways to manage their networks. Costly
infrastructure upgrades to increase network bandwidth capacity
neither address service providers need for network
visibility nor prioritize revenue-generating applications.
Furthermore, service providers have generally been unsuccessful
in capturing the significant new revenue opportunities available
from providing differentiated, premium broadband services that
command higher prices. By capitalizing on new revenue
opportunities and maximizing the capacity of existing network
infrastructure, our DPI technology enables service providers to
optimize returns on their investments and enhance the quality of
the services they provide.
Our products consist of our NetEnforcer traffic management
systems and NetXplorer application management suite. NetEnforcer
employs advanced DPI technology, which identifies applications
at high speeds by examining data packets and searching for
application patterns and behaviors. NetXplorer enables the
implementation of user-defined network management policies and
the collection of detailed statistics on the networks
users and applications. Our goal is to be the leading provider
of independent network inspection and management solutions used
by service providers and enterprises to transform generic access
broadband networks into intelligent broadband networks.
We generated revenues of $23.0 million in 2005,
representing a 27% increase over the prior year, and revenues of
$24.6 million for the nine months ended September 30,
2006, representing a 55% increase over the same period in the
prior year. We had a net loss of $2.4 million in 2005 and
had net income of $0.6 million for the nine months ended
September 30, 2006. We have incurred net losses in each
fiscal year since our incorporation in 1996 and may be unable to
achieve profitability. Since inception, we have financed our
operations primarily through private placements of our equity
securities and, to a lesser extent, through borrowings from
financial institutions. We had 232 employees as of
September 30, 2006.
Industry
Background
The rapid proliferation of broadband networks in recent years
has been largely driven by demand from users for faster and more
reliable access to the Internet and by the proliferation in the
number and complexity of broadband applications. According to a
May 2006 report by International Data Corporation, or IDC, a
provider of information about the telecommunications market, the
number of broadband subscribers globally is expected to reach
396 million by 2010, representing a compound annual growth
rate of 14% over the 206 million in 2005. The applications
utilized by broadband subscribers include
peer-to-peer
file-sharing (P2P),
voice-over-IP
(VoIP), Internet video and online video gaming applications, as
well as applications to enable online content services. In
contrast to traditional applications, such as
e-mail and
web-browsing, these new applications require large amounts of
bandwidth and are highly sensitive to network delays, thereby
increasing the cost of maintaining network performance. As a
result of increased competition and lack of service
differentiation, broadband access has become a commodity,
contributing to downward price pressure, low ARPU, and high
customer churn rates. Yet, because service providers do not have
the tools to analyze and manage applications on their networks,
most service providers still only offer users undifferentiated
connectivity for a flat fee, regardless of the type of
application, its importance to the user and level of usage.
1
To address these issues, service providers have begun to offer
premium, differentiated applications, such as VoIP, video and
new online content services based on the willingness of
subscribers to pay premium rates for upgraded quality of service
and certain applications. However, to offer premium services,
and to guarantee service levels, service providers need to be
able to identify, control and protect network applications used
by different subscribers. By offering such tiered services and
charging subscribers according to the value of these services,
service providers can capitalize on the revenue enhancement
opportunities enabled by different broadband applications.
The proliferation of network applications also presents
significant challenges for enterprises operating wide-area
networks. Enterprises have also become increasingly dependent on
broadband Internet and Intranet access, as content distribution
between partners and customers, employee remote access, and
VoIP, have become more common. Applications such as
e-mail,
customer relationship management, or CRM, enterprise resource
planning, or ERP, and other online transactional and business
applications are critical to enterprises businesses. In
order to guarantee the performance of these mission-critical
applications, as well as to reduce infrastructure expenses,
enterprises seek the tools required to prioritize and control
their network applications.
Service providers and enterprises are seeking to transform
generic access broadband networks into intelligent broadband
networks. The ability to identify, distinguish and prioritize
different network applications plays a major role in intelligent
network management, allowing service providers to optimize
bandwidth usage and reduce operational costs, while maintaining
high quality of service. Application designers are employing
increasingly sophisticated methods to avoid detection by network
operators who desire to manage network use. For example,
applications can disguise themselves as permitted applications
and also use sophisticated encryption techniques to avoid
detection. Unlike traditional network infrastructure devices,
such as switches and routers, which can perform only a very
limited examination of packets, DPI solutions offer active
control over each application and subscriber in the network.
The Allot
Solution
Our NetEnforcer traffic management systems and NetXplorer
application management suite enable our end-customers to
accomplish the following objectives:
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Network visibility. Our intelligent network
solutions enable our end-customers to generate detailed
real-time and historical reports by identifying bandwidth usage
by application, subscriber usage patterns, network performance,
long- and short-term usage trends and abnormal events, such as
denial-of-service
attacks and worms.
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Application management and control. Service
providers and enterprises apply our intelligent network
application management technology to improve service quality by
optimizing available bandwidth usage for different applications.
For example, P2P applications that consume large amounts of
network bandwidth can be de-prioritized to enhance the
performance of applications, such as VoIP or Internet video,
that are more sensitive to delay. Intelligent application
controls can ensure the delivery of mission-critical
applications by deprioritizing non-critical, bandwidth-intensive
applications, discourage the use of non-business or recreational
applications, and warn and protect against security threats.
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Subscriber and service management. Our
offerings enable service providers to increase total revenue,
ARPU and customer loyalty by offering tiered service plans and
differentiated content offerings to better meet varying
subscriber needs. Using our systems, service providers can
tailor and price service plans based on customer needs and
demands, such as plans that guarantee performance of certain
applications, the ability to purchase bandwidth on demand or
bandwidth for prioritized content delivery. Content providers
can also contract with service providers to guarantee high
quality service to their customers over the service
providers infrastructure, thereby enabling content
providers to differentiate their offerings.
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Our
Competitive Strengths
Our competitive strengths include the following:
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Market-leading DPI technology and analytical
capabilities. Our focus on developing the most
efficient means to search for hundreds of different
applications, combined with our extensive database of algorithms
that detect network applications, provide us with a significant
competitive advantage. We believe that our NetEnforcer AC-2500,
is currently the only commercially deployed solution with its
level of functionality capable of supporting 5 gigabits/second
performance and 2 million simultaneous connections.
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Broad product portfolio. We believe that our
broad product portfolio with offerings targeted at small,
midsize and large service providers and enterprises enables us
to compete in, and our channel partners to serve, a wider range
of profitable markets than our competitors.
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Independence from underlying network
infrastructure. Our independent solutions are
designed for easy deployment and to be less disruptive to
existing networks than embedded solutions, which require changes
or upgrades to the network infrastructure. In addition,
independent solutions can be upgraded easily to respond to rapid
changes in application behavior and subscriber demands, and
offer end-customers flexibility in choosing any infrastructure
equipment vendor.
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Global sales and marketing channels. Our
global network of over 300 distributors, resellers and
systems integrators, through which we make substantially all of
our sales, have enabled us to achieve a diverse customer base.
We also rely on these third parties to install and provide basic
technical support for our systems. To date, we have deployed
over 9,000 NetEnforcer systems in 118 countries.
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Focus on service optimization solutions. We
believe that our dedicated focus on DPI solutions differentiates
the level of service and support that we provide to our channel
partners and end-customers. This includes our responsiveness to
the introduction of new applications and effective integration
of our products into our customers existing billing,
customer care and other business systems.
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Our
Strategy
Our goal is to be the leader in offering service providers and
enterprises network inspection and management solutions to
transform generic access broadband networks into intelligent
broadband networks. Our strategy to achieve this goal includes
the following:
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Further our technological advantage. We intend
to continue investing in the development of market leading
broadband service optimization technologies and new broadband
applications and services. Our next generation product, which is
designed to support multiple channels of 10 gigabit/second
full performance throughput rates, will utilize the new Advanced
Telecom Computing Architecture standards, or ATCA, since it
better enables the integration of additional third-party
services into our product offerings.
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Continue to expand our sales and marketing
channels. We intend to expand our world-wide
sales and marketing channels to further address small and
medium-sized service providers and enterprises, including the
government and education sectors. We intend to seek channel
partners in new geographical territories, as well as in vertical
markets in countries where we have already established a
presence.
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Focus on larger service providers. We intend
to target larger service providers in response to increased
demand from them for the ability to differentiate their service
offerings. We believe that sales to these end-customers are more
likely to result in sustained demand for our NetEnforcer systems
as they deploy our products throughout their networks and as
their networks grow. We intend to supplement these efforts by
expanding our relationships with system integrators and OEMs who
have existing relationships with larger service providers.
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Selectively pursue strategic partnerships and
acquisitions. We intend to selectively pursue partnerships
and acquisitions that will provide us access to complementary
technologies and accelerate our penetration into new markets,
including mobile networks, security applications and subscriber
management.
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We face a number of challenges in achieving our goal. In
particular, the market for our products in the service provider
market is still emerging and is highly competitive, and our
growth may be harmed if carriers do not adopt DPI solutions or
if they adopt DPI solutions from our competitors. In addition,
sales of our products can involve lengthy sales cycles, which
may impact the timing of our revenues and result in us expending
significant resources without making any sales.
Company
Information
We were incorporated under the laws of the State of Israel in
November 1996. Our principal executive offices are located at
22 Hanagar Street, Neve Neeman Industrial
Zone B, Hod-Hasharon 45240, Israel, and our telephone
number is
+972 (9) 761-9200.
Our web site address is www.allot.com. The information on our
web site does not constitute part of this prospectus.
Unless the context otherwise requires, the terms
Allot, we, us and
our refer to Allot Communications Ltd. and our
wholly-owned subsidiaries.
The terms NetEnforcer and NetReality, as
well as the name Allot Communications, are
registered trademarks and we have filed a trademark application
to register our logo. All other registered trademarks appearing
in this prospectus are owned by their holders.
4
THE
OFFERING
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Ordinary shares offered by us |
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6,500,000 shares. |
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Ordinary shares to be outstanding after this offering |
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20,914,233 shares. |
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Use of proceeds |
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We intend to use the net proceeds of this offering to fund our
research and development activities, business development and
marketing activities, and for general corporate purposes and
working capital. We also may use a portion of the net proceeds
to acquire or invest in complementary companies, products or
technologies although we currently do not have any acquisition
or investment planned. |
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Proposed Nasdaq Global Market symbol |
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ALLT. |
The number of ordinary shares to be outstanding after this
offering excludes (1) 3,541,171 ordinary shares
reserved for issuance under our share option plans as of the
date of this prospectus, of which options to purchase
3,451,439 ordinary shares at a weighted average exercise
price of $2.32 per share have been granted,
(2) 246,479 ordinary shares that have been issued, but
are held in trust for the benefit of our founder and Chairman,
Yigal Jacoby, pending his payment of the purchase price of such
shares (see Certain Relationships and Related Party
Transactions Agreements with Directors and
Officers Escrow Agreement with Yigal Jacoby),
and (3) up to 163,705 ordinary shares issuable upon the
exercise of warrants granted to two Israeli banks and an Israeli
non-profit organization at a weighted average exercise price of
$3.37 per share.
Unless otherwise indicated, all information in this prospectus:
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reflects the issuance upon the closing of this offering of
270,016 ordinary shares upon the exercise of warrants to
purchase Series B preferred shares on a cashless and
non-cashless basis, and the receipt of $1,128 by us from such
exercise;
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reflects the issuance upon the closing of this offering of
14,094 ordinary shares upon the exercise of an option to
purchase Series B preferred shares and the receipt of NIS
620, representing approximately $145, from such exercise, held
by Mr. Jacoby;
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reflects the conversion upon the closing of this offering of
(1) all of our issued and outstanding Series A, B, C,
D and E preferred shares into 10,969,745 ordinary shares,
including 275,127 ordinary shares resulting from an
anti-dilution adjustment for price protection granted to holders
of our Series C preferred shares in connection with prior
financings and this offering, and (2) all of our
Series A ordinary shares into 611,349 ordinary shares;
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assumes an initial public offering price of $10.00 per
ordinary share, the midpoint of the estimated initial public
offering price range;
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assumes no exercise of the underwriters option to purchase
from us up to 975,000 additional ordinary shares; and
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reflects a
1-for-100 share
split effected on February 5, 1998, a share dividend
effected on September 12, 2000 of three shares for each
outstanding share, and a
4.3962-for-1
reverse share split effected on October 29, 2006. Such
reverse share split was effected through a
10-for-1
consolidation of each series of our ordinary and preferred
shares, followed by a share dividend of approximately 1.275
ordinary shares for each ordinary share outstanding and an
adjustment to the ordinary share conversion ratio of our
preferred shares and Series A ordinary shares. We effected
the reverse share split in this manner in order to maintain a
round par value per share and to give our board of directors
maximum flexibility under Israeli law to determine the amount of
the share dividend prior to printing preliminary prospectuses
for this offering.
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5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial and
operating data derived from our consolidated financial
statements. You should read this data along with the sections of
this prospectus entitled Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and related notes included
elsewhere in this prospectus.
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2003
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2004
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2005
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2005
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2006
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(unaudited)
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(in thousands, except share and per share data)
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Consolidated statements of
operations data:
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Revenues:
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Products
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$
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13,122
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$
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14,638
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$
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18,498
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$
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12,576
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$
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20,718
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Services
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1,653
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3,447
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4,474
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3,317
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3,859
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Total revenues
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14,775
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18,085
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22,972
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15,893
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24,577
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Cost of revenues(1):
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Products
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3,229
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3,942
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4,481
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3,237
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4,562
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Services
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362
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679
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938
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699
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845
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Total cost of revenues
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3,591
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4,621
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5,419
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3,936
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|
|
|
5,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,184
|
|
|
|
13,464
|
|
|
|
17,553
|
|
|
|
11,957
|
|
|
|
19,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
4,053
|
|
|
|
4,851
|
|
|
|
6,652
|
|
|
|
4,964
|
|
|
|
6,737
|
|
Less royalty-bearing participation
|
|
|
1,094
|
|
|
|
894
|
|
|
|
727
|
|
|
|
582
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net(1)
|
|
|
2,959
|
|
|
|
3,957
|
|
|
|
5,925
|
|
|
|
4,382
|
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
8,164
|
|
|
|
10,104
|
|
|
|
11,887
|
|
|
|
8,797
|
|
|
|
10,859
|
|
General and administrative(1)
|
|
|
1,832
|
|
|
|
2,081
|
|
|
|
2,380
|
|
|
|
1,709
|
|
|
|
2,260
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,955
|
|
|
|
16,508
|
|
|
|
20,192
|
|
|
|
14,888
|
|
|
|
18,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,771
|
)
|
|
|
(3,044
|
)
|
|
|
(2,639
|
)
|
|
|
(2,931
|
)
|
|
|
409
|
|
Financing and other income
(expenses), net
|
|
|
(507
|
)
|
|
|
(241
|
)
|
|
|
45
|
|
|
|
36
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
expenses (benefit)
|
|
|
(2,278
|
)
|
|
|
(3,285
|
)
|
|
|
(2,594
|
)
|
|
|
(2,895
|
)
|
|
|
638
|
|
Income tax expenses (benefit)
|
|
|
2
|
|
|
|
3
|
|
|
|
(218
|
)
|
|
|
(178
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,280
|
)
|
|
$
|
(3,288
|
)
|
|
$
|
(2,376
|
)
|
|
$
|
(2,717
|
)
|
|
$
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share
|
|
$
|
(0.82
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per
share
|
|
$
|
(0.82
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
used in computing basic net earnings (loss) per share
|
|
|
2,774,639
|
|
|
|
2,787,554
|
|
|
|
2,943,500
|
|
|
|
2,903,356
|
|
|
|
13,310,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
used in computing diluted net earnings (loss) per share
|
|
|
2,774,639
|
|
|
|
2,787,554
|
|
|
|
2,943,500
|
|
|
|
2,903,356
|
|
|
|
15,501,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net
earning (loss) per share of ordinary shares (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
(1) |
|
Includes stock-based compensation expense related to options
granted to employees and others as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8
|
|
Research and development, net
|
|
|
22
|
|
|
|
17
|
|
|
|
12
|
|
|
|
10
|
|
|
|
97
|
|
Sales and marketing
|
|
|
40
|
|
|
|
25
|
|
|
|
251
|
|
|
|
240
|
|
|
|
330
|
|
General and administrative
|
|
|
235
|
|
|
|
116
|
|
|
|
42
|
|
|
|
27
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
297
|
|
|
$
|
158
|
|
|
$
|
305
|
|
|
$
|
277
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Pro forma basic and diluted loss per ordinary share gives effect
to the conversion upon the closing of this offering, assuming
such closing occurred on September 30, 2006, of
(1) all of our issued and outstanding preferred shares into
10,969,795 ordinary shares, and (2) all of our
Series A ordinary shares into 611,349 ordinary shares. See
Note 2r to our consolidated financial statements for an
explanation of the number of shares used in computing per share
data. |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
Pro Forma as
|
|
|
|
Actual
|
|
|
Adjusted
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,547
|
|
|
$
|
63,497
|
|
Marketable securities
|
|
|
8,897
|
|
|
|
8,897
|
|
Working capital
|
|
|
5,048
|
|
|
|
63,498
|
|
Total assets
|
|
|
27,524
|
|
|
|
85,974
|
|
Total liabilities
|
|
|
14,686
|
|
|
|
14,686
|
|
Accumulated deficit
|
|
|
(37,321
|
)
|
|
|
(37,321
|
)
|
Total shareholders equity
|
|
|
12,838
|
|
|
|
71,288
|
|
Pro forma as adjusted information included above in the
consolidated balance sheet data reflects (1) our receipt of
estimated net proceeds of $58.5 million from our sale of
the ordinary shares in this offering, based on an initial public
offering price of $10.00 per share, the midpoint of the
estimated initial public offering price range, after deducting
the underwriting discount and estimated offering expenses, of
which $0.5 million had been prepaid as of
September 30, 2006 and is included in working capital,
(2) the receipt of $1,128 by us pursuant to the issuance of
270,016 ordinary shares pursuant to the exercise on a cashless
and non-cashless basis upon the closing of this offering of
warrants to purchase Series B preferred shares, and
(3) the receipt of $145 by us pursuant to the issuance of
14,094 ordinary shares pursuant to the exercise upon the closing
of this offering of an option to purchase Series B
preferred shares held by our founder and Chairman, Yigal Jacoby.
7
RISK
FACTORS
This offering and an investment in our ordinary shares
involve a high degree of risk. You should consider carefully the
risks described below, together with the financial and other
information contained in this prospectus, before you decide to
buy our ordinary shares. If any of the following risks actually
occurs, our business, financial condition and results of
operations would suffer. In this case, the trading price of our
ordinary shares would likely decline and you might lose all or
part of your investment. The risks described below are not the
only ones we face. Additional risks that we currently do not
know about or that we currently believe to be immaterial may
also impair our business operations.
Risks
Relating to Our Business
We
have a history of losses, may incur future losses and may not
achieve profitability.
We have incurred net losses in each fiscal year since we
commenced operations in 1997. We incurred net losses of
$2.4 million in 2005, $3.3 million in 2004 and
$2.3 million in 2003. As of September 30, 2006, our
accumulated deficit was $37.3 million. Our losses could
continue for the next several years as we expand our sales and
marketing activities and continue to invest in research and
development. We may incur losses in the future and may not
generate sufficient revenues in the future to achieve
profitability.
We are
dependent on our NetEnforcer traffic management system and
NetXplorer network management application suite for all of our
revenue.
Our revenues are currently derived solely from sales of our
NetEnforcer traffic management system and NetXplorer network
management application suite, and from maintenance and support
contracts related to these products. We currently expect that
our revenues from these products will continue to account for
all or substantially all of our revenues for the foreseeable
future. As a result, any factor adversely affecting our ability
to sell, or the pricing of or demand for, these products would
severely harm our ability to generate revenues.
We may
be unable to compete effectively with other companies in our
market who offer, or may in the future offer, competing
technologies.
We compete in a rapidly evolving and highly competitive sector
of the networking technology market. Our principal competitors
are Cisco Systems, Inc. (through its acquisition of P-Cube,
Inc.), Sandvine Inc. and Ellacoya Networks, Inc. in the service
provider market, and Packeteer Inc. in the enterprise market. We
also compete in particular geographic areas with a number of
smaller local competitors and we compete indirectly with router
and switch infrastructure companies with features that address
some of the problems that our products address. We also face
competition from companies that offer partial solutions
addressing only one aspect of the challenges facing broadband
providers, such as network monitoring or security. Our
competitors may announce new products, services or enhancements
that better meet the needs of customers or changing industry
requirements, or may offer alternative methods to achieve
customer objectives. One of our direct competitors, Cisco
Systems, is substantially larger than we are and has
significantly greater financial, sales and marketing, technical,
manufacturing and other resources. The entry of new competitors
into our market and acquisitions of our existing competitors by
companies with significant resources and established
relationships with our potential customers could result in
increased competition and harm our business. Increased
competition may cause price reductions, reduced gross margins
and loss of market share, any of which could have a material
adverse effect on our business, financial condition or result of
operations.
Demand
for our products depends in part on the rate of adoption of
bandwidth-intensive broadband applications, such as
peer-to-peer
(P2P), and latency-sensitive applications, such as
voice-over-Internet
protocol (VoIP), Internet video and online video gaming
applications.
Our products are used by service providers and enterprises to
monitor and manage bandwidth-intensive applications that cause
congestion in broadband networks and impact the quality of
experience of users. In addition to the general increase in
applications delivered over broadband networks that require
large amounts
8
of bandwidth, such as P2P applications, demand for our products
is driven particularly by the growth in applications which are
highly sensitive to network delays and therefore require
efficient network management. These applications include VoIP,
Internet video and online video gaming applications. If the
rapid growth in adoption of VoIP and in the popularity of
Internet video and online video gaming applications does not
continue, the demand for our products may not grow as
anticipated.
We
depend on third parties to market, sell, install, and provide
initial technical support for our products.
We market and sell our products to end-customers through third
party channel partners, such as distributors, resellers, OEMs
and system integrators. Our channel partners are also
responsible for installing our products and providing initial
customer support for them. As a result, we depend on the ability
of our channel partners to market and sell our products
successfully to end-customers. If any significant channel
partners fail, individually or in the aggregate, to perform as
we expect, our sales may suffer. We also depend on our ability
to maintain our relationships with existing channel partners and
develop relationships in key markets with new channel partners.
We cannot assure you that our channel partners will market our
products effectively, receive and fulfill customer orders of our
products on a timely basis or continue to devote the resources
necessary to provide us with effective sales, marketing and
technical support. Our products are complex and it takes time
for a new channel partner to gain experience in their operation
and installation. Therefore, it may take a period of time before
a new channel partner can successfully market, sell and support
our products if an existing channel partner ceases to sell our
products.
Our channel partners install our products and provide initial
customer support to end-customers of our products. Any failure
by our channel partners to provide adequate support to
end-customers could result in customer dissatisfaction with us
or our products, which could result in a loss of customers, harm
our reputation and delay or limit market acceptance of our
products.
Our agreements with channel partners are generally not exclusive
and our channel partners may market and sell products that
compete with our products. Our agreements with our distributors
and resellers are usually for an initial one year term and
following the expiration of this term, they can be terminated by
either party. We can give no assurance that these agreements
will not be terminated upon proper notice and any such
termination may adversely affect our profitability and results
of operations.
The
market for our products in the service provider market is still
emerging and our growth may be harmed if carriers do not adopt
DPI solutions.
The market for DPI technology is still emerging and the majority
of our sales to date have been to small and midsize service
providers and enterprises. We believe that the largest service
providers, referred to as Tier 1 carriers, as well as cable
and mobile operators, present a significant market opportunity
and are an important element of our long term strategy, but they
are still in the early stages of evaluating the benefits and
applications of DPI technology. Carriers may decide that full
visibility into their networks or highly granular control over
content based applications is not critical to their business.
They may also determine that certain applications, such as VoIP
or video, can be adequately prioritized in their networks by
using router and switch infrastructure products without the use
of DPI technology. They may also, in some instances, face
regulatory constraints that could change the characteristics of
the markets. Furthermore, widespread adoption of our products by
carriers will require that they migrate to a new business model
based on offering subscriber and application-based tiered
services and market these new services successfully to
consumers. If carriers decide not to adopt DPI technology, our
market opportunity would be reduced and our growth rate may be
harmed.
Demand
for our products may be impacted by government regulation of the
telecommunications industry.
Carriers are subject to government regulation in jurisdictions
in which we sell our products. For example, there has been a
series of draft bills introduced to the U.S. Congress in
the first half of 2006 that would prohibit service providers
from prioritizing applications from content providers who are
prepared to pay for such service. To date, none of these bills
has been adopted; however, some of these bills may still be
raised for consideration and other jurisdictions in which we
operate may adopt similar legislation. Advocates for the
9
legislation claim that collecting premium fees from certain
preferred customers would distort the market for
Internet applications in favor of larger and better-funded
content providers and would impact end users who purchased
broadband access only to experience differing response times in
interacting with various content providers. Opponents of the
legislation believe that content providers who support
bandwidth-intensive applications should be required to pay
service providers a premium in order to support further network
investments. Demand from carriers for the traffic management and
subscriber management features of our products could be
adversely affected if regulations prohibit, or limit, service
providers from managing traffic on their networks. A decrease in
demand for these features could adversely impact sales of our
products.
Sales
of our products to large service providers can involve a lengthy
sales cycle, which may impact the timing of our revenues and
result in us expending significant resources without making any
sales.
The length of our sales cycles to large service providers,
including carriers and cable and mobile operators, is generally
lengthy, as these end-customers undertake significant testing to
assess the performance of our products within their networks. As
a result, we may invest significant time from initial contact
with a large service provider until that end-customer decides to
incorporate our products in its network. We may also expend
significant resources attempting to persuade large service
providers to incorporate our products into their networks
without success. Even after deciding to purchase our products,
initial network deployment of our products by a large service
provider may last up to three years. Carriers, especially in
North America, often require that products they purchase meet
Network Equipment Building System (NEBS) certification
requirements, which relate the reliability of telecommunications
equipment. Our NetEnforcer
AC-1000 and
AC-2500 are
designed to meet NEBS certification requirements and are
currently undergoing the certification process, but carriers may
not choose to use our systems until we receive the
certification. If a competitor succeeds in convincing a large
service provider to adopt that competitors product, it may
be difficult for us to displace the competitor because of the
cost, time, effort and perceived risk to network stability
involved in changing solutions. As a result we may incur
significant expense without generating any sales.
Our
revenues and business will be harmed if we do not keep pace with
changes in broadband applications and with advances in
technology.
We will need to invest heavily in developing our DPI technology
in order to keep pace with rapid changes in applications,
increased broadband network speeds and with our
competitors efforts to advance their technology. Designers
of broadband applications that our products are designed to
identify and manage are using increasingly sophisticated methods
to avoid detection and management by network operators. Even if
our products successfully identify a particular application, it
is sometimes necessary to distinguish between different types of
traffic belonging to a single application. Accordingly, we face
significant challenges in ensuring that we identify new
applications as they are introduced without impacting network
performance, especially as networks become faster. This
challenge is increased as we seek to expand sales of our
products in new geographic territories because the applications
vary from country to country and region to region. If we fail to
address the needs of customers in particular geographic markets
and if we fail to develop enhancements to our products in order
to keep pace with advances in technology, our business and
revenues will be adversely affected.
We
currently depend on a single subcontractor, R.H. Electronics
Ltd., to manufacture and provide hardware warranty support for
our NetEnforcer traffic management system and if it experiences
delays, disruptions, quality control problems or a loss in
capacity, it could materially adversely affect our operating
results.
We currently depend on a single subcontractor,
R.H. Electronics Ltd., to manufacture, assemble, test,
package and provide hardware warranty support for all of our
NetEnforcer traffic management systems, although we are
negotiating with candidates for an additional third-party
manufacturer. In addition, our agreement with
R.H. Electronics requires it to procure and store key
components for the NetEnforcer at its facilities. If
R.H. Electronics experiences delays, disruptions or quality
control problems in manufacturing our products, or if we fail to
effectively manage the relationship with R.H. Electronics,
shipments of products to our customers may be delayed and our
ability to deliver products to customers could be materially
adversely
10
affected. Our agreement with R.H. Electronics is
automatically renewed annually for additional one-year terms,
unless R.H. Electronics elects not to renew by giving us at
least 90 days prior notice to the expiration of any such
term. Furthermore, R.H. Electronics may terminate our
agreement at any time during the term upon 120 days prior
notice. We expect that it would take approximately six months to
transition manufacturing of our products to an alternate
manufacturer and our inventory of completed products may not be
sufficient for us to continue delivering products to our
customers on a timely basis during any such transition.
Therefore, the loss of R.H. Electronics would adversely
affect our sales and operating results, and harm our reputation.
R.H. Electronics facilities are located in northern Israel
and are in range of rockets that were fired recently from
Lebanon into Israel. In the event that the facilities of
R.H. Electronics are damaged as a result of hostile action,
our ability to deliver products to customers could be materially
adversely affected. See also Risk Factors
Conditions in Israel could adversely affect our business,
and Our operations may be disrupted by the
obligations of personnel to perform military service.
Certain
components for our NetEnforcer traffic management systems come
from single or limited sources, and we could lose sales if these
sources fail to satisfy our supply requirements.
Certain components used in our NetEnforcer systems are obtained
from single or limited sources. Since our NetEnforcer systems
have been designed to incorporate these specific components, any
change in these components due to an interruption in supply or
our inability to obtain such components on a timely basis would
require engineering changes to our products before we could
incorporate substitute components. Such changes could be costly
and result in lost sales. In particular, the central processing
unit for our NetEnforcer
AC-400 and
our NetEnforcer
AC-800 is
from Intel Corporation and the network processor for our
NetEnforcer
AC-1000 and
our NetEnforcer AC-2500 is from Hifn Inc.
If we or our contract manufacturer fail to obtain components in
sufficient quantities when required, our business could be
harmed. Our suppliers also sell products to our competitors. Our
suppliers may enter into exclusive arrangements with our
competitors, stop selling their products or components to us at
commercially reasonable prices or refuse to sell their products
or components to us at any price. Our inability to obtain
sufficient quantities of single-source or limited-sourced
components, or to develop alternative sources for components or
products would harm our ability to maintain and expand our
business.
The
slowdown in capital expenditures by telecommunications service
providers in prior years had a material adverse effect on our
results of operations. Another down turn in technology spending
could have a material adverse effect on our results of
operations.
A deterioration of economies around the world and economic
uncertainty in the telecommunications market began in 2000 and
continued through 2003. There was a curtailment of capital
investment by telecommunications carriers and service providers
as well as by businesses that use our products, referred to as
the enterprise market. Recent increased expenditures in the
telecommunications industry in general or in the broadband
portion of the market in particular may not continue. Since a
substantial portion of our operating expenses consist of
salaries, we may not be able to reduce our operating expenses in
line with any reduction in revenues or may elect not to do so
for business reasons. We will need to continue to generate
increased revenues and manage our costs to maintain
profitability. Any future industry downturn may increase our
inventories, decrease our revenues, result in additional
pressure on the price of our products and prolong the time until
we are paid, all of which would have a material adverse effect
on the results of our operations and on our cash flow from
operations.
We use
certain open-source software tools that carry the
risk of being subject to intellectual property infringement
claims, the assertion of which could impair our product
development plans, interfere with our ability to support our
customers or require us to pay licensing fees.
Our NetEnforcer traffic management systems and NetXplorer
management application suite contain software from open source
code sources. Open source code is software that is accessible,
usable and modifiable by anyone, provided that users and
modifiers abide by certain licensing requirements. The original
11
developers of the open source code provide no warranties on such
code. Our products include, for example, open source code such
as the Linux kernel and the GNU/Linux operating system. The
Linux kernel and the GNU/Linux operating system have been
developed under a license (known as a General Public License or
GPL), which permits them to be liberally copied, modified and
distributed.
Under certain conditions, the use of some open source code to
create derivative code may obligate us to make the resulting
derivative code available to others at no cost. The
circumstances under which our use of open source code would
compel us to offer derivative code at no cost are subject to
different interpretations. While we have periodically undertaken
reviews of our use of open source code in an effort to avoid
situations that would require us to make parts of our core
proprietary technology freely available as open source code, we
cannot guarantee that such circumstances will not occur or that
a court would not conclude that, under a different
interpretation of an open source license, certain of our core
technology must be made available as open source code. The use
of such open source code may also ultimately require us to take
remedial action, such as replacing certain code used in our
products, paying a royalty to use some open source code, making
certain proprietary source code available to others or
discontinuing certain products, that may divert resources away
from our development efforts.
The license under which we licensed the Linux kernel and
GNU/Linux operating system, is currently the subject of
litigation in the case of The SCO Group, Inc. v.
International Business Machines Corp., pending in the United
States District Court for the District of Utah. SCO filed its
complaint in 2003. According to the current schedule, the
parties will complete summary judgment briefing by
December 8, 2006 and the court has postponed the jury-trial
date of February 26, 2007, pending the outcome of the
motions. SCO has alleged that certain versions of the Linux
kernel and GNU/Linux operating system contributed by IBM contain
unauthorized UNIX code or derivative works of UNIX code, which
SCO claims it owns. If the court were to rule in SCOs
favor and find, for example, that GNU/Linux-based products, or
significant portions of them, may not be liberally copied,
modified or distributed, we may have to modify our products
and/or seek
a license to use the code in question, which may or may not be
available on commercially reasonable terms, and this could have
a material adverse effect on our business. Regardless of the
merit of SCOs allegations, uncertainty concerning
SCOs allegations could adversely affect our products and
customer relationships.
If we
are unable to successfully protect the intellectual property
embodied in our technology, our business could be harmed
significantly.
Know-how relating to networking protocols, building
carrier-grade systems and identifying applications is an
important aspect of our intellectual property. To protect our
know-how, we customarily require our employees, distributors,
resellers, software testers and contractors to execute
confidentiality agreements or agree to confidentiality
undertakings when their relationship with us begins. Typically,
our employment contracts also include the following clauses:
assignment of intellectual property rights for all inventions
developed by employees, non-disclosure of all confidential
information, and non-compete clauses for six months following
termination of employment. The enforceability of non-compete
clauses in Israel is limited. We cannot provide any assurance
that the terms of these agreements are being observed and will
be observed in the future. Because our product designs and
software are stored electronically and thus are highly portable,
we attempt to reduce the portability of our designs and software
by physically protecting our servers through the use of closed
networks, which prevent external access to our servers. We
cannot be certain, however, that such protection will adequately
deter individuals or groups from wrongful access to our
technology. Monitoring unauthorized use of intellectual property
is difficult, and some foreign laws do not protect proprietary
rights to the same extent as the law of the United States. We
cannot be certain that the steps we have taken to protect our
proprietary information will be sufficient. In addition, to
protect our intellectual property, we may become involved in
litigation, which could result in substantial expenses, divert
the attention of management, cause significant delays,
materially disrupt the conduct of our business or adversely
affect our revenue, financial condition and results of
operations.
As of September 30, 2006, we had a limited patent
portfolio. We had two issued U.S. patents and four pending
U.S. patent applications. We also have one pending
counterpart application outside of the United
12
States, filed pursuant to the Patent Cooperation Treaty. While
we plan to protect our intellectual property with, among other
things, patent protection, there can be no assurance that:
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current or future U.S. or foreign patents applications will
be approved;
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our issued patents will protect our intellectual property and
not be held invalid or unenforceable if challenged by third
parties;
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we will succeed in protecting our technology adequately in all
key jurisdictions in which we or our competitors operate;
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the patents of others will not have an adverse effect on our
ability to do business; or
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others will not independently develop similar or competing
products or methods or design around any patents that may be
issued to us.
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The failure to obtain patents, inability to obtain patents with
claims of a scope necessary to cover our technology, or the
invalidation of our patents, may weaken our competitive position
and may adversely affect our revenues.
We may
be subject to claims of intellectual property infringement by
third parties that, regardless of merit, could result in
litigation and our business, operating results or financial
condition could be materially adversely affected.
There can be no assurance that we will not receive
communications from third parties asserting that our products
and other intellectual property infringe, or may infringe their
proprietary rights. We are not currently subject to any
proceedings for infringement of patents or other intellectual
property rights and are not aware of any parties that intend to
pursue such claims against us. Any such claims, regardless of
merit, could result in litigation, which could result in
substantial expenses, divert the attention of management, cause
significant delays and materially disrupt the conduct of our
business. As a consequence of such claims, we could be required
to pay a substantial damage award, develop non-infringing
technology, enter into royalty-bearing licensing agreements,
stop selling our products or re-brand our products. If it
appears necessary, we may seek to license intellectual property
that we are alleged to infringe. Such licensing agreements may
not be available on terms acceptable to us or at all. Litigation
is inherently uncertain and any adverse decision could result in
a loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from others and
otherwise negatively affect our business. In the event of a
successful claim of infringement against us and our failure or
inability to develop non-infringing technology or license the
infringed or similar technology, our business, operating results
or financial condition could be materially adversely affected.
Our
products are highly technical, and any undetected software or
hardware errors in our products could have a material adverse
effect on our operating results.
Our products are complex and are incorporated into broadband
networks which are a major source of revenue for service
providers and which support critical applications for
subscribers and enterprises. Due to the complexity of our
products and variations among customers network
environments, we may not detect product defects until full
deployment in our customers networks. Regardless of
whether warranty coverage exists for a product, we may be
required to dedicate significant technical resources to resolve
any defects. If we encounter significant product problems, we
could experience, among other things, loss of major customers,
cancellation of product orders, increased costs, delay in
recognizing revenue, and damage to our reputation. In addition,
we could face claims for product liability, tort, or breach of
warranty. Defending a lawsuit, regardless of its merit, is
costly and may divert managements attention. In addition,
if our business liability insurance is inadequate or future
coverage is unavailable on acceptable terms or at all, our
financial condition could be harmed.
13
We
need to increase the functionality of our products and offer
additional features in order to maintain or increase our
profitability.
The market in which we operate is highly competitive and unless
we continue to enhance the functionality of our products and add
additional features, our competitiveness may be harmed and the
average selling prices for our products may decrease over time.
Such a decrease would generally result from the introduction by
competitors of competing products and from the standardization
of DPI technology. To counter this trend, we endeavor to enhance
our products by offering higher system speeds, and additional
features, such as additional security functions, supporting
additional applications and enhanced reporting tools. We may
also need to reduce our per unit manufacturing costs at a rate
equal to or faster than the rate at which selling prices
decline. If we are unable to reduce these costs or to offer
increased functionally and features, our profitability may be
adversely affected.
If we
fail to attract and retain skilled employees, we may not be able
to timely develop, sell or support our products.
Our success depends in large part on the continued contribution
of our research and development, sales and marketing and
managerial personnel. If our business continues to grow, we will
need to hire additional qualified research and development,
sales and marketing and managerial personnel to succeed. The
process of hiring, training and successfully integrating
qualified personnel into our operation is a lengthy and
expensive one. The market for qualified personnel is very
competitive because of the limited number of people available
with the necessary technical skills, sales skills and
understanding of our products and technology. This is
particularly true in Israel, where competition for qualified
personnel is intense. Our failure to hire and retain qualified
personnel could cause our revenues to decline and impair our
ability to meet our research and development and sales
objectives.
The
European Union has issued directives relating to the sale in
member countries of electrical and electronic equipment,
including products sold by us. If our products fail to comply
with these directives, we could be subject to penalties and
sanctions that could materially adversely affect our
business.
A directive issued by the European Union, or EU, on the
Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment, referred to as RoHS, came
into effect on July 1, 2006. The RoHS directive, lists a
number of substances, including lead, mercury, cadmium and
hexavalent chromium, which must either be removed, or reduced to
maximum permitted concentrations, in any products containing
electrical or electronic components that are sold within the EU.
Our products fall within the scope of the RoHS directive. We
believe that our products are currently compliant with the RoHS
directive. There can, however, be no assurance that we will
continue to comply with the RoHS directive or any similar
directives in other jurisdictions in the future.
In 2003, the EU approved a directive on Waste Electrical and
Electronic Equipment, or WEEE, which promotes waste recovery
with a view to reducing the quantity of waste for disposal and
saving natural resources, in particular by reuse, recycling,
composting and recovering energy from waste. The WEEE directive
covers all electrical and electronic equipment used by consumers
and electronic equipment intended for professional use. The
directive, which went into effect in August 2005, requires that
all new electrical and electronic equipment placed for sale in
the EU be appropriately labeled regarding waste disposal and
contains other obligations regarding the collection and
recycling of waste electrical and electronic equipment. Our
products fall within the scope of the WEEE directive, with which
we believe we are compliant and are taking all requisite steps
to ensure continued compliance.
The countries of the EU form the largest single market for our
products. If our products fail to comply with WEEE or RoHS
directives, we could be subject to heavy penalties and other
sanctions that could have a material adverse affect on our
results of operations and financial condition.
14
Our
international operations expose us to the risk of fluctuation in
currency exchange rates.
In 2005, we derived our revenues principally in
U.S. dollars and to a lesser extent in euros and shekels.
Although a majority of our expenses were denominated in
U.S. dollars, a significant portion of our expenses were
denominated in shekels and to a lesser extent in euros and yen.
Our shekel-denominated expenses consist principally of salaries
and related personnel expenses. We anticipate that a material
portion of our expenses will continue to be denominated in
shekels. If the U.S. dollar weakens against the shekel,
there will be a negative impact on our profit margins. We
currently do not hedge our currency exposure through financial
instruments. In addition, if we wish to maintain the
dollar-denominated value of our products in
non-U.S. markets,
devaluation in the local currencies of our customers relative to
the U.S. dollar could cause our customers to cancel or
decrease orders or default on payment.
We may
expand our business or enhance our technology through
acquisitions that could result in diversion of resources and
extra expenses. This could disrupt our business and adversely
affect our financial condition.
Part of our strategy is to selectively pursue partnerships and
acquisitions that provide us access to complementary
technologies and accelerate our penetration into new markets.
For example, in 2002 we acquired the assets of NetReality, an
Israeli manufacturer of traffic management solutions, which
increased our customers base and enhanced our engineering
capabilities and technology. The negotiation of acquisitions,
investments or joint ventures, as well as the integration of
acquired or jointly developed businesses or technologies, could
divert our managements time and resources. Acquired
businesses, technologies or joint ventures may not be
successfully integrated with our products and operations. We may
not realize the intended benefits of any acquisition, investment
or joint venture and we may incur future losses from any
acquisition, investment or joint venture.
In addition, acquisitions could result in:
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substantial cash expenditures;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities;
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a decrease in our profit margins;
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amortization of intangibles and potential impairment of
goodwill; and
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write-offs of in-process research and development.
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If acquisitions disrupt our operations, our business may suffer.
Under
current U.S. and Israeli law, we may not be able to enforce
employees covenants not to compete and therefore may be
unable to prevent our competitors from benefiting from the
expertise of some of our former employees.
It is our practice to have our employees sign appropriate
non-compete agreements. These agreements prohibit our employees,
if they cease working for us, from competing directly with us or
working for our competitors for a limited period. Under current
U.S. and Israeli law, we may be unable to enforce these
agreements and it may be difficult for us to restrict our
competitors from gaining the expertise our former employees
gained while working for us. If we cannot enforce our
employees non-compete agreements, we may be unable to
prevent our competitors from benefiting from the expertise of
our former employees.
We
have not yet evaluated our internal controls over financial
reporting in compliance with Section 404 of the
Sarbanes-Oxley Act.
We are required to comply with the internal control evaluation
and certification requirements of Section 404 of the
Sarbanes-Oxley Act by no later than the end of our 2007 fiscal
year. We are in the process of determining whether our existing
internal controls over financial reporting systems are compliant
with
15
Section 404. This process may divert internal resources and
will take a significant amount of time and effort to complete.
If it is determined that we are not in compliance with
Section 404, we may be required to implement new internal
control procedures and reevaluate our financial reporting. We
may experience higher than anticipated operating expenses as
well as higher independent auditor fees during the
implementation of these changes and thereafter. Further, we may
need to hire additional qualified personnel in order for us to
comply with Section 404. If we are unable to implement
these changes effectively or efficiently, it could harm our
operations, financial reporting or financial results and could
result in our being unable to obtain an unqualified report on
internal controls from our independent auditors.
Risks
Related to this Offering
There
has been no prior market for our ordinary shares and our share
price may be volatile.
Prior to this offering there has been no public market for our
ordinary shares. We cannot predict the extent to which investor
interest will lead to the development of an active trading
market in our ordinary shares or whether such a market will be
sustained. The market price of our ordinary shares may be
volatile and could fluctuate substantially due to many factors,
including:
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announcements or introductions of technological innovations or
new products, or product enhancements or pricing policies by us
or our competitors;
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disputes or other developments with respect to our or our
competitors intellectual property rights;
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announcements of strategic partnerships, joint ventures or other
agreements by us or our competitors;
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recruitment or departure of key personnel;
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regulatory developments in the markets in which we sell our
product;
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our sale of ordinary shares or other securities in the future;
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changes in the estimation of the future size and growth of our
markets; and
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market conditions in our industry, the industries of our
customers and the economy as a whole.
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Share price fluctuations may be exaggerated if the trading
volume of our ordinary shares is too low. The lack of a trading
market may result in the loss of research coverage by securities
analysts. Moreover, we cannot assure you that any securities
analysts will initiate or maintain research coverage of our
company and our ordinary shares. If our future quarterly
operating results are below the expectations of securities
analysts or investors, the price of our ordinary shares would
likely decline. Securities class action litigation has often
been brought against companies following periods of volatility.
Any securities litigation claims brought against us could result
in substantial expense and divert managements attention
from our business.
Following
the closing of this offering, a small number of significant
beneficial owners of our shares acting together will have a
controlling influence over matters requiring shareholder
approval, which could delay or prevent a change of
control.
Following the closing of this offering, the largest beneficial
owners of our shares, entities and individuals affiliated with
Tamir Fishman Ventures, the Gemini Group, Genesis Partners, and
Odem Rotem Holdings Ltd., a company owned and controlled by our
Chairman, Yigal Jacoby, each of which currently beneficially
owns more than 10.0% of our outstanding shares, will
beneficially own in the aggregate 38.6% of our ordinary shares
or 37.0% if the underwriters exercise their option to purchase
additional shares. As a result, these shareholders, acting
together, could exercise a controlling influence over our
operations and business strategy and will have sufficient voting
power to control the outcome of matters requiring shareholder
approval. These matters may include:
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the composition of our board of directors which has the
authority to direct our business and to appoint and remove our
officers;
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approving or rejecting a merger, consolidation or other business
combination;
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raising future capital; and
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amending our articles of association which govern the rights
attached to our ordinary shares.
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This concentration of ownership of our ordinary shares could
delay or prevent proxy contests, mergers, tender offers,
open-market purchase programs or other purchases of our ordinary
shares that might otherwise give you the opportunity to realize
a premium over the then-prevailing market price of our ordinary
shares. This concentration of ownership may also adversely
affect our share price.
Future
sales of our ordinary shares following this offering could cause
the market price of our ordinary shares to drop significantly,
even if our business is profitable.
Upon completion of this offering, we will have 20,914,233
ordinary shares outstanding. The 6,500,000 ordinary shares we
are selling in this offering will be freely tradable without
restriction immediately following this offering. Our directors
and officers, and holders of nearly all of our outstanding
shares, have signed
lock-up
agreements for a period of 180 days following the date of
this prospectus, subject to extension in the case of an earnings
release or material news or a material event relating to us.
Lehman Brothers Inc. may, in its sole discretion and without
notice, release all or any portion of the ordinary shares
subject to
lock-up
agreements. As restrictions on resale end, the market price of
our ordinary shares could drop significantly if the holders of
these restricted shares sell them or are perceived by the market
as intending to sell them. These factors could also make it more
difficult for us to raise additional funds through future
offerings of our ordinary shares or other securities. The
following chart shows when we expect that the remaining
14,414,233 ordinary shares that are not being sold in this
offering will be available for resale in the public markets.
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Number of Shares/
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Percentage of Total
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Outstanding
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Date of Availability for Resale Into the Public Market
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218,864/1.0%
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Upon the date of this prospectus.
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161,302/0.8%
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90 days after the date of
this prospectus.
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13,924,274/66.6%
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180 days after the date of
this prospectus of which 9,850,355, or 47.1%, are subject to
volume limitations under Rule 144.
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109,793/0.5%
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More than 180 days after the
date of this prospectus.
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In addition to our outstanding shares, as of the date of this
prospectus, we have granted options to purchase 3,451,439
ordinary shares under our share option plans. The holders of
options to purchase 88,409 ordinary shares that are vested and
exercisable as of the date of this prospectus are not required
to sign
lock-up
agreements with respect to such shares in the event that they
exercise options. Accordingly, following any such exercise,
these optionholders will be able to sell the shares underlying
the options into the public markets beginning 90 days after
the date of this prospectus pursuant to Rule 701. The
holders of nearly all of the remaining options that we have
granted under the terms of our share option plans are required
to sign a
lock-up
agreement upon our request and we have undertaken to the
underwriters to require any such optionholder exercising an
option during the
180-day
period following this offering to sign such a
lock-up
agreement. In addition, we have agreed that we will not file a
registration statement on
Form S-8
for the resale of securities underlying employee share options
until at least 90 days after the date of this prospectus.
After 180 days following this offering, subject to the
lock-up
agreement described above, holders of 11,545,147 ordinary shares
and options and warrants to purchase ordinary shares are
entitled to request that we register their shares for resale and
these shareholders, optionholders and warrantholders have the
right to include their shares in a registration statement for
any public offering we undertake in the future. The registration
or sale of any of these shares could cause the market price of
our ordinary shares to drop significantly. See Certain
Relationships and Related Party Transactions
Registration Rights.
Our
U.S. shareholders may suffer adverse tax consequences if we
are characterized as a Passive Foreign Investment
Company.
Generally, if for any taxable year 75% or more of our gross
income is passive income, or at least 50% of our assets are held
for the production of, or produce, passive income, we would be
characterized as a passive foreign investment company for
U.S. federal income tax purposes. To determine if at least
50% of our assets
17
are held for the production of, or produce, passive income we
may use the market capitalization method for certain periods.
Under the market capitalization method, the total asset value of
the Company would be considered to equal the fair market value
of its outstanding shares plus outstanding indebtedness on a
relevant testing date. Because the market price of our ordinary
shares is likely to fluctuate after this offering, the market
price of the shares of technology companies has been especially
volatile, and the market price may affect the determination of
whether we will be considered a passive foreign investment
company, there can be no assurance that we will not be
considered a passive foreign investment company for any taxable
year. If we are characterized as a passive foreign investment
company, our U.S. shareholders may suffer adverse tax
consequences, including having gains realized on the sale of our
ordinary shares treated as ordinary income, rather than capital
gain, the loss of the preferential rate applicable to dividends
received on our ordinary shares by individuals who are
U.S. holders, and having potentially punitive interest
charges apply to the proceeds of share sales. See Taxation
and Government Programs United States Federal Income
Taxation Distributions Passive Foreign
Investment Company Considerations.
You
will experience immediate and substantial dilution in the net
tangible book value of the ordinary shares you purchase in this
offering.
The initial public offering price of our ordinary shares is
expected to exceed substantially the net tangible book value per
share of our ordinary shares immediately after this offering.
Therefore, based on an assumed initial public offering price of
$10.00 per share, if you purchase our ordinary shares in
this offering, you will suffer immediate dilution of
$6.60 per share or $6.33 if the underwriters exercise their
option to purchase additional ordinary shares. As a result of
this dilution, investors purchasing 6,500,000 ordinary shares
from us will have contributed 57.9% of the total amount of our
total net funding to date but will only own 31.1% of our equity.
If outstanding options and warrants to purchase our ordinary
shares are exercised in the future, you will experience
additional dilution.
Our
management will have broad discretion over the use of proceeds
from this offering and may not obtain a favorable return on the
use of these proceeds.
Our management will have broad discretion in determining how to
spend the net proceeds from this offering and may spend the
proceeds in a manner that our shareholders may not deem
desirable. We currently intend to use the net proceeds from this
offering to fund our research and development activities, expand
our business development and marketing activities, and other
general corporate purposes and working capital. We may also use
a portion of the net proceeds to acquire or invest in
complementary companies, products or technologies. We cannot
assure you that these uses or any other use of the net proceeds
of this offering will yield favorable returns or results.
Risks
Relating to our Location in Israel
Conditions
in Israel could adversely affect our business.
We are incorporated under Israeli law and our principal offices,
and research and development facilities are located in Israel.
In addition, the subcontractor for our products is located in
Israel. Accordingly, political, economic and military conditions
in Israel directly affect our business. Since the State of
Israel was established in 1948, a number of armed conflicts have
occurred between Israel and its Arab neighbors. Although Israel
has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, there has been an increase in unrest and
terrorist activity, which began in September 2000 and has
continued with varying levels of severity into 2006. The recent
election of representatives of the Hamas movement to a majority
of seats in the Palestinian Legislative Council has resulted in
an escalation in violence and among Israel, the Palestinian
Authority and other groups. In July and August 2006, significant
fighting took place between Israel and Hezbollah in Lebanon,
resulting in rockets being fired from Lebanon up to
50 miles into Israel. Furthermore, several countries,
principally in the Middle East, still restrict doing business
with Israel and Israeli companies, and additional countries may
impose restrictions on doing business with Israel and Israeli
companies if hostilities in Israel continue or increase. These
restrictions may limit materially our ability to sell our
solutions to companies in these countries. Any hostilities
involving Israel or the interruption or curtailment of trade
18
between Israel and its present trading partners, or a
significant downturn in the economic or financial condition of
Israel, could adversely affect our operations and product
development, cause our revenues to decrease and adversely affect
the share price of publicly traded companies having operations
in Israel, such as us. Additionally, any hostilities involving
Israel may have a material adverse effect on R.H. Electronics
and its facilities in which event, all or a portion of our
inventory may be damaged, and our ability to deliver products to
customers may be materially adversely affected.
Our
operations may be disrupted by the obligations of personnel to
perform military service.
As of September 30, 2006, we had 232 employees of whom 170
were based in Israel. Our employees in Israel, including three
executive officers, may be called upon to perform up to one
month (in some cases more) of annual military reserve duty until
they reach age 45 and, in emergency circumstances, could be
called to active duty. In response to increased tension and
hostilities, there have been since September 2000 occasional
call-ups of military reservists, including in connection with
recent hostilities in Lebanon, and it is possible that there
will be additional call-ups in the future. Our operations could
be disrupted by the absence of a significant number of our
employees related to military service or the absence for
extended periods of one or more of our key employees for
military service. Such disruption could materially adversely
affect our business and results of operations. Additionally, the
absence of a significant number of the employees of R.H.
Electronics related to military service or the absence for
extended periods of one or more of R.H. Electronics key
employees for military service may disrupt its operations in
which event our ability to deliver products to customers may be
materially adversely affected.
The
tax benefits that are available to us require us to meet several
conditions and may be terminated or reduced in the future, which
would increase our costs and taxes.
Our investment program in equipment at our facility in
Hod-Hasharon, Israel has been granted approved enterprise status
and we are therefore eligible for tax benefits under the Israeli
Law for the Encouragement of Capital Investments, 1959, referred
to as the Investment Law. We expect to utilize these tax
benefits after we utilize our net operating loss carry forwards.
As of December 31, 2005, the end of our last fiscal year,
our net operating loss carry forwards for Israeli tax purposes
amounted to approximately $20.5 million. To remain eligible
for these tax benefits, we must continue to meet certain
conditions stipulated in the Investment Law and its regulations
and the criteria set forth in the specific certificate of
approval, including, among other conditions, that the approved
enterprise be operated over a seven-year period and that at
least 30% of our investment in fixed assets of the approved
enterprise be funded by additional
paid-up
ordinary share capital. If we do not meet the conditions
stipulated in the Investment Law and its regulations and the
criteria set forth in the specific certificate of approval in
the future, the tax benefits would be canceled and we could be
required to refund any tax benefits that we have received. These
tax benefits may not be continued in the future at their current
levels or at any level.
Effective April 1, 2005, the Israeli Law for the
Encouragement of Capital Investments was amended. As a result,
the criteria for new investments qualified to receive tax
benefits were revised. No assurance can be given that we will,
in the future, be eligible to receive additional tax benefits
under this law. The termination or reduction of these tax
benefits would increase our tax liability in the future, which
would reduce our profits or increase our losses. Additionally,
if we increase our activities outside of Israel, for example, by
future acquisitions, our increased activities might not be
eligible for inclusion in Israeli tax benefit programs.
See Taxation and Government Programs Israeli
Tax Considerations and Government Programs Law for
the Encouragement of Capital Investments, 1959.
The
government grants we have received for research and development
expenditures restrict our ability to manufacture products and
transfer technologies outside of Israel and require us to
satisfy specified conditions. If we fail to comply with such
restrictions or these conditions, we may be required to refund
grants previously received together with interest and penalties,
and may be subject to criminal charges.
We have received grants from the government of Israel through
the Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor, for the financing of a portion of our research
and development
19
expenditures in Israel, pursuant to the provisions of The
Encouragement of Industrial Research and Development Law, 1984,
referred to as the Research and Development Law. In 2003, 2004
and 2005, we received and accrued grants totaling
$2.7 million from the Office of the Chief Scientist,
representing 27.0%, 18.4% and 10.9%, respectively, of our
gross research and development expenditures in these periods. We
may not receive future grants from the Office of the Chief
Scientist and our failure to receive additional grants in the
future could adversely affect our profitability.
The terms of the grants prohibit us from manufacturing products
outside of Israel or transferring intellectual property rights
in technologies developed using these grants inside or outside
of Israel without special approvals. Even if we receive approval
to manufacture our products outside of Israel, we may be
required to pay an increased total amount of royalties, which
may be up to 300% of the grant amount plus interest, depending
on the manufacturing volume that is performed outside of Israel.
This restriction may impair our ability to outsource
manufacturing or engage in similar arrangements for those
products or technologies. Know-how developed under an approved
research and development program may not be transferred to any
third parties, except in certain circumstances and subject to
prior approval. In addition, if we fail to comply with any of
the conditions and restrictions imposed by the Research and
Development Law or by the specific terms of under which we
received the grants, we may be required to refund any grants
previously received together with interest and penalties, and
may be subject to criminal charges. In recent years, the
government of Israel has accelerated the rate of repayment of
the Office of Chief Scientist grants and may further accelerate
them in the future.
It may
be difficult to enforce a U.S. judgment against us, our
officers and directors and the Israeli experts named in this
prospectus in Israel or the United States, or to assert
U.S. securities laws claims in Israel or serve process on
our officers and directors and these experts.
We are incorporated in Israel. The majority of our executive
officers and directors and the Israeli experts named in this
prospectus are not residents of the United States, and the
majority of our assets and the assets of these persons are
located outside the United States. Therefore, it may be
difficult for an investor, or any other person or entity, to
enforce a U.S. court judgment based upon the civil
liability provisions of the U.S. federal securities laws
against us or any of these persons in a U.S. or Israeli
court, or to effect service of process upon these persons in the
United States. Additionally, it may be difficult for an
investor, or any other person or entity, to assert
U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws on the grounds that
Israel is not the most appropriate forum in which to bring such
a claim. Even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable
to the claim. If U.S. law is found to be applicable, the
content of applicable U.S. law must be proved as a fact
which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Israeli law. There
is little binding case law in Israel addressing the matters
described above. See Enforceability of Civil
Liabilities.
Provisions
of Israeli law and our articles of association may delay,
prevent or make undesirable an acquisition of all or a
significant portion of our shares or assets.
Our articles of association contain certain provisions that may
delay or prevent a change of control, including a classified
board of directors. In addition, Israeli corporate law regulates
acquisitions of shares through tender offers and mergers,
requires special approvals for transactions involving
significant shareholders and regulates other matters that may be
relevant to these types of transactions. These provisions of
Israeli law could 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, and may limit the price that investors may be
willing to pay in the future for our ordinary shares.
Furthermore, Israeli tax considerations may make potential
transactions undesirable to us or to some of our shareholders.
See Description of Ordinary Shares
Anti-Takeover Provisions under Israeli Law and
Acquisitions under Israeli Law.
20
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We have
based these forward-looking statements on our current
expectations and projections about future events. These
statements include but are not limited to:
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statements regarding the expected growth in the use of
particular broadband applications;
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statements as to our ability to meet anticipated cash needs
based on our current business plan;
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|
statements as to the impact of the rate of inflation and the
political and security situation on our business; and
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our intended uses of the proceeds from this offering.
|
These statements may be found in the sections of this prospectus
entitled Prospectus Summary, Risk
Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business and in this prospectus generally, including
the section of this prospectus entitled
Business Overview and
Business Industry Overview, which
contains information obtained from independent industry sources.
Actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including all the risks discussed in Risk Factors
and elsewhere in this prospectus.
In addition, statements that use the terms believe,
expect, plan, intend,
estimate, anticipate and similar
expressions are intended to identify forward-looking statements.
All forward-looking statements in this prospectus reflect our
current views about future events and are based on assumptions
and are subject to risks and uncertainties that could cause our
actual results to differ materially from future results
expressed or implied by the forward-looking statements. Many of
these factors are beyond our ability to control or predict. You
should not put undue reliance on any forward-looking statements.
Unless we are required to do so under U.S. federal
securities laws or other applicable laws, we do not intend to
update or revise any forward-looking statements.
The forward looking statements contained in this prospectus are
excluded from the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995 and Section 27A of
the Securities Act of 1933, as amended.
21
USE OF
PROCEEDS
Assuming an initial public offering price of $10.00 per
share, the midpoint of the estimated initial public offering
price range, we estimate that we will receive total net proceeds
from this offering of $58.5 million, after deducting the
underwriting discount and estimated offering expenses payable by
us. A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase
(decrease) the net proceeds from this offering by
$6.0 million, assuming the number of shares offered, as set
forth on the cover page of this prospectus, remains the same and
after deducting the estimated underwriting discount and
estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional
ordinary shares, we estimate that we will receive an additional
$9.1 million in net proceeds based on the midpoint of the
estimated initial public offering price range.
We intend to use the net proceeds of this offering for research
and development activities, expand our business development and
marketing activities, and the remaining proceeds for general
corporate purposes and working capital. We may also use a
portion of the net proceeds to acquire or invest in
complementary companies, products or technologies, although we
currently do not have any acquisitions or investments planned.
We will have broad discretion in the way that we use the net
proceeds of this offering. The amounts that we actually spend
for the purposes described above may vary significantly and will
depend, in part, on the timing and amount of our future revenues.
Pending use of the net proceeds as described above, we intend to
invest the net proceeds in interest-bearing, investment-grade
instruments with maturities of less than one year or deposit the
net proceeds in bank accounts in Israel or outside of Israel.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our
ordinary shares and we do not anticipate paying any cash
dividends on our ordinary shares in the future. We currently
intend to retain all future earnings to finance our operations
and to expand our business. Any future determination relating to
our dividend policy will be made at the discretion of our board
of directors and will depend on a number of factors, including
future earnings, capital requirements, financial condition and
future prospects and other factors our board of directors may
deem relevant.
22
CAPITALIZATION
The following table presents our capitalization as of
September 30, 2006, assuming the closing of this offering
on such date:
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on an actual basis;
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on a pro forma basis to give effect to the conversion upon the
closing of this offering of (1) all of our issued and
outstanding preferred shares into 10,969,795 ordinary shares,
including 275,177 ordinary shares resulting from an
anti-dilution adjustment for price protection granted to holders
of our Series C preferred shares in connection with prior
financings and this offering, and (2) all of our
Series A ordinary shares into 611,349 ordinary
shares; and
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on a pro forma as adjusted basis to give effect to:
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|
|
|
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the issuance upon the closing of this offering of 270,016
ordinary shares upon the exercise of warrants to purchase
Series B preferred shares on a cashless and non-cashless
basis, and the receipt of $1,128 by us from such exercise;
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|
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the issuance upon the closing of this offering of 14,094
ordinary shares upon the exercise of an option to purchase
Series B preferred shares and the receipt of NIS 620,
representing approximately $145, from such exercise, held by our
founder and Chairman, Yigal Jacoby; and
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the sale by us of 6,500,000 ordinary shares in this offering at
the assumed initial public offering price of $10.00 per ordinary
share, the midpoint of the estimated initial public offering
price range, and the receipt by us of the estimated net proceeds
of $58.5 million, after deducting the underwriting discount
and estimated offering expenses payable by us.
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You should read this table in conjunction with Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this prospectus.
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|
|
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|
|
|
|
|
|
|
|
|
As of September 30, 2006
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|
|
|
|
|
|
|
|
Pro Forma
|
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|
|
Actual
|
|
|
Pro Forma
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|
|
as Adjusted
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|
(unaudited)
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(in thousands)
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|
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Shareholders equity:
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|
|
|
|
|
|
|
|
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|
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Ordinary shares and Series A
ordinary shares: NIS 0.10 par value; 8,297,393 shares
authorized actual and 200,000,000 shares authorized, pro
forma and pro forma as adjusted; 2,815,439 shares issued
and outstanding, actual; 14,374,301 shares issued, pro
forma*; 14,127,822 shares outstanding, pro forma;
21,158,411 shares issued, pro forma as adjusted*;
20,911,932 shares outstanding, pro forma as adjusted
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$
|
33
|
|
|
$
|
152
|
|
|
$
|
469
|
|
Series A through E preferred
shares, NIS 0.10 par value; 5,102,632 shares
authorized, actual and zero shares authorized, pro forma and pro
forma as adjusted; 4,809,926 shares issued, actual*;
4,701,569 shares outstanding, actual; zero issued and
outstanding, pro forma and pro forma as adjusted
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|
|
113
|
|
|
|
|
|
|
|
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|
Additional paid-in capital
|
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|
50,095
|
|
|
|
50,089
|
|
|
|
108,222
|
|
Deferred stock compensation
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(43
|
)
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Additional other compensation loss
|
|
|
(39
|
)
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|
|
(39
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)
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|
|
(39
|
)
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Accumulated deficit
|
|
|
(37,321
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)
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|
|
(37,321
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)
|
|
|
(37,321
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)
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|
|
|
|
|
|
|
|
|
|
|
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|
Total shareholders equity
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$
|
12,838
|
|
|
$
|
12,838
|
|
|
$
|
71,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total capitalization
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|
$
|
27,524
|
|
|
$
|
27,524
|
|
|
$
|
85,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
* |
|
Includes 246,479 ordinary shares that have been issued but are
not outstanding, which are held in trust for the benefit of
Mr. Jacoby pending his payment of the purchase price of
such shares. |
23
A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase
(decrease) each of additional paid-in capital and total
shareholders equity by $6.0 million, assuming the
number of ordinary shares offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
the estimated underwriting discount and offering expenses
payable by us.
The preceding table excludes (1) 3,543,522 ordinary shares
reserved for issuance under our share option plans as of
September 30, 2006, of which options to purchase 3,470,318
ordinary shares at a weighted average exercise price of
$2.26 per share have been granted, (2) except to the
extent stated in the preceding table, 246,479 ordinary shares
that had been issued, but are held in trust for the benefit of
Mr. Jacoby pending his payment of the full purchase price
of such shares, and (3) up to 163,705 ordinary shares
issuable upon the exercise of warrants granted to two Israeli
banks and an Israeli non-profit organization at a weighted
average exercise price of $3.37 per share.
24
DILUTION
Our pro forma consolidated net tangible book value as of
September 30, 2006 was $12.7 million, or
$0.90 per ordinary share. Pro forma consolidated net
tangible book value per share represents consolidated tangible
net assets less consolidated liabilities divided by the number
of ordinary shares outstanding on a pro forma basis after giving
effect to the conversion of all outstanding preferred and
Series A ordinary shares into ordinary shares. Our pro
forma as adjusted consolidated net tangible book value as of
September 30, 2006 would have been $71.2 million or
$3.40 per ordinary share assuming the closing of this
offering on such date after giving effect to:
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|
|
the issuance upon the closing of this offering of 270,016
ordinary shares upon the exercise of warrants to purchase
Series B preferred shares on a cashless and non-cashless
basis, and the receipt of $1,128 by us from such exercise;
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|
|
the issuance upon the closing of this offering of 14,094
ordinary shares upon the exercise of an option to purchase
Series B preferred shares and the receipt of NIS620,
approximately $145, from such exercise, held by our founder and
Chairman, Yigal Jacoby;
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|
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the conversion upon the closing of this offering of (1) all
of our issued and outstanding preferred shares into 10,969,795
ordinary shares, including 275,177 ordinary shares resulting
from an anti-dilution adjustment for price protection granted to
holders of our Series C preferred shares in connection with
prior financings and this offering, and (2) all of our
Series A ordinary shares into 611,349 ordinary shares;
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|
the sale by us of 6,500,000 ordinary shares in this offering at
the assumed initial public offering price of $10.00 per
ordinary share, the midpoint of the estimated initial public
offering price range, and the receipt by us of the estimated net
proceeds of $58.5 million, after deducting the underwriting
discount and estimated offering expenses payable by us.
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This represents an immediate increase in pro forma consolidated
net tangible book value of $2.50 per ordinary share to
existing shareholders and an immediate dilution of
$6.60 per ordinary share to new investors purchasing
ordinary shares in this offering. Dilution per share represents
the difference between the price per share to be paid by new
investors for the ordinary shares sold in this offering and the
pro forma consolidated net tangible book value per share
immediately after this offering. The following table illustrates
this per share dilution:
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Assumed initial public offering
price per share
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|
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|
$
|
10.00
|
|
Pro forma consolidated net
tangible book value per share as of September 30, 2006
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|
$
|
0.90
|
|
|
|
|
|
Increase in pro forma consolidated
net tangible book value per share attributable to new investors
in this offering
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Pro forma consolidated net
tangible book value per share after this offering
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|
|
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|
3.40
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|
|
|
|
|
|
|
|
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Dilution per share to new investors
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|
|
|
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|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase
(decrease) the net tangible book value by $6.0 million, the
net tangible book value per share after this offering by
$0.29 per share and the dilution in net tangible book value
per share to investors in this offering by $0.71 per share,
assuming that the number of ordinary shares offered by us, as
set forth on the cover page of this prospectus, remains the same
and after deducting the estimated underwriting discount and
offering expenses payable by us.
25
The following table presents the differences between the total
consideration paid to us and the average price per share paid by
existing shareholders and by new investors purchasing ordinary
shares in this offering, before deducting the estimated
underwriting discounts and estimated offering expenses payable
by us:
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|
|
|
|
|
|
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Ordinary Shares Purchased
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|
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Total Consideration
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|
|
Average Price
|
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|
Number
|
|
|
Percent
|
|
|
Amount
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|
|
Percent
|
|
|
Per Share
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|
Existing shareholders
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|
14,411,932
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|
|
|
68.9
|
%
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|
$
|
43.3
|
|
|
|
40.0
|
%
|
|
$
|
3.00
|
|
New investors
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|
|
6,500,000
|
|
|
|
31.1
|
|
|
|
65.0
|
|
|
|
60.0
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,911,932
|
|
|
|
100.0
|
%
|
|
$
|
108.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preceding table excludes (1) 3,543,522 ordinary shares
reserved for issuance under our share option plans as of
September 30, 2006, of which options to purchase 3,470,318
ordinary shares at a weighted average exercise price of
$2.26 per share had been granted, (2) 246,479 ordinary
shares that have been issued, but are held in trust for the
benefit of Mr. Jacoby pending his payment of the purchase
price of such shares, and (3) up to 163,705 ordinary shares
issuable upon the exercise of warrants granted to two Israeli
banks and an Israeli non-profit organization at a weighted
average exercise price of $3.37 per share.
Assuming the exercise in full of the underwriters option
to purchase 975,000 ordinary shares to cover over-allotments,
the pro forma net tangible book value after giving effect to
this offering would be $3.65 per share, and the dilution in
pro forma net tangible book value per share to investors in this
offering would be $6.35 per share.
26
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial
data in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the related notes
included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended
December 31, 2003, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2004 and 2005 are
derived from our audited consolidated financial statements
included elsewhere in this prospectus, which have been prepared
in accordance with generally accepted accounting principles in
the United States. The consolidated statements of operations for
the years ended December 31, 2001 and 2002 and the
consolidated balance sheet data as of December 31, 2001,
2002 and 2003 have been derived from our audited consolidated
financial statements which are not included in this prospectus.
The consolidated statements of operations data for the nine
months ended September 30, 2005 and 2006 and the
consolidated balance sheet data as of September 30, 2006
are derived from our unaudited consolidated financial statements
that are included elsewhere in this prospectus. In the opinion
of management, these unaudited interim consolidated financial
statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of our
financial position and operating results for these periods.
Results for interim periods are not necessarily indicative of
the results that may be expected for the entire year.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Consolidated statements of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
5,881
|
|
|
$
|
7,819
|
|
|
$
|
13,122
|
|
|
$
|
14,638
|
|
|
$
|
18,498
|
|
|
$
|
12,576
|
|
|
$
|
20,718
|
|
Services
|
|
|
258
|
|
|
|
946
|
|
|
|
1,653
|
|
|
|
3,447
|
|
|
|
4,474
|
|
|
|
3,317
|
|
|
|
3,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6,139
|
|
|
|
8,765
|
|
|
|
14,775
|
|
|
|
18,085
|
|
|
|
22,972
|
|
|
|
15,893
|
|
|
|
24,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
1,838
|
|
|
|
1,914
|
|
|
|
3,229
|
|
|
|
3,942
|
|
|
|
4,481
|
|
|
|
3,237
|
|
|
|
4,562
|
|
Services
|
|
|
224
|
|
|
|
270
|
|
|
|
362
|
|
|
|
679
|
|
|
|
938
|
|
|
|
699
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,062
|
|
|
|
2,184
|
|
|
|
3,591
|
|
|
|
4,621
|
|
|
|
5,419
|
|
|
|
3,936
|
|
|
|
5,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,077
|
|
|
|
6,581
|
|
|
|
11,184
|
|
|
|
13,464
|
|
|
|
17,553
|
|
|
|
11,957
|
|
|
|
19,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
6,244
|
|
|
|
4,041
|
|
|
|
4,053
|
|
|
|
4,851
|
|
|
|
6,652
|
|
|
|
4,964
|
|
|
|
6,737
|
|
Less royalty-bearing participation
|
|
|
1,710
|
|
|
|
1,144
|
|
|
|
1,094
|
|
|
|
894
|
|
|
|
727
|
|
|
|
582
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net(1)
|
|
|
4,534
|
|
|
|
2,897
|
|
|
|
2,959
|
|
|
|
3,957
|
|
|
|
5,925
|
|
|
|
4,382
|
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
7,295
|
|
|
|
6,856
|
|
|
|
8,164
|
|
|
|
10,104
|
|
|
|
11,887
|
|
|
|
8,797
|
|
|
|
10,859
|
|
General and administrative(1)
|
|
|
2,739
|
|
|
|
1,679
|
|
|
|
1,832
|
|
|
|
2,081
|
|
|
|
2,380
|
|
|
|
1,709
|
|
|
|
2,260
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,568
|
|
|
|
11,432
|
|
|
|
12,955
|
|
|
|
16,508
|
|
|
|
20,192
|
|
|
|
14,888
|
|
|
|
18,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(10,491
|
)
|
|
|
(4,851
|
)
|
|
|
(1,771
|
)
|
|
|
(3,044
|
)
|
|
|
(2,639
|
)
|
|
|
(2,931
|
)
|
|
|
409
|
|
Financing and other income
(expenses), net
|
|
|
(29
|
)
|
|
|
(490
|
)
|
|
|
(507
|
)
|
|
|
(241
|
)
|
|
|
45
|
|
|
|
36
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
expenses (benefit)
|
|
|
(10,520
|
)
|
|
|
(5,341
|
)
|
|
|
(2,278
|
)
|
|
|
(3,285
|
)
|
|
|
(2,594
|
)
|
|
|
(2,895
|
)
|
|
|
638
|
|
Income tax expenses (benefit)
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
(218
|
)
|
|
|
(178
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,522
|
)
|
|
$
|
(5,343
|
)
|
|
$
|
(2,280
|
)
|
|
$
|
(3,288
|
)
|
|
$
|
(2,376
|
)
|
|
$
|
(2,717
|
)
|
|
$
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share
|
|
$
|
(4.02
|
)
|
|
$
|
(1.94
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per
share
|
|
$
|
(4.02
|
)
|
|
$
|
(1.94
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
used in computing basic net earnings (loss) per share
|
|
|
2,620,442
|
|
|
|
2,756,954
|
|
|
|
2,774,639
|
|
|
|
2,787,554
|
|
|
|
2,943,500
|
|
|
|
2,903,356
|
|
|
|
13,310,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
used in computing diluted net earnings (loss) per share
|
|
|
2,620,442
|
|
|
|
2,756,954
|
|
|
|
2,774,639
|
|
|
|
2,787,554
|
|
|
|
2,943,500
|
|
|
|
2,903,356
|
|
|
|
15,501,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net
earnings (loss) per share of ordinary shares (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense related to options
granted to employees and others as follows: |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Cost of revenues
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8
|
|
Research and development, net
|
|
|
1,615
|
|
|
|
159
|
|
|
|
22
|
|
|
|
17
|
|
|
|
12
|
|
|
|
10
|
|
|
|
97
|
|
Sales and marketing
|
|
|
740
|
|
|
|
231
|
|
|
|
40
|
|
|
|
25
|
|
|
|
251
|
|
|
|
240
|
|
|
|
330
|
|
General and administrative
|
|
|
1,274
|
|
|
|
392
|
|
|
|
235
|
|
|
|
116
|
|
|
|
42
|
|
|
|
27
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,633
|
|
|
$
|
786
|
|
|
$
|
297
|
|
|
$
|
158
|
|
|
$
|
305
|
|
|
$
|
277
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Pro forma basic and diluted loss per ordinary share gives effect
to the conversion upon the closing of this offering, assuming
such closing occurred on September 30, 2006, of
(1) all of our issued and outstanding preferred shares into
10,969,795 ordinary shares, including 275,177 ordinary shares
resulting from an anti-dilution adjustment for price protection
granted to holders of our Series C preferred shares in
connection with prior financings and this offering, and
(2) all of our Series A ordinary shares into 611,349
ordinary shares. See Note 2r to our consolidated financial
statements for an explanation of the number of ordinary shares
used in computing per share data. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,953
|
|
|
$
|
2,832
|
|
|
$
|
3,631
|
|
|
$
|
4,095
|
|
|
$
|
3,677
|
|
|
$
|
4,547
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,846
|
|
|
|
4,581
|
|
|
|
8,897
|
|
Working capital
|
|
|
2,698
|
|
|
|
4,107
|
|
|
|
2,481
|
|
|
|
6,640
|
|
|
|
4,274
|
|
|
|
5,048
|
|
Total assets
|
|
|
10,429
|
|
|
|
11,075
|
|
|
|
10,771
|
|
|
|
17,167
|
|
|
|
17,591
|
|
|
|
27,524
|
|
Total liabilities
|
|
|
6,425
|
|
|
|
5,651
|
|
|
|
7,326
|
|
|
|
8,974
|
|
|
|
11,465
|
|
|
|
14,686
|
|
Accumulated deficit
|
|
|
(24,597
|
)
|
|
|
(29,940
|
)
|
|
|
(32,220
|
)
|
|
|
(35,508
|
)
|
|
|
(37,884
|
)
|
|
|
(37,321
|
)
|
Total shareholders equity
|
|
|
4,004
|
|
|
|
5,424
|
|
|
|
3,446
|
|
|
|
8,193
|
|
|
|
6,126
|
|
|
|
12,838
|
|
29
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements discussion and analysis of
financial condition and results of operations contains
forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under
Risk Factors and elsewhere in this prospectus. We
assume no obligation to update forward-looking statements or the
risk factors. You should read the following discussion in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus.
Overview
We are a leading designer and developer of broadband service
optimization solutions using advanced deep packet inspection, or
DPI, technology. Our solutions provide broadband service
providers and enterprises with real-time, highly granular
visibility into, and control of, network traffic, and enable
them to efficiently and effectively manage and optimize their
networks. End-customers use our solutions to create
sophisticated policies to monitor network applications, enforce
quality of service policies that guarantee mission-critical
application performance, mitigate security risks and leverage
network infrastructure investments. Our carrier-class products
are used by service providers to offer subscriber-based and
application-based tiered services that enable them to optimize
their service offerings, reduce churn rates and increase ARPU.
We were incorporated in late 1996 and commenced operations in
1997. Between 1998 and 2000, we focused primarily on developing
our technology and products. In 1998, we shipped our first
traffic management product. Between 2000 and 2003, we continued
to develop our technology, including through our acquisition of
the assets of NetReality, an Israeli manufacturer of traffic
management solutions, which increased our customer base and
resulted in an enhancement of our engineering capabilities. In
2003, we introduced our NetEnforcer
AC-1000
product, which was the first commercially available network
traffic management system operating above 1 gigabit full
duplex throughput per second. In 2004, we increased our sales
and marketing efforts to the service provider market and in late
2004 and in 2005 we accelerated sales to large service
providers. In late 2005, we introduced our NetXplorer management
application suite, which complements our NetEnforcer system, by
adding a centralized management capability, and monitoring and
reporting capabilities. In 2006, we introduced the NetEnforcer
AC-2500,
which supports up to 5 gigabit throughput per second, and
our Subscriber Management Platform, which enhances our
NetXplorer management application suite to include subscriber
management.
We market and sell our products through our channel partners,
which include distributors, resellers, OEMs and system
integrators. End customers of our products include carriers,
cable operators, wireless and wireline Internet service
providers, educational institutions, governments and enterprises.
Revenues
We generate revenues from two sources: (1) sales of our
NetEnforcer network traffic management system and our
application suites, including our NetXplorer management
application suite, and (2) maintenance and support
services, including installation and training. We provide
maintenance and support services pursuant to a one- or
three-year maintenance and support program, which may be
purchased by customers at the time of product purchase or on a
renewal basis.
We recognize revenues from product sales when persuasive
evidence of an agreement exists, delivery of the product has
occurred, no significant obligations with respect to
implementation remain, the fee is fixed or determinable, and
collection is probable. We grant a one-year hardware warranty
and a three-month software warranty on all of our products and
take a reserve against revenues on account of possible warranty
claims based on our historical experience. Warranty claims have
to date been immaterial to our results of operations. We
recognize revenues associated with our maintenance and support
programs on a straight-line basis over the term of the
maintenance and support agreement. See Critical Accounting
Policies and Estimates Revenue Recognition.
30
Customer concentration. We derived
approximately 13% of our revenues in 2003, 12% of our revenues
in 2004 and 9% of our revenues in 2005 from a single
U.S. distributor of our products to other resellers and
system integrators in the United States. We derived 16% of our
revenues in 2005 and 27% in the first nine months of 2006 from a
single system integrator for our products in the United Kingdom,
primarily in connection with the deployment of our products by
NTL Group Limited, a leading United Kingdom cable operator.
During these periods no other end-customer accounted for more
than 5% of our revenues. We expect that sales attributable to
NTL will decline significantly as a percentage of revenue in the
last quarter of 2006 and in 2007 as deployment of a majority of
our products by NTL is completed and as sales to other customers
increase.
Geographical breakdown. The following table
sets forth the geographic breakdown of our revenues for the
periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
United Kingdom
|
|
|
5
|
%
|
|
|
12
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
33
|
%
|
United States
|
|
|
39
|
|
|
|
35
|
|
|
|
29
|
|
|
|
31
|
|
|
|
22
|
|
Europe (excluding United Kingdom)
|
|
|
24
|
|
|
|
26
|
|
|
|
21
|
|
|
|
18
|
|
|
|
17
|
|
Asia and Oceania
|
|
|
18
|
|
|
|
20
|
|
|
|
18
|
|
|
|
19
|
|
|
|
20
|
|
Middle East and Africa
|
|
|
3
|
|
|
|
4
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|
|
|
4
|
|
|
|
3
|
|
|
|
5
|
|
Americas (excluding United States)
|
|
|
11
|
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The increase in our revenues in the United Kingdom in 2005 and
the first nine months of 2006 compared to our revenues in the
other areas for the same periods is mainly attributable to sales
to a local system integrator, primarily in connection with the
deployment of our products by NTL. We expect that the percentage
of our revenues from the United Kingdom will return to
historical levels in the last quarter of 2006 and in 2007, as
deployment of a majority of our products by NTL is completed and
as sales in other geographic areas increase.
Cost
of revenues
Our product cost of revenues consists primarily of costs of
materials, manufacturing services and overhead, warehousing,
testing and royalties paid to the Office of the Chief Scientist
of the Israeli Ministry of Industry, Trade and Labor. Our
services cost of revenues consist primarily of salaries and
related personnel costs for our help desk staff. We expect cost
of revenues to increase primarily as a result of the increase in
our product and service revenues, although we expect our gross
margins to approximate current levels.
Operating
expenses
Research and development. Our research and
development expenses consist primarily of salaries and related
personnel costs, costs for subcontractor services, depreciation,
rent and costs of materials consumed in connection with the
design and development of our products. We expense all of our
research and development costs as they are incurred. Our net
research and development expenses are our gross research and
development expenses offset by financing through royalty-bearing
grants from the Office of the Chief Scientist. Such
participation grants are recognized at the time at which we are
entitled to such grants on the basis of the costs incurred and
included as a deduction of research and development expenses
(See Government Grants below). We
believe significant investment in research and development is
essential to our future success and expect that in future
periods our research and development expenses will increase on
an absolute basis but decrease as a percentage of revenues as
sales increase.
Sales and marketing. Our sales and marketing
expenses consist primarily of salaries and related personnel
costs, travel expenses, costs associated with promotional
activities such as public relations, conventions and
exhibitions, rental expenses, depreciation and commissions paid
to third parties. We intend to
31
continue our activities to target the service provider market
and therefore we expect that sales and marketing expenses will
increase on an absolute basis in the future as we hire
additional sales, marketing and engineering personnel, continue
to promote our brand and establish marketing channels and sales
offices in additional U.S. and international locations. We
expect that our sales and marketing expenses will decrease as a
percentage of revenues as sales increase.
General and administrative. Our general and
administrative expenses consist primarily of salaries and
related personnel costs, rental expenses, costs for professional
services and depreciation. We expect these expenses to increase
on an absolute basis as we hire additional personnel and incur
additional costs related to the growth of our business as well
as the costs associated with being a public company, including
corporate governance compliance under the Sarbanes-Oxley Act of
2002 and rules implemented by the U.S. Securities and
Exchange Commission and Nasdaq, as well as director and officer
liability insurance.
Amortization of deferred stock-based
compensation. We have granted options to purchase
our ordinary shares to our employees and consultants at prices
below the fair market value of the underlying ordinary shares on
the grant date. These options were considered compensatory
because the deemed fair market value of the underlying ordinary
shares was greater than the exercise prices determined by our
board of directors on the option grant date. The determination
of the fair market value of the underlying ordinary shares prior
to this offering involved subjective judgment, third party
valuations and the consideration by our board of directors of a
variety of factors. Because there has been no public market for
our ordinary shares prior to this offering, the amount of the
compensatory charge was not based on an objective measure, such
as the trading price of our ordinary shares. We discuss in
detail the factors affecting our determination of the deemed
fair value of the underlying ordinary shares below in
Critical Accounting Policies and Estimates
Accounting for Stock-Based Compensation. As of
January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R) Share Based
Payment, or SFAS No. 123(R), which requires us
to expense the fair value of employee stock options. We adopted
the fair value recognition provisions of
SFAS No. 123(R), using the modified prospective method
for grants that were measured using the fair value method and
adopted SFAS No. 123(R) using the
prospective-transition method for grants that were measured
using the Minimum Value method in SFAS No. 123 for
either recognition or pro forma disclosures. The fair value of
stock-based awards granted after January 1, 2006, was
estimated using the binominal model. As a result of adopting
SFAS No. 123(R) on January 1, 2006, our net
income for the nine month period ended September 30, 2006,
is $252,000 lower with a negative effect of $0.01 on basic or
diluted earnings per share, than if it had continued to account
for stock based compensation under Accounting Principles Board
Opinion 25 Accounting for Stock Issued to
Employees, or APB 25.
In connection with the grant of options, we recorded total
stock-based compensation expenses of $297,000 in 2003, $158,000
in 2004 and $305,000 in 2005. We also recorded a total
stock-based compensation expense of $682,000 in the nine months
ended September 30, 2006, of which $8,000, $97,000,
$330,000 and $247,000 resulted from cost of revenue, research
and development expenses, sales and marketing expenses and
general and administrative expenses, respectively, based on the
division in which the recipient of the option grant was
employed. As of September 30, 2006, we had an aggregate of
$3.1 million of deferred unrecognized stock-based
compensation remaining to be recognized. We estimate that this
deferred unrecognized stock-based compensation balance will be
amortized as follows: approximately $0.4 million during the
remainder of 2006, approximately $1.0 million in 2007 and
approximately $0.8 million in 2008 and approximately
$0.9 million in 2009 and thereafter.
Financial
income (expenses), net
Financial income consists primarily of interest earned on our
cash balances and other financial investments, foreign currency
exchange gains and, to a lesser extent, interest accrued on
loans made to employees. Financing expenses consist primarily of
amortization of discounts on bank-credit lines, bank fees,
foreign currency exchange losses and interest accrued on banks
loans.
32
Corporate
Tax
Israeli companies are generally subject to corporate tax at the
rate of 31% of their taxable income in 2006. The rate is
scheduled to decline to 29% in 2007, 27% in 2008, 26% in 2009
and 25% in 2010 and thereafter. However, the effective tax rate
payable by a company that derives income from an Approved
Enterprise designated as such under the Law for the
Encouragement of Capital Investments, 1959 (the Investment
Law) may be considerably less. Our investment programs in
equipment at our facilities in Hod-Hasharon, Israel have been
granted Approved Enterprise status under the Investment Law and
enjoys certain tax benefits. We expect to utilize these tax
benefits after we utilize our net operating loss carry forwards.
As of December 31, 2005, the end of our last fiscal year,
our net operating loss carry forwards for Israeli tax purposes
amounted to approximately $20.5 million. Income derived
from other sources, other than the Approved
Enterprise, during the benefit period will be subject to
tax at the regular corporate tax rate. For more information
about the tax benefits available to us as an Approved Enterprise
see Taxation and Government Programs Law for
the Encouragement of Capital Investments, 1959.
NetReality
In September 2002, we acquired the assets of NetReality, from a
receiver pursuant to a court ruling. In consideration for the
assets acquired, we granted to NetRealitys receiver a
fully-vested warrant to purchase 48,267 Series B preferred
shares (with an exercise price of NIS 0.10 per share) and
undertook to pay the receiver a minimum of $1 million and
maximum of $2.5 million in royalties over a period of five
years from the date of the acquisition at the rate of the higher
of (1) 7% of sales of the NetReality products and
(2) 1% of our total sales. The purchase price was valued at
approximately $1.3 million, based on the fair value of the
warrant granted, and the minimum commitment of such royalties.
We also assumed the commitment to pay royalties to the Office of
the Chief Scientist as discussed under the subheading
Government Grants below. The acquisition increased
our customer base and resulted in an enhancement of our
engineering capabilities. In the fourth quarter of 2004, we
decided to cease sales of the NetReality product line, although
we continue selling maintenance and support programs relating to
the NetReality products. Consequently, an impairment of
intangible assets relating to the NetReality acquisition of
$0.4 million was recorded to operating expenses at the end
of 2004. We do not expect our ongoing sales of maintenance and
support programs relating to the NetReality products to be a
significant source of revenue in the future.
Government
Grants
Our research and development efforts have been financed, in
part, through grants from the Office of the Chief Scientist
under our approved plans in accordance with the Israeli Law for
Encouragement of Research and Development in the Industry, 1984,
or the R&D Law. Through September 30, 2006, we had
applied and received approval for grants totaling
$9.4 million from the Office of the Chief Scientist. Under
Israeli law and the approved plans, royalties on the revenues
derived from sales of all of our products are payable to the
Israeli government, generally at the rate of 3.0% during the
first three years and 3.5% beginning with the fourth year, up to
the amount of the received grants as adjusted for fluctuation in
the U.S. dollar/shekel exchange rate. The amounts received
after January 1, 1999 bear interest equal to the
12-month
London Interbank Offered Rate applicable to dollar deposits that
is published on the first business day of each calendar year.
Royalties are paid on our consolidated revenues.
The government of Israel does not own proprietary rights in
knowledge developed using its funding and there is no
restriction related to such funding on the export of products
manufactured using the know-how. The know-how is, however,
subject to other legal restrictions, including the obligation to
manufacture the product based on the know-how in Israel and to
obtain the Office of the Chief Scientists consent to
transfer the know-how to a third party, whether in or outside
Israel. These restrictions may impair our ability to outsource
manufacturing or enter into similar arrangements for those
products or technologies and they continue to apply even after
we have paid the full amount of royalties payable for the grants.
If the Office of the Chief Scientist consents to the manufacture
of the products outside Israel, the regulations allow the Office
of the Chief Scientist to require the payment of increased
royalties, ranging from
33
120% to 300% of the amount of the grant plus interest, depending
on the percentage of foreign manufacture. If the manufacturing
is performed outside of Israel by us, the rate of royalties
payable by us on revenues from the sale of products manufactured
outside of Israel will increase by 1% over the regular rates. If
the manufacturing is performed outside of Israel by a third
party, the rate of royalties payable by us on those revenues
will be a percentage equal to the percentage of our total
investment in our products that was funded by grants. The
R&D Law further permits the Office of the Chief Scientist,
among other things, to approve the transfer of manufacturing or
manufacturing rights outside Israel in exchange for an import of
certain manufacturing or manufacturing rights into Israel as a
substitute, in lieu of the increased royalties.
The R&D Law provides that the consent of the Office of the
Chief Scientist for the transfer outside of Israel of know-how
derived out of an approved plan may only be granted under
special circumstances and subject to fulfillment of certain
conditions specified in the R&D Law as follows: (a) the
grant recipient pays to the Office of the Chief Scientist a
portion of the sale price paid in consideration for such Office
of the Chief Scientist-funded know-how (according to certain
formulas), except if the grantee receives from the transferee of
the know-how an exclusive, irrevocable, perpetual unlimited
license to fully utilize the know-how and all related rights;
(b) the grant recipient receives know-how from a third
party in exchange for its Office of the Chief Scientist funded
know-how; or (c) such transfer of Office of the Chief
Scientist funded know-how arises in connection with certain
types of cooperation in research and development activities.
In connection with the NetReality acquisition, we assumed a
commitment to pay royalties to the Office of the Chief Scientist
up to the amount of the contingent liabilities derived from the
grants that had been received by NetReality prior to the
acquisition.
As of September 30, 2006, we had an outstanding contingent
obligation to pay royalties in the amount of approximately
$11.7 million, including obligations assumed in connection
with the purchase of the operations of NetReality.
Factors
Affecting Our Performance
Our business, financial position and results of operations, as
well as the
period-to-period
comparability of our financial results, are significantly
affected by a number of factors, some of which are beyond our
control, including:
|
|
|
|
|
mix between product and service revenues;
|
|
|
|
size of end-customers and sales cycles;
|
|
|
|
declines in average selling prices; and
|
|
|
|
cost of revenues and cost reductions.
|
Mix between product and service revenues. The
following table sets forth information for the periods presented
regarding the percentage of our revenues derived from product
and service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Product revenues
|
|
|
88.8
|
%
|
|
|
80.9
|
%
|
|
|
80.5
|
%
|
|
|
79.1
|
%
|
|
|
84.3
|
%
|
Service revenues
|
|
|
11.2
|
|
|
|
19.1
|
|
|
|
19.5
|
|
|
|
20.9
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
During the period from 2003 to 2005, we increased the percentage
of our service revenues compared to product revenues both as a
result of the increase in the installed base of our NetEnforcer
and NetReality systems and also as a result of increased efforts
to drive service contract renewals among end-customers. However,
for the nine months ended September 30, 2006, the
percentage of our service revenues was lower than in the nine
months ended September 30, 2005, primarily as a result of
product sales to a system integrator in the United Kingdom, as
part of the deployment of our systems by NTL. In addition, such
decrease in the
34
percentage of our service revenues was also due in part to the
decrease in sales of maintenance and support services relating
to the NetReality products. We are targeting our service
revenues to remain at approximately the percentage levels of
2004 and 2005. Our service gross margins have historically been
slightly higher than our product gross margins and we believe
that our service activities can be scaled to address a larger
installed basis without a proportionate increase in cost of
services.
Size of end-customers and sales cycles. We
believe that our growth can be accelerated by increasing sales
to large service providers and have hired additional sales and
marketing personnel in recent years in order to achieve this
goal. The deployment of our products by small and midsize
enterprises and service providers can be completed relatively
quickly with a limited number of NetEnforcer systems compared to
the number required by large service providers. Design wins with
large service providers, including carriers, are more likely to
result in sustained demand for additional NetEnforcer systems as
they deploy our products throughout their networks and as their
networks grow. The increased deployment of our products in
carriers networks also enhances our reputation and name
recognition in the market. We, therefore, expect that
significant customer wins in the carrier market will positively
impact future performance. However, our performance is also
influenced by sales cycles for our products, which typically
fluctuate based upon the size and needs of end-customers that
purchase our products. Generally, large service providers take
longer to plan the integration of DPI solutions into their
existing networks and to set goals for the implementation of the
technology. The varying length of our sales cycles creates
unpredictability regarding the timing of our sales and may cause
our quarterly operating results to fluctuate if a significant
customer defers an order from one quarter to another.
Furthermore, longer sales cycles may result in delays from the
time we increase our operating expenses and make investments in
inventory, until the time that we generate revenue from related
product sales.
Average selling prices. Our performance is
affected by the selling price of our products. We price our
products based on several factors, including manufacturing
costs, the stage of the products life cycle, competition,
technical complexity of the product, discounts given to channel
partners in certain territories, customization and other special
considerations in connection with larger projects. We typically
are able to charge the highest price for a product when it is
first introduced to the market. We expect that the average
selling prices for our products will decrease over the
products life cycle as our competitors introduce new
products and DPI technology becomes more standardized. In order
to maintain or increase our current price, we expect that we
will need to enhance the functionality of our products by
offering higher system speeds, and additional features, such as
additional security functions, supporting additional
applications and enhanced reporting tools. For example, we sell
additional software packages as part of the NetXplorer
management application suite, and optional upgrade application
suites to the NetEnforcer network traffic management system. We
also from time to time introduce higher end models that
typically increase our average selling price. To further offset
such declines, we sell maintenance and support programs on our
products, and as our customer base and number of field
installations grows our related service revenues are expected to
increase.
Cost of revenues and cost reductions. We
strive to control our cost of revenues in order to maintain and
increase our gross margins. Our cost of revenues as a percentage
of total revenues was 24.3% for 2003, 25.6% for 2004, 23.6% for
2005 and 22.0% for the nine months ended September 30,
2006. Our products use
off-the-shelf
components and typically the prices of such components decline
over time. In addition, we make an effort to identify cheaper
components of comparable performance and quality, as well as
making engineering improvements in our products that will reduce
costs. Since our cost of revenues also include royalties paid to
the Office of the Chief Scientist, our cost of sales may be
impacted positively or negatively by actions of the Israeli
government changing the royalty rate. In addition, we may in the
future incorporate features into our products that require
payment of royalties to third parties.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses
and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. These estimates and
35
judgments are subject to an inherent degree of uncertainty and
actual results may differ. Our significant accounting policies
are more fully described in Note 2 to our consolidated
financial statements included elsewhere in this prospectus.
Certain of our accounting policies are particularly important to
the portrayal of our financial position and results of
operations. In applying these critical accounting policies, our
management uses its judgment to determine the appropriate
assumptions to be used in making certain estimates. Those
estimates are based on our historical experience, the terms of
existing contracts, our observance of trends in our industry,
information provided by our customers and information available
from other outside sources, as appropriate. With respect to our
policies on revenue recognition and warranty costs, our
historical experience is based principally on our operations
since we commenced selling our products in 1998. Our estimates
are guided by observing the following critical accounting
policies:
Revenue recognition. We recognize revenues
from sales of our products in accordance with the American
Institute of Certified Public Accountants Statement of
Position, or SOP,
97-2,
Software Revenue Recognition, as modified by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions. When an arrangement does not require
significant production, modification or customization of
software or does not contain services considered to be essential
to the functionality of the software, revenue is recognized when
the following four criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement
exists. We require evidence of a purchase order
with a customer specifying the terms and conditions of the
products or services to be delivered typically in the form of a
signed contract or statement of work accompanied by a purchase
order.
|
|
|
|
Delivery has occurred. For products that
include a software license delivered with a hardware appliance,
delivery takes place when shipment occurs. For software licenses
that are not bundled with a hardware appliance, delivery takes
place when the software programs and applicable activation key
are sent or released via the internet. For services, delivery
takes place as the services are provided.
|
|
|
|
The fee is fixed and determinable. Fees are
fixed and determinable if they are not subject to a refund or
cancellation and do not have payment terms that exceed our
standard payment terms. Typical payment terms are between net
30 days to net 90 days.
|
|
|
|
Collection is probable. We generally perform a
credit review of customers with significant transactions to
determine whether collection is probable.
|
We exercise judgment and use estimates in connection with the
determination of the amount of product software license and
services revenues to be recognized in each accounting period. If
collection is not considered probable, revenue is recognized
when the fee is collected. We record provisions against revenue
for estimated sales returns, sales incentives and warranty
allowances on product and service-related sales in the same
period as the related revenue is recorded. We also record a
provision to operating expenses for bad debts resulting from
customers inability to pay for the products or services
they have received. These estimates are based on historical
sales returns, sale incentives, warranty related expenses, and
bad debt expense, analyses of credit memo data, and other known
factors, such as bankruptcy. If the historical data we use to
calculate these estimates do not accurately reflect actual or
future returns, sales incentives, warranty related expenses or
bad debts, adjustments to these reserves may be required that
would increase or decrease revenue or net income.
Many of our product sales include multiple elements. Such
elements typically include several or all of the following:
hardware appliance, software licenses, hardware and software
maintenance, technical support and training services. For
multiple-element arrangements that do not involve significant
modification or customization of the software and do not involve
services that are considered essential to the functionality of
the software, we allocate value to each element based on its
relative fair value, if sufficient specific objective evidence
of fair value exists for each element of the arrangement.
Specific objective evidence of fair value is determined based on
the price charged when each element is sold separately. If
sufficient specific objective evidence exists for all
undelivered elements, but does not exist for the delivered
element, typically the hardware appliance and software license,
then the residual method is used to allocate value to each
element. Under the residual method, each undelivered element is
allocated value based on customer specific objective evidence of
fair value for that element, as described above, and the
remainder of the total arrangement fee is
36
allocated to the delivered element(s). If sufficient customer
specific objective evidence does not exist for all undelivered
elements and the arrangement involves rights to unspecified
additional software products, all revenue is recognized ratably
over the term of the arrangement. If the arrangement does not
involve rights to unspecified additional software products, all
revenue is initially deferred until typically the only remaining
undelivered element is software maintenance or technical
support, at which time the entire fee is recognized ratably over
the remaining maintenance or support term.
Accounting for Stock-Based
Compensation. Through December 31, 2005, we
elected to follow the intrinsic value-based method prescribed by
APB 25 and related interpretations in accounting for
employee stock options rather than adopting the alternative fair
value accounting provided under Statement of Financial
Accounting Standards No. 123, or SFAS No. 123,
Accounting for Stock Based Compensation. Therefore,
we have not recorded any compensation expense for stock options
we granted to our employees where the exercise price equals the
fair market value of the stock on the date of grant and the
exercise price, number of shares eligible for issuance under the
options and vesting period are fixed. However, where the
exercise price is less than the fair market value of the stock
on the date of grant, compensation expense was recognized.
Deferred compensation is amortized to compensation expense over
the vesting period of the options, which is generally four
years, on a straight-line method.
We comply with the disclosure requirements of
SFAS No. 123 and Statement of Financial Accounting
Standards No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure, or
SFAS No. 148, which require that we disclose our pro
forma net income or loss and net income or loss per ordinary
share as if we had expensed the fair value of the options. In
calculating such fair value, there are certain assumptions that
we use, as disclosed in Note 2 of our consolidated
financial statements included elsewhere in this prospectus. For
purposes of this pro forma disclosure, we estimate the fair
value of stock options issued to employees using the minimum
value valuation model through December 31, 2005. Option
valuation models require the input of highly subjective
assumptions, including the expected life of options and our
expected stock price volatility. Therefore, the estimated fair
value of our employee stock options may vary significantly as a
result of changes in the assumptions used.
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS 123(R), which requires companies to
expense the fair value of employee stock options and other forms
of share-based compensation. SFAS 123(R) requires nonpublic
companies that used the Minimum Value method in SFAS 123
for either recognition or pro forma disclosures to apply
SFAS 123(R) using the prospective-transition method. As
such, we will continue to apply APB 25 in future periods to
equity awards outstanding at the date of
SFAS 123(R)adoption that were measured using the Minimum
Value method.
We adopted SFAS 123(R) using the prospective transition
method for grants that were measured for pro forma purposes
using the Minimum Value Method. Under SFAS 123(R), we are
required to determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method
for compensation cost and the transition method to be used at
date of adoption. We use the Minimum Value valuation model to
value options for pro forma financial statement disclosure
purposes. The use of a different model to value options may have
resulted in a different fair value. We adopted SFAS 123(R)
commencing January 1, 2006 and recognized a compensation
expense of $682,000 in the nine months ended September 30,
2006. The fair value of stock-based awards, granted after
January 1, 2006, was estimated using the Binominal model.
With respect to each option grant date, we determine the deemed
fair value of our ordinary shares. As there is no public market
for our ordinary shares, this determination was necessarily
subjective. In making this determination, we considered a number
of factors, including:
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the issuance price of our series of preferred shares to third
parties;
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the liquidation preference and other rights of the preferred
shares;
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37
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significant events in our history including the securing of
design wins as well as our overall financial
performance; and
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trends in the market for public companies involved in similar
lines of business.
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We have reviewed the methodologies used in making these
determinations in light of the AICPAs Practice Aid
Valuation of Privately-Held-Company Equity Securities Issued
as Compensation, which we refer to as the practice aid. We
took into consideration the market and income approaches to
valuation as set forth in the practice aid. We believe that the
valuation methodologies that we have used are consistent with
the practice aid.
In connection with the preparation of our financial statements
for the years ended December 31, 2004 and 2005, and the
nine months ended September 30, 2006, we assessed the
valuations of our ordinary shares as of the applicable grant
dates and engaged an independent valuation firm, BDO Ziv Haft
Consulting & Management Ltd.
We also assessed our estimate of the fair value for financial
reporting purposes of our ordinary shares based on the
subjective factors mentioned above, the various approaches to
valuation set forth in the practice aid, the independent
valuation studies and an assessment of market considerations,
including the overall economic marketplace, factors affecting
our industry as well as the likelihood of an initial public
offering, the uncertainties inherent in an initial public
offering and the enterprise value of our company.
The valuation methodologies employed in connection with our
2004, 2005 and 2006 independent valuation studies were based
upon various generally accepted valuation methods but relied
primarily on the discounted cash flow and market approach
models. Determining the fair value of our ordinary shares
involves complex and subjective judgments involving estimates of
revenues, earnings, assumed market growth rates and estimated
costs, as well as appropriate discount rates. At the time of
each valuation, the significant estimates used in the income
approach included estimates of revenues for 2006 and revenues
growth rates for the following years.
Inventories. We value our inventories at the
lower of cost or estimated market value, cost being determined
on the basis of the average cost method for raw materials,
manufacturing costs and indirect allocable costs. We estimate
market value based on our current pricing, market conditions and
specific customer information. We write off inventory for
slow-moving items or technological obsolescence. We also assess
our inventories for obsolescence based upon assumptions about
future demand and market conditions. Once inventory is written
off, a new cost basis for these assets is established for future
periods. Inventory write offs totaled $0.2 million in 2003,
$0.4 million in 2004 and $0.2 million in 2005.
38
Results
of Operations
The following table sets forth our statements of operations as a
percentage of revenues for the periods indicated:
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2003
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2004
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2005
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2005
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2006
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(unaudited)
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Revenues
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Products
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88.8
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%
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80.9
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%
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80.5
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%
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79.1
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%
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84.3
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%
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Services
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11.2
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19.1
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19.5
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20.9
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15.7
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Total revenues
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100.0
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100.0
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100.0
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100.0
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100.0
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Cost of revenues:
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Products
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21.8
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21.8
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19.5
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20.4
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18.6
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Services
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2.5
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3.8
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4.1
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4.4
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3.4
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Total cost of revenues
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24.3
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25.6
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23.6
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24.8
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22.0
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Gross profit
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75.7
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74.4
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76.4
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75.2
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78.0
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Operating expenses:
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Research and development, net
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20.0
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21.9
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25.8
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27.6
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23.0
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Sales and marketing
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55.3
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55.9
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51.7
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55.4
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44.1
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General and administrative
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12.4
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11.5
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10.4
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10.8
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9.2
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Impairment of intangible assets
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2.0
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Total operating expenses
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87.7
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91.3
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87.9
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93.7
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76.3
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Operating income (loss)
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(12.0
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(16.9
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(11.5
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(18.4
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)
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1.7
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Financing and other income
(expenses), net
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(3.4
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(1.3
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0.2
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0.2
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0.9
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Income (loss) before income tax
benefit (expense)
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(15.4
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(18.2
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(11.3
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(18.2
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)
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2.6
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Income tax benefit (expense)
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1.0
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1.1
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(0.3
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Net income (loss)
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(15.4
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(18.2
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(10.3
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(17.1
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)
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2.3
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Nine
Months Ended September 30, 2006 Compared to Nine Months
Ended September 30, 2005
Revenues
Products. Product revenues increased by
$8.1 million, or 65%, to $20.7 million in the nine
months ended September 30, 2006 from $12.6 million in
the nine months ended September 30, 2005. The majority of
our product revenues in the nine months ended September 30,
2006 were derived from sales of the NetEnforcer
AC-1000. We
continued to increase our concentration in the service provider
market during this period. Product revenues for the nine months
ended September 30, 2006 also include $6.8 million of
sales of our products to a single system integrator for our
products in the United Kingdom relating primarily to deployment
of our systems by NTL compared to $2.5 million of sales to
the same system integrator in relation to the same project for
in the nine months ended September 30, 2005.
Services. Service revenues increased by
$0.6 million, or 16%, to $3.9 million in the nine
months ended September 30, 2006 from $3.3 million in
the nine months ended September 30, 2005. The increase in
service revenues resulted primarily from a larger product base
covered by maintenance and support contracts. The increase in
service revenues was partially offset by a decrease of sales of
maintenance and support programs related to NetRealitys
legacy products in the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005.
Service revenues as a percentage of sales decreased in part due
to sales to NTL, which, as of September 30, 2006, had not
included maintenance and support contracts typically associated
with our product sales.
Cost of
revenues and gross margin
Products. Cost of product revenues increased
by $1.4 million, or 41%, to $4.6 million in the nine
months ended September 30, 2006, from $3.2 million in
the nine months ended September 30, 2005. This
39
increase resulted primarily from increased expenditure of
$0.6 million on materials due to an increased number of
units sold, and an increase of $0.3 million in royalty
expense accrued or paid to the Office of the Chief Scientist.
Product gross margin was 78.0% in the nine months ended
September 30, 2006 compared to 74.3% in the nine months
ended September 30, 2005. This increase resulted from
higher priced modules accounting for a greater proportion of
total sales and, to a lesser degree, cost reduction efforts.
Services. Service cost of revenues increased
by $0.1 million, or 21%, to $0.8 million in the nine
months ended September 30, 2006 from $0.7 million in
the nine months ended September 30, 2005. This increase
resulted primarily from post-sales support expenses as a result
of salary increases. Services gross margin was 78.1% in the nine
months ended September 2006 compared to 78.9% in the nine months
ended September 30, 2005.
Total gross margin was 78.0% in the nine months ended
September 30, 2006 compared to 75.2% in the nine months
ended September 30, 2005.
Operating
expenses
Research and development. Gross research and
development expenses increased by $1.7 million, or 36%, to
$6.7 million in the nine months ended September 30,
2006 from $5.0 million in the nine months ended
September 30, 2005. This increase resulted from an increase
of $1.5 million due primarily to the hiring of additional
research and development staff in connection with development of
our ATCA-based 10G platform, as well as salary increases.
Research and development expenses as a percentage of revenues
decreased to 27% in the nine months ended September 30,
2006 from 31% in the nine months ended September 30, 2005.
Research and development expenses, net of received and accrued
royalty-bearing grants from the Office of the Chief Scientist
increased by $1.2 million, or 29%, to $5.6 million in
the nine months ended September 30, 2006 from
$4.4 million in the nine months ended September 30,
2005. Grants received and accrued increased by
$0.5 million, or 88%, to $1.1 million in the nine
months ended September 30, 2006 from $0.6 million in
the nine months ended September 30, 2005, due to a larger
grant approved by the Office of the Chief Scientist.
Sales and marketing. Sales and marketing
expenses increased by $2.1 million, or 23%, to
$10.9 million in the nine months ended September 30,
2006 from $8.8 million in the nine months ended
September 30, 2005. This increase resulted from an increase
of $1.3 million due primarily to the hiring of additional
sales, marketing and engineering personnel to provide broader
geographical coverage and increased focus on the service
provider and carrier markets, an increase of $0.3 million
in expenses relating to resellers and end-customers events and
an increase of $0.2 million in rental costs related to our
offices. Sales and marketing expenses as a percentage of
revenues decreased to 44% in the nine months ended
September 30, 2006 from 55% in the nine months ended
September 30, 2005.
General and administrative. General and
administrative expenses increased by $0.6 million, or 32%,
to $2.3 million in the nine months ended September 30,
2006 from $1.7 million in the nine months ended
September 30, 2005. This increase resulted from an increase
of $0.3 million due primarily to the hiring of additional
personnel, as well as salary increases and increased
stock-based-compensation costs, and an increase of
$0.1 million in professional services rendered. General and
administrative expenses as a percentage of revenues decreased to
9% in the nine months ended September 30, 2006 from 11% in
the nine months ended September 30, 2005.
Financial
and other income (expenses), net
Financial and other income was $229,000 in the nine months ended
September 30, 2006 compared to financial and other income
of $36,000 in the nine months ended September 30, 2005. The
increase in financial income resulted from interest received on
cash balances and decrease of amortization of discount on bank
credit line.
40
Income
tax benefit (expense)
Income tax expense was $75,000 in the nine months ended
September 30, 2006 compared to income tax benefit of
$178,000 in the nine months ended September 30, 2005. The
income tax benefit in the nine months ended September 30,
2005 was attributable to deferred income tax asset recorded by
our U.S. subsidiary.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Revenues
Products. Product revenues increased by
$3.9 million, or 26%, to $18.5 million in 2005 from
$14.6 million in 2004. The majority of our product revenues
in 2005 was derived from sales of the NetEnforcer
AC-1000,
which is targeted primarily at service providers, and the
balance from sales of the NetEnforcer
AC-400 and
AC-800.
While we experienced growth in sales from all NetEnforcer
models, the rate of growth of the NetEnforcer
AC-400 and
AC-800 was
slower than in previous years as we shifted our focus to the
service provider market. Products revenues for 2005 also include
$3.7 million of sales to a single system integrator
compared to $0.6 million of sales to the same system
integrator in 2004.
The increase in NetEnforcer sales was partially offset by a
decrease of sales of NetRealitys legacy products which
accounted for sales of $1.0 million in 2004 compared to
$0.1 million of sales in 2005. At the end of 2004, we
decided to cease selling NetRealitys product line,
although we continue selling maintenance and support programs
relating to the NetReality products.
Services. Service revenues increased by
$1.1 million, or 30%, to $4.5 million in 2005 from
$3.4 million in 2004. The increase in service revenues
resulted primarily from a larger product base covered by
maintenance and support contracts. The increase in service
revenues was partially offset by a decrease of sales of
maintenance and support programs related to NetRealitys
legacy products in 2004 compared to 2005.
Cost of
revenues and gross margin
Products. Cost of product revenues increased
by $0.5 million, or 14%, to $4.5 million in 2005 from
$4.0 million in 2004. This increase resulted primarily from
increased expenditure of $0.5 million on materials which
was partially offset by a write off of $0.2 million
primarily related to NetReality inventories, and an increase of
$0.2 million in royalties paid to the Office of the Chief
Scientist. Product gross margin was 75.8% in 2005 compared to
73.1% in 2004. This increase resulted from higher priced modules
accounting for a greater proportion of total sales, as well as
lower relative fixed costs and decreased inventory write-offs
compared to 2004.
Services. Service cost of revenues increased
by $0.2 million, or 38%, to $0.9 million in 2005 from
$0.7 million in 2004. This increase resulted from an
increase of $0.2 million in post-sales support expenses as
a result of employing additional post-sale support engineers and
salary increases. Services gross margin was 79.0% in 2005
compared to 80.3% in 2004.
Total gross margin was 76.4% in 2005 compared to 74.4% in 2004.
Operating
expenses
Research and development. Gross research and
development expenses increased by $1.8 million, or 37%, to
$6.7 million in 2005 from $4.9 million in 2004. This
increase resulted from an increase of $1.4 million due
primarily to the hiring of additional research and development
staff as well as increased salaries, an increase of
$0.2 million due to additional materials consumed and an
increase of $0.1 million due to additional subcontractor
work. These increases were driven by the development of new
products, such as our NetXplorer management application suite
and the initial development of our new ATCA-based 10G platform.
Research and development expenses, net of received and accrued
grants from the Office of the Chief Scientist, increased by
$1.9 million, or 50%, to $5.9 million in 2005 from
$4.0 million in 2004. Grants totaled $0.7 million in
2005 compared to $0.9 million in 2004. The decrease in the
size of grants received and accrued in 2005 compared to 2004 was
primarily due to unfavorable changes in the currency exchange
rates
41
between the shekel and the U.S. dollar as well as an
adjustment in 2005 of the grant allowance for 2004. Research and
development expenses as a percentage of revenues increased to
26% in 2005 from 22% in 2004.
Sales and marketing. Sales and marketing
expenses increased by $1.8 million in 2005, or 18%, to
$11.9 million in 2005 from $10.1 million in 2004. This
increase resulted from an increase of $1.1 million due
primarily to the hiring of additional sales, marketing and
engineering personnel to provide broader geographical coverage
and increased focus on the service provider market, an increase
of $0.2 million in commissions paid to third parties, an
increase of $0.2 million in amortization of stock-based
compensation and an increase of $0.1 million in expenses
relating to cooperative advertising expenses, public relations
and advertising. Sales and marketing expenses as a percentage of
revenues decreased to 52% in 2005 from 56% in 2004.
General and administrative. General and
administrative expenses increased by $0.3 million, or 14%,
to $2.4 million in 2005 from $2.1 million in 2004.
This increase resulted from an increase of $0.1 million due
primarily to the hiring of additional personnel as well as
salary increases and an increase of $0.1 million in
expenses related to professional services. General and
administrative expenses as a percentage of revenues decreased to
10% in 2005 from 12% in 2004.
Impairment
of intangible assets
Impairment of intangible assets was $0.4 million in 2004
and zero in 2005. This decrease resulted from the impairment at
the end 2004 of most of the intangible assets acquired in
connection with our acquisition of the assets of NetReality in
2002.
Financial
and other income (expenses), net
Financial and other income, net was $45,000 in 2005 compared to
financial and other expenses, net of $241,000 in 2004. The
increase in financial and other income resulted from an increase
of $0.1 million related to interest received on cash
balances and decrease of $0.3 million related to
amortization of discount on bank credit-lines.
Income
tax benefit (expense)
Income tax benefit was $218,000 in 2005 compared to income tax
expense of $3,000 in 2004. The income tax benefit in 2005 was
attributable to deferred income tax asset recognized by our
U.S. subsidiary.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Revenues
Products. Product revenues increased by
$1.5 million, or 12%, to $14.6 million in 2004 from
$13.1 million in 2003. The increase in product revenues
resulted primarily from an increase in sales of our NetEnforcer
product, partially offset by a decrease of $1.8 million in
sales of our NetReality legacy products. At the end of 2004, we
decided to cease selling NetRealitys product line,
although we continue selling maintenance and support programs
relating to the NetReality products.
Services. Revenues increased by
$1.7 million, or 109%, to $3.4 million in 2004 from
$1.7 million in 2003. The increase in service revenues
resulted from an increased emphasis on selling maintenance and
support programs.
Cost of
revenues and gross margin
Products. Cost of product revenues increased
by $0.7 million, or 22%, to $3.9 million in 2004 from
$3.2 million in 2003. This increase resulted from a write
off of $0.4 million primarily related to NetReality
inventories and from increased product sales. Products gross
margin was 73.1% in 2004 compared to 75.4% in 2003.
42
Services. Cost of service revenues increase by
$317,000, or 88%, to $679,000 in 2004 from $362,000 in 2003.
Services gross margin was 80.3% in 2004 compared to 78.1% in
2003. This increase resulted from employing additional
post-sales support engineers.
Total gross margin was 74.4% in 2004 compared to 75.7% in 2003.
Operating
expenses
Research and development. Gross research and
development expenses increased by $0.8 million, or 20%, to
$4.9 million in 2004 from $4.1 million in 2003. This
increase resulted from an increase of $0.7 million due
primarily to the hiring of additional research and development
staff for the development of new products. Research and
development expenses as a percentage of revenues were 27% in
both 2004 and 2003.
Research and development expenses, net of received and accrued
grants from the Office of the Chief Scientist, increased by
$1.0 million, or 34%, to $4.0 million in 2004 from
$3.0 million in 2003. Grants totaled $0.9 million in
2004 compared to $1.1 million in 2003. The decrease in the
size of grants received and accrued in 2004 compared to 2003 was
primarily due to budget constraints imposed by the Israeli
government that led to a reduction in participation rates from
50% to 40%, as well as unfavorable changes in the currency
exchange rates between the shekel and the U.S. dollar.
Sales and marketing. Sales and marketing
expenses increased by $1.9 million in 2004, or 24%, to
$10.1 million in 2004 from $8.2 million in 2003. This
increase resulted from an increase of $1.3 million due
primarily to the hiring of additional sales and marketing
personnel in our sales, support and marketing departments and
expansion to new territories, an increase of $0.4 million
in travel expenses and an increase of $0.2 million related
to conventions and exhibitions. Sales and marketing expenses as
a percentage of revenues increased to 56% in 2004 from 55% in
2003.
General and administrative. General and
administrative expenses increased by $0.3 million, or 11%,
to $2.1 million in 2004 from $1.8 million in 2003.
This increase resulted primarily from an increase of
$0.2 million in expenses related to professional services
and $0.1 million due primarily to the hiring of additional
personnel as well as salary increases. General and
administrative expenses as a percentage of revenues decreased to
11.5% in 2004 from 12.4% in 2003.
Impairment
of intangible assets
Impairment of intangible assets was $0.4 million in 2004
and zero in 2003. This increase resulted from the impairment at
the end 2004 of most of the intangible assets acquired in
connection with our acquisition of the assets of NetReality in
2002.
Financial
and other income (expenses), net
Financial and other income (expenses), net decreased to
$0.2 million in 2004 from $0.5 million in 2003. This
decrease was primarily a result of higher interest expenses in
2003 relating to bank loans and foreign exchange gains from and
increased interest income on cash balances in 2004.
Income
tax benefit (expense)
Income tax expense was $3,000 in 2004 compared to $2,000 in 2003.
Quarterly
Results of Operations
The table below sets forth unaudited consolidated statements of
operations data in dollars for each of the seven consecutive
quarters ended September 30, 2006. In managements
opinion, the unaudited consolidated financial statements have
been prepared on the same basis as our audited consolidated
financial statements contained elsewhere in this prospectus and
include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such financial
information. This information should be read in conjunction with
the audited consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Statements of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,437
|
|
|
$
|
5,428
|
|
|
$
|
6,028
|
|
|
$
|
7,079
|
|
|
$
|
7,571
|
|
|
$
|
8,152
|
|
|
$
|
8,854
|
|
Total cost of revenues
|
|
|
1,108
|
|
|
|
1,308
|
|
|
|
1,520
|
|
|
|
1,483
|
|
|
|
1,700
|
|
|
|
1,746
|
|
|
|
1,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,329
|
|
|
|
4,120
|
|
|
|
4,508
|
|
|
|
5,596
|
|
|
|
5,871
|
|
|
|
6,406
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
1,436
|
|
|
|
1,441
|
|
|
|
1,505
|
|
|
|
1,543
|
|
|
|
1,882
|
|
|
|
1,953
|
|
|
|
1,807
|
|
Sales and marketing
|
|
|
2,811
|
|
|
|
3,176
|
|
|
|
2,810
|
|
|
|
3,090
|
|
|
|
3,493
|
|
|
|
3,749
|
|
|
|
3,617
|
|
General and administrative
|
|
|
578
|
|
|
|
586
|
|
|
|
545
|
|
|
|
671
|
|
|
|
609
|
|
|
|
710
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,825
|
|
|
|
5,203
|
|
|
|
4,860
|
|
|
|
5,304
|
|
|
|
5,984
|
|
|
|
6,412
|
|
|
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,496
|
)
|
|
|
(1,083
|
)
|
|
|
(352
|
)
|
|
|
292
|
|
|
|
(113
|
)
|
|
|
(6
|
)
|
|
|
528
|
|
Financial and other income
(expenses), net
|
|
|
(32
|
)
|
|
|
39
|
|
|
|
29
|
|
|
|
9
|
|
|
|
121
|
|
|
|
62
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
(1,528
|
)
|
|
|
(1,044
|
)
|
|
|
(323
|
)
|
|
|
301
|
|
|
|
8
|
|
|
|
56
|
|
|
|
574
|
|
Tax income (expense)
|
|
|
101
|
|
|
|
42
|
|
|
|
35
|
|
|
|
40
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,427
|
)
|
|
$
|
(1,002
|
)
|
|
$
|
(288
|
)
|
|
$
|
341
|
|
|
$
|
5
|
|
|
$
|
53
|
|
|
$
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our quarterly revenues and results of operations have varied in
the past and can be expected to vary in the future due to
numerous factors. We believe that
period-to-period
comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of
future performance. Generally, our revenues are lowest in the
first quarter and our fourth quarter has tended to exhibit
stronger results than other quarters, which we believe may
result from the budgeting processes of many of our customers
which are based on a calendar fiscal year.
Quantitative
and Qualitative Disclosures about Market Risk
Market risk is the risk of loss related to changes in market
prices, including interest rates and foreign exchange rates, of
financial instruments that may adversely impact our consolidated
financial position, results of operations or cash flows.
Risk
of Interest Rate Fluctuation
We do not have any long-term borrowings. Our investments consist
primarily of cash and cash equivalents and interest bearing,
investment-grade investments in marketable securities with
maturities of up to three years. These marketable securities
currently consist of corporate debt securities, governmental
debt securities and money market funds, and may in the future
include commercial paper and non-governmental debt securities.
The primary objective of our investment activities is to
preserve principal while maximizing the income that we receive
from our investments without significantly increasing risk and
loss. Our investments are exposed to market risk due to
fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage
this exposure by performing ongoing evaluations of our
investments. Due to the short and medium-term maturities of our
investments to date, their carrying value approximates the fair
value. We generally hold investments to maturity in order to
limit our exposure to interest rate fluctuations.
Foreign
Currency Exchange Risk
Our foreign currency exposures give rise to market risk
associated with exchange rate movements of the U.S. dollar,
our functional and reporting currency, mainly against the shekel
and the euro. We are exposed to the risk of fluctuation in the
U.S. dollar/shekel exchange rate. In 2005, we derived our
revenues principally in U.S. dollars and to a lesser extent
in euros and shekels. Although a majority of our expenses were
denominated in U.S. dollars, a significant portion of our
expenses were denominated in shekels and to a lesser extent in
euros and yen. Our shekel-denominated expenses consist
principally of salaries and related personnel expenses.
44
We anticipate that a material portion of our expenses will
continue to be denominated in shekels. If the U.S. dollar
weakens against the shekel, there will be a negative impact on
our profit margins. We currently do not hedge our currency
exposure through financial instruments. In the future, we may
undertake hedging or other similar transactions or invest in
market risk sensitive instruments if we determine that it is
advisable to offset these risks.
Liquidity
and Capital Resources
Since inception, we have financed our operations primarily
through private placements of our equity securities and, to a
lesser extent, through borrowings from financial institutions.
Through September 30, 2006, sales of our equity securities
resulted in net proceeds to us of approximately
$42.2 million, net of issuance expenses. As of
September 30, 2006, we had $4.5 million in cash and
cash equivalents and $8.9 million in marketable securities.
As of September 30, 2006, our working capital, which we
calculate by subtracting our current liabilities from our
current assets, was $5.0 million.
By subcontracting our manufacturing and component supply chain
activities to a third party subcontractor, we minimize our
working capital requirements. Based on our current business
plan, we believe that the net proceeds from this offering,
together with our existing cash balances and cash generated from
operations, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least
the next 12 months. If our estimates of revenues, expenses
or capital or liquidity requirements change or are inaccurate or
if cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or
arrange additional debt financing. In addition, we may seek to
sell additional equity or arrange debt financing to give us
financial flexibility to pursue attractive acquisition or
investment opportunities that may arise in the future, although
we currently do not have any acquisitions or investments planned.
Operating activities. Net cash provided by
operating activities in the nine months ended September 30,
2006 was $1.2 million and was generated primarily from our
net income of $0.6 million adjusted for non-cash expenses
of $1.3 million and by an increase in trade and other
accounts payable of $0.8 million and an increase of
$0.9 million in deferred revenues, partially offset by an
increase of $0.6 million in trade receivables, an increase
of $1.0 million in inventories, and by an increase of
$1.6 million in other receivables and prepaid expenses and
other assets, primarily due to prepaid payments for lease of our
new leased offices in Hod-Hasharon, Israel, and prepaid expenses
of $0.5 million for our offering costs. Net cash used in
operating activities in the nine months ended September 30,
2005 was $1.2 million and resulted primarily from our net
loss of $2.7 million adjusted for non-cash expenses of
$0.7 million, partially offset by an increase of
$0.9 million in deferred income.
Net cash provided by operating activities in 2005 was
$0.2 million and was generated primarily by an increase of
$1.3 million in deferred revenues and an increase in trade
and other accounts payable of $1.1 million, partially
offset by our net loss of $2.4 million adjusted for
non-cash expenses of $0.9 million. Net cash used in
operating activities in 2004 was $1.7 million and resulted
primarily from our net loss of $3.3 million adjusted for
non-cash expenses of $1.1 million and an increase of
$0.6 million in trade receivables, partially offset by an
increase of $0.8 million in deferred revenues. Net cash
provided by operating activities in 2003 was $0.6 million
and was generated primarily from $2.1 million in deferred
revenues, partially offset by our net loss of $2.3 million
adjusted for non-cash expenses of $0.9 million and by an
increase of $0.3 million in trade receivables.
Investing activities. Net cash used in
investing activities in the nine months ended September 30,
2006 was $5.8 million, primarily due to investments in
available-for-sale
marketable securities in the amount of $4.3 million and
$1.5 million of capital investments primarily in research
and development equipment and in leasehold improvement of our
new leased offices in Hod-Hasharon, Israel. Net cash used in
investing activities in the nine months ended September 30,
2005 was $0.7 million and consisted primarily of
$0.5 million of capital investments primarily in research
and development equipment.
Net cash used in investing activities in 2005 was
$0.4 million and consisted primarily of $0.7 million
of capital investments primarily in research and development
equipment partially offset by net proceeds from sale
45
of marketable securities. Net cash used in investing activities
in 2004 was $5.5 million and consisted primarily of
$4.9 million invested in marketable securities and
$0.6 million of capital investments primarily in research
and development equipment. Net cash provided by investing
activities in 2003 was $1.3 million and consisted primarily
of $1.5 million received from receipt of short-term bank
deposits partially offset by $0.2 million of capital
investments primarily in research and development equipment.
We expect that our capital expenditures will total approximately
$2.0 million in 2006 and approximately $1.5 million in
2007. We anticipate that these capital expenditures will be
primarily related to further investments in research and
development equipment and in leasehold improvements.
Financing activities. Net cash provided by
financing activities in the nine months ended September 30,
2006 was $5.5 million and was generated by the issuance of
share capital. Net cash used in financing activities in the nine
months ended September 30, 2005 was $0.2 million and
consisted primarily repayment of bank credit line.
Net cash used in financing activities in 2005 was
$0.1 million resulting primarily from the repayment of
$0.2 million of indebtedness partially offset by funds
received from option exercises. Net cash provided by financing
activities in 2004 was $7.7 million generated by the
issuance of share capital of $7.9 million partially offset
by repayment of $0.2 million of indebtedness. Net cash used
in financing activities in 2003 was $1.0 million resulting
primarily from the repayment net of $1.0 million of
indebtedness.
Off
Balance Sheet Arrangements
We are not a party to any material off-balance sheet
arrangements. In addition, we have no unconsolidated special
purpose financing or partnership entities that are likely to
create material contingent obligations.
Contractual
and Other Commitments
The following table of our material contractual and other
obligations known to us as of September 30, 2006,
summarizes the aggregate effect that these obligations are
expected to have on our cash flows in the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
After 2009
|
|
|
|
(in thousands)
|
|
|
Operating leases
offices(1)
|
|
$
|
3,303
|
|
|
$
|
99
|
|
|
$
|
586
|
|
|
$
|
527
|
|
|
$
|
480
|
|
|
$
|
1,611
|
|
Operating leases
vehicles
|
|
|
1,505
|
|
|
|
188
|
|
|
|
590
|
|
|
|
474
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,808
|
|
|
$
|
287
|
|
|
$
|
1,176
|
|
|
$
|
1,001
|
|
|
$
|
733
|
|
|
$
|
1,611
|
|
|
|
|
(1) |
|
Consists primarily of an operating lease for our facilities in
Hod-Hasharon, Israel, as well as operating leases for facilities
leased by our subsidiaries. |
Recent
Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, or SFAS No. 154,
Accounting Changes and Error Corrections, a
replacement of APB No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. APB No. 20
previously required that most voluntary changes in accounting
principles be recognized by including in net income for the
period of change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires
retroactive application to prior periods financial
statements of a voluntary change in accounting principles unless
it is impracticable. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
In November 2005, the FASB issued FASB Staff Position
(FSP)
FAS 115-1.
The FSP addresses the determination as to when an investment is
considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. The FSP
also includes accounting considerations
46
subsequent to the recognition of
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as
other-than-temporary
impairments. The guidance in this FSP amends
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity. The FSP replaces the impairment
evaluation guidance of EITF Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
with references to the existing
other-than-temporary
impairment guidance. The FSP clarifies that an investor should
recognize an impairment loss no later than when the impairment
is deemed
other-than-temporary,
even if a decision to sell an impaired security has not been
made. The guidance in this FSP is to be applied to reporting
periods beginning after December 15, 2005. We do not expect
that the adoption of FSP
FAS 115-1
will have a material impact on our financial position or results
of operations.
47
BUSINESS
Overview
We are a leading designer and developer of broadband service
optimization solutions using advanced deep packet inspection, or
DPI, technology. Our solutions provide broadband service
providers and enterprises with real-time, highly granular
visibility into network traffic, and enable them to efficiently
and effectively manage and optimize their networks.
End-customers use our solutions to create sophisticated policies
to monitor network applications, enforce quality of service
policies that guarantee mission-critical application
performance, mitigate security risks and leverage network
infrastructure investments. Our carrier-class products are used
by service providers to offer subscriber-based and
application-based tiered services that enable them to optimize
their service offerings, reduce churn rates and increase average
revenue per user, or ARPU. Our goal is to be the leading
provider of network inspection and management solutions used by
service providers and enterprises to transform generic access
broadband networks into intelligent broadband networks.
The rapid growth of broadband networks and the proliferation in
the number and complexity of broadband applications have led
broadband service providers to demand new ways to manage their
networks. Broadband applications, such as
peer-to-peer,
or P2P, VoIP, Internet video and online video gaming increase
network congestion and require real time voice, video and data
communications. New and innovative applications that pose
significant challenges are continuously being introduced. Costly
infrastructure upgrades to increase network bandwidth capacity
neither address service providers need for network
visibility nor prioritize revenue-generating applications.
Furthermore, service providers have generally been unsuccessful
in capturing the significant new revenue opportunities available
from providing differentiated, premium broadband services that
command higher prices. By capitalizing on new revenue
opportunities and maximizing the capacity of existing network
infrastructure, our DPI technology enables service providers to
optimize returns on their investments and enhance the quality of
the services they provide.
Our products consist of our NetEnforcer traffic management
systems and NetXplorer application management suite. NetEnforcer
employs advanced DPI technology, which identifies applications
at high speeds by examining data packets and searching for
application patterns and behaviors. NetEnforcer is available in
several models addressing a wide range of network needs,
architectures and cost criteria. NetXplorer enables the
implementation of customized and automated traffic management
policies, as well as tailored and detailed reports on network
usage. This fully integrated network traffic management solution
allows service providers and enterprises to gain real time,
highly granular visibility into their networks and to enhance
network efficiency and security by managing and prioritizing
different applications. Our DPI systems are independent of and
not embedded in the underlying network infrastructure and are
therefore quicker to deploy in any existing network.
We predominantly focus our resources on the development and
advancement of our network traffic management products. In order
to minimize our costs and leverage our core strengths, we have
partnered with a third party to manufacture our NetEnforcer
devices. We also leverage our sales and marketing investments by
distributing products through an extensive global network of
more than 300 distributors, resellers, OEMs and system
integrators. End-customers of our products include carriers,
cable operators, wireless and wireline Internet service
providers, educational institutions, governments and enterprises.
We commenced operations in 1997 and shipped our first product in
1998. We generated revenues of $23.0 million in 2005,
representing a 27% increase over the prior year, and generated
revenues of $24.6 million for the nine months ended
September 30, 2006, representing a 55% increase over the
same period in the prior year. We had 232 employees as of
September 30, 2006.
Industry
Background
The rapid proliferation of broadband networks in recent years
has been largely driven by demand from users for faster and more
reliable access to the Internet and by the proliferation in the
number and complexity of broadband applications. According to a
May 2006 report by International Data Corporation, or IDC, a
provider of information about the telecommunications market,
there were 206 million broadband subscribers
48
globally in 2005, representing an increase of 35% over 2004
levels. The same report projects that the number of broadband
subscribers will reach 396 million by 2010, representing a
compound annual growth rate of 14%.
Rising
Network Operational Costs Due to the Rapid Adoption of Broadband
Applications
The increasing adoption of broadband access has enabled
significant advances in the sophistication of applications
delivered over broadband networks. In contrast to traditional
applications, such as
e-mail and
web-browsing, many new applications require large amounts of
bandwidth and are highly sensitive to network delays. In
response to these challenges, service providers have been forced
to invest heavily in network infrastructure upgrades and
customer support services in order to maintain the quality of
experience for subscribers. Examples of network applications
that are particularly popular and demanding on network resources
include:
|
|
|
|
|
P2P. P2P file-sharing applications, such as
eDonkey or BitTorrent, enable users to share content directly
with each other. Increasingly, subscribers are using P2P
applications to distribute multimedia content, such as audio and
video files, which are extremely large and require significant
network bandwidth. Unlike applications using the traditional
client-server model where a well-known source provides content
downstream to requesting clients,
P2P applications create heavy upstream traffic because all
users computers accept data requests. Heavy upstream
traffic places a significant burden on asymmetric networks, such
as digital subscriber line, or DSL, and cable networks, that
were originally designed to handle only heavy downstream
traffic. In addition, P2P applications are frequently left
unattended for long periods of time while files upload
and/or
download, resulting in increased congestion during hours of peak
network usage. According to an August 2005 article from
GigaOM.com, a news and weblog for hi-tech consumers and
professionals, on average 80% of upstream broadband
capacity is consumed by P2P traffic. As a result, users of
P2P applications dilute bandwidth for all users on the network,
despite the fact that these users do not pay incremental amounts
for increased bandwidth consumption. At the same time,
P2P applications, which are not particularly sensitive to
network delays, result in a diminished performance for
latency-sensitive applications, such as VoIP, Internet video and
online video gaming.
|
|
|
|
VoIP. VoIP enables voice communications to be
transmitted over IP networks thereby replacing traditional
telephone services. According to Infonetics Research, the number
of worldwide VoIP subscribers is expected to almost double from
2005 to 2006, when it is projected to exceed 47 million.
IDC also expects revenue from consumer VoIP services in the
United States to increase from $2 billion in 2005 to nearly
$14 billion in 2010, at a compound annual growth rate of
45.9%. As the quality of voice communications is particularly
sensitive to network delays, VoIP traffic is heavily dependent
on highly efficient network management to sustain a quality
level equivalent to traditional telephone services.
|
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Internet video. Internet video includes the
viewing of standard television content and on-demand
movies and video clips transmitted over broadband networks.
Network delays significantly diminish users quality of
experience from video applications and adversely impact their
willingness to pay for these applications. Internet video
applications consume significant bandwidth which further
increases network congestion. A 2005 report by In-Stat, a
high-tech market research firm, projects that non-adult video
content delivered through subscription or
pay-per-download
over the Internet will have a worldwide retail value of
$2.6 billion by 2009 compared to $745 million in 2005.
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Online video gaming. Online video gaming has
grown rapidly in recent years. These applications require
immediate responses from a gamers counterparts and
therefore the quality of a gamers online experience is
highly sensitive to network delays. According to a March 2006
report from IDC, more than 4 million people paid for online
personal computer gaming subscriptions in the United States in
2005, and the number is expected to increase to over
10.7 million by 2010.
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Online content sites. Online content sites,
such as
E-commerce
sites, search engines, blogs, and sites that provide public
storage for users files, attract a large number of
visitors and traffic to these sites
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consumes significant bandwidth and network resources. The
operators of these sites generate significant revenues from
Internet traffic, however do not own, and make no investment in,
network infrastructure. As a result, carriers may seek to
generate revenues from such sites by applying network policies
that prioritize traffic to content sites, in return for fees
paid by the content sites operators or subscribers.
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Service
Providers Demand for the Ability to Offer Premium and
Differentiated Services
Most service providers offer flat-fee broadband access,
regardless of the type of applications and data used by
subscribers. These operators provide the same level of service
to all subscribers and do not guarantee access quality,
regardless of a subscribers willingness to pay for premium
services and network performance. In addition, competition among
service providers has increased because of multiple broadband
delivery options, such as cable, DSL and wireless. As a result
of these factors, broadband access has become a commodity,
contributing to downward price pressure and high churn rates.
To address these issues and increase ARPU, service providers
have begun to offer premium, differentiated applications, such
as VoIP, video and new online content services. However, these
service providers have as yet been unable to offer guaranteed
service levels for these applications on an individual
subscriber basis. By offering such tiered services and charging
subscribers according to the value of these services, service
providers can capitalize on the revenue enhancement
opportunities enabled by broadband applications. To offer
premium services such as VoIP, video and online content
services, and to guarantee service levels for those services,
service providers need enhanced visibility into network traffic,
including visibility into the type of applications used on the
network and levels of traffic generated by different subscribers.
Increasing
Enterprise Demand for Visibility and Delivery of
Mission-Critical Applications
The proliferation of network applications also presents
significant challenges for enterprises operating wide-area
networks. Applications such as
e-mail,
customer relationship management, or CRM, enterprise resource
planning, or ERP, and other online transactional and business
applications are critical to enterprises ability to
operate efficiently. Enterprises have also become increasingly
dependent on broadband Internet and Intranet access, as content
distribution between partners and customers, employee remote
access, and even VoIP, have become more common. At the same
time, the openness of the Internet allows employees to use a
wide variety of recreational and non-business applications on
enterprise networks, resulting in network congestion and
negatively impacting employee productivity. As a result,
enterprises have experienced diminished performance of their
mission-critical applications.
Network
Security Threats and Content Control
As reliance on the Internet has grown, service providers and
subscribers have become increasingly vulnerable to a wide range
of security threats, including denial of service attacks such as
worms, viruses and spam. The attacks hinder the ability of
service providers to provide high quality broadband access to
subscribers, prevent enterprises from using mission-critical
applications and compromise network and data integrity. We
believe that users increasingly expect service providers to
protect them from these threats. Therefore, it has become
imperative for service providers and enterprises to identify and
block malicious traffic at very early stages.
The
Challenge of Implementing Intelligent Networks
Service providers are seeking to transform generic access
broadband networks into intelligent broadband networks. The
ability to identify, distinguish and prioritize different
network applications plays a major role in intelligent network
management, allowing service providers to optimize bandwidth
usage and reduce operational costs, while maintaining high
quality of service. Application designers are employing
increasingly sophisticated methods to avoid detection by network
operators who desire to manage network use. For example,
applications can disguise themselves as permitted applications
and also use sophisticated encryption techniques to avoid
detection. Traditional network infrastructure devices, such as
routers and switches, do not generally have sufficient computing
resources or the required algorithms to distinguish between
different and
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rapidly evolving applications. The dilemma of implementing
intelligent networks is further complicated by todays
higher speed broadband networks which carry tremendous amounts
of data and serve millions of customers. Unlike traditional
network infrastructure devices, such as switches and routers,
which can perform only a very limited examination of packets,
DPI solutions offer active control over each application and
subscriber in the network requiring significant processing power
and speed, greater memory and special algorithms.
The Allot
Solution
Our solutions employ advanced DPI, which identifies applications
by examining the content encapsulated in packets, including
header and application information. By correlating data from
multiple packets and flows, searching for application signatures
and recognizing application behavior, our solutions identify
each subscriber and application in the network and provide
in-depth, real time information about their behavior. Once an
application has been identified, it can be managed using
predetermined policies that determine the level of network
resources allocated for that application based on the business
strategy of the service provider or enterprise. For example, an
application can be granted a guaranteed bandwidth allocation, or
can be rate limited, redirected, marked/tagged, blocked or
reported to a network administrator. We have developed
market-leading DPI technology that accurately identifies
hundreds of application protocols at higher speeds and creates
customized detailed usage analyses and reports.
The illustration below demonstrates our solutions
integration of application control with subscriber management.
Our solutions enable our end-customers to accomplish the
following objectives:
Network
Visibility
Our NetEnforcer system and NetXplorer application suite enable
our end users to generate detailed real time and historical
reports on subscriber behavior and application usage. Our
systems also offer enterprises visibility into the types of
applications being used on their networks and threats to the
efficient delivery of mission-critical applications. Our
intelligent network solutions identify:
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bandwidth usage by application;
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subscriber usage patterns;
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real-time network performance;
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long- and short-term usage trends; and
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abnormal events, such as malicious traffic, including
denial-of-service
attacks and worms.
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Application
Management and Control
After achieving network visibility, service providers and
enterprises apply our intelligent network application management
technology to improve service quality by optimizing available
bandwidth usage for different applications and prioritizing
network traffic. For example, P2P applications that consume
large amounts of network bandwidth can be de-prioritized to
enhance the performance of applications that are more sensitive
to delay such as VoIP or Internet video. Providers can also
choose to limit the usage of P2P applications during peek hours
of network traffic in order to optimize, prioritize and even
guarantee the performance of other applications. Alternatively,
service providers may elect to limit individual subscribers who
use the network excessively, allocating resources more equitably
among users. Intelligent application controls can ensure the
delivery of mission-critical applications by prioritizing
non-critical, bandwidth-intensive applications, discourage the
use of non-business or recreational applications, and warn and
protect against security threats.
Subscriber
and Service Management
Our offerings enable service providers to increase total
revenue, ARPU and customer loyalty by offering tiered service
plans and differentiated content offerings to better meet
varying subscriber needs. Using our systems, service providers
can:
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tailor and price service plans differently for light
subscribers, such as those who use the network primarily for
e-mail, and
heavy subscribers including those that use the
network for broadband-intensive applications;
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prioritize network traffic by application type and offer
subscriber plans that guarantee performance of their intended
application such as VoIP;
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offer subscribers the ability to purchase additional bandwidth
on demand for particular applications (such as extra bandwidth
for downloading video on-demand or for large data
transfers); and
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offer guaranteed bandwidth to those content providers who
require prioritized content delivery. The content provider and
the service provider can then collaborate to provide a premium
experience for the subscriber with both parties sharing the
resulting revenue.
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Our
Competitive Strengths
Our competitive strengths include the following:
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Market-leading DPI technology and analytical
capabilities. Our market leading DPI technology
enables our solutions to identify hundreds of network
applications and protocols in real time. We continuously monitor
the development of new applications and respond rapidly to
requests from customers to address new applications. We believe
that our continued focus on developing the most efficient means
to search for application patterns and behaviors, including
encrypted applications which are very difficult to identify,
combined with our extensive database of algorithms that detect
network applications and protocols, provide us with a
significant competitive advantage. In addition, our NetXplorer
management application suite has sophisticated data mining
capabilities enabling it to collect, group and analyze data from
multiple sources, and to provide users with detailed, customized
and user-friendly information displays. We believe that our
NetEnforcer
AC-2500, is
currently the only commercially deployed solution with its level
of functionality capable of supporting 5 gigabits/second
performance and 2 million simultaneous connections. Several
NetEnforcer AC-2500s can be grouped together to support higher
performance networks of up to 10 gigabits per second and
beyond.
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Furthermore, during the first half of 2007 we plan to add a
10 gigabits physical interface to our NetEnforcer
AC-2500
system that will support end users in their transition to
10 gigabit networks.
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Broad product portfolio. Our broad product
portfolio enables us to compete in a wide range of markets and
enables our channel partners to serve a wider range of markets.
Our NetEnforcer
AC-400 and
NetEnforcer
AC-800
systems address the specialized needs of small and midsize
service providers and enterprises, while our NetEnforcer
AC-1000 and
NetEnforcer
AC-2500
address the needs of large service providers and enterprises. We
believe that this breadth of products has enabled us to
successfully target profitable markets, such as smaller service
providers and universities, while our larger competitors
generally target only large service providers or enterprises.
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Independence from underlying network
infrastructure. Our DPI solutions are independent
from and not embedded in the underlying network infrastructure.
We believe that independent solutions are easier to deploy in
existing networks and are less likely to compromise the
reliability, performance and stability of networks, which is
critical to service providers and enterprises, because they do
not require changes or upgrades to the network infrastructure.
Independent solutions can be upgraded easily to respond to rapid
changes in application behavior and subscriber demands without
impacting network performance. In addition, independent
solutions provide service providers and enterprises more
flexibility in choosing their infrastructure equipment
manufacturer, thereby allowing them to choose best of breed
products that suit their specific application requirements, as
well as reducing their dependence on a single vendor.
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Global sales and marketing channels. We have a
global sales and marketing network of over
300 distributors, resellers, OEMs and system integrators.
We make substantially all of our sales through these channel
partners, who are also responsible for installing our products
and providing technical support. To date, we have deployed over
9,000 NetEnforcer systems in 118 countries. Our
channel partners have enabled us to achieve a diverse revenue
base and to target markets that we would not have been able to
address without significant investment in an internal sales and
marketing force.
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Focus on service optimization solutions. We
believe that our dedicated focus on DPI solutions differentiates
the level of service and support that we provide to our channel
partners and end-customers, and has been critical to the
advancement and deployment of our products. This includes our
responsiveness to the introduction of new applications and
effective integration of our products into our customers
existing billing, customer care and other business systems. In
addition, we offer technical support through our field offices
and channel partners, both before and after sales, that we
believe helps us win and retain end-customers.
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Our
Strategy
Our goal is to be the leader in offering service providers and
enterprises network inspection and management solutions to
transform generic access broadband networks into intelligent
broadband networks. Our strategy to achieve this goal includes
the following:
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Further our technological advantage. We intend
to continue investing in the development of our market leading
broadband service optimization technologies. For example, our
next generation solutions, which are designed to support
multiple channels of 10 gigabits/second full performance
throughput rates, will utilize the new Advanced Telecom
Computing Architecture standards, or ATCA, since it better
enables the integration of additional third-party services into
our product offerings. We are also committed to developing new
applications and services, such as subscriber management
applications, voice and video quality analysis and additional
security applications, in order to meet the evolving demands of
our end-customers.
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Continue to expand our sales and marketing
channels. We intend to expand our world-wide
sales and marketing channels to further address small and
medium-sized service providers and enterprises, including in the
government and education sectors. Through these channels, we
have sold our products to a diverse range of end-customers and
we intend to build on this success by continuously improving
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our channel relationships, creating mutual marketing campaigns
and supporting their efforts to promote our products. We intend
to seek channel partners in new geographical territories, as
well as in vertical markets in countries where we have already
established a presence.
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Focus on larger service providers. We intend
to target larger service providers, including carriers, and
cable and mobile operators, in response to increased demand from
them for the ability to differentiate their service offerings.
We believe that targeting large service providers is important
to our revenue growth because sales to these end-customers are
more likely to result in sustained demand for our NetEnforcer
systems as they deploy our products throughout their networks.
We believe that we are well-positioned to continue to target
these end-customers with our carrier-class products, together
with our management solutions, operating experience and
installed base. We intend to target these end-customers by
continuing to develop partnerships with system integrators and
OEMs in order to leverage their existing relationships with
larger service providers. We intend to supplement these efforts
with direct business development and by tailoring our customer
support capabilities to further enhance our ability to support
system integrators and OEMs.
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Selectively pursue strategic partnerships and
acquisitions. We intend to selectively pursue
partnerships and acquisitions that will provide us access to
complementary technologies and accelerate our penetration into
new markets, including mobile networks, security applications
and subscriber management. For example, in 2002 we acquired the
assets of NetReality, an Israeli manufacturer of traffic
management solutions, which increased our customer base and
enhanced our engineering capabilities and technology. We believe
that our core DPI technology and intelligent network management
expertise can be complemented with other technologies that
enhance our service offerings, such as parental control,
security and subscriber management.
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Our
Products
NetEnforcer
Our NetEnforcer traffic management system inspects, monitors and
controls network traffic by application and by user. NetEnforcer
devices are positioned at multiple strategic network locations
where the most traffic traverses and can be monitored and
managed. These locations include network access points, or
peering points, where the network connects to other
networks and data centers. NetEnforcer includes its own
management software and can also be managed by other vendor
management applications through an interface that integrates
with the end-customers operating environment. These
applications include policy servers, provisioning systems,
customer care and billing applications.
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NetEnforcer devices are available in several different models to
address the needs of a wide range of service providers and
enterprises:
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Series
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Target Market
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Operation Speeds
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Subscribers(1)
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NetEnforcer AC-400
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Small to medium enterprise
networks and service provider networks
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2, 10, 45 and 100 Mbps
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Up to 4,000
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NetEnforcer AC-800
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Medium and large enterprise
networks and medium service provider networks
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45, 100, 155 and 310 Mbps
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Up to 28,000
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NetEnforcer AC-1000/ AC-2500
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Carrier-class solutions used by
medium and large service provider networks
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155, 310, 400 and 622 Mbps,
and 1 Gbps and 5 Gbps
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Up to 80,000
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Represents the maximum number of subscribers that a system can
handle simultaneously. Typically, due to network topology,
redundancy requirements and other constraints, such as total
bandwidth available per subscriber, the actual number per
NetEnforcer unit is lower. |
Our NetEnforcer AC-1000 and AC-2500 are designed to meet NEBS
(Network Equipment Building System) Level 3 certification
requirements to ensure operation in extreme environmental
conditions and are currently undergoing the certification
process.
NetEnforcer offers the following features:
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DPI technology that identifies hundreds of applications and
protocols, including web applications, multiple VoIP and video
protocols,
e-mail
protocols, online video gaming, business applications, instant
messaging, including the distinction between chat and voice, and
a large number of different P2P applications;
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carrier-class performance supporting multiple gigabit per second
throughput servicing tens of thousands of subscribers and
permitting a significant level of processing for each flow and
packet;
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hierarchical traffic management policies enabling the
prioritization, redirection and blockage of traffic flow;
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independence from network infrastructure resulting in easy and
cost-effective deployment without risk to network integrity;
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an open standards platform that allows our end-customers the
flexibility to integrate a variety of other applications, such
as billing and customer care software and to use existing
infrastructure equipment;
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carrier-class design supporting high availability and redundancy;
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identification of individual user profiles to help dynamically
shape traffic according to the policies set by the service
provider or enterprise; and
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the ability to identify and mitigate security threats and other
abnormal events traversing the network.
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NetXplorer
Our NetXplorer management application suite, introduced in late
2005, provides enterprises and service providers a highly
granular, real time view of all traffic on the network. This
centralized management suite, which replaces our previous
management applications, works in conjunction with our
NetEnforcer products to provide network traffic intelligence and
enable enterprises and service providers to effectively manage
broadband services and set policies for the use of their
networks. The data provided from multiple NetEnforcer
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systems are aggregated, analyzed and conveyed using our
NetXplorer management application suite. NetXplorer offers the
following features:
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network-wide visibility for in-depth analysis, including
identification of traffic trends and inspection down to the
individual device, user or application level for real-time
troubleshooting;
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intuitive graphical interface that provides both a logical
network-wide perspective together with the power to quickly
navigate at the device, user or application level;
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monitoring and analysis, including in-depth analysis at the
single user sessions and single applications, real-time
monitoring, short-term monitoring for the collection of highly
granular information;
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multiple technologies designed to cope with the inherent
challenge of collecting large amounts of data from multiple
sources and storing and aggregating the data into a central
database;
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insightful reporting of information in real-time and over time
for evaluation of trends and accurate capacity planning, and for
tracking usage for accounting or charge-back purposes using
volume-based reports in hundreds of customizable formats;
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ability to build policies to enable rapid deployment of services
or service changes and automatic distribution of configurations
and changes to all managed NetEnforcer units;
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configuration and policy provisioning of managed NetEnforcers
without logging into each device;
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frontline security enabling easy detection of potential denial
of service attacks or network-born security attacks, setting of
thresholds, generation of alarms, and automatic execution of
corrective actions; and
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intelligent alarms about abnormal events and automatically
invoke corrective actions before problems become costly.
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The addition of our Subscriber Management Platform to NetXplorer
enables each of the above features on a per network and per
subscriber basis.
NetXplorer architecture consists of four elements: first, the
client element is the NetXplorer graphical user interface
application; second, the server element consisting of the actual
NetXplorer application, including the database; third, the
optional collector element, which assists in collecting large
amounts of data from multiple NetEnforcers; and fourth, an agent
element that is an add-on to the NetEnforcer that enables it to
be managed by the NetXplorer and support all network management
functions.
Technology
Our expertise in sophisticated DPI-based solutions designed for
service provider and enterprise environments is our core
technological strength. We have invested significant resources
in designing, planning and developing scalable integrated
network traffic management solutions that provide a granular
level of detail to monitor and control Internet traffic at the
single application connection level.
Our intelligent network products are the result of integrating
multiple skill sets into a single solution. These skills include:
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Multiple application identification. Some
application developers are creating new techniques designed to
avoid detection and are introducing new versions that change
their communication protocols frequently. Accordingly, we have
invested heavily in our DPI technology in two principal areas:
(1) developing efficient DPI methods, such as searching for
signatures, detecting behavior patterns and tracking the
progress of application session establishment over multiple
packets and flows (state-full session tracking) that
are used to identify applications, including those that use data
encryption, and (2) research, including researching the
thousands of applications used in network environments and
finding the appropriate detection method for each.
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High-rate classification and policy matching of IP
flows. We have built an embedded system solution
and technology that combines special packet processing
applications and devices to provide high speed
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DPI and quality of service processing. The DPI methods we have
developed require processing large sequences of packet data,
which is more sophisticated than the methods employed by
traditional network elements. Our products, and in particular
the NetEnforcer AC-1000 and AC-2500, are designed to use network
processor technology, which provides fast data packet
processing, under very tight memory constraints, large code
sizes and complex development environments. We have invested
significant time developing, adapting and optimizing our network
processor technology to support all necessary functions at the
required level of performance.
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Multiple actions
quality-of-service
enforcement. Our technology includes the ability
to perform a number of quality of service enforcement actions
using multiple parameters. Our products use our proprietary per
flow queuing algorithm, which implements quality of service
control per flow with up to 2 million concurrent sessions
using queuing techniques and provides quality of service actions
for bandwidth limitation or guarantee, connection block or
re-direct or use relative priority in bandwidth allocation, as
well combinations of multiple actions.
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Real-time collection, aggregation, export of traffic
statistics. NetEnforcer implements the collection
of traffic statistics in real-time for the network traffic
passing through the device by counting the byte-volume of
traffic per connection, conversation or policy rule. A number of
algorithms are implemented to filter and aggregate the collected
statistics based on the end-users target information and
the significance of the data. The implementation takes into
account high-scale traffic volume of up to 5 gigabits and
2 million concurrent connections and the fact that the
NetEnforcer has to complete an export cycle of the collected
statistics in 30-second intervals.
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Presentation of traffic statistics. Our
NetXplorer server collects statistics from multiple NetEnforcers
over the network and aggregates the information into a
consolidated database for retrieval by the operator. We have
developed algorithms for efficient aggregation, storage and
retrieval of information so that the server is able to complete
a collection cycle with multiple NetEnforcers within the desired
time and provides data mining capabilities to the operator with
fast response time when producing a report. This includes an
optimized collection process and aggregation process, an
efficient database scheme and report execution.
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Customers
We have a global, diversified end-customer base consisting
primarily of service providers and enterprises. Our direct
customers are generally distributors, resellers, OEMs and system
integrators, who we refer to as our channel partners. In 2005,
we derived 50% of our revenues from Europe, the Middle East and
Africa, 32% from the Americas and 18% from Asia and Oceania. We
generally only have direct contact with end-customers in the
case of larger projects since smaller projects are driven by our
channel partners. A single system integrator located in the
United Kingdom accounted for 16% of our revenues in 2005 and
accounted for 27% of our revenues in the first nine months of
2006, primarily through product sales to NTL. Otherwise, no
end-customer accounted for more than 10% of our revenues in 2005
and, other than NTL, no end-customer accounted for more than 5%
of our revenues in the first nine months of 2006. Our
end-customers, who purchase products through our channel
partners include:
Cablecom (United Kingdom)
China Unicom Beijing
China Telecom Guizhou
Eutelsat S.A. (Europe)
Fastweb Spa (Italy)
Fuji TV (Japan)
Horizon Line Brasil Ltda-Group ISP Vivax
MetroCast Cablevision (United States)
MegaCable (Mexico)
NTL Telewest Networks (United Kingdom)
NTT Communications (Japan)
NZ Telecom (New Zealand)
Optus (Australia)
Perot Systems Inc. (United States)
PCCW (Hong Kong)
Samsung Security (Korea)
Seednet (Taiwan)
Schneider Electric
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Shin Satellite Public Co. Ltd. (Asia)
Spacenet Inc. (United States)
Telecom (Colombia Telecomunicaiones S.A.)
TNM, PT Telecom (Portugal)
True Internet Co. Ltd. (Thailand)
Unwired Australia
Wakwak (Japan)
Verizon Avenue (United States)
NYC Department of Education (United States)
ZID-Zentrum fur Informations (Germany)
Channel
Partners
We market and sell our products to end-customers through our
channel partners, which include distributors, resellers, OEMs
and system integrators. Our channel partners generally purchase
our products from us upon receiving orders from end-customers
and are responsible for installing and providing initial
customer support for our products. As of September 30,
2006, we had approximately 300 channel partners. Our channel
partners are located around the world and address most major
markets. Our channel partners target a range of end-users,
including carriers, alternative carriers, cable operators,
private networks, data centers and enterprises in a wide range
of industries, including government, financial institutions and
education. Our agreements with channel partners that are
distributors or resellers are generally for an initial term of
one year and automatically renew for successive one-year terms
unless terminated. After the first year, such agreements may be
terminated by either party upon 90 days prior notice. These
agreements are generally non-exclusive and generally contain
minimum purchase requirements and we are permitted to terminate
the agreement in the event of a failure to meet such targets.
We offer extensive support to all of our channel partners. This
support includes the generation of leads through marketing
events, seminars and web-based leads and incentive programs as
well as technical and sales training.
Our sales staffs direct contact with end-customers
consists mainly of developing leads for our channel partners.
Substantially all of our sales occur through our channel
partners.
Sales and
Marketing
The sales and deployment cycle for our products varies based
upon the intended use by the end-customer. The sales cycle for
initial network deployment may last between one and three years
for large and medium service providers, six to twelve months for
small service providers, and one to six months for enterprises.
Follow-on orders and additional deployment of our products
usually require shorter cycles. Large and medium service
providers generally take longer to plan the integration of DPI
solutions into their existing networks and to set goals for the
implementation of the technology.
We focus our marketing efforts on product positioning,
increasing brand awareness, communicating product advantages and
generating qualified leads for our sales organization. We rely
on a variety of marketing communications channels, including our
website, trade shows, industry research and professional
publications, the press and special events to gain wider market
exposure.
We have organized our worldwide sales efforts into the following
three territories: North and South America, Europe the Middle
East and Africa, and Asia and Oceania. We have regional offices
in the U.S, Israel, France, Spain, United Kingdom, Singapore,
Japan and China, and a dedicated regional sales presence in
Germany, Italy, Denmark and Australia. We also maintain a
regional sales presence in Mexico and Brazil.
As of September 30, 2006, our sales and marketing staff
consisted of 96 employees, including 39 sales and support
engineers that support the end-customers in pre- and post-sales
activities.
Service
and Technical Support
We believe our technical support and professional services
capabilities are a key element of our sales strategy. Our
technical staff assists in presales activities and advises
channel partners on the integration of our solutions into
end-user networks. Our basic warranty extended to end-customers
through our channel partners is three months for software and
12 months for hardware. End-customers are also offered,
through our channel
58
partners, a choice of one year or three-year customer support
programs when they purchase our products. These warranties can
be renewed at the end of their terms. Our end-customer support
plans offer the following features:
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expedited replacement units in the event of a warranty claim; and
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software updates and upgrades offering new features and
addressing new network applications.
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Our channel partner support plans are designed to maximize
network up-time and minimize operating costs. Our channel
partners and their end-customers are entitled to take advantage
of our
around-the-clock
technical support which we provide through our four help desks,
located in France, Israel, Singapore and the United States. We
also offer our channel partners
24-hour
access to an external web-based technical knowledge base, which
provides technical support information and enables them to
support their customers independently and obtain follow up and
support from us. We manage our channel partner and customer
support efforts through a single database which enables us to
track seamlessly any response provided to a channel partner or
end-customer from a different office and to escalate
automatically any customer inquiry after a predetermined period
of time.
Research
and Development
Our research and development activities take place in Israel. As
of September 30, 2006, 95 of our employees were engaged
primarily in research and development. We devote a significant
amount of our resources towards research and development to
introduce and continuously enhance products to support our
growth strategy. We have assembled a core team of experienced
engineers, many of whom are leaders in their particular field or
discipline and have technical degrees from top universities and
experience working for leading Israeli networking companies.
These engineers are involved in advancing our core technologies,
as well as in applying these core technologies to our product
development activities. Our research and development efforts
have benefited from royalty-bearing grants from the Office of
the Chief Scientist. The State of Israel does not own any
proprietary rights in technology developed with the Office of
the Chief Scientist funding and there is no restriction related
to the Office of the Chief Scientist on the export of products
manufactured using technology developed with Office of the Chief
Scientist funding. For a description of restrictions on the
transfer of the technology and with respect to manufacturing
rights, please see Risk Factors The government
grants we have received for research and development
expenditures restrict our ability to manufacture products and
transfer technologies outside of Israel and require us to
satisfy specified conditions. If we fail to comply with such
restrictions or these conditions, we may be required to refund
grants previously received together with interest and penalties,
and may be subject to criminal charges.
Manufacturing
We subcontract the manufacture and repair of our NetEnforcer
products to R.H. Electronics, an Israeli manufacturer. This
strategy enables us to reduce our fixed costs, focus on our core
research and development competencies and provide flexibility in
meeting market demand. R.H. Electronics is contractually
obligated to use commercially reasonable efforts to provide us
with manufacturing services based on agreed specifications,
including manufacturing, assembling, testing, packaging and
procuring the raw materials for our NetEnforcer devices. We
submit advance forecasts of our projected requirements and R.H.
Electronics is required to maintain an inventory of components
sufficient to support the manufacture of an agreed number of our
units beyond these projections. We are not required to provide
any minimum orders. Our agreement with R.H. Electronics is
automatically renewed annually for additional one-year terms,
unless we or R.H. Electronics elect not to renew by giving
at least 90 days prior notice to the expiration of any such
term. Furthermore, either we or R.H. Electronics may terminate
the agreement at any time upon prior notice of 120 days. We
retain the right to procure independently any of the components
used in our products. R.H. Electronics has a
U.S. subsidiary to which it can, with the prior consent of
the Office of the Chief Scientist, transfer manufacturing of our
products if necessary, in which event we may be required to pay
increased royalties to the Office of the Chief Scientist. We
expect that it would take approximately six months to transition
59
manufacturing of our products to an alternate manufacturer. We
are, however, negotiating with candidates for an additional
third-party manufacturer.
We design and develop internally a number of the key components
for our products, including printed circuit boards and software.
Some of the components used in NetEnforcer are obtained from
single or limited sources. Since our products have been designed
to incorporate these specific components, any change in these
components due to an interruption in supply or our inability to
obtain such components on a timely basis would require
engineering changes to our products before we could incorporate
substitute components. In particular, we purchase the central
processing unit for our NetEnforcer AC-400 and our NetEnforcer
AC-800 from Intel Corporation and we have agreed to purchase the
network processor for our NetEnforcer AC-1000 and our
NetEnforcer AC-2500 from Hifn Inc. We carry approximately three
to six months of inventory of key components. We also work
closely with our suppliers to monitor the
end-of-life
of the product cycle for integral components, and believe that
in the event that they announce end of life, we will be able to
increase our inventory to allow enough time for replacing the
products. We have been informed by Hifn that it is their general
policy to provide their customers with a
6-month
last-time-buy option and 12 months to take delivery of the
product in the event that Hifn decides to discontinue production
of the network processor. Product testing and quality assurance
is performed by our contract manufacturer using tests and
automated testing equipment and according to controlled test
documentation we specify. We also use inspection testing and
statistical process controls to assure the quality and
reliability of our products.
Competition
Our principal competitors are Cisco Systems (through its
acquisition of P-Cube), Sandvine and Ellacoya Networks in the
service provider market, and Packeteer in the enterprise market.
We also compete in particular geographic areas with a number of
smaller local competitors. We also face competition from
companies that offer partial solutions addressing only one
aspect of the challenges facing broadband providers, such as
network monitoring or security. We compete on the basis of
product performance, such as speed and number of applications
identified, ease of use and installation, and customer support.
Price is also an important, although not the principal, basis on
which we compete. See Risk Factors We may be
unable to compete effectively with other companies in our market
who offer, or may in the future offer, competing
technologies.
Intellectual
Property
Our intellectual property rights are very important to our
business. We believe that the complexity of our products and the
know-how incorporated in them makes it difficult to copy them or
replicate their features. We rely on a combination of
confidentiality and other protective clauses in our agreements,
copyright and trademarks to protect our know-how. We also
restrict access to our servers physically and through closed
networks since our product designs and software are stored
electronically and thus are highly portable.
We customarily require our employees, distributors, resellers,
software testers and contractors to execute confidentiality
agreements or agree to confidentiality undertakings when their
relationship with us begins. Typically, our employment contracts
also include the following clauses: assignment of intellectual
property rights for all inventions developed by employees,
non-disclosure of all confidential information, and non-compete
clauses for six months following termination of employment. The
enforceability of non-compete clauses in Israel is limited.
Because our product designs and software are stored
electronically and thus are highly portable, we attempt to
reduce the portability of our designs and software by physically
protecting our servers through the use of closed networks, which
prevent external access to our servers.
The communications equipment industry is characterized by
constant product changes resulting from new technological
developments, performance improvements and lower hardware costs.
We believe that our future growth depends to a large extent on
our ability to be an innovator in the development and
application of hardware and software technology. As we develop
the next generation products, we intend to pursue patent
protection for our core technologies in the telecommunications
segment. We plan to seek patent protection in our largest
markets and our competitors markets, for example in the
United States and Europe. As we continue to move into markets,
such as Japan, Korea and China, we will evaluate how best to
protect our
60
technologies in those markets. We intend to vigorously prosecute
and defend the rights of our intellectual property.
As of September 30, 2006, we had two U.S. patents and
four pending patent applications in the United States. We also
have one pending counterpart application outside of the United
States, filed pursuant to the Patent Cooperation Treaty. We
expect to formalize our evaluation process for determining which
inventions to protect by patents or other means. We cannot be
certain that patents will be issued as a result of the patent
applications we have filed.
We have obtained U.S. trademark registrations for certain
of our key marks that we use to identify our products or
services, including NetEnforcer and Allot
Communications.
Corporate
Organization
We conduct our global operations through five wholly-owned
subsidiaries: (1) Allot Communications, Inc., headquartered
in Eden Prairie, Minnesota; (2) Allot Communication Europe
SARL, headquartered in Sophia, France; (3) Allot
Communications Japan K.K., headquartered in Tokyo, Japan;
(4) Allot Communications (UK) Limited, headquartered in
Bedford, England; and (5) Allot Communications (Asia
Pacific) Pte. Ltd., headquartered in Singapore. Our
U.S. subsidiary commenced operations in 1997 and engages in
the sale, marketing and technical support services in the United
States of products manufactured by and imported from our
company. Our French, U.K., Japanese and Singapore subsidiaries
engage in marketing and technical support services of our
products in Europe, Japan and Asia Pacific, respectively.
Employees
As of September 30, 2006, we had 232 employees of whom 170
were based in Israel, 29 in the United States and the remainder
in Asia and Europe. The breakdown of our employees by department
is as follows:
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December 31,
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September 30,
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Department
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2003
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2004
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2005
|
|
|
2006
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|
Manufacturing and operations
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10
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|
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14
|
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14
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22
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|
Research and development
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44
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|
64
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75
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95
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Sales, marketing, service and
support
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57
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74
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80
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96
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Management and administration
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9
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11
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15
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19
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Total
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120
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163
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184
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232
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Under applicable Israeli law, we and our employees are subject
to protective labor provisions such as restrictions on working
hours, minimum wages, minimum vacation, sick pay, severance pay
and advance notice of termination of employment as well as equal
opportunity and anti-discrimination laws. Orders issued by the
Israeli Ministry of Industry, Trade and Labor make certain
industry-wide collective bargaining agreements applicable to us.
These agreements affect matters such as cost of living
adjustments to salaries, length of working hours and week,
recuperation, travel expenses, and pension rights. Our employees
are not represented by a labor union. We provide our employees
with benefits and working conditions which we believe are
competitive with benefits and working conditions provided by
similar companies in Israel. We have never experienced
labor-related work stoppages and believe that our relations with
our employees are good.
Facilities
Our principal administrative and research and development
activities are located in a 39,245 square foot
(3,646 square meter) facility in Hod-Hasharon, Israel. The
lease for this facility commenced in August 2006 and will expire
in August 2013. We believe that this facility will be adequate
to meet our needs in Israel for at least the next 12 months.
We also lease a 5,812 square foot (539 square meter)
facility in Eden Prairie, MN, for the purposes of our
U.S. sales and marketing operations pursuant to a lease
that expires in August 2008. We lease other
61
smaller facilities for the purpose of our sales and marketing
activities in France, the United Kingdom, Singapore, Spain,
China and Japan.
Legal
Proceedings
We are not a party to any material litigation or proceeding and
are not aware of any material litigation or proceeding, pending
or threatened, to which we may become a party.
62
MANAGEMENT
Directors
and Executive Officers
Our directors and executive officers, their ages and positions
as of September 30, 2006, are as follows:
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Name
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Age
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Position
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Directors
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Yigal Jacoby
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45
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Chairman of the Board
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Rami Hadar
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43
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Director, Chief Executive Officer
and President
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Yossi Sela(1)
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54
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Director
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Dr. Eyal Kishon(1)(2)
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46
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Director
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Shai Saul(1)
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44
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Director
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Erel Margalit(2)
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45
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Director
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Yosi Elihav(2)
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52
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Director
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Executive Officers
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Adi Sapir
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36
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Chief Financial Officer
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Amir Weinstein
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46
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Executive Vice
President Products and Technology
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Anat Shenig
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37
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Director of Human Resources
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Elazar (Azi) Ronen
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45
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Executive Vice
President Corporate Development
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Larry Schmidt
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49
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Vice President The
Americas
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Menashe Mukhtar
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46
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Vice President
International Sales
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Michael Shurman
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51
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Chief Technology Officer and Vice
President Product Management
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Pini Gvili
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41
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Vice President
Operations
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Ramy Moriah
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50
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Vice President
Customer Care and Information Technology
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Sharon Hess
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52
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Vice President
Marketing
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(1) |
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Member of our compensation and nominating committee. |
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(2) |
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Member of our audit committee. |
Directors
Yigal Jacoby co-founded our company in 1996 and serves as
Chairman of our board of directors. Prior to co-founding Allot,
Mr. Jacoby served as General Manager of Bay Networks
Network Management Division in Santa Clara from 1996 to
1997. In 1992, he founded Armon Networking, a manufacturer of
RMON-based network management solutions, which was sold to Bay
Networks in 1996. He also held various engineering and marketing
management positions at Tekelec, a manufacturer of
Telecommunication monitoring and diagnostic equipment, including
Director, OSI & LAN Products from 1989 to 1992 and
Engineering Manager from 1987 to 1989. Mr. Jacoby has
founded several startups in the communications field and served
on their boards. Mr. Jacoby has a B.A., cum laude,
in Computer Science from Technion Israel Institute
of Technology and an M.Sc. in Computer Science from University
of Southern California.
Rami Hadar has served as our Chief Executive Officer and
President since 2006 and is a member of our board of directors.
Prior to joining us, Mr. Hadar founded CTP Systems, a
developer of cordless telephony systems in 1989 and served as
Chief Executive Officer until its acquisition by DSP
Communications in 1995. Mr. Hadar continued with DSP
Communications executive management team for two years,
and thereafter, in 1999, the company was acquired by Intel. In
1997, Mr. Hadar co-founded Ensemble Communications, a
pioneer in the broadband wireless space and the WiMax standard,
where he served as Executive Vice President of Sales and
Marketing until 2002. Mr. Hadar also served as Chief
Executive Officer of Native Networks from
63
2002 to 2005. Mr. Hadar holds a B.Sc. in Electrical
Engineering from Technion Israel Institute of
Technology.
Yossi Sela has served as a director since 1998.
Mr. Sela is the Managing Partner of Gemini Israel Funds, a
leading Venture Capital fund, which invests primarily in seed
and early stage Israeli technology companies. In this capacity,
Mr. Sela sits on the board of a number of Gemini portfolio
companies, including Adimos Inc., Saifun Semiconductors Ltd.,
and IXI Mobile, Ltd. Mr. Selas past board positions
include CommTouch Software Ltd., Precise Software Solutions Ltd.
and Envara Inc. In 1995, he served as the Chief Executive
Officer of Ornet Data Communication Technologies Ltd., which was
a Gemini portfolio company. Mr. Sela led that company until
its acquisition by Siemens AG in September 1995. From 1990 to
1992, Mr. Sela served as Vice President of Marketing at DSP
Group, an American-Israeli company specializing in proprietary
Digital Signal Processing for consumer and telecommunication
applications. He later served as VP Marketing at DSP
Communications, Inc., a spin-off of DSP Group. From 1985 to
1989, Mr. Sela worked at Daisy Systems Inc. where he was
Director for CAD Development and PCB Marketing Manager for
Europe. From 1974 to 1984, he served in the Israel Defense
Forces and was responsible for the definition and development of
systems for communication applications. Mr. Sela holds a
B.Sc. in Electrical Engineering from the Technion
Israel Institute of Technology and an M.B.A. from Tel Aviv
University.
Dr. Eyal Kishon has served as a director since 1998.
In 1996, Dr. Kishon co-founded Genesis Partners, an Israeli
technology-driven venture capital fund, and currently serves as
Founder and Managing Partner. From 1993 to 1996, Dr. Kishon
served as the Associate Director of the Polaris Fund, now
Pitango. Prior to that, Dr. Kishon served as Chief
Technology Officer at Yozma Venture Capital from 1992 to 1993.
From 1991 to 1992, he worked at the IBM Research Center, and
from 1989 to 1991 he worked at the AT&T Bell
Laboratories Robotics Research Department. Dr. Kishon
also serves as a director of AudioCodes Ltd. (NASDAQ: AUDC) and
Celtro Inc. He holds a Ph.D. in Computer Science and Robotics
from the Courant Institute of Mathematical Sciences at New York
University and a B.A. in Computer Science from the
Technion Israel Institute of Technology.
Dr. Kishon has written a number of scientific publications
and holds a patent for signature verification for interactive
security systems.
Shai Saul has served as a director since 2000.
Mr. Saul is currently Managing General Partner of Tamir
Fishman Ventures. During 2001, he acted as interim-CEO for
CopperGate Communications. From 1994 to 1999, Mr. Saul
acted as Executive Vice President for Aladdin Knowledge Systems
Ltd. (NASDAQ: ALDN), a leading provider of digital security
solutions. From 1993 to 1994, he served as Chief Executive
Officer of Ganot Ltd. Mr. Saul also serves as Chairman of
the Board of CopperGate Communications. Mr. Saul holds an
LL.B. from Tel Aviv University.
Erel Margalit has served as a director since 2006.
Mr. Margalit founded Jerusalem Venture Partners and has
served as its Managing General Partner since 1997. He co-founded
Jerusalem Pacific Ventures in 1993. From 1990 to 1993,
Mr. Margalit was the Director of Business Development for
the City of Jerusalem under its former Mayor, Teddy Kollek. He
also serves as a director of several portfolio companies
including Cogent Communications, Inc., Cyber-Ark Software, Ltd.,
CyOptics Inc., MagniFire, Native Networks, Bridgewave
Communications, Sepaton and UP Tech. Mr. Margalit holds an
M.A. in philosophy from Columbia University and an M.B.A. from
Hebrew University.
Yosi Elihav has served as a director since 1997.
Mr. Elihav was retained by the high-tech RAD Group as a
finance and capital markets activities consultant and tax
consultant since the beginning of 1999. Also, since 2001, he has
served as director and manager in the RAD Ventures Limited
Partners investment fund. From,
1986-1998,
Mr. Elihav was a managing partner in the firm of Schwartz,
Lerner, Duvshani & Co., Certified Public Accountants.
Mr. Elihav is a qualified C.P.A. who holds a B.A. in
Accounting and Economics from Tel Aviv University.
Executive
Officers
Adi Sapir joined our company in 1998 and has served as
our Chief Financial Officer since then. Prior to joining us,
from 1996 to 1998, Mr. Sapir worked for Teva Pharmaceutical
Industries (NASDAQ: TEVA), a global pharmaceutical company
specializing in the development, production and marketing of
generic and
64
proprietary branded pharmaceuticals as well as active
pharmaceutical ingredients, as a Controller for the Israel and
International Divisions. Mr. Sapir is a certified public
accountant in Israel and holds a B.A. in Accounting and a B.A.
in Economics from Tel Aviv University.
Amir Weinstein joined our company in 2005 and has served
as our Executive Vice President Products and
Technology since then. Prior to that, in 1999,
Mr. Weinstein co-founded Business Layers, now Netegrity, a
provisioning company, providing workflow and IT provisioning
solutions to enterprises, and held the position of General
Manager until 2004. Mr. Weinstein has held several other
senior management positions, including Vice President of
Engineering at Nortel Networks, a phone and data communication
company from 1996 to 1999. Amir holds a B.Sc. in Computer
Science and Mathematics from Bar Ilan University and M.Sc. in
Computer Science from UCLA.
Anat Shenig joined our company in 2000 and has served as
our Director of Human Resources ever since. She is responsible
for human resources recruiting, welfare policy and
employees training. Prior to joining us, Ms. Shenig
served as Human Resource Manager for Davidoff insurance company
and as an organizational consultant for Aman Consulting.
Ms. Shenig holds bachelor degrees in Psychology and
Economics from Tel Aviv University and an M.B.A. in
organizational behavior from Tel Aviv University.
Elazar (Azi) Ronen has served as our Executive
Vice President Corporate Development since 2005 and
served as Executive Vice President Technology and
Marketing from 1999 to 2005. Prior to joining us, from 1998
through 1999, Mr. Ronen was the Vice President of Marketing
at VocalTec Communications, a vendor of VoIP networking
equipment from 1998 to 1999. Previously, he was the Vice
President of Research and Development at RADLINX, a member of
the RAD group, a vendor of remote access servers and fax over IP
networking equipment from 1990 to 1998. Mr. Ronen has a
B.Sc., cum laude, in Computer Sciences from the
Technion Israel Institute of Technology.
Larry Schmidt joined our company in June, 2004 as Vice
President, U.S. Channels Sales and has served as our Vice
President The Americas, since May, 2005. From 1989
to 2004, Mr. Schmidt was employed by Norstan, Inc., a
publicly held communications solutions and services company of
1,100 employees, now part of the Black Box network services
company. Most recently he served as Norstans Executive
Vice President of Direct Solutions. From 1986 to 1989,
Mr. Schmidt was a Systems Consultant with Fujitsu.
Mr. Schmidt holds a Bachelor of Science degree in
Telecommunications from St. Marys University and is
also a graduate of the Executive Development Program at the
University of Minnesotas Carlson School of Business.
Menashe Mukhtar joined our company in 1999 and has served
as our Vice President International Sales since
2001. From 1993 to 1996, he was the Sales and Marketing Manager
for the Far East and Japan at LANNET, now Avaya Technologies.
Prior to LANNET, from 1991 to 1993, Mr. Mukhtar held the
position of Customer Support Manager for the Far East at
Orbotech Systems and was a developer and manufacturer of
Automatic Optical Inspection (AOI) systems for the PCB and
flat panel displays industries. Mr. Mukhtar holds a B.Sc.
in Electronic Engineering from Tel Aviv University.
Michael Shurman co-founded our company in 1996 and serves
as our Chief Technology Officer and Vice President
Product Management. Mr. Shurman served as a member of our
board of directors until October 2006. Mr. Shurman has also
served as our Vice President Engineering and as an
outside consultant. Before co-founding our company, from 1995 to
1996, Mr. Shurman was Director of Software Development at
LANNET, the leading provider of Local Area Network Equipment,
now Avaya Technologies. He also served as LANNETs Director
of Network Management from
1992-1995.
He is named as the inventor on two issued U.S. patents in
networking. Mr. Shurman holds a B.Sc. in Computer Science
and Statistics from the Hebrew University in Jerusalem.
Pini Gvili has served as our Vice President
Operations since 2006. Prior to joining us, from 2004 to 2006,
he served as Vice President Operations for Celerica, a
start-up
company specializing in solutions for cellular network
optimization. From 2001 to 2004, he was the Vice
President Operations and IT at Terayon Communication
Systems, and from 1998 to 2000, held the position of Manager of
Integration and Final Testing at Telegate. He was also a
hardware/software engineer at Comverse/Efrat, a world leader of
voice mail
65
and digital recording systems, from 1994 to 1997. Mr. Gvili
has a B.Sc. in computer science from Champlain University and
was awarded a practical electronics degree from ORT Technical
College.
Ramy Moriah has served as our Vice President
Customer Care & IT since 2005. Prior to joining us,
Mr. Moriah was a founding member of Daisy Systems
Design Center in Israel, in 1984. From 1991 to 1994, he held the
position of Manager of Software Development at Orbot
Instruments, a world leader of Automatic Optical Inspection
manufacturer for the VLSI Chip Industry. Mr. Moriah was
also the acting General Manager at ACA, 3D CAD/solid modeling
software for architecture from 1995 to 1997, and served there as
Vice President Research and Development from 1995 to
1997. Mr. Moriah holds a B.Sc., cum laude, in
Computer Engineering from the Technion Israel
Institute of Technology and an M.Sc. in Management and
Information Systems from the Tel Aviv University School of
Business Administration.
Sharon Hess has served as our Vice President of
Marketing, since 2005. Prior to joining us, she served as
Principal of the Hess MarkITing Company from 1999 to 2005. Prior
to joining us, from 1997 to 1999, Ms. Hess served as Vice
President of Corporate Marketing at Tadiran Telecommunications,
one of the largest Israeli high tech firms for developing and
manufacturing telecommunication equipment. Tadiran Telecom was
acquired by ECI Telecom. From 1995 to 1997 Ms. Hess served
as Marketing Director at Algorithmic Research, and from 1995 to
1996 she was a Director of Marketing Programs EMEA at Madge
Networks after Madge had acquired LANNET. She also served as
Director of Marketing Communications at LANNET, from 1992 to
1995, now Avaya Technologies. She is a project faculty member
and mentor to the Wharton School of Management/Recanati Tel Aviv
University M.B.A. program and holds a B.A. with honors in
Communications Studies from Concordia University.
Corporate
Governance Practices
As a foreign private issuer, we are permitted to follow Israeli
corporate governance practices instead of the Nasdaq Global
Market requirements, provided we disclose which requirements we
are not following and the equivalent Israeli requirement. We
intend to rely on this foreign private issuer
exemption only with respect to the quorum requirement for
meetings of our shareholders. Under our articles of association
to be effective following this offering, the quorum required for
an ordinary meeting of shareholders will consist of at least two
shareholders present in person, by proxy or by written ballot,
who hold or represent between them at least 25% of the voting
power of our shares, instead of
331/3%
of the issued share capital provided by under the Nasdaq Global
Market requirements. This quorum requirement is based on the
default requirement set forth in the Israeli Companies law. We
otherwise intend to comply with the Nasdaq Global Market rules
requiring that listed companies have a majority of independent
directors and maintain a compensation and nominating committee
composed entirely of independent directors. In addition,
following the closing of this offering, we intend to comply with
Israeli corporate governance requirements applicable to
companies incorporated in Israel whose securities are listed for
trading on a stock exchange outside of Israel.
Board of
Directors and Officers
Our current board of directors consists of seven directors, each
of whom was appointed by a certain group of shareholders
pursuant to rights of appointment granted in our articles of
association, except for Mr. Hadar, who serves on our board
of directors by virtue of his position as Chief Executive
Officer. Our articles of association to be effective upon the
closing of this offering provide that we may have up to nine
directors. See Certain Relationships and Related Party
Transactions Rights of Appointment.
Under our articles of association to be effective upon the
closing of this offering, our directors (other than the outside
directors, whose appointment is required under the Companies
Law; see Outside Directors) are divided
into three classes. Each class of directors consists, as nearly
as possible, of one-third of the total number of directors
constituting the entire board of directors (other than the
outside directors). At each annual general meeting of our
shareholders, the election or re-election of directors following
the expiration of the term of office of the directors of that
class of directors, will be for a term of office that expires on
the third annual general meeting following such election or
re-election, such that from 2006 and after, each year the term
of office of only one class of directors will expire.
Class I directors, consisting of Yosi Elihav and Erel
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Margalit, will hold office until our annual meeting of
shareholders to be held in 2007. Class II directors,
consisting of Dr. Eyal Kishon, Yossi Sela and Shai Saul,
will hold office until our annual meeting of shareholders to be
held in 2008. Class III directors, consisting of Yigal
Jacoby and Rami Hadar, will hold office until our annual meeting
of shareholders to be held in 2009. The directors shall be
elected by a vote of the holders of a majority of the voting
power present and voting at that meeting. Each director, will
hold office until the annual general meeting of our shareholders
for the year in which his or her term expires and until his or
her successor is elected and qualified, unless the tenure of
such director expires earlier pursuant to the Companies Law.
Under our articles of association to be effective upon the
closing of this offering, the approval of a special majority of
the holders of at least 75.0% of the voting rights present and
voting at a general meeting is generally required to remove any
of our directors from office. The holders of a majority of the
voting power present and voting at a meeting may elect directors
in their stead or fill any vacancy, however created, in our
board of directors. In addition, vacancies on our board of
directors, other than vacancies created by an outside director,
may be filled by a vote of a simple majority of the directors
then in office. A director so chosen or appointed will hold
office until the next annual general meeting of our
shareholders, unless earlier removed by the vote of a majority
of the directors then in office prior to such annual meeting.
See Outside Directors for a description
of the procedure for election of outside directors.
Each of our executive officers serves at the discretion of the
board of directors and holds office until his or her successor
is elected or until his or her earlier resignation or removal.
There are no family relationships among any of our directors or
executive officers.
Outside
Directors
Qualifications
of Outside Directors
Under the Israeli Companies Law, companies incorporated under
the laws of the State of Israel that are public
companies, which also includes companies with shares
listed on the Nasdaq Global Market, are required to appoint at
least two outside directors at a shareholders meeting to
be held within three months after becoming a public
company.
A person may not serve as an outside director if at the date of
the persons appointment or within the prior two years, the
person, the persons relatives, entities under the
persons control, or the persons partners or
employer, have or had any affiliation with us or any entity
controlled by or under common control with us during the prior
two years, or which controls us at the time of such
persons appointment.
The term affiliation includes:
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an employment relationship;
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a business or professional relationship maintained on a regular
basis;
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control; and
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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 as a director of the
private company in order to serve as an outside director
following the public offering.
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The term relative is defined as spouses, siblings, parents,
grandparents, descendants, spouses descendants and the
spouses of each of these persons.
The term office holder is defined as a director, general
manager, chief business manager, deputy general manager, vice
general manager, executive vice president, vice president, other
manager directly subordinate to the general manager or any other
person assuming the responsibilities of any of the foregoing
positions, without regard to such persons title. Each
person listed under Directors and Executive
Officers is an office holder.
No person can serve as an outside director if the persons
position or other business create, or may create, a conflict of
interests with the persons responsibilities as a director
or may otherwise interfere with the persons ability to
serve as a director. If at the time an outside director is
appointed all current members of the board of directors are of
the same gender, then that outside director must be of the other
gender.
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The Companies Law provides that each outside director must meet
certain professional qualifications or have financial and
accounting expertise, and that at least one outside director
must have financial and accounting expertise. However, if at
least one of our directors meets the independence requirements
of the Securities Exchange Act of 1934, as amended, and the
standards of the Nasdaq Global Market rules for membership on
the audit committee and also has financial and accounting
expertise as defined in the Companies Law and applicable
regulations, then our outside directors are required to meet the
professional qualifications only. Under applicable regulations,
a director with financial and accounting expertise is a director
who, by reason of his or her education, professional experience
and skill, has a high level of proficiency in and understanding
of business accounting matters and financial statements. He or
she must be able to thoroughly comprehend the financial
statements of the company and initiate debate regarding the
manner in which financial information is presented. The
regulations define a director with the requisite professional
qualifications as a director who satisfies one of the following
requirements: (1) the director holds an academic degree in
either economics, business administration, accounting, law or
public administration, (2) the director either holds an
academic degree in any other field or has completed another form
of higher education in the companys primary field of
business or in an area which is relevant to the office of an
outside director, or (3) the director has at least five
years of cumulative experience serving in one or more of the
following capacities: (a) a senior business management
position in a corporation with a substantial scope of business,
(b) a senior position in companys primary field of
business or (c) a senior position in public administration.
Until the lapse of two years from termination of office, a
company may not engage an outside director to serve as an office
holder and cannot employ or receive professional services for
payment from that person, either directly or indirectly,
including through a corporation controlled by that person.
Election
of Outside Directors
Outside directors are elected by a majority vote at a
shareholders meeting, provided that either:
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the majority of shares voted at the meeting, including at least
one-third of the shares of non-controlling shareholders voted at
the meeting, excluding abstentions, vote in favor of the
election of the outside director; or
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the total number of shares voted against the election of the
outside director does not exceed one percent of the aggregate
voting rights in the company.
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The initial term of an outside director is three years and he or
she may be reelected to additional terms of three years each by
a majority vote at a shareholders meeting, subject to the
conditions described above for election of outside directors.
Reelection to each additional term beyond the first extension
needs to comply with the following additional conditions:
(1) the audit committee and, subsequently, the board of
directors confirmed that the reelection for an additional term
is for the benefit of the company, taking into account the
outside directors expertise and special contribution to
the function of the board of directors and its committees, and
(2) the general meeting of the companys shareholders,
prior to its approval of the reelection of the outside director,
was informed of the term previously served by him or her and of
the reasons of the board of directors and audit committee for
the extension of the outside directors term. Outside
directors may only be removed by the same majority of
shareholders as is required for their election, or by a court,
as follow: (1) if the board of directors is made aware of a
concern that an outside director has ceased to meet the
statutory requirements for his or her appointment, or has
violated his or her duty of loyalty to the company, then the
board of directors is required to discuss the concern and
determine whether it is justified, and if the board of directors
determines that the concern is justified, to call a special
general meeting of the companys shareholders, the agenda
of which includes the dismissal of the outside director, and
(2) at the request of a director or a shareholder of the
company a court may remove an outside director from office if it
determines that the outside director has ceased to meet the
statutory requirements for his or her appointment, or has
violated his or her duty of loyalty to the company, or
(3) at the request of the company, a director, a
shareholder or a creditor of the company, a court may remove an
outside director from office if it determines that the outside
director is unable to perform his or her duties on a regular
basis, or is convicted of certain offenses set forth in the
Companies Law. If the vacancy of an outside directorship causes
the company to have
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fewer than two outside directors, a companys board of
directors is required under the Companies Law to call a special
general meeting of the companys shareholders immediately
to appoint a new outside director.
Each committee to which the companys board delegates power
is required to include at least one outside director and our
audit committee is required to include all of the outside
directors.
An outside director is entitled to compensation as provided in
regulations promulgated under the Companies Law and is otherwise
prohibited from receiving any other compensation, directly or
indirectly, in connection with services provided as an outside
director. The regulations provide three alternatives for cash
compensation to outside directors: (1) a fixed amount
determined by the regulations, (2) an amount within a range
contained in the regulations, or (3) an amount proportional
to the amount paid to the other directors of the company,
provided that such proportional amount (A) may not be lower
than the compensation granted to directors of the company who
are not controlling shareholders of the company and do not fill
any other function in the company or in an entity that controls
or is under common control with the company (Other
Directors), and (B) may not exceed the average
compensation granted to all Other Directors. An outside director
is also entitled to reimbursement of expenses as set forth in
the regulations. A company may also issue shares or options to
an outside director, in addition to cash compensation, provided
that: (A) such shares or options must be granted as part of
a compensation plan for all directors, office holders and
directors who are not outside directors, and (B) the amount
of shares or options may not be lower than the amount of shares
or options granted to any Other Director and may not exceed the
average amount granted to all Other Directors. Compensation
determined in any manner (other than cash compensation at the
fixed amount determined by the regulations) requires the
approval of a companys shareholders. All outside directors
must receive identical compensation.
Nasdaq
Requirements
Under the rules of the Nasdaq Global Market, a majority of
directors must meet the definition of independence contained in
those rules. Our board of directors has determined that all of
our directors, other than Yigal Jacoby and Rami Hadar, meet the
independence standards contained in the rules of the Nasdaq
Global Market. We do not believe that any of these directors
have a relationship that would preclude a finding of
independence under these rules and, in reaching its
determination, our board of directors determined that the other
relationships that these directors have with us do not impair
their independence.
Audit
Committee
Companies
Law Requirements
Under the Companies Law, the board of directors of any public
company must also appoint an audit committee comprised of at
least three directors including all of the outside directors,
but excluding the:
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chairman of the board of directors;
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controlling shareholder or a relative of a controlling
shareholder; and
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any director employed by the company or who provides services to
the company on a regular basis.
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Nasdaq
Requirements
Under the Nasdaq Global Market rules, we are required to
maintain an audit committee consisting of at least three
independent directors, all of whom are financially literate and
one of whom has accounting or related financial management
expertise. Our audit committee members are required to meet
additional independence standards, including minimum standards
set forth in rules of the Securities and Exchange Commission and
adopted by the Nasdaq Global Market.
Approval
of Transactions with Office Holders and Controlling
Shareholders
The approval of the audit committee is required to effect
specified actions and transactions with office holders and
controlling shareholders. The term controlling shareholder means
a shareholder with the ability to
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direct the activities of the company, other than by virtue of
being an office holder. A shareholder is presumed to be a
controlling shareholder if the shareholder holds 50.0% or more
of the voting rights in a company or has the right to appoint
the majority of the directors of the company or its general
manager. For the purpose of approving transactions with
controlling shareholders, the term also includes any shareholder
that holds 25.0% or more of the voting rights of the company if
the company has no shareholder that owns more than 50.0% of its
voting rights. For purposes of determining the holding
percentage stated above, two or more shareholders who have a
personal interest in a transaction that is brought for the
companys approval are deemed as joint holders. The audit
committee may not approve an action or a transaction with a
controlling shareholder or with an office holder unless at the
time of approval two outside directors are serving as members of
the audit committee and at least one of them was present at the
meeting at which the approval was granted.
Audit
Committee Role
Our board of directors has adopted an audit committee charter
setting forth the responsibilities of the audit committee
consistent with the rules of the Securities and Exchange
Commission and The Nasdaq Global Market rules which include:
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retaining and terminating the companys independent
auditors, subject to shareholder ratification;
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pre-approval of audit and non-audit services provided by the
independent auditors; and
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approval of transactions with office holders and controlling
shareholders, as described above, and other related-party
transactions.
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Additionally, under the Companies Law, the role of the audit
committee is to identify irregularities in the business
management of the company in consultation with the internal
auditor or the companys independent auditors and suggest
an appropriate course of action to the board of directors and to
approve the yearly or periodic work plan proposed by the
internal auditor to the extent required. The audit committee
charter states that in fulfilling this role the committee is
entitled to rely on interviews and consultations with our
management, our internal auditor and our independent auditor,
and is not obligated to conduct any independent investigation or
verification.
Our audit committee consists of our directors, Mr. Yosi
Elihav, Dr. Eyal Kishon and Mr. Erel Margalit. The
financial expert on the audit committee pursuant to the
definition of the Securities and Exchange Commission is
Mr. Elihav. Under the Companies Law, the outside directors
that will be appointed within three months after our becoming a
public company must be members of our audit
committee.
Compensation
and Nominating Committee
We have established a compensation and nominating committee
consisting of our directors, Mr. Yossi Sela, Dr. Eyal
Kishon and Mr. Shai Saul. Under the Companies Law, at least
one of the outside directors to be appointed within three months
after our becoming a public company must be a member
of our compensation and nominating committee. This committee
will also oversee matters related to our corporate governance
practices. Our board of directors has adopted a compensation,
nominating and governance committee charter setting forth the
responsibilities of the committee consistent with the Nasdaq
Global Market rules which include:
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determining the compensation of our Chief Executive Officer and
other executive officers;
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granting options to our employees and the employees of our
subsidiaries;
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recommending candidates for nomination as members of our board
of directors; and
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developing and recommending to the board corporate governance
guidelines and a code of business ethics and conduct in
accordance with applicable laws.
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Internal
Auditor
Under the Companies Law, the board of directors of a public
company must appoint an internal auditor nominated by the audit
committee. The role of the internal auditor is, among other
things, to examine whether a companys actions comply with
applicable law and orderly business procedure. Under the
Companies Law, the internal auditor may be an employee of the
company but not an interested party or an office holder or a
relative of an interested party or an office holder, nor may the
internal auditor be the companys independent auditor or
the representative of the same.
An interested party is defined in the Companies Law as a holder
of 5.0% or more of the issued share capital or voting power in a
company, any person or entity who has the right to designate one
director or more or the chief executive officer of the company
or any person who serves as a director or as a chief executive
officer. We intend to appoint an internal auditor following the
closing of this offering.
Approval
of Specified Related Party Transactions Under Israeli
Law
Fiduciary
Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty
on all office holders of a company.
The duty of care requires an office holder to act with the
degree of care with which a reasonable office holder in the same
position would have acted under the same circumstances. The duty
of care includes a duty to use reasonable means to obtain:
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information on the advisability of a given action brought for
his or her approval or performed by virtue of his or her
position; and
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all other important information pertaining to these actions.
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The duty of loyalty requires an office holder to act in good
faith and for the benefit of the company, and includes the duty
to:
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refrain from any conflict of interest between the performance of
his or her duties in the company and his or her personal affairs;
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refrain from any activity that is competitive with the company;
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refrain from exploiting any business opportunity of the company
for the purpose of gaining a personal advantage for himself or
herself or others; and
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disclose to the company any information or documents relating to
a companys affairs which the office holder received as a
result of his or her position as an office holder.
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Disclosure
of Personal Interests of an Office Holder
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 in his or
her possession relating to any existing or proposed transaction
by the company. An interested office holders disclosure
must be made no later than the first meeting of the board of
directors at which the transaction is considered. An office
holder is not obliged to disclose such information if the
personal interest of the office holder derives solely of the
personal interest of his or her relative in a transaction that
is not extraordinary.
Personal interest is defined under the Companies Law
to include a personal interest of a person in an action or in
the business of a company, including the personal interest of
such persons relative or the interest of any corporation
in which the person is an interested party.
Under the Companies Law, an extraordinary transaction is a
transaction:
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other than in the ordinary course of business;
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that is not on market terms; or
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that may have a material impact on the companys
profitability, assets or liabilities.
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Under the Companies Law, once an office holder has complied with
the above disclosure requirement, a company may approve a
transaction between the company and the office holder or a third
party in which the office holder has a personal interest, or
approve an action by the office holder that would otherwise be
deemed a breach of duty of loyalty. However, a company may not
approve a transaction or action that is adverse to the
companys interest or that is not performed by the office
holder in good faith. If the transaction is an extraordinary
transaction, both the audit committee and the board of directors
must approve the transaction. Under certain circumstances,
shareholder approval may also be required. A director who has a
personal interest in a matter which is considered at a meeting
of the board of directors or the audit committee, may generally
not be present at this meeting or vote on this matter unless a
majority of the directors or members of the audit committee have
a personal interest in the matter. If a majority of the
directors have a personal interest in the matter, it also
requires approval of the shareholders of the company.
Under the Companies Law, all arrangements as to compensation of
office holders who are not directors require approval by the
board of directors. An undertaking to indemnify, insure or
exculpate an office holder who is not a director requires both
board and audit committee approval. In general, arrangements
regarding the compensation, indemnification and insurance of
directors require audit committee and shareholder approval in
addition to board approval.
Disclosure
of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure requirements that apply
to an office holder also apply to a controlling shareholder of a
public company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal
interest, and the terms of engagement of a controlling
shareholder or a controlling shareholders relative,
whether as an office holder or an employee, require the approval
of the audit committee, the board of directors and a majority of
the shares voted by the shareholders of the company
participating and voting on the matter in a shareholders
meeting. In addition, the shareholder approval must fulfill one
of the following requirements:
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at least one-third of the shares held by shareholders who have
no personal interest in the transaction and are voting at the
meeting must be voted in favor of approving the transaction,
excluding abstentions; or
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the shares voted by shareholders who have no personal interest
in the transaction who vote against the transaction represent no
more than 1.0% of the voting rights in the company.
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Under the Companies Law, a shareholder has a duty to refrain
from abusing its power in the company and to act in good faith
and in an acceptable manner in exercising its rights and
performing its obligations to the company and other
shareholders, including, among other things, voting at general
meetings of shareholders on the following matters:
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an amendment to the articles of association;
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an increase in the companys authorized share capital;
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a merger; and
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approval of related party transactions that require shareholder
approval.
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A shareholder also has a general duty to refrain from acting to
the detriment of other shareholders.
In addition, any controlling shareholder, any shareholder that
knows that its vote can determine the outcome of a shareholder
vote and any shareholder that, under the companys articles
of association, has the power to appoint or prevent the
appointment of an office holder, or has another power with
respect to the company, is under a duty to act with fairness
towards the company. The Companies Law does not describe the
substance of this duty except to state that the remedies
generally available upon a breach of contract will also apply in
the event of a breach of the duty to act with fairness, taking
the shareholders position in the company into account.
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Exculpation,
Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office
holder from liability for a breach of the duty of loyalty.
However, the company may approve an act performed in breach of
the duty of loyalty of an office holder provided that the office
holder acted in good faith, the act or its approval does not
harm the company, and the office holder discloses the nature of
his or her personal interest in the act and all material facts
and documents a reasonable time before discussion of the
approval. An Israeli company may exculpate an office holder in
advance from liability to the company, in whole or in part, for
damages caused to the company as a result of a breach of duty of
care but only if a provision authorizing such exculpation is
inserted in its articles of association. Our articles of
association include such a provision. An Israeli company may not
exculpate a director for liability arising out of a prohibited
dividend or distribution to shareholders.
An Israeli company may indemnify an office holder in respect of
certain liabilities either in advance of an event or following
an event provided a provision authorizing such indemnification
is inserted in its articles of association. Our articles of
association contain such an authorization. An undertaking
provided in advance by an Israeli company to indemnify an office
holder with respect to a financial liability imposed on him or
her in favor of another person pursuant to a judgment,
settlement or arbitrators award approved by a court must
be limited to events which in the opinion of the board of
directors can be foreseen based on the companys activities
when the undertaking to indemnify is given, and to an amount or
according to criteria determined by the board of directors as
reasonable under the circumstances, and such undertaking shall
detail the above mentioned events and amount or criteria. In
addition, a company may undertake in advance to indemnify an
office holder against the following liabilities incurred for
acts performed as an office holder:
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reasonable litigation expenses, including attorneys fees,
incurred by the office holder as a result of an investigation or
proceeding instituted against him or her by an authority
authorized to conduct such investigation or proceeding, provided
that (i) no indictment was filed against such office holder
as a result of such investigation or proceeding; and
(ii) no financial liability, such as a criminal penalty,
was imposed upon him or her as a substitute for the criminal
proceeding as a result of such investigation or proceeding or,
if such financial liability was imposed, it was imposed with
respect to an offense that does not require proof of criminal
intent; and
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reasonable litigation expenses, including attorneys fees,
incurred by the office holder or imposed by a court in
proceedings instituted against him or her by the company, on its
behalf or by a third party or in connection with criminal
proceedings in which the office holder was acquitted or as a
result of a conviction for an offense that does not require
proof of criminal intent.
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An Israeli company may insure an office holder against the
following liabilities incurred for acts performed as an office
holder if and to the extent provided in the companys
articles of association:
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a breach of duty of loyalty to the company, to the extent that
the office holder acted in good faith and had a reasonable basis
to believe that the act would not prejudice the company;
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a breach of duty of care to the company or to a third party,
including a breach arising out of the negligent conduct of the
office holder; and
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a financial liability imposed on the office holder in favor of a
third party.
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An Israeli company may not indemnify or insure an office holder
against any of the following:
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a breach of duty of loyalty, except to the extent that the
office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
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a breach of duty of care committed intentionally or recklessly,
excluding a breach arising out of the negligent conduct of the
office holder;
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an act or omission committed with intent to derive illegal
personal benefit; or
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a fine or forfeit levied against the office holder.
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Under the Companies Law, exculpation, indemnification and
insurance of office holders must be approved by our audit
committee and our board of directors and, in respect of our
directors, by our shareholders.
Our articles of association allow us to indemnify and insure our
office holders to the fullest extent permitted by the Companies
Law. Our office holders are currently covered by a directors and
officers liability insurance policy. As of the date of
this offering, no claims for directors and officers
liability insurance have been filed under this policy and we are
not aware of any pending or threatened litigation or proceeding
involving any of our directors or officers in which
indemnification is sought.
We have entered into agreements with each of our directors and
office holders exculpating them, to the fullest extent permitted
by law, from liability to us for damages caused to us as a
result of a breach of duty of care, and undertaking to indemnify
them to the fullest extent permitted by law, including with
respect to liabilities resulting from this offering. This
indemnification is limited to events determined as foreseeable
by the board of directors based on our activities, and to an
amount or according to criteria determined by the board of
directors as reasonable under the circumstances, and the
insurance is subject to our discretion depending on its
availability, effectiveness and cost. The current maximum amount
set forth in such agreements is the greater of (1) with
respect to indemnification in connection with a public offering
of our securities, the gross proceeds raised by us
and/or any
selling shareholder in such public offering, and (2) with
respect to all permitted indemnification, including a public
offering of our securities, an amount equal to 50% of the our
shareholders equity on a consolidated basis, based on our
most recent financial statements made publicly available before
the date on which the indemnity payment is made.
In the opinion of the U.S. Securities and Exchange
Commission, however, indemnification of directors and office
holders for liabilities arising under the Securities Act is
against public policy and therefore unenforceable.
Compensation
of Office Holders
The aggregate compensation paid by us and our subsidiaries to
our current office holders, including stock based compensation,
for the year ended December 31, 2005 was $1.4 million.
This amount includes approximately $0.2 million set aside
or accrued to provide pension, severance, retirement or similar
benefits or expenses, but does not include business travel,
relocation, professional and business association due and
expenses reimbursed to office holders, and other benefits
commonly reimbursed or paid by companies in Israel. None of our
directors has so far received any cash compensation for his or
her services as a director other than reimbursement of expenses.
Following the closing of this offering, we will pay an annual
cash retainer and per meeting cash fee to each of our directors.
Employment
and Consulting Agreements with Executive Officers
We have entered into written employment or consulting agreements
with all of our executive officers. These agreements all contain
provisions standard for a company in our industry regarding
noncompetition, confidentiality of information and assignment of
inventions. The enforceability of covenants not to compete in
Israel is limited. See Certain Relationships and Related
Party Transactions Agreements with Officers and
Directors for additional information.
Share
Options Plans
We have adopted four share option plans and, as of
September 30, 2006, we had 4,217,644 ordinary shares
reserved for issuance under these plans, with respect to which
(i) options to purchase 3,470,318 ordinary shares at a
weighted average exercise price of $2.26 per share were
outstanding, and (ii) options to purchase 674,122 ordinary
shares were already exercised by certain of the grantees and
such shares were issued by us. As of September 30, 2006,
options to purchase 1,603,393 ordinary shares were vested and
exercisable.
74
2006
Incentive Compensation Plan
We have adopted the 2006 Incentive Compensation Plan, which will
become effective prior to this offering. Following the approval
of the 2006 plan by the Israeli tax authorities, which we expect
will be within three months of the date of this prospectus, we
will only grant options or other equity incentive awards under
the 2006 plan, although previously-granted options will continue
to be governed by our other plans. The 2006 plan is intended to
further our success by increasing the ownership interest of
certain of our and our subsidiaries employees, directors
and consultants and to enhance our and our subsidiaries
ability to attract and retain employees, directors and
consultants.
We may issue up to 89,732 ordinary shares remaining available
for issuance and not subject to outstanding awards under our
2003 plan and 1997 plans on the date of this prospectus, upon
the exercise or settlement of share options or other equity
incentive awards granted under the 2006 plan. The number of
ordinary shares that we may issue under the 2006 plan will
increase on the first day of each fiscal year during the term of
the 2006 plan, in each case in an amount equal to the lesser of
(i) 1,000,000 shares, (ii) 3.5% of our
outstanding ordinary shares on the last day of the immediately
preceding year, or (iii) an amount determined by our board
of directors. The number of shares subject to the 2006 plan is
also subject to adjustment if particular capital changes affect
our share capital. Ordinary shares subject to outstanding awards
under the 2006 plan or our 2003 plan or 1997 plans that are
subsequently forfeited or terminated for any other reason before
being exercised will again be available for grant under the 2006
plan. As of the closing of this offering, no options or other
awards will have been granted under the 2006 plan.
A share option is the right to purchase a specified number of
ordinary shares in the future at a specified exercise price and
subject to the other terms and conditions specified in the
option agreement and the 2006 plan. The exercise price of each
option granted under the 2006 plan will be determined by our
compensation and nominating committee and for incentive
stock options shall be equal to or greater than the fair
market value of our ordinary shares at the time of grant (except
for any options granted under the 2006 plan in substitution or
exchange for options or awards of another company involved in a
corporate transaction with us or a subsidiary, which will have
an exercise price that is intended to preserve the economic
value of the award that is replaced). The exercise price of any
share options granted under the 2006 plan may be paid in cash,
ordinary shares already owned by the option holder or any other
method that may be approved by our compensation and nominating
committee, such as a cashless broker-assisted exercise that
complies with law.
Our compensation and nominating committee may also grant, or
recommend our board of directors to grant, other forms of equity
incentive awards under the 2006 plan, such as restricted share
awards, share appreciation rights, restricted share units and
other forms of equity-based compensation.
Israeli participants in the 2006 plan may be granted options
subject to Section 102 of the Israeli Income Tax Ordinance.
Section 102 of the Israeli Income Tax Ordinance, allows
employees, directors and officers, who are not controlling
shareholders and are considered Israeli residents to receive
favorable tax treatment for compensation in the form of shares
or options. Our non-employees service providers and controlling
shareholders may only be granted options under another section
of the Tax Ordinance, which does not provide for similar tax
benefits. Section 102 includes two alternatives for tax
treatment involving the issuance of options or shares to a
trustee for the benefit of the grantees and also includes an
additional alternative for the issuance of options or shares
directly to the grantee. The most favorable tax treatment for
the grantees is under Section 102(b)(2) of the Tax
Ordinance, the issuance to a trustee under the capital
gain track. However, under this track we are not allowed
to deduct an expense with respect to the issuance of the options
or shares. Any stock options granted under the 2006 plan to
participants in the United States will be either incentive
stock options, which may be eligible for special tax
treatment under the Internal Revenue Code of 1986, or options
other than incentive stock options (referred to as
nonqualified stock options), as determined by our
compensation and nominating committee and stated in the option
agreement.
Our compensation and nominating committee will administer the
2006 plan. Our board of directors may, subject to any legal
limitations, exercise any powers or duties of the compensation
and nominating committee concerning the 2006 plan. The
compensation and nominating committee will select which of our
and our subsidiaries and affiliates eligible
employees, directors
and/or
consultants shall receive options or other
75
awards under the 2006 plan and will determine, or recommend to
our board of directors, the number of ordinary shares covered by
those options or other awards, the terms under which such
options or other awards may be exercised (however, options
generally may not be exercised later than 10 years from the
grant date of an option) or may be settled or paid, and the
other terms and conditions of such options and other awards
under the 2006 plan in accordance with the provisions of the
2006 plan. Holders of options and other equity incentive awards
may not transfer those awards, unless they die or, except in the
case of incentive stock options, the compensation and nominating
committee determines otherwise.
If we undergo a change of control, as defined in the 2006 plan,
subject to any contrary law or rule, or the terms of any award
agreement in effect before the change of control, (a) the
compensation and nominating committee may, in its discretion,
accelerate the vesting, exercisability and payment, as
applicable, of outstanding options and other awards; and
(b) the compensation and nominating committee, in its
discretion, may adjust outstanding awards by substituting
ordinary shares or other securities of any successor or another
party to the change of control transaction, or cash out
outstanding options and other awards, in any such case,
generally based on the consideration received by our
shareholders in the transaction.
Subject to particular limitations specified in the 2006 plan and
under applicable law, our board of directors may amend or
terminate the 2006 plan, and the compensation and nominating
committee may amend awards outstanding under the 2006 plan. The
2006 plan will continue in effect until all ordinary shares
available under the 2006 plan are delivered and all restrictions
on those shares have lapsed, unless the 2006 plan is terminated
earlier by our board of directors. No awards may be granted
under the 2006 plan on or after the tenth anniversary of the
date of adoption of the plan.
Allot
Communications Ltd. Key Employee Share Incentive Plan
(2003)
Our 2003 share option plan provides for the grant of
options to our and our affiliates employees, directors,
officers, consultants, advisers and service providers. We have
reserved 3,451,573 ordinary shares for issuance under the plan,
including the unused reservation of our 1997 plans, as described
below. This reservation may increase as a result of the
expiration of unexercised options that were granted under our
1997 plans. As of September 30, 2006, there were
(i) 73,204 ordinary shares available for issuance under the
plan, (ii) options to purchase 3,098,538 ordinary shares
were outstanding, of which 1,231,622 were vested and exercisable
and (iii) options to purchase 279,831 ordinary shares were
already exercised. Any shares underlying any option that
terminates without exercise, including those granted under our
1997 plans, become available for future issuance under this
plan. There will be no additional options granted under this
plan after the earlier of approval of the 2006 plan by the
Israeli tax authorities or March 12, 2013.
The terms of the plan are in compliance with Section 102 of
the Israeli Income Tax Ordinance, which allows employees,
directors and officers, who are not controlling shareholders and
are considered Israeli residents to receive favorable tax
treatment for compensation in the form of shares or options. Our
non-employees service providers and controlling shareholders may
only be granted options under another section of the Tax
Ordinance, which does not provide for similar tax benefits.
Section 102 includes two alternatives for tax treatment
involving the issuance of options or shares to a trustee for the
benefit of the grantees and also includes an additional
alternative for the issuance of options or shares directly to
the grantee. The most favorable tax treatment for the grantees
is under Section 102(b)(2) of the Tax Ordinance, the
issuance to a trustee under the capital gain track.
However, under this track the company is not allowed to deduct
an expense with respect to the issuance of the options or
shares. We have elected to issue our options under the capital
gain track and, accordingly, all options granted under this plan
to Israeli residents have been granted under the capital gain
track. Section 102 also provides for an income tax track,
under which, among other things, the benefits to the employees
would be taxed as ordinary income, we would be allowed to
recognize expenses for tax purposes and the minimum holding
period for the trustee will be 12 months from the end of
the calendar year in which such options are granted, and if
granted after January 1, 2006, 12 months after the
date of grant. We will be able to change our election with
respect to future grants under the plan. In addition, we will be
able to make a different election under a new plan. In order to
comply with the terms of the capital gain track, all options, as
well as the ordinary shares issued upon
76
exercise of these options and other shares received subsequently
following any realization of rights with respect to such
options, such as stock dividends and stock splits are granted to
a trustee and should be held by the trustee for the lesser of
30 months from the date of grant, or two years following
the end of the tax year in which the options were granted and if
granted after January 1, 2006 only two years after the date
of grant. Under this plan, all options, whether or not granted
pursuant to said Section 102, the ordinary shares issued
upon their exercise and other shares received subsequently
following any realization of rights are issued to a trustee.
The plan is administered by our board of directors which has
delegated certain responsibilities to our compensation committee
which is empowered to directly issue options to our and our
affiliates employees and to make recommendations to the
board of directors for the issuance of options to non-employee
service providers of us or our affiliates. The price per share
covered by each option award is determined by the committee but
may not be less than the par value of the shares. Options under
the plan generally vest and become exercisable over a period of
four years with 25% vesting on the first anniversary of the
vesting commencement date and 6.25% vesting at the end of each
subsequent three month period. More favorable vesting terms,
including acceleration of vesting upon certain events, were
granted to our management and certain key employees and
consultants. Specifically, our standard form of option award
agreement for management and certain key employees and
consultants provides that all options will become fully vested
immediately prior to (1) a merger with entities other than
our current shareholders as a result of which we are not the
surviving entity, (2) a sale of at least 80% of our share
capital to entities other than our current shareholders,
(3) a sale of all or substantially all of our assets or
(4) a sale of more than 50% (and less than 80%) of the our
share capital to entities other than our current shareholders in
which the successor company (or parent or subsidiary of the
successor company) does not agree to assume or substitute the
options. If the successor company (or parent or subsidiary of
the successor company) agrees to assume or substitute the
options in a transaction described in (4) in the preceding
sentence and within one year of the closing of a such sale, the
option holders employment with the successor company is
terminated by the successor company without cause, or the option
holder is not offered to continue to be employed by the
successor company in a comparable or senior position
and/or on
comparable or favorable terms, then the options will become
fully vested as of the date of such termination, or the date
upon such change in position
and/or terms
would take effect, as applicable.
Certain of the options granted to Odem Rotem Holdings Ltd., a
company wholly-owned and controlled by Yigal Jacoby, will
accelerate upon a firmly underwritten IPO. As a result,
immediately following the closing of this offering and based on
the number of unvested options beneficially held by
Mr. Jacoby as of the date of this prospectus, options to
purchase 240,897 ordinary shares beneficially owned by
Mr. Jacoby that would otherwise not be vested will vest and
become exercisable. Payment for shares under an option award
must be effected in cash or by a cashiers or certified
check payable to us, or such other method acceptable to us.
Option awards and shares purchasable under the plan and held by
the trustee, whether or not fully paid, are not assignable nor
transferable and may not be given as collateral by the grantee.
Generally, the terms of our options grant letters provide that
any option not exercised within 10 years of the grant date
expires unless extended by our board of directors. If we
terminate the employment or engagement of a grantee for cause,
all of the grantees vested and unvested options expire,
and we will also be entitled, at any time, to repurchase from
such grantee all shares issued upon previous exercise of options
granted to him or her under the plan at an exercise price
determined by the compensation committee. However, the exercise
price must not be lower than the exercise price paid for such
shares. Under the plan, upon termination of engagement due to
death, a grantees estate is entitled, for a period of four
months following the grantees death, to exercise such
rights the grantee could have exercised had he or she continued
to be engaged with us during such four-month period. The plan
provides that upon termination of engagement due to disability
or retirement, a grantee will continue to enjoy rights under the
plan on such terms as the compensation committee in its
discretion may determine. As a matter of practice, the terms of
our grant letters provide that in the case of grantees
disability, he or she may exercise the vested options for a
period of four months following termination. Upon the
termination of engagement for any other reason, a grantee may
exercise his or her vested options within 30 days of the
date of termination. Our senior management and
77
certain key employees and consultants are entitled to extended
periods of exercising their options in case of termination for
any reason other than cause.
In the event of our being acquired by means of merger with or
into another entity, in which our outstanding shares are
exchanged for securities or other consideration issued, or
caused to be issued, by the acquiring company or its subsidiary,
or in the event of the sale of all or substantially all of our
assets, to the extent it has not been previously exercised, each
vested or unvested option will terminate immediately prior to
the consummation of such transaction. The plan further provides
that, in the event of our consolidation or merger with or into
another corporation, the compensation committee may, in its
absolute discretion and without obligation, agree that instead
of termination: (i) each unexercised option, if possible,
will be assumed or an equivalent option will be substituted by
our successor corporation or a parent or subsidiary of our
successor corporation; or (ii) we will pay to the grantee
an amount equivalent to the valuation of the grantees
unexercised options on an as converted basis at that time.
Pursuant to the voting rights of the shares issued upon the
exercise of the options by the grantees, the plan provides that
the trustee that holds such shares shall empower the board of
directors with all such voting rights and may not exercise the
voting rights himself or herself, until our shares are
registered for trading on a recognized stock exchange.
Allot
Communications Ltd. Key Employees Share Incentive Plan and Key
Employees of Subsidiaries and Consultants Share Incentive Plan
(1997)
Our Key Employees Share Incentive Plan, adopted in 1997,
provides for the grant of options to any of our directors,
officers and employees, and our Key Employees of Subsidiaries
and Consultants Share Incentive Plan, also adopted in 1997,
provides for the grant of options to any of our or our
subsidiaries directors, officers, employees, or
consultants. The terms of both plans are identical, except that
the grant of options under the first plan was made in compliance
with the provisions of Section 102 of the Tax Ordinance, as
was in effect in 1997 and prior to its amendments in 2003, which
allows employees who are considered Israeli residents to receive
favorable tax treatment.
As of September 30, 2006, there were outstanding options to
purchase 766,071 ordinary shares under the two plans, of which
options to purchase 371,780 ordinary shares were vested and
options to purchase 394,291 ordinary shares were already
exercised for ordinary shares. We no longer grant options under
these plans, and ordinary shares underlying any option granted
under these plans that terminates without exercise become
available for future issuance under our 2003 plan or, following
its approval by the Israeli tax authorities, our 2006 plan.
The plans are administered by our compensation committee. The
options granted under the plans generally vest and become
exercisable over a period of five years with 40% vesting on the
second anniversary of the vesting commencement date and 5%
vesting at the end of each subsequent three month period or over
a period of four years with 50% vesting on the second
anniversary of the vesting commencement date and 6.25% vesting
at the end of each subsequent three month period. Payment for
shares under an option award must be effected in cash or by a
cashiers or certified check payable to us, or such other
method acceptable to us. Option awards and shares purchasable
under the plan are not transferable by the grantee.
The plans provide that if an option has not been exercised or
the shares issued following the exercise of an option have not
been fully paid for before or on August 1, 2011, then the
right to acquire such shares shall terminate and all interests
and rights of the grantee in and to the same shall expire. The
grant letters we issued provide that the options may be
exercised within 10 years of the board of directors
approval of the plans, which means that unexercised options will
expire in 2007, unless they are extended by our board of
directors.
The plans generally provide that if we terminate a
grantees engagement for cause, all of the grantees
vested and unvested options expire upon notice of such
termination. Upon termination of engagement due to death, a
grantees estate is entitled, for a period of three months
following the grantees death, to exercise such rights the
grantee could have exercised during or at the end of such three
month period had he or she survived and continued his or her
engagement with the company. According to the plans, in the
event of disability or
78
retirement, a grantee will continue to enjoy rights under the
plans on terms determined by the compensation committee.
Generally, if a grantee should otherwise cease working for us,
all of his or her unexercised option awards will terminate two
weeks after the notice of termination or resignation. In the
event of a merger, consolidation, reorganization,
recapitalization or similar transaction in which our ordinary
shares are exchanged for other securities of the company or of
another corporation, each grantee will be entitled to purchase
the number of shares or other securities as were exchangeable
for the number of our ordinary shares which the grantee would
have been entitled to purchase except for the transaction.
The plans provide that the voting rights vested in any share
held by the trustee pursuant to the plans cannot be exercised by
the trustee, except in cases when, at his discretion and after
consulting with the compensation committee, the trustee believes
that the rights should be exercised for the protection of the
grantees as a minority among our shareholders.
79
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our policy is to enter into transactions with related parties on
terms that, on the whole, are no more favorable, or no less
favorable, than those available from unaffiliated third parties.
Based on our experience in the business sectors in which we
operate and the terms of our transactions with unaffiliated
third parties, we believe that all of the transactions described
below met this policy standard at the time they occurred.
Financing
Transactions
Original Rounds of Financing. Since our
founding, we have raised capital through multiple rounds of
financing. Between 1997 and 2002, we raised capital through
sales of our Series A ordinary shares and Series A, B,
C and C-1
preferred shares. In 2002, in connection with the sale of our
Series B preferred shares, a portion of our Series C
preferred shares and all of our
Series C-1
preferred shares were converted into Series B preferred
shares and, in addition, such sale triggered an anti-dilution
adjustment to the Series C preferred shares, increasing the
number of ordinary shares resulting from conversion of the
Series C preferred shares from 204,328, assuming a
one-to-one
conversion, to 223,804. Subsequently, we raised additional
capital though our Series D and Series E financings as
more fully described below.
Series D Financing. In 2004, we sold
Series D preferred shares, convertible into 1,785,961
ordinary shares, at a price per underlying ordinary share of
$4.49538 for an aggregate investment of $8.0 million. The
issuance of the Series D preferred shares triggered an
anti-dilution adjustment to the Series C preferred shares,
increasing the number of ordinary shares resulting from
conversion of the Series C preferred shares to 242,178.
Each Series D preferred share will convert into one
ordinary share upon the closing of this offering and additional
ordinary shares will be issued to reflect the share dividend to
be effected prior to the closing of this offering. The following
table sets forth the number of ordinary shares resulting from
conversion at the closing of this offering of the Series D
preferred shares purchased by entities which, as of the date of
this prospectus, beneficially own more than 5.0% of our ordinary
shares assuming the conversion of all of outstanding preferred
shares:
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|
|
|
|
|
|
|
|
|
|
|
Number of Ordinary
|
|
|
|
|
|
|
Shares Resulting
|
|
|
|
|
|
|
from the Conversion
|
|
|
|
|
|
|
of Series D
|
|
|
|
Aggregate Purchase Price
|
|
|
Preferred Shares
|
|
|
Entities affiliated with the
Gemini Group
|
|
$
|
1,681,025
|
|
|
|
373,950
|
|
Entities affiliated with Tamir
Fishman Group
|
|
|
1,000,000
|
|
|
|
222,454
|
|
Entities affiliated with Partech
International Group
|
|
|
5,000,000
|
|
|
|
1,112,258
|
|
Series E Financing. In 2006, we sold
Series E preferred shares convertible into 1,028,517
ordinary shares, at a purchase price per underlying ordinary
share of $5.34758 in consideration for an aggregate investment
of $5.5 million. The issuance of the Series E
preferred shares triggered an anti-dilution adjustment to the
Series C preferred shares, increasing the number of
ordinary shares resulting from a conversion of the Series C
shares to 250,329. Each Series E preferred share will
convert into one ordinary share upon the closing of this
offering and additional ordinary shares will be issued to
reflect the share dividend to be effected prior to the closing
of this offering. The following table sets forth the number of
ordinary shares resulting from conversion at the closing of this
offering of the Series E preferred shares purchased by
entities which, as of the date of this prospectus, beneficially
own more than 5.0% of our outstanding ordinary shares assuming
the conversion of all of outstanding preferred shares:
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|
|
|
|
|
|
|
|
|
|
|
|
Number of Ordinary
|
|
|
|
|
|
|
Shares Resulting
|
|
|
|
|
|
|
from the Conversion
|
|
|
|
|
|
|
of Series E
|
|
|
|
Aggregate Purchase Price
|
|
|
Preferred Shares
|
|
|
Entities affiliated with Tamir
Fishman Group
|
|
$
|
1,800,000
|
|
|
|
336,610
|
|
Entities affiliated with Partech
International Group
|
|
|
900,000
|
|
|
|
168,304
|
|
Entities affiliated with Jerusalem
Venture Partners
|
|
|
2,500,000
|
|
|
|
467,503
|
|
80
Series C
Preferred Anti-dilution Protection
Our articles of association provide that if the price per share
at which our ordinary shares are sold in an initial public
offering, when multiplied by the number of ordinary shares
resulting from conversion of Series C preferred shares,
will not yield to the holders of the Series C preferred
shares an amount equal to at least three times the price paid to
us for the issuance of all Series C preferred shares, then
upon the conversion of the Series C preferred shares into
ordinary shares in such initial public offering, additional
ordinary shares will be issued to the holders of the
Series C preferred shares in accordance with the formula
stated in our articles of association. Currently, an initial
public offering price which is lower than $33.92 per share
will entitle the holders of Series C preferred shares to be
issued additional ordinary shares. Accordingly, upon the
conversion of the Series C preferred shares into ordinary
shares in connection with this offering, and assuming an initial
public offering price of $10.00 per share, the midpoint of
the estimated initial offering price range for pricing, the
holders of the Series C preferred shares will be issued
229,126 ordinary shares in excess of the number of ordinary
shares they would have received had such conversion taken place
prior to this offering. In addition to this amount, the holders
of the Series C preferred shares will also be entitled to
receive upon conversion an additional 46,001 ordinary
shares in respect of an anti-dilution adjustment arising out of
prior financings.
The following table sets forth the number of ordinary shares
resulting from the conversion of the Series C preferred
shares that are held by entities which, as of the date of this
prospectus, beneficially own more than 5.0% of our ordinary
shares assuming the conversion of all of outstanding preferred
shares into ordinary shares:
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|
|
|
|
|
|
|
|
|
|
|
Number of Ordinary
|
|
|
|
|
|
|
Shares Resulting
|
|
|
|
|
|
|
from the Conversion
|
|
|
|
Number of Ordinary Shares
|
|
|
of Series C
|
|
|
|
Resulting from the Assumed
|
|
|
Preferred Shares
|
|
|
|
Conversion of Series C Preferred Shares
|
|
|
Upon the Closing
|
|
|
|
Prior to this Offering
|
|
|
of this Offering
|
|
|
Entities affiliated with Tamir
Fishman Group
|
|
|
87,239
|
|
|
|
167,089
|
|
Entities affiliated with Jerusalem
Venture Partners
|
|
|
56,943
|
|
|
|
109,063
|
|
Rights of
Appointment
Our current board of directors consists of seven directors.
Under our articles of association in effect prior to this
offering, a majority of the holders of our ordinary shares are
entitled to elect three members of our board of directors and
each of Jerusalem Venture Partners, Partech International Group,
The Gemini Group, The Tamir Fishman Group and The Genesis Group,
each a beneficial owner of greater than 5.0% of our ordinary
shares, are currently entitled to appoint one director. Our
Chief Executive Officer, Rami Hadar, serves as a director,
ex-officio.
In addition, NJI Investment Fund Ltd., a holder of our
Series B preferred shares, BancBoston Investments, Inc., a
holder of our Series B, C and D preferred shares and Tamar
Technology Investors (Delaware) LP together with Tamar
Technology Investors (Israel) LP, holders of our ordinary shares
and Series B preferred shares are currently each entitled
to appoint an observer to attend meetings of our board of
directors. All rights to appoint directors and observers will
terminate upon the closing of this offering, although
currently-serving directors that were appointed prior to this
offering will continue to serve pursuant to their appointment
until the annual meeting of shareholders at which the term of
their class of director expires.
We are not a party to, and are not aware of, any voting
agreements among our shareholders.
Registration
Rights
We have entered into an amended and restated investors rights
agreement with certain of our shareholders, pursuant to which
10,969,745 ordinary shares resulting from conversion of our
issued and outstanding preferred shares are entitled to certain
registration rights as described below. This amount does not
include
81
shares issuable upon the exercise of options and warrants, which
are also entitled to registration rights as described under
Registration Rights Certain
Options and Warrants. In accordance with such agreement,
the following entities which, as of the date of this prospectus,
beneficially own more than 5.0% of our ordinary shares assuming
the conversion of all of outstanding preferred shares, are
entitled to registration rights: the Tamir Fishman Group; the
Gemini Group; the Genesis Group; the Partech International
Group; and Jerusalem Venture Partners and our Chairman, Yigal
Jacoby, and Odem Rotem Holdings, a company wholly-owned and
controlled by Mr. Jacoby.
Demand registration rights. We are required to
file a registration statement in respect of ordinary shares held
by our former preferred shareholders as follows:
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|
two registrations at the request of one or more of our
shareholders holding ordinary shares representing in the
aggregate a majority of ordinary shares resulting from
conversion of our Series A preferred shares, Series B
preferred shares (the B Registrable Securities)
and Series C preferred shares and all ordinary shares
issued in respect of such shares;
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one registration (a Preferred D Demand) at the
request of one of more of our shareholders holding ordinary
shares representing in the aggregate a majority of ordinary
shares resulting from conversion of our Series D preferred
shares (the D Registrable Securities) and all
ordinary shares issued in respect of such shares; and
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one registration (a Preferred E Demand) at the
request of one of more of our shareholders holding ordinary
shares representing in the aggregate a majority of ordinary
shares resulting from conversion of our Series E preferred
shares (the E Registrable Securities) and all
ordinary shares issued in respect of such shares,
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provided that (1) the aggregate proceeds from any such
registration are estimated in good faith to be in excess of
$5.0 million and (2) we are not required to effect a
registration within 180 days after the effective date of
the registration statement of which this prospectus forms a part
or a registration statement for any subsequent offering.
Following a request to effect a registration by our shareholders
as described above, we are required to offer the other
shareholders that are entitled to registration rights an
opportunity to include their shares in the registration
statement. In the event that the managing underwriter advises
the registering shareholders in writing that marketing factors
require a limitation on the number of shares that can be
included in the registration statement:
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if the registration statement is being filed pursuant to a
Preferred E Demand, the shares will be included in the
registration statement in the following order of preference:
first, the E Registrable Securities, second, the
D Registrable Securities up to 30% of the aggregate number
of shares included in the registration statement, third,
registrable securities that are not E Registrable
Securities or D Registrable Securities, fourth, to any
shares that we wish to include for our own account, and fifth,
any of our other securities; and
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if the registration statement is not being filed pursuant to a
Preferred E Demand, the shares will be included in the
registration statement in the following order of preference:
first, the D registrable securities up to 30% of the
aggregate number of shares included in the registration
statement, second, registrable securities that are not
D Registrable Securities, including E Registrable
Securities up to 10% of the aggregate number of shares included
in the registration statement, third, securities that we wish to
include for our own account, and fourth, any of our other
securities.
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Registration on
Form F-3
or
S-3. After
we become eligible under applicable securities laws to file a
registration statement on
Form F-3
or
Form S-3,
as applicable, which will not be until at least 12 months
after the date of this prospectus, shareholders holding
registrable securities may request that we register such
registrable securities on
Form F-3
or
Form S-3,
as applicable, provided that each such registration generates
proceeds of at least $2.0 million. This right may be
exercised up to twice in any twelve-month period. We are
required to give notice of any such request to the other holders
of registrable securities and offer them an
82
opportunity to include their shares in the registration
statement. In the event that the managing underwriter advises in
writing that marketing factors require a limitation on the
number of shares that can be included in the registration
statement, the shares will be included in the registration
statement in the following order of preference: first, the
E Registrable Securities up to 30% of the aggregate number
of shares included in the registration statement, second the
D Registrable Securities up to 30% of the aggregate number
of shares included in the registration statement, third,
registrable securities which are not D Registrable
Securities or E Registrable Securities, fourth, securities
that we wish to include for our own account, and fifth, any of
our other securities.
Piggyback registration rights. Following this
offering, shareholders holding registrable securities will also
have the right to request that we include their registrable
securities in any registration statements filed by us in the
future for the purposes of a public offering, subject to
specified exceptions. In the event that the managing underwriter
advises in writing that marketing factors require a limitation
on the number of shares that can be included in the registration
statement, the shares will be included in the registration
statement in the following order of preference: first, the
shares that we wish to include for our own account, second, the
E Registrable Securities up to 30% of the aggregate number
of shares included in the registration statement, third the
D Registrable Securities up to 30% of the aggregate number
of shares included in the registration statement, fourth,
registerable securities which are not D Registrable
Securities or E Registrable Securities, and fifth, any of
our other securities.
Termination. All registration rights granted
to holders of registrable securities terminate on the fifth
anniversary of the closing of this offering and, with respect to
any of our holders of registrable securities, when the shares
held by such shareholder can be sold within a
90-day
period under Rule 144.
Expenses. We will pay all expenses in carrying
out the above registrations.
Certain options and warrants. We have also
granted the following registration rights to holders of certain
warrants and options to purchase our preferred shares:
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171,782 ordinary shares issuable upon the non-cashless exercise
of warrants granted to an Israeli bank are entitled to the same
registration rights as the B Registrable Securities,
subject to first cutback as to the B Registrable
Securities. An aggregate of 67,069 ordinary shares will be
issued pursuant to the partial cashless exercise of these
warrants upon the closing of this offering.
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229,047 ordinary shares issuable upon the non-cashless exercise
of warrants granted to an affiliate of another Israeli bank are
entitled to notice of and inclusion in any registration
statement that we file following this offering. An aggregate of
93,154 ordinary shares will be issued pursuant to the cashless
exercise of one of these warrants, upon the closing of this
offering. This right terminates with respect to 143,154 of such
shares if they can be sold within a
180-day
period under Rule 144.
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14,094 ordinary shares issuable upon the exercise of an option
to purchase Series B preferred shares held by our founder
and Chairman, Yigal Jacoby, are entitled to the same
registration rights as the B Registrable Securities.
Mr. Jacoby has agreed to exercise this option upon the
closing of this offering.
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246,479 ordinary shares that have been issued, but are held in
trust for the benefit of Mr. Jacoby pending his payment of
the purchase price of such shares, will be entitled, upon the
payment of the purchase price, to the same registration rights
as the Series A preferred shares.
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Agreements
with Directors and Officers
Employment of Yigal Jacoby. In October 2006,
we entered into an agreement with Mr. Jacoby governing the
terms of his employment with us for the provision of management
and guidance services with regard to our strategy, long term
vision and key objectives. Under the terms of the agreement,
Mr. Jacoby is required to devote 75% of his time to
his position with us. The agreement contains standard employment
provisions, including provisions relating to confidentiality and
assignment of inventions. We may terminate
Mr. Jacobys employment on 30 days prior
notice, or we may terminate Mr. Jacobys employment
without notice if we give him 30 days pay in lieu of
notice.
83
Prior to his transition to a direct employment relationship,
Mr. Jacoby provided substantially identical services to us
pursuant to a consulting agreement, dated December 2001. Under
the agreement, Odem Rotem Holdings was solely responsible for
the direct compensation and reimbursement of Mr. Jacoby.
The agreement was terminated in October 2006. The agreement
contained standard confidentiality provisions that survived the
agreements termination.
In August 2004 we entered into a non-competition agreement with
Mr. Jacoby and Odem Rotem Holdings. Under this agreement,
Mr. Jacoby and Odem Rotem Holdings are prohibited during
the term of Mr. Jacobys engagement with us and for a
period of 12 months thereafter from directly or indirectly
competing with our products or services or directly or
indirectly soliciting our employees or consultants to engage in
business which competes with our products or services. The
non-competition agreement does, however, permit Mr. Jacoby,
if he becomes an executive of a venture capital fund in the
future to serve as a director of the venture capital funds
portfolio companies. Further, any employment or solicitation of
our employees or consultants or solicitation of business
opportunities by a company in which Odem Rotem Holdings or
Mr. Jacoby are a director or shareholders are not be
deemed, by itself, to violate the non-competition agreement so
long as neither Odem Rotem Holdings nor Mr. Jacoby were
actively involved in such employment or solicitation.
Escrow Agreement with Yigal Jacoby. A right to
purchase Series A preferred shares which are convertible
into 246,479 ordinary shares was granted to Mr. Jacoby in
connection with our Series A financing. The underlying
Series A preferred shares are issued, but are held in trust
for the benefit of the Mr. Jacoby pursuant to an escrow
agreement entered into on January 28, 1998, amended on
October 26, 2006, by and among the Company, Mr. Jacoby
and an escrow agent. Pursuant to the terms of this agreement,
the escrow agent is holding such shares for which
Mr. Jacoby has paid nominal value. While these shares are
held in trust, neither Mr. Jacoby nor the trustee has
voting or economic rights with respect to such shares.
Mr. Jacoby may exercise his right to purchase the shares in
trust, in whole or in part, by paying any portion of the full
$600,000 purchase price (less $475 previously paid in respect of
the nominal value of the shares) for the respective portion of
the underlying Series A preferred shares. Following an
initial public offering or a liquidity event, Mr. Jacoby
will have the right to pay any portion of the purchase price for
the respective portion of shares by net payment of
his right to purchase. Mr. Jacobys right to purchase
expires upon the earlier of (1) two years following the
closing of this offering, or (2) upon the consummation of a
liquidity event. See Note 9d(1) to our consolidated
financial statements for additional information.
Consulting Agreement with Hess MarkITing
Ltd. In June 2005, we entered into a consulting
agreement with Hess MarkITing Ltd., as consultant, for
consulting services to be determined. All of the consulting
service provided by the consultant will be provided through
Sharon Hess, our Vice President Marketing and the
founder and owner of Hess MarkITing Ltd. The agreement contains
a non-compete provision prohibiting the consultant from directly
or indirectly having any connection with a business or venture
that competes with us. Under the agreement, we have promised to
pay Hess MarkITing a monthly consulting fee, provide use of one
of our company cars and grant stock options to purchase our
ordinary shares to Ms. Hess. Such monthly consulting fee is
recorded as a sales and marketing expense. This agreement renews
automatically at the end of each one year term, but may be
terminated by either party on 90 days prior written
notice.
Technical Training Services Agreement with
Experteam. We have received technical writing
services from Experteam Ltd., a company owned and controlled by
the wife of our Chairman, Yigal Jacoby. We began using Experteam
in 2004 and our payments to Experteam were $17,000 in 2004,
$14,000 in 2005 and $72,000 in the nine months ended
September 30, 2006.
Employment Agreements. We have entered into
employment agreements with each of our officers who work for us
as employees. See Management Employment
Agreements.
Exculpation, Indemnification and
Insurance. Our articles of association permit us
to exculpate, indemnify and insure our office holders to the
fullest extent permitted by the Companies Law. We have entered
into agreements with each of our office holders, exculpating
them from a breach of their duty of care to us to the fullest
extent permitted by law and undertaking to indemnify them to the
fullest extent permitted by law, including with respect to
liabilities resulting from this offering to the extent that
these liabilities are not covered by insurance. See
Management Exculpation, Insurance and
Indemnification of Directors and Officers.
84
PRINCIPAL
SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our outstanding ordinary shares as of
the date of this prospectus, as adjusted to reflect the sale of
the ordinary shares in this offering:
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each person who we know beneficially owns 5.0% or more of the
outstanding ordinary shares;
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each of our directors individually;
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each of our executive officers individually; and
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all of our directors and executive officers as a group.
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Beneficial ownership of shares is determined under rules of the
Securities and Exchange Commission and generally includes any
shares over which a person exercises sole or shared voting or
investment power. The information set forth in the table below
gives effect to the conversion of all preferred shares and
Series A ordinary shares into ordinary shares, including
preferred shares issuable upon the closing of this offering upon
the exercise of warrants, options or rights that are subject to
irrevocable notices of exercise. The table also includes the
number of ordinary shares underlying warrants, options or rights
that are exercisable within 60 days of the date of this
offering. Ordinary shares subject to these warrants, options or
rights are deemed to be outstanding for the purpose of computing
the ownership percentage of the person beneficially holding
these warrants, options or rights, but are not deemed to be
outstanding for the purpose of computing the ownership
percentage of any other person. The table assumes 13,900,997
ordinary shares outstanding as of the date of this prospectus
(excluding 246,479 shares held in trust for
Mr. Jacoby) and 20,914,233 ordinary shares outstanding upon
the completion of this offering. The After Offering
columns also include additional ordinary shares issuable upon
the closing of the offering based on the midpoint of the
estimated initial public offering price range pursuant to
anti-dilution adjustments to our Series C preferred shares.
As of the date of this prospectus, we are aware of 13
U.S. persons that are holders of record of our ordinary
shares holding an aggregate of 4,600,184 shares.
Unless otherwise noted below, each shareholders address is
c/o Allot Communications Ltd., 22 Hanagar Street, Neve
Neeman Industrial Zone B, Hod-Hasharon 45240, Israel.
85
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Percentage of
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Shares Owned
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Assuming Exercise
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Number of Shares
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Percentage of Shares
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of Option to
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Beneficially Owned
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Beneficially Owned
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Purchase Additional
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Name and Address
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Before Offering
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After Offering
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Before Offering
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After Offering
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Ordinary Shares
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Principal
shareholders:
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Tamir Fishman Group(1)
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2,265,208
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2,345,058
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16.3
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%
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11.2
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%
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10.7
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%
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Gemini Group(2)
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2,211,679
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2,211,679
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15.9
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10.6
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10.1
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Genesis Partners(3)
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2,028,510
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2,028,510
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14.6
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9.7
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9.3
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Yigal Jacoby(4)
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1,858,707
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1,858,707
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12.5
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8.5
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8.1
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Partech International Group(5)
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1,280,562
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1,280,562
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9.2
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6.1
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5.9
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Jerusalem Venture Partners(6)
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1,017,299
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1,069,419
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7.3
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5.1
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4.9
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Directors and executive
officers:
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Rami Hadar
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Amir Weinstein
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*
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*
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*
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*
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*
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Anat Shenig
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*
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*
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*
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*
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*
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Azi Ronen
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*
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*
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*
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*
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*
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Michael Shurman(7)
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236,058
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236,058
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1.7
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1.1
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1.1
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Larry Schmidt
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*
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*
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*
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*
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*
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Menashe Mukhtar
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*
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*
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*
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*
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*
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Sharon Hess
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*
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*
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*
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*
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*
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Ramy Moriah
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*
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*
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*
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*
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*
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Adi Sapir
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*
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*
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*
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*
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*
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Pini Gvili
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*
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*
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*
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*
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*
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Shai Saul(8)
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2,265,208
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2,345,058
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16.3
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11.2
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10.7
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Yossi Sela(9)
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2,211,679
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2,211,679
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15.9
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10.6
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10.1
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Eyal Kishon(10)
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2,028,510
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2,028,510
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14.6
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9.7
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9.3
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Erel Margalit(11)
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1,017,299
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1,069,419
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7.3
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5.1
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4.9
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Yosi Elihav
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480,038
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480,038
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3.5
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2.3
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2.2
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All directors and executive
officers as a group
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10,576,866
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10,708,836
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68.9
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%
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47.9
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%
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45.9
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%
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* |
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Less than 1.0% |
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(1) |
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Prior to the offering consists of 1,131,794 shares held by
Tamir Fishman Ventures II L.P., 781,962 shares held by
Tamir Fishman Venture Capital II Ltd., 151,472 shares
held by Tamir Fishman Ventures II (Israel) L.P.,
133,888 shares held by Tamir Fishman Ventures II
(Cayman Islands) L.P., 53,481 shares held by Tamir Fishman
Ventures II CEO Funds (U.S.) L.P. and 12,611 shares
held by Tamir Fishman Ventures II CEO Funds L.P. Assuming
that the initial public offering price of our shares is within
the estimated range set forth on the cover of this prospectus,
the number of shares beneficially owned after this offering by
foregoing entities could range from 2,337,706 shares to
2,354,069 shares as a result of the anti-dilution rights of
Series C preferred shareholders. Tamir Fishman
Ventures II, LLC is the sole general partner of each of the
foregoing limited partnerships and has management rights over
the shares held by Tamir Fishman Venture Capital II Ltd. by
virtue of a management agreement with Tamir Fishman
Ventures II, LLC. The managing members of Tamir Fishman
Ventures II, LLC are Shai Saul, Michael Elias and Tamir
Fishman & Co. Ltd. Eldad Tamir and Danny Fishman are
Co-Presidents and Co-Chief Executive Officers of Tamir
Fishman & Co. Ltd. and, by virtue of their positions,
may be deemed to be beneficial owners of the securities held
thereby. Each of the foregoing entities and individuals
disclaims beneficial ownership of these securities except to the
extent of its or his pecuniary |
86
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interest therein. The address of the Tamir Fishman entities and
the foregoing individuals is 21 Haarbaa, Tel Aviv 64739 Israel. |
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(2) |
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Consists of 1,143,448 shares held by Gemini Israel II
L.P., 897,119 shares held by Gemini Israel II Parallel
Fund L.P., 145,760 shares held by Advent PGGM Gemini
L.P. and 25,352 shares held by Gemini Partner Investors
L.P. Yossi Sela is a managing partner and a shareholder of
Gemini Israel Funds Ltd., the sole general partner or the sole
general partner of the general partner of Gemini Israel II
L.P., Gemini Israel II Parallel Fund L.P., Advent PGGM
Gemini L.P., Gemini Partner Investors L.P., Gemini
Israel III L.P. and Gemini Israel III Parallel
Fund L.P. The board of directors of Gemini Israel Funds
Ltd. has sole investment control with respect to these entities
and is comprised of Steve Kahn, Amram Rasiel, Dr. A.I. (Ed)
Mlavsky, Yossi Sela and David Cohen. These individuals share
voting power over the shares and held by the Gemini entities and
may be deemed to be the beneficial owners of the securities held
thereby. Each individual disclaims beneficial ownership of these
securities except to the extent of his pecuniary interest
therein. The address of the Gemini entities and the foregoing
individuals is 9 HaMenofim Street, Herzliya Pituach 46725,
Israel. |
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(3) |
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Consists of 1,312,770 shares held by Genesis Partners I
L.P. and 715,740 shares held by Genesis Partners (Cayman)
L.P. Eddy Shalev and Dr. Eyal Kishon are the directors of
E. Shalev Management Ltd., a general partner of these funds.
These individuals each have voting, investment and dispositive
power with respect to the shares held by the Genesis entities
and may be deemed to be beneficial owners of the securities held
thereby. Each individual disclaims beneficial ownership of these
securities except to the extent of his pecuniary interest
therein. The address of the Genesis entities and the foregoing
individuals is 11 HaMenofim Street, Herzliya Pituach 46725,
Israel. |
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(4) |
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Consists of 895,410 shares held by Odem Rotem Holdings
Ltd., a company wholly-owned and controlled by Yigal Jacoby, and
an option to purchase 481,794 shares held by Odem Rotem
Holdings. Also consists of options held directly by
Mr. Jacoby to purchase 235,024 shares and a right held
by Mr. Jacoby to purchase 246,479 shares currently
held by a trustee. See Certain Relationships and Related
Party Transactions Agreements with Directors and
Officers Escrow Agreement with Yigal Jacoby. |
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(5) |
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Consists of 469,537 shares held by Partech International
Growth Capital I LLC, 533,565 shares held by Partech
International Growth Capital III LLC, 224,098 shares
held by AXA Growth Capital II L.P., 32,016 shares held
by Double Black Diamond II LLC and 21,346 shares held
by Multinvest LLC. 46th Parallel, LLC is the managing
member of each of Partech International Growth Capital I,
LLC and Partech International Growth Capital III, LLC.
48th Parallel, LLC is the general partner of AXA Growth
Capital II L.P. ParVenture Japan Managers, LLC is the
managing member of Multinvest, LLC. Thomas G. McKinley and
Vincent Worms are the managing members of Double Black
Diamond II, LLC. PAR SF, LLC is the managing member of each
of 46th Parallel, LLC and 48th Parallel, LLC. Vincent
Worms and Vendome Capital, LLC are the managing members of each
of PAR SF, LLC and ParVenture Japan Managers, LLC. Thomas G.
McKinley is the managing member of Vendome Capital, LLC. Thomas
G. McKinley and Vincent Worms share voting power over the shares
held by the Partech International Group and may be deemed to be
the beneficial owners of the securities held thereby. Each
individual disclaims beneficial ownership of these securities
except to the extent of his pecuniary interest therein. The
address of the Partech International entities and the foregoing
individuals is 50 California Street, Suite 3200,
San Francisco, California. |
|
(6) |
|
Prior to the offering consists of 976,798 shares held by
Jerusalem Venture Partners IV L.P., 23,504 shares held
by Jerusalem Venture Partners IV (Israel) L.P.,
8,752 shares held by Jerusalem Venture Partners
Entrepreneurs Fund IV L.P. and 8,245 shares held by
Jerusalem Venture Partners IV-A L.P. Assuming that the initial
public offering price of our shares is within the estimated
range set forth on the cover of this prospectus, the number of
shares beneficially owned after this offering by foregoing
entities could range from 1,064,620 shares to
1,075,301 shares as a result of the anti-dilution rights of
our Series C preferred shareholders. Jerusalem Partners IV,
L.P. is the general partner of Jerusalem Venture Partners IV,
L.P., Jerusalem Venture Partners IV-A, L.P. and Jerusalem
Venture Partners Entrepreneurs Fund IV, L.P. Jerusalem
Partners IV-Venture Capital, L.P. serves as the general partner
of Jerusalem Venture Partners IV (Israel), L.P. JVP Corp.
IV is the general partner of Jerusalem Partners IV, L.P. and
Jerusalem Partners IV-Venture Capital, L.P. Erel Margalit is an
officer of JVP Corp. IV and, by virtue of his position, may be |
87
|
|
|
|
|
deemed to be the beneficial owner of the securities held
thereby. Mr. Margalit disclaims beneficial ownership of
these securities except to the extent of his pecuniary interest
therein. The address of the Jerusalem Venture Partners entities
and the foregoing individuals is 7 West 22nd St.,
7th Floor, New York, NY 10010. |
|
(7) |
|
Consists of 221,556 shares and options to purchase
14,502 shares. |
|
(8) |
|
Prior to the offering consists of 2,265,208 shares and
following the offering consists of 2,345,058 shares held by
the Tamir Fishman Group. Shai Saul is a managing partner of
Tamir Fishman and, by virtue of his position, may be deemed to
have voting and investment power, and thus beneficial ownership,
with respect to the shares held by the Tamir Fishman Group.
Mr. Saul disclaims such beneficial ownership except to the
extent of his pecuniary interest therein. |
|
(9) |
|
Consists of 2,211,679 shares held by the Gemini Group.
Mr. Sela is a managing partner of Gemini Israel Funds and,
by virtue of his position, may be deemed to have voting and
investment power, and thus beneficial ownership, with respect to
the shares held by the Gemini Group. Mr. Sela disclaims
such beneficial ownership except to the extent of his pecuniary
interest therein. |
|
(10) |
|
Consists of 2,028,510 shares held by the Genesis Group.
Eyal Kishon is a managing partner of Genesis Partners and, by
virtue of his position, may be deemed to have voting and
investment power, and thus beneficial ownership, with respect to
the shares held by the Genesis Group. Mr. Kishon disclaims
such beneficial ownership except to the extent of his pecuniary
interest therein. |
|
(11) |
|
Prior to the offering consists of 1,017,299 shares and
following the offering consists of 1,069,419 shares held by
Jerusalem Venture Partners. Erel Margalit is a managing general
partner and, by virtue of his position, may be deemed to have
voting and investment power, and thus beneficial ownership, with
respect to the shares held by Jerusalem Venture Partners.
Mr. Margalit disclaims such beneficial ownership except to
the extent of his pecuniary interest therein. |
88
DESCRIPTION
OF SHARE CAPITAL
As of the date of this prospectus, our authorized share capital
consists of 194,628,607 ordinary shares, 268,761 Series A
ordinary shares and 5,102,632 preferred shares, each with a par
value of NIS 0.10 per share. Upon the closing of this
offering, all of our outstanding Series A ordinary shares
and preferred shares, will automatically convert into ordinary
shares. Upon the closing of this offering, our authorized share
capital will consist of 200,000,000 ordinary shares, of which
20,914,233 will be issued and outstanding.
Our ordinary shares are not redeemable and following the closing
of this offering will not have preemptive rights. The ownership
or voting of ordinary shares by non-residents of Israel is not
restricted in any way by our memorandum of association, our
articles of association or the laws of the State of Israel,
except that citizens of countries which are in a state of war
with Israel may not be recognized as owners of ordinary shares.
Our current articles will be replaced by new articles of
association to be effective upon the closing of this offering
and which are attached as an exhibit to the registration
statement of which this prospectus forms part. The description
below reflects the terms of the new articles of association to
be effective upon the closing of this offering.
Voting
Holders of our ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders at
a shareholder meeting. Shareholders may vote at shareholder
meeting either in person, proxy or by written ballot. Israeli
law does not provide for public companies such as us to have
shareholder resolutions adopted by means of a written consent in
lieu of a shareholder meeting. Shareholder voting rights may be
affected by the grant of any special voting rights to the
holders of a class of shares with preferential rights that may
be authorized in the future. The Companies Law provides that a
shareholder, in exercising his or her rights and performing his
or her obligations toward the company and its other
shareholders, must act in good faith and in an acceptable
manner, and avoid abusing his or her powers. This is required
when voting at general meetings on matters such as amendments to
the articles of association, increasing the companys
authorized capital, mergers and approval of related party
transactions that require shareholder approval. A shareholder
also has a general duty to refrain from depriving any other
shareholder of their rights as a shareholder. In addition, any
controlling shareholder, any shareholder who knows that its vote
can determine the outcome of a shareholder vote and any
shareholder who, under a companys articles of association,
can appoint or prevent the appointment of an office holder or
has other power with respect to the company, is under a duty to
act with fairness towards the company. The Companies Law does
not describe the substance of this duty, except to state that
the remedies generally available upon a breach of contract will
apply also in the event of a breach of the duty to act with
fairness, taking the shareholders position in a company
into account.
Transfer
of Shares
Fully paid ordinary shares are issued in registered form and may
be freely transferred under our articles of association unless
the transfer is restricted or prohibited by another instrument,
Israeli law or the rules of a stock exchange on which the shares
are traded.
Election
of Directors
Our ordinary shares do not have cumulative voting rights for the
election of directors. Rather, under our articles of association
our directors are elected by the holders of a simple majority of
our ordinary shares at a general shareholder meeting. As a
result, the holders of our ordinary shares that represent more
than 50.0% of the voting power represented at a shareholder
meeting have the power to elect any or all of our directors
whose positions are being filled at that meeting, subject to the
special approval requirements for outside directors described
under Management Outside Directors.
89
Dividend
and Liquidation Rights
Under the Companies Law, shareholder approval is not required
for the declaration of a dividend, unless the companys
articles of association provide otherwise. Our articles of
association provide that our board of directors may declare and
distribute a dividend to be paid to the holders of ordinary
shares without shareholder approval in proportion to the paid up
capital attributable to the shares that they hold. Dividends may
only be paid out of profits legally available for distribution,
as defined in the Companies Law, provided that there is no
reasonable concern that a payment of a dividend will prevent us
from satisfying our existing and foreseeable obligations as they
become due. If we do not have profits legally available for
distribution, we may seek the approval of the court to
distribute a dividend. The court may approve our request if it
is convinced that there is no reasonable concern that a payment
of a dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the
holders of ordinary shares in proportion to the paid up capital
attributable to the shares that they hold. Dividend and
liquidation rights may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of
shares with preferential rights that may be authorized in the
future.
Shareholder
Meetings
We are required to convene an annual general meeting of our
shareholders once every calendar year within a period of not
more than 15 months following the preceding annual general
meeting. Our board of directors may convene a special general
meeting of our shareholders and is required to do so at the
request of two directors or one quarter of the members of our
board of directors or at the request of one or more holders of
5.0% or more of our share capital and 1.0% of our voting power
or the holder or holders of 5.0% or more of our voting power.
All shareholder meetings require prior notice of at least
21 days. The chairperson of our board of directors, or any
other person appointed by the board of directors, presides over
our general meetings. In the absence of the chairperson of the
board of directors or such other person, one of the members of
the board designated by a majority of the directors presides
over the meeting. If no director is designated to preside as
chairperson, then the shareholders present will choose one of
the shareholders present to be chairperson. Subject to the
provisions of the Companies Law and the regulations promulgated
thereunder, shareholders entitled to participate and vote at
general meetings are the shareholders of record on a date to be
decided by the board of directors, which may be between four and
40 days prior to the date of the meeting.
Quorum
The quorum required for a meeting of shareholders consists of at
least two shareholders present in person, by proxy or by written
ballot, who hold or represent between them at least 25% of our
voting power. A meeting adjourned for lack of a quorum generally
is adjourned to the same day in the following week at the same
time and place or any time and place as the directors designate
in a notice to the shareholders. At the reconvened meeting, the
required quorum consists of at least two shareholders present,
in person, by proxy or by written ballot, who hold or represent
between them at least 10% of our voting power, provided that if
the meeting was initially called pursuant to a request by our
shareholders, then the quorum required must include at least the
number of shareholders entitled to call the meeting. See
Shareholder Meetings.
Resolutions
An ordinary resolution requires approval by the holders of a
simple majority of the voting rights represented at the meeting,
in person, by proxy or by written ballot, and voting on the
resolution.
Under the Companies Law, unless otherwise provided in the
articles of association or applicable law, all resolutions of
the shareholders require a simple majority. A resolution for the
voluntary winding up of the company requires the approval by
holders of 75.0% of the voting rights represented at the
meeting, in person, by proxy or by written ballot and voting on
the resolution. Under our articles of association
(1) certain shareholders resolutions require the
approval of a special majority of the holders of at least 75.0%
of the voting rights represented at the meeting, in person, by
proxy or by written ballot and voting on the resolution,
90
and (2) certain shareholders resolutions require the
approval of a special majority of the holders of at least
two-thirds of the voting securities of the company then
outstanding.
Access to
Corporate Records
Under the Companies Law, all shareholders generally have the
right to review minutes of our general meetings, our shareholder
register, including with respect to material shareholders, our
articles of association, our financial statements and any
document we are required by law to file publicly with the
Israeli Companies Registrar. Any shareholder who specifies the
purpose of its request may request to review any document in our
possession that relates to any action or transaction with a
related party which requires shareholder approval under the
Companies Law. We may deny a request to review a document if we
determine that the request was not made in good faith, that the
document contains a commercial secret or a patent or that the
documents disclosure may otherwise impair our interests.
Registration
Rights
For a discussion of registration rights we have granted to
shareholders, please see the section of this prospectus entitled
Certain Relationships and Related Party
Transactions Registration Rights.
Acquisitions
under Israeli Law
Full Tender Offer. A person wishing to acquire
shares of a public Israeli company and who would as a result
hold over 90.0% of the target companys issued and
outstanding share capital is required by the Companies Law to
make a tender offer to all of the companys shareholders
for the purchase of all of the issued and outstanding shares of
the company. A person wishing to acquire shares of a public
Israeli company and who would as a result hold over 90.0% of the
issued and outstanding share capital of a certain class of
shares is required to make a tender offer to all of the
shareholders who hold shares of the same class for the purchase
of all of the issued and outstanding shares of the same class.
If the shareholders who do not accept the offer hold less than
5.0% of the issued and outstanding share capital of the company
or of the applicable class, all of the shares that the acquirer
offered to purchase will be transferred to the acquirer by
operation of law. However, a shareholder that had its shares so
transferred may, within three months from the date of acceptance
of the tender offer, petition the court to determine that tender
offer was for less than fair value and that the fair value
should be paid as determined by the court. If the shareholders
who did not accept the tender offer hold at least 5.0% of the
issued and outstanding share capital of the company or of the
applicable class, the acquirer may not acquire shares of the
company that will increase its holdings to more than 90.0% of
the companys issued and outstanding share capital or of
the applicable class from shareholders who accepted the tender
offer.
Special Tender Offer. The Companies Law
provides that an acquisition of shares of a public Israeli
company must be made by means of a special tender offer if as a
result of the acquisition the purchaser would become a holder of
at least 25.0% of the voting rights in the company, unless one
of the exemptions in the Companies Law is met. This rule does
not apply if there is already another holder of at least 25.0%
of the voting rights in the company. Similarly, the Companies
Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of more than
45.0% of the voting rights in the company, if there is no other
shareholder of the company who holds more than 45.0% of the
voting rights in the company, unless one of the exemptions in
the Companies Law is met.
In the event that a special tender offer is made, a
companys board of directors is required to express its
opinion on the advisability of the offer, or shall abstain from
expressing any opinion if it is unable to do so, provided that
it gives the reasons for its abstention. An office holder in a
target company who, in his or her capacity as an office holder,
performs an action the purpose of which is to cause the failure
of an existing or foreseeable special tender offer or is to
impair the chances of its acceptance, is liable to the potential
purchaser and shareholders for damages, unless such office
holder acted in good faith and had reasonable grounds to believe
he or she was acting for the benefit of the company. However,
office holders of the target company
91
may negotiate with the potential purchaser in order to improve
the terms of the special tender offer, and may further negotiate
with third parties in order to obtain a competing offer.
If a special tender offer was accepted by a majority of the
shareholders who announced their stand on such offer, then
shareholders who did not announce their stand or who had
objected to the offer may accept the offer within four days of
the last day set for the acceptance of the offer.
In the event that a special tender offer is accepted, then the
purchaser or any person or entity controlling it or under common
control with the purchaser or such controlling person or entity
shall refrain of making a subsequent tender offer for the
purchase of shares of the target company and cannot execute a
merger with the target company for a period of one year from the
date of the offer, unless the purchaser or such person or entity
undertook to effect such an offer or merger in the initial
special tender offer.
Merger. The Companies Law permits merger
transactions if approved by each partys board of directors
and, unless certain requirements described under the Companies
Law are met, a certain percentage of each partys
shareholders. The board of directors of a merging company is
required pursuant to the Companies Law to discuss and determine
whether in its opinion there exists a reasonable concern that as
a result of a proposed merger, the surviving company will not be
able to satisfy its obligations towards its creditors, such
determination taking into account the financial status of the
merging companies. If the board has determined that such a
concern exists, it may not approve a proposed merger. Following
the approval of the board of directors of each of the merging
companies, the boards must jointly prepare a merger proposal for
submission to the Israeli Registrar of Companies.
Under the Companies Law, if the approval of a general meeting of
the shareholders is required, merger transactions may be
approved by holders of a simple majority of our shares
(including the separate vote of each class of shares, if we have
issued shares of different classes) present, in person, by proxy
or by written ballot, at a general meeting and voting on the
transaction. In determining whether the required majority has
approved the merger, if shares of the company are held by the
other party to the merger, or by any person holding at least
25.0% of the voting rights or 25.0% of the means of appointing
directors or the general manager of the other party to the
merger, then a vote against the merger by holders of the
majority of the shares present and voting, excluding shares held
by the other party or by such person, or any person or entity
acting on behalf of, related to or controlled by either of them,
is sufficient to reject the merger transaction. If the
transaction would have been approved but for the separate
approval of each class or the exclusion of the votes of certain
shareholders as provided above, a court may still approve the
merger upon the request of holders of at least 25.0% of the
voting rights of a company, if the court holds that the merger
is fair and reasonable, taking into account the value of the
parties to the merger and the consideration offered to the
shareholders.
Under the Companies Law, each merging company must inform its
secured creditors of the proposed merger plans. Unsecured
creditors are entitled to notice of the merger pursuant to
regulations to be adopted under the Companies Law (no such
regulations have been adopted to date). Upon the request of a
creditor of either party to the proposed merger, the court may
delay or prevent the merger if it concludes that there exists a
reasonable concern that, as a result of the merger, the
surviving company will be unable to satisfy the obligations of
any of the parties to the merger, and may further give
instructions to secure the rights of creditors.
In addition, a merger may not be completed unless at least
50 days have passed from the date that a proposal for
approval of the merger was filed with the Israeli Registrar of
Companies and 30 days from the date that shareholder
approval of both merging companies was obtained.
Anti-Takeover
Measures
Undesignated preferred stock. The Companies
Law allows us to create and issue shares having rights different
to those attached to our ordinary shares, including shares
providing certain preferred or additional rights to voting,
distributions or other matters and shares having preemptive
rights. Following the closing of this offering, we will not have
any authorized or issued shares other than ordinary shares. In
the future, if we
92
do create and issue a class of shares other than ordinary
shares, such class of shares, depending on the specific rights
that may be attached to them, may delay or prevent a takeover or
otherwise prevent our shareholders from realizing a potential
premium over the market value of their ordinary shares. The
authorization of a new class of shares will require an amendment
to our articles of association which requires the prior approval
of the holders of a majority of our voting power voted at a
general meeting. Shareholders voting at such a meeting will be
subject to the restrictions under the Companies Law described in
Voting.
Supermajority voting. Our amended and restated
articles of association require the approval of the holders of
at least two thirds of our combined voting power to effect
certain amendments to our articles of association.
Classified board of directors. Our amended and
restated articles of association provide for a classified board
of directors. See Management Board of
Directors and Officers.
Establishment
We were incorporated under the laws of the State of Israel in
November 1996 and commenced operations in July 1997. We are
registered with the Israeli registrar of companies in Jerusalem.
Our registration number is 51-239477-6. Our objects under our
memorandum of association are to engage in the business of
computers, hardware and software, including without limitation
research and development, marketing, consulting and the selling
of knowledge, and any other engagement which our board of
directors shall determine.
Transfer
Agent and Registrar
The transfer agent and registrar for our ordinary shares is
American Stock Transfer & Trust Company. Its address is
59 Maiden Lane, New York, New York 10038 and its telephone
number is
(718) 921-8200.
Listing
We have applied to list our ordinary shares on The Nasdaq Global
Market under the symbol ALLT.
93
ORDINARY
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our ordinary shares in the
public market following this offering, or the perception that
such sales may occur, could adversely affect prevailing market
prices of our ordinary shares. Assuming no exercise of options
outstanding following this offering, we will have an aggregate
of 20,914,233 ordinary shares outstanding upon completion
of this offering. The 6,500,000 shares sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act, unless purchased by
affiliates as that term is defined under
Rule 144 of the Securities Act, who may sell only the
volume of shares described below and whose sales would be
subject to additional restrictions described below.
The remaining 14,414,233 ordinary shares will be held by
our existing shareholders and will be deemed to be
restricted securities under Rule 144.
Restricted securities may only be sold in the public market
pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from registration
under Rule 144 or Rule 701 under the Securities Act.
These rules are summarized below.
Eligibility
of Restricted Shares for Sale in the Public Market
The following indicates approximately when the
14,414,233 ordinary shares that are not being sold in this
offering, but which will be outstanding at the time this
offering is complete, will be eligible for sale into the public
market, under the provisions of Rule 144: