U
NITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
o
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
OR
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended
December 31,
2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from __________ to __________
OR
o
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
Date
of event requiring this shell company report ____________
Commission
file number 0-29452
RADCOM
Ltd.
(Exact
name of registrant as specified in its charter)
Israel
(Jurisdiction
of incorporation or organization)
24
Raoul Wallenberg Street, Tel-Aviv 69719, Israel
(Address
of principal executive offices)
Jonathan
Burgin: (+972) 3 645 5055 (tel), (+972) 3 647 4681
(fax)
24
Raoul Wallenberg Street, Tel Aviv 69719, Israel
(Name,
Telephone, E-mail and/or Facsimile Number and Address of Company Contact
Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title
of Each Class
|
|
Name
of Each Exchange on Which Registered
|
Ordinary
Shares, NIS 0.20 par
value
per share
|
|
NASDAQ
Capital Market
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None.
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None.
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of
May
31, 2008 following the issuer’s one-for-four reverse share split: 5,075,910
Ordinary Shares, NIS 0.20 par value per share. (As of December 31, 2007,
prior
to the reverse split effect, the close of the period covered by this annual
report, there were 16,364,888 Ordinary Shares, NIS 0.05 par value per share)
.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934. Yes
o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer
o
Accelerated
Filer
o
Non-Accelerated
Filer
x
Indicate
by check mark which basis of accounting the registrant has used to prepare
the
financial statements included in this filing:
U.S.
GAAP
x
International
Financial Reporting Standards as issued by the International Accounting
Standards Board
o
Other
o
If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant elected to
follow.
Item
17
o
Item
18
o
If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
INTRODUCTION
RADCOM
develops, manufactures, markets and supports innovative network test and
service
monitoring solutions for communications service providers and equipment vendors.
We were incorporated in 1985 under the laws of the State of Israel and commenced
operations in 1991.
Except
for the historical information contained herein, the statements contained
in
this annual report are forward-looking statements, within the meaning of
the
Private Securities Litigation Reform Act of 1995, with respect to our business,
financial condition and results of operations. 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 “Item 3—Key
Information—Risk Factors” and elsewhere in this annual report.
We
urge
you to consider that statements that use the terms “believe,” “do not believe,”
“expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are
intended to identify forward-looking statements. These statements reflect
our
current views regarding future events and are based on assumptions and are
subject to risks and uncertainties. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
As
used
in this annual report, the terms “we,” “us,” “our,” “RADCOM” and the “Company”
mean RADCOM Ltd. and its subsidiaries, unless otherwise indicated.
PrismLite™,
Omni-Q™, MediaPro™, GearSet™, SipSim™ and Wirespeed™ are our trademarks. All
other trademarks and trade names appearing in this annual report are owned
by
their respective holders.
TABLE
OF
CONTENTS
PART
I
|
1
|
|
ITEM
1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
1
|
|
ITEM
2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
1
|
|
ITEM
3.
|
KEY
INFORMATION
|
1
|
|
|
A.
|
SELECTED
FINANCIAL DATA
|
1
|
|
|
B.
|
CAPITALIZATION
AND INDEBTEDNESS
|
2
|
|
|
C.
|
REASONS
FOR THE OFFER AND USE OF PROCEEDS
|
2
|
|
|
D.
|
RISK
FACTORS
|
3
|
|
ITEM
4.
|
INFORMATION
ON THE COMPANY
|
15
|
|
|
A.
|
HISTORY
AND DEVELOPMENT OF THE COMPANY
|
15
|
|
|
B.
|
BUSINESS
OVERVIEW
|
15
|
|
|
C.
|
ORGANIZATIONAL
STRUCTURE
|
27
|
|
|
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
28
|
|
ITEM
4A.
|
UNRESOLVED
STAFF COMMENTS
|
28
|
|
ITEM
5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
28
|
|
|
A.
|
OPERATING
RESULTS
|
32
|
|
|
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
36
|
|
|
C.
|
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
|
43
|
|
|
D.
|
TREND
INFORMATION
|
43
|
|
|
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
44
|
|
|
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
44
|
|
ITEM
6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
45
|
|
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
45
|
|
|
B.
|
COMPENSATION
|
47
|
|
|
C.
|
BOARD
PRACTICES
|
48
|
|
|
D.
|
EMPLOYEES
|
51
|
|
|
E.
|
SHARE
OWNERSHIP
|
51
|
|
ITEM
7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
52
|
|
|
A.
|
MAJOR
SHAREHOLDERS
|
52
|
|
|
B.
|
RELATED
PARTY TRANSACTIONS
|
53
|
|
|
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
54
|
|
ITEM
8.
|
FINANCIAL
INFORMATION
|
54
|
|
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
54
|
|
|
B.
|
SIGNIFICANT
CHANGES
|
55
|
|
ITEM
9.
|
THE
OFFER AND LISTING
|
56
|
|
|
A.
|
OFFER
AND LISTING DETAILS
|
56
|
|
|
B.
|
PLAN
OF DISTRIBUTION
|
57
|
|
|
C.
|
MARKETS
|
57
|
|
|
D.
|
SELLING
SHAREHOLDERS
|
58
|
|
|
E.
|
DILUTION
|
58
|
|
|
F.
|
EXPENSES
OF THE ISSUE
|
58
|
|
ITEM
10.
|
ADDITIONAL
INFORMATION
|
58
|
|
|
A.
|
SHARE
CAPITAL
|
58
|
|
|
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
58
|
|
|
C.
|
MATERIAL
CONTRACTS
|
64
|
|
|
D.
|
EXCHANGE
CONTROLS
|
64
|
|
|
E.
|
TAXATION
|
64
|
|
|
F.
|
DIVIDENDS
AND PAYING AGENTS
|
76
|
|
|
G.
|
STATEMENT
BY EXPERTS
|
76
|
|
|
H.
|
DOCUMENTS
ON DISPLAY
|
76
|
|
|
I.
|
SUBSIDIARY
INFORMATION
|
77
|
|
ITEM
11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
77
|
|
ITEM
12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
77
|
PART
II
|
77
|
|
ITEM
13.
|
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|
77
|
|
ITEM
14.
|
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
|
77
|
|
ITEM
15T.
|
CONTROLS
AND PROCEDURES
|
78
|
|
ITEM
16A.
|
AUDIT
COMMITTEE FINANCIAL EXPERT
|
80
|
|
ITEM
16B.
|
CODE
OF ETHICS
|
80
|
|
ITEM
16C.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
80
|
|
ITEM
16D.
|
EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
81
|
|
ITEM
16E.
|
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
|
81
|
PART
III
|
81
|
|
ITEM
17.
|
FINANCIAL
STATEMENTS
|
81
|
|
ITEM
18.
|
FINANCIAL
STATEMENTS
|
81
|
|
ITEM
19.
|
EXHIBITS
|
82
|
|
|
SIGNATURES
|
85
|
PART
I
ITEM
1.
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2.
OFFER
STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM
3.
KEY
INFORMATION
A.
SELECTED
FINANCIAL DATA
We
have
derived the following selected consolidated financial data as of
December 31, 2006 and 2007 and for each of the years ended
December 31, 2005, 2006 and 2007 from our consolidated financial statements
and notes included in this annual report. The selected consolidated financial
data as of December 31, 2003, 2004 and 2005 and for the years ended
December 31, 2003 and 2004 have been derived from audited consolidated
financial statements not included in this annual report. We prepare our
consolidated financial statements in accordance with accounting principles
generally accepted in the United States.
You
should read the selected consolidated financial data together with “Item
5—Operating and Financial Review and Prospects” and our consolidated financial
statements and related notes included elsewhere in this annual report. All
references to “dollar,” “dollars” or “$” in this annual report are to the “U.S.
dollar” or “U.S. dollars.” All references to “NIS” are to the New Israeli
Shekels.
|
|
Year
Ended December 31,
|
|
|
|
(in thousands of U.S. dollars – except weighted average number of ordinary shares, and
basic and diluted income (loss) per ordinary share)
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
10,228
|
|
$
|
13,956
|
|
$
|
20,514
|
|
$
|
20,641
|
|
$
|
10,158
|
|
Services
|
|
|
975
|
|
|
2,099
|
|
|
1,826
|
|
|
2,900
|
|
|
3339
|
|
|
|
|
11,203
|
|
|
16,055
|
|
|
22,340
|
|
|
23,541
|
|
|
13,497
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,854
|
|
|
5,045
|
|
|
7,290
|
|
|
7,213
|
|
|
4,927
|
|
Services
|
|
|
40
|
|
|
82
|
|
|
108
|
|
|
183
|
|
|
466
|
|
|
|
|
4,894
|
|
|
5,127
|
|
|
7,398
|
|
|
7,396
|
|
|
5,393
|
|
Gross
profit
|
|
|
6,309
|
|
|
10,928
|
|
|
14,942
|
|
|
16,145
|
|
|
8,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
5,593
|
|
|
5,232
|
|
|
5,815
|
|
|
6,826
|
|
|
7,378
|
|
Less
- royalty-bearing participation
|
|
|
1,997
|
|
|
1,722
|
|
|
1,735
|
|
|
1,904
|
|
|
2,096
|
|
Research
and development, net
|
|
|
3,596
|
|
|
3,510
|
|
|
4,080
|
|
|
4,922
|
|
|
5,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
7,411
|
|
|
6,983
|
|
|
7,881
|
|
|
9,196
|
|
|
9,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,620
|
|
|
2,191
|
|
|
1,689
|
|
|
2,553
|
|
|
2,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
12,627
|
|
|
12,684
|
|
|
13,650
|
|
|
16,671
|
|
|
16,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(6,318
|
)
|
|
(1,756
|
)
|
|
1,292
|
|
|
(526
|
)
|
|
(8,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
income, net
|
|
|
93
|
|
|
78
|
|
|
235
|
|
|
472
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(6,225
|
)
|
|
(1,678
|
)
|
|
1,527
|
|
|
(54
|
)
|
|
(8,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per ordinary share
|
|
$
|
(2.37
|
)
|
$
|
(0.50
|
)
|
$
|
0.42
|
|
$
|
(0.01
|
)
|
$
|
(2.10
|
)
|
Weighted
average number of ordinary shares used to compute basic net income
(loss)
per ordinary share
|
|
|
2,623,296
|
|
|
3,363,377
|
|
|
3,674,023
|
|
|
3,973,509
|
|
|
4,084,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per ordinary share
|
|
$
|
(2.37
|
)
|
$
|
(0.50
|
)
|
$
|
0.39
|
|
$
|
(0.01
|
)
|
$
|
(2.10
|
)
|
Weighted
average number of ordinary shares used to compute diluted net income
(loss) per ordinary share
|
|
|
2,623,296
|
|
|
3,363,377
|
|
|
3,890,396
|
|
|
3,973,509
|
|
|
4,084,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
5,702
|
|
$
|
10,051
|
|
$
|
12,987
|
|
$
|
15,783
|
|
$
|
7,303
|
|
Total
assets
|
|
$
|
14,403
|
|
$
|
20,129
|
|
$
|
23,790
|
|
$
|
27,753
|
|
$
|
18,896
|
|
Shareholders’
equity
|
|
$
|
6,246
|
|
$
|
10,024
|
|
$
|
12,485
|
|
$
|
15,373
|
|
$
|
7,578
|
|
Share
capital
|
|
$
|
57
|
|
$
|
101
|
|
$
|
107
|
|
$
|
120
|
|
$
|
122
|
|
|
B.
|
CAPITALIZATION
AND INDEBTEDNESS
|
Not
applicable
.
|
C.
|
REASONS
FOR THE OFFER AND USE OF
PROCEEDS
|
Not
applicable.
D.
RISK FACTORS
Our
business, operating results and financial condition could be seriously harmed
due to any of the following risks, among others. If we do not successfully
address the risks to which we are subject, we could experience a material
adverse effect on our business, results of operations and financial condition
and our share price may decline. We cannot assure you that we will successfully
address any of these risks.
Risks
Related to Our Business and Our Industry
We
may incur losses in the future.
Although
we had net income in the fiscal year ended December 31, 2005, in the fiscal
years ended December 31, 2006 and 2007, we incurred losses, and we also incurred
a loss in the first quarter of 2008 of $0.9 million. We may incur losses
in the
future, which could materially affect our cash, liquidity and adversely affect
the value and market price of our shares. See item 5.B, Liquidity and Capital
Resources for further discussion.
We
have a history of quarterly fluctuations and unpredictability in our results
of
operations and expect these fluctuations to continue. This may cause our
stock
price to decline.
We
have
experienced and expect to experience in the future significant fluctuations
in
our quarterly results of operations. Factors that may contribute to fluctuations
in our quarterly results of operations include:
|
·
|
the
variation in size and timing of individual purchases by our customers;
|
|
·
|
absence
of long-term customer purchase contracts;
|
|
·
|
seasonal
factors that may affect capital spending by customers, such as
the varying
fiscal year-ends of customers and the reduction in business during
the
summer months, particularly in Europe;
|
|
·
|
the
relatively long sale cycles for our products;
|
|
·
|
competitive
conditions in our markets;
|
|
·
|
the
timing of the introduction and market acceptance of new products
or
product enhancements by us and by our customers, competitors and
suppliers;
|
|
·
|
changes
in the level of operating expenses relative to revenues;
|
|
·
|
product
quality problems;
|
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changes
in global or regional economic conditions or in the telecommunications
industry;
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delays
in purchasing decisions or customer orders due to customer consolidation;
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changes
in the mix of products sold; and
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size
and timing of approval of grants from the Government of
Israel.
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We
believe, therefore, that period-to-period comparisons of our operating results
should not be relied upon as a reliable indication of future
performance.
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Our
revenues in any period generally have been, and may continue to
be,
derived from a relatively small number of orders with relatively
high
average revenues per order. Therefore, the loss of any order or
a delay in
closing a transaction could have a more significant impact on our
quarterly revenues and results of operations than on those of companies
with relatively high volumes of sales or low revenues per order.
Our
products generally are shipped within 15 to 30 days after orders
are
received. As a result, we generally do not have a significant backlog
of
orders, and revenues in any quarter are substantially dependent
on orders
booked, shipped and installed in that quarter.
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We
may
experience a delay in generating or recognizing revenues for a number of
reasons
and based on revenue recognition accounting requirements. Unfulfilled orders
at
the beginning of each quarter are typically substantially less than our expected
revenues for that quarter. Therefore, we depend on obtaining orders in a
quarter
for shipment in that quarter to achieve our revenue objectives. Moreover,
demand
for our products may fluctuate as a result of seasonality.
Our
revenues for a particular period may also be difficult to predict and may
be
adversely affected if we experience a non-linear (back-end loaded) sales
pattern
during the period. We generally experience significantly higher levels of
sales
towards the end of a period as a result of customers submitting their orders
late in the period or as a result of manufacturing issues or component shortages
which may delay shipments. Such non-linearity in shipments can increase costs,
as irregular shipment patterns result in periods of underutilized capacity
and
periods when overtime expenses may be incurred, and also lead to additional
costs associated with inventory planning and management. Furthermore, orders
received towards the end of the period may not ship within the period due
to our
manufacturing lead times.
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Except
for our cost of revenues, most of our costs, including personnel
and
facilities costs, are relatively fixed at levels based on anticipated
revenue. As a result, a decline in revenue from even a limited
number of
orders could result in our failure to achieve expected revenue
in any
quarter and unanticipated variations in the timing of realization
of
revenue could cause significant variations in our quarterly operating
results and could result in losses.
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If
our revenues in any quarter remain level or decline in comparison
to any
prior quarter, our financial results could be materially adversely
affected. In addition, if we do not reduce our expenses in a timely
manner
in response to level or declining revenues, our financial results
for that
quarter could be materially adversely affected.
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Due
to the factors described above, as well as other unanticipated
factors, in
future quarters our results of operations could fail to meet the
expectations of public market analysts or investors. If this occurs,
the
price of our ordinary shares may fall.
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A
slowdown in the telecommunications industry generally, or in the sectors
of the
industry that we target (currently primarily 3G and 3.5G Cellular and
triple-play networks), could materially adversely affect our revenues and
results of operations.
Our
future success is dependent upon the continued growth of the telecommunications
industry. The global telecommunications industry is evolving rapidly, and
it is
difficult to predict its potential growth rate or future trends in technology
development. The deregulation, privatization and economic globalization of
the
worldwide telecommunications market that have resulted in increased competition
and escalating demand for new technologies and services may not continue
in a
manner favorable to us or our business strategies. In addition, the growth
in
demand for Internet services and the resulting need for high speed or enhanced
telecommunications equipment may not continue at its current rate or at all.
Our
future success depends upon the increased utilization of our test solutions
by
next-generation network operators and telecommunications equipment vendors.
Industry-wide network equipment and infrastructure development driving the
demand for our products and services may be delayed or prevented by a variety
of
factors, including cost, regulatory obstacles or the lack of, or reduction
in,
consumer demand for advanced telecommunications products and services.
Telecommunications equipment vendors and network operators may not develop
new
technology or enhance current technology. Further, any such new technology
or
enhancements may not lead to greater demand for our products.
Continued
negative trends and factors affecting the telecommunications industry
specifically and the economy in general may result in reduced demand and
pricing
pressure on our products.
Negative
trends and factors affecting the telecommunications industry specifically
and
the economy in general over the past several years have negatively affected
our
results of operations. As a result of the build-up of capacity by
telecommunications companies in the late 1990s, the telecommunications sector
has been facing significant challenges from excess capacity, new technologies
and intense price competition. This excess network capacity, combined with
the
failure of many competitors in the telecommunications sector, has contributed
to
delayed adoption of next-generation cellular and wireline networks. In addition,
weak economic conditions that started during the second half of 2007 resulted
in
reduced capital expenditures, reluctance to commit to long-term capital outlays
and longer sales processes for network procurements by our customers. Although
this trend has abated, we cannot predict the duration of the improvement
or the
impact it may have on our results of operations. Furthermore, during 2007,
we
were affected by a slowdown in the pace of new 3G and 3.5G Cellular deployments.
Generally, if economic growth in the United States and other countries’
economies is slowed, many customers may delay or reduce technology purchases.
This could result in reductions in sales of our products, longer sales cycles,
slower adoption of new technologies and increased price competition. In
addition, weakness in the end-user market could negatively affect the cash
flow
of our distributors and resellers who could, in turn, delay paying their
obligations to us. This would increase our credit risk exposure and cause
delays
in our recognition of revenues on future sales to these customers. Any of
these
events would likely harm our business, operating results and financial
condition. If global economic and market conditions, or economic conditions
in
the United States or other key markets deteriorate, we may experience material
impacts on our business, operating results, and financial condition. Finally,
an
overall trend toward industry consolidation and rationalization among our
customers, competitors and suppliers can affect our business, especially
if any
of the sectors we service or the countries or regions in which we do business
are affected. Industry consolidation may slow down the implementation of
new
systems and technologies. Any future weakness in the economy or the
telecommunications industry could affect us through reduced demand for our
products, leading to a reduction in revenues and a material adverse effect
on
our business and results of operations.
The
market for our products is characterized by changing technology, requirements,
standards and products, and we may be materially adversely affected if we
do not
respond promptly and effectively to such changes.
The
telecommunications market for our products is characterized by rapidly changing
technology, changing customer requirements, evolving industry standards and
frequent new product introductions, certain changes of which could reduce
the
market for our products or require us to develop new products. For example,
the
new IPTV market required us to develop a new product to keep ahead with customer
requirements.
New
or
enhanced telecommunications and data communications-related products developed
by other companies could be incompatible with our products. Therefore, our
timely access to information concerning, and our ability to anticipate, changes
in technology and customer requirements and the emergence of new industry
standards, as well as our ability to develop, manufacture and market new
and
enhanced products successfully and on a timely basis, will be significant
factors in our ability to remain competitive. For example, many of our strategic
initiatives and investments are aimed at meeting the requirements of application
providers of 3G and 3.5G Cellular and triple-play networks. If networking
evolves toward greater emphasis on application providers, we believe we have
positioned ourselves well relative to our key competitors. If it does not,
however, our initiatives and investments in this area may be of no or limited
value. As a result we cannot quantify the impact of new product introductions
on
our future operations.
In
addition, as a result of the need to develop new and enhanced products, we
expect to continue making investments in research and development before
or
after product introductions. Some of our research and development activities
relate to long-term projects, and these activities may fail to achieve their
technical or business targets and may be terminated at any point, and revenues
expected from these activities may not be received for a substantial time,
if at
all.
Our
inventory may become obsolete or unusable.
We
make
advance purchases of various component parts in relatively large quantities
to
ensure that we have an adequate and readily available supply. Our failure
to
accurately project our needs for these components and the demand for our
products that incorporate them, or changes in our business strategy or
technology that reduce our need for these components, could result in these
components becoming obsolete prior to their intended use or otherwise unusable
in our business. This would result in a write-off of inventories for these
components.
Any
reversal or slowdown in deregulation of telecommunications markets could
materially harm the markets for our products.
Future
growth in the markets for our products will depend, in part, on the continued
privatization, deregulation and the restructuring of telecommunications markets
worldwide, as the demand for our products is generally higher when a competitive
environment exists. Any reversal or slowdown in the pace of this privatization,
deregulation or restructuring could materially harm the markets for our
products. Moreover, the consequences of deregulation are subject to many
uncertainties, including judicial and administrative proceedings that affect
the
pace at which the changes contemplated by deregulation occur, and other
regulatory, economic and political factors. Furthermore, the uncertainties
associated with deregulation have in the past, and could in the future, cause
our customers to delay purchasing decisions pending the resolution of these
uncertainties.
Our
business could be harmed if we were to lose the services of one or more members
of our senior management team, or if we are unable to attract and retain
qualified personnel.
Our
future growth and success depends to a significant extent upon the continuing
services of our executive officers and other key employees. We do not have
long-term employment agreements or non-competition agreements with any of
our
employees. Competition for qualified management and other high-level
telecommunications industry personnel is intense, and we may not be successful
in attracting and retaining qualified personnel. If we lose the services
of any
key employees, we may not be able to manage our business successfully or
to
achieve our business objectives.
Our
success also depends on our ability to identify, attract and retain qualified
technical, sales, finance and management personnel. We have experienced,
and may
continue to experience, difficulties in hiring and retaining candidates with
appropriate qualifications. If we do not succeed in hiring and retaining
candidates with appropriate qualifications, our revenues and product development
efforts could be harmed.
We
may lose significant market share as a result of intense competition in the
markets for our existing and future products.
Many
companies compete with us in the market for network testing and service
monitoring solutions. We expect that competition will increase in the future,
both with respect to products that we currently offer and products that we
are
developing. Moreover, manufacturers of data communications and
telecommunications equipment, which are current and potential customers of
ours,
may in the future incorporate into their products capabilities similar to
ours,
which would reduce the demand for our products. In addition, affiliates of
ours
that currently provide services to us may, in the future, compete with us.
Many
of
our existing and potential competitors have substantially greater resources,
including financial, technological, engineering, manufacturing and marketing
and
distribution capabilities, and several of them may enjoy greater market
recognition than us. We may not be able to compete effectively with our
competitors. A failure to do so could adversely affect our revenues and
profitability.
We
are dependent upon the success of distributors and sales representatives
who are
under no obligation to distribute our products.
We
are
highly dependent upon our distributors for their active marketing and sales
efforts and for the distribution of our products and sales representatives
in
North America to a lesser degree. Many of our distributors outside of North
America and China are the only entities engaged in the distribution of our
products in their respective geographical areas. Typically, our arrangements
with them do not prevent our distributors from distributing competing products,
or require them to distribute our products in the future. Our distributors
may
not give a high priority to marketing and supporting our products. Our results
of operations could be materially adversely affected by changes in the financial
situation, business or marketing strategies of our distributors. Any such
changes could occur suddenly and rapidly.
We
may lose customers and/or distributors on whom we currently depend and we
may
not succeed in developing new distribution channels.
We
had
one customer in North America who accounted for more than 10% of our sales
in
each of 2005 and 2006. This customer reduced its orders in 2007, thereby
accounting for less than 10% of our sales, which caused a decrease in our
operating results.
Our
seven
largest distributors accounted for a total of approximately 36.1% of our
sales
in 2005, 40.7% of our sales in 2006 and 39.3% of our sales in 2007. One of
our
largest distributors in Europe accounted for about 10% of our sales in 2005.
None of our distributors accounted for more than 10% of our sales in 2006
or
2007.
If
we
terminate or lose any of our distributors or if they downsize significantly,
we
may not be successful in replacing them on a timely basis, or at all. Any
changes in our distribution and sales channels, particularly the loss of
a major
distributor or our inability to establish effective distribution and sales
channels for new products, will impact our ability to sell our products and
result in a loss of revenues.
We
could be subject to warranty claims and product recalls, which could be very
expensive and harm our financial condition.
Products
as complex as ours sometimes contain undetected errors. These errors can
cause
delays in product introductions or require design modifications. In addition,
we
are dependent on other suppliers for key components that are incorporated
in our
products. Defects in systems in which our products are deployed, whether
resulting from faults in our products or products supplied by others, due
to
faulty installation or any other cause, may result in customer dissatisfaction,
product return and, potentially, product liability claims being filed against
us. Our warranties permit customers to return defective products for repair.
The
warranty period is for one year. Any failure of a system in which our products
are deployed (whether or not our products are the cause), any product recall
or
product liability claims with any associated negative publicity, could result
in
the loss of, or delay in, market acceptance of our products and harm to our
business.
We
incorporate open source technology in our products, which may expose us to
liability and have a material impact on our product development and
sales.
Some
of
our products utilize open source technologies. These technologies are licensed
to us on varying license structures, including the General Public License.
This
license and others like it pose a potential risk to products in the event
they
are inappropriately integrated. In the event that we have not, or do not
in the
future, properly integrate software that is subject to such licenses into
our
products, we may be required to disclose our own source code to the public,
which could enable our competitors to eliminate any technological advantage
that
our products may have over theirs. Any such requirement to disclose our source
code or other confidential information related to our products could, therefore,
materially adversely affect our competitive advantage and impact our business
results of operations and financial condition.
We
depend on limited sources for key components and if we are unable to obtain
these components when needed, we will experience delays in manufacturing
our
products.
We
currently obtain key components for our products from either a single supplier
or a limited number of suppliers. We do not have long-term supply contracts
with
any of our existing suppliers. This presents the following risks:
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Delays
in delivery or shortages in components could interrupt and delay
manufacturing and result in cancellations of orders for our
products.
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Suppliers
could increase component prices significantly and with immediate
effect.
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We
may not be able to locate alternative sources for product
components.
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Suppliers
could discontinue the manufacture or supply of components used
in our
products. This may require us to modify our products, which may
cause
delays in product shipments, increased manufacturing costs and
increased
product prices.
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We
may be required to hold more inventory than would be immediately
required
in order to avoid problems from shortages or discontinuance
.
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We
have experienced delays and shortages in the supply of components
on more
than one occasion in the past. This resulted in delays in our delivering
products to our customers.
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We
depend on a limited number of independent manufacturers, which reduces our
ability to control our manufacturing process.
We
rely
on a limited number of independent manufacturers, some of which are small,
privately held companies, to provide certain assembly services to our
specifications. We do not have any long-term supply agreements with any
third-party manufacturer. If our assembly services are reduced or interrupted,
our business, financial condition and results of operations could be adversely
affected until we are able to establish sufficient assembly services supply
from
alternative sources. Alternative manufacturing sources may not be able to
meet
our future requirements, and existing or alternative sources may not continue
to
be available to us at favorable prices.
If
we do not effectively manage our planned growth, our business and operating
results could be adversely affected.
Our
planned growth has placed, and is expected to continue to place, significant
demands on our management and our administrative and operational resources.
To
manage our planned expansion effectively, we need to continue to develop
and
improve our operational and financial systems, sales and marketing capabilities
and expand, train, retain, manage and motivate our employee base. Our systems,
procedures or controls may not be adequate to support our operations and
our
management may not be able to successfully exploit future market opportunities,
including, without limitation, strategic partnerships and joint ventures,
or
successfully manage our relationships with customers and other third parties.
We
may not continue to grow and, if we do, we may not effectively manage such
planned growth. Any failure to manage planned growth
could
have an adverse effect on our business, financial condition and results of
operations.
Our
proprietary technology is difficult to protect and unauthorized use of our
proprietary technology by third parties may impair our ability to compete
effectively.
Our
success and ability to compete depend in large part upon protecting our
proprietary technology. We rely upon a combination of contractual rights,
software licenses, trade secrets, copyrights, nondisclosure agreements and
technical measures to establish and protect our intellectual property rights
in
our products and technologies. In addition, we sometimes enter into
non-competition, non-disclosure and confidentiality agreements with our
employees, distributors and manufacturers’ representatives, and certain
suppliers with access to sensitive information. However, we have no registered
patents, and these measures may not be adequate to protect our technology
from
third-party infringement. Moreover, pursuant to current U.S. and Israeli
laws,
we may not be able to enforce certain existing non-competition agreements.
Additionally, effective trademark, patent and trade secret protection may
not be
available in every country in which we offer, or intend to offer, our
products.
We
may be subject to litigation, including without limitation, regarding
infringement claims or claims that we have violated intellectual property
rights, which could seriously harm our business.
Third
parties may from time to time assert against us infringement claims or claims
that we have violated a patent or infringed a copyright, trademark or other
proprietary right belonging to them. If such infringement were found to exist,
we might be required to modify our products or intellectual property or obtain
a
license or right to use such technology or intellectual property. Any
infringement claim, even if not meritorious, could result in the expenditure
of
significant financial and managerial resources.
Yehuda
Zisapel and Zohar Zisapel, beneficially own approximately 39.3% of our ordinary
shares and therefore have significant influence over the outcome of matters
requiring shareholder approval, including the election of
directors.
As
of May
31, 2008, Yehuda Zisapel and Zohar Zisapel (our Chairman of the Board of
Directors), who are brothers, beneficially owned an aggregate of
1,993,447
ordinary shares, representing approximately 39.3% of the ordinary shares.
As a
result, Yehuda Zisapel and Zohar Zisapel have significant influence over
the
outcome of various actions that require shareholder approval, including the
election of our directors. In addition, Yehuda Zisapel and Zohar Zisapel
may be
able to delay or prevent a transaction in which shareholders might receive
a
premium over the prevailing market price for their shares and prevent changes
in
control of management.
We
engage in transactions, and compete, with companies controlled by Yehuda
Zisapel
and Zohar Zisapel, which may result in potential
conflicts.
We
are
engaged in, and expect to continue to be engaged in, numerous transactions
with
companies controlled by Yehuda Zisapel and Zohar Zisapel. We believe that
such
transactions are beneficial to us and are generally conducted upon terms
that
are no less favorable to us than would be available from unaffiliated third
parties. Nevertheless, these transactions may result in a conflict of interest
between what is best for us and the interests of the other parties in such
transactions. In addition, several products of such affiliated companies
may be
used in place of our products, and it is possible that direct competition
between us and one or more of such affiliated companies may develop in the
future. Moreover, opportunities to develop, manufacture, or sell new products
(or otherwise enter new fields) may arise in the future and be pursued by
one or
more affiliated companies instead of or in competition with us. This could
materially adversely affect our business and results of operations.
We
may encounter difficulties with our international operations and sales which
could affect our results of operations.
While
we
are headquartered in Israel, approximately 96.6% of our sales in 2005, 98.5%
of
our sales in 2006 and 96.4% of our sales in 2007 were generated outside of
Israel, including in North America, Europe, Asia, South America and Australia.
This subjects us to many risks inherent in international business activities,
including:
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national
standardization and certification requirements and changes in tax
law and
regulatory requirements;
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longer
sales cycles, especially upon entry into a new geographic
market;
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export
license requirements;
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economic
or political instability;
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greater
difficulty in safeguarding intellectual property;
and
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difficulty
in managing overseas subsidiaries, branches or international
operations.
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We
may
encounter significant difficulties in connection with the sale of our products
in international markets as a result of one or more of these factors. In
particular, the significant devaluation of the U.S. dollar vis-à-vis the NIS
during 2007 had and may continue to have an adverse effect on our operations,
as
we derive most of our revenues in U.S. dollars while we incur most of our
expenses in NIS.
Any
inability to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding
internal control attestation may negatively impact the report on our financial
statements to be provided by our independent auditors.
We
are
subject to the reporting requirements of the United States Securities and
Exchange Commission (the “SEC”). The SEC, as directed by Section 404 of the
United States Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), adopted
rules requiring public companies to include a report of management on the
Company’s internal control over financial reporting in its annual report on Form
10-K or Form 20-F, as the case may be, that contains an assessment by management
of the effectiveness of the Company’s internal control over financial reporting.
In addition, the Company’s independent registered public accountants must attest
to and report on management’s assessment of the effectiveness of the Company’s
internal control over financial reporting. Our management may not conclude
that
our internal controls over financial reporting are effective. Moreover, even
if
our management does conclude that our internal controls over financial reporting
are effective, if the independent accountants are not satisfied with our
internal controls, the level at which our controls are documented, designed,
operated or reviewed, or if the independent accountants interpret the
requirements, rules or regulations differently from us, they may issue an
adverse opinion on our internal control over financial reporting. Any of
these
possible outcomes could result in a loss of investor confidence in the
reliability of our financial statements, which could negatively impact the
market price of our shares.
As
a
non-accelerated filer, we must now comply with the annual disclosure
requirements of Section 404 regarding management’s report on internal control
over financial reporting. Pursuant to Section 404(b), we will be required
to
provide an independent auditor’s attestation in the 2009 annual report, i.e.,
for the year ended December 31, 2009.
If
we
determine that we are not in compliance with Section 404, we may be
required to implement new internal control procedures and re-evaluate our
financial reporting. We may experience higher than anticipated operating
expenses as well as outside auditor fees during the implementation of these
changes and thereafter. Further, we may need to hire additional qualified
personnel in order for us to be compliant 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
conclusion that our internal controls over financial reporting are not
effective.
Our
adoption of SFAS 123(R) will result in ongoing accounting charges that will
significantly reduce our net income.
In
December 2004, the Financial Accounting Standards Board (the “FASB”) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires all companies to measure compensation
expense for all share-based payments (including employee stock options) at
fair
value, and which became effective for public companies for annual reporting
periods of fiscal years beginning after June 15, 2005. Our adoption of SFAS
123(R) required us to record an expense of $564,000 for stock-based compensation
plans during 2007 and will continue to result in ongoing accounting charges
that
will significantly reduce our net income. See Note 6 of our Notes to the
Consolidated Financial Statements for further information.
If
we are characterized as a passive foreign investment company, our U.S.
shareholders may suffer adverse tax consequences.
As
more
fully described below in “Item 10—Additional Information—Taxation—United States
Federal Income Tax Considerations—Taxation of Ordinary Shares—Passive Foreign
Investment Company Status,” if for any taxable year our passive income, or our
assets that produce (or are held for the production of) passive income, exceed
specified levels, we may be characterized as a passive foreign investment
company (“PFIC”) for U.S. federal income tax purposes. This characterization
could result in adverse U.S. tax consequences to our U.S. shareholders,
including gain on the disposition of our ordinary shares being treated as
ordinary income and any resulting U.S. federal income tax being increased
by an
interest charge. Rules similar to those applicable to dispositions generally
will apply to certain “excess distributions” in respect of our ordinary shares.
We believe that we were not a PFIC for 2007 based upon our income, assets,
activities and market capitalization during such year. However, there are
no
assurances that the IRS will agree with our conclusion or that we will not
become a PFIC in subsequent taxable years. U.S. shareholders should consult
with
their own U.S. tax advisors with respect to the U.S. tax consequences of
investing in our ordinary shares.
Volatility
of the market price of our ordinary shares could adversely affect us and
our
shareholders.
The
market price of our ordinary shares has been and is likely to continue to
be
highly volatile and could be subject to wide fluctuations in response to
numerous factors, including the following:
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market
conditions or trends in our
industry;
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political,
economic and other developments in the State of Israel and
worldwide;
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actual
or anticipated variations in our quarterly operating results or
those of
our competitors;
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announcements
by us or our competitors of technological innovations or new and
enhanced
products;
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changes
in the market valuations of our
competitors;
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announcements
by us or our competitors of significant
acquisitions;
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entry
into strategic partnerships or joint ventures by us or our competitors;
and
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additions
or departures of key personnel.
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In
addition, the stock market in general, and the market for Israeli and technology
companies in particular, has been highly volatile. Many of these factors
are
beyond our control and may materially adversely affect the market price of
our
ordinary shares, regardless of our performance. Shareholders may not be able
to
resell their ordinary shares following periods of volatility because of the
market’s adverse reaction to such volatility and we may not be able to raise
capital through an offering of securities.
From
time to time we may need to raise financing. If adequate funds are not available
on terms favorable to us or to our shareholders, our operations and growth
strategy will be materially adversely affected.
From
time
to time we may be required to raise financing in connection with our operations
and growth strategy. We do not know whether additional financing will be
available when needed, or whether it will be available on terms favorable
to us.
If adequate funds are not available on terms favorable to us or to our
shareholders, our operations and growth strategy will be materially adversely
affected.
We
might not satisfy all the requirements for continued listing on the NASDAQ
Capital Market, and our shares may be delisted.
Following
a one-to-four reverse share split that we effected on June 16, 2008, we are
currently in compliance with all requirements for continued listing on the
NASDAQ Capital Market, to which we transferred from the NASDAQ Global Market
on
October 1, 2007. We cannot assure you, however, that we will maintain such
compliance over the long term or that we will be able to maintain compliance
with all of the continued listing requirements for the NASDAQ Capital Market.
If
we fail to comply with any of the continued listing requirements, we could
be
delisted from the NASDAQ Capital Market. Our shares would then be quoted
on the
Over-The-Counter Bulletin Board (assuming we satisfied the continued listing
requirements for that quotation system). During 2007 and 2008, our share
price
decreased below the required minimum bid price. In addition, in 2007, we
fell
below the minimum $10 million shareholders’ equity requirement of the NASDAQ
Global Market and we had to transfer to the NASDAQ Capital Market in order
to
continue to be listed on NASDAQ. The post-reverse share split price of our
ordinary share is approximately $2.50 as of June 1, 2008; however, if our
share
price continues to decline we might be unable to satisfy the NASDAQ Capital
Market continued listing requirements, including its minimum bid price of
a $1
per share.
Risks
Relating to Our Location in Israel
Conditions
in Israel affect our operations and may limit our ability to produce and
sell
our products.
We
are
incorporated under Israeli law and our principal offices and manufacturing
and
research and development facilities are located in the State of Israel.
Political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel in 1948, a number
of
armed conflicts have taken place between Israel and its Arab neighbors, and
a
state of hostility, varying in degree and intensity, has led to security
and
economic problems for Israel. We could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel
and
its trading partners, a significant increase in inflation, or a significant
downturn in the economic or financial condition of Israel. Since
October 2000, there has been a marked increase in hostilities between
Israel and the Palestinians, which has adversely affected the peace process
and
has negatively influenced Israel’s relationship with several Arab countries.
Also, the political and security situation in Israel may result in certain
parties with whom we have contracts claiming that they are not obligated
to
perform their commitments pursuant to force majeure provisions of those
contracts. In January 2006, Hamas, an Islamic movement responsible for many
attacks against Israelis, won the majority of the seats in the Parliament
of the
Palestinian Authority. The election of a majority of Hamas-supported candidates
is expected to be a major obstacle to relations between Israel and the
Palestinian Authority, as well as to the stability in the Middle East as
a
whole. During the third quarter of 2006, Israel was engaged in war with the
Hezballah in Lebanon; however, the war did not materially affect the Company’s
results. There have been e
xtensive
hostilities along Israel's border with the Gaza Strip since June 2007 when
the
Hamas effectively took control of the Gaza Strip.
Further
escalation has occurred during 2008.
Since
our
manufacturing facilities are located exclusively in Israel, we could experience
disruption of our manufacturing due to acts of terrorism or any other
hostilities involving or threatening Israel. If an attack were to occur,
any
Israeli military response that results in the call to duty of the country’s
reservists (as further discussed below) could affect the performance of our
Israeli facilities for the short term. Our business interruption insurance
may
not adequately compensate us for losses that may occur and any losses or
damages
incurred by us could have a material adverse effect on our business. We do
not
believe that the political and security situation has had any material impact
on
our business to date; however, we can give no assurance that it will have
no
such effect in the future.
Some
neighboring countries, as well as certain companies and organizations, continue
to participate in a boycott of Israeli firms and others doing business with
Israel or with Israeli companies. We are also precluded from marketing our
products to certain of these countries due to U.S. and Israeli regulatory
restrictions. Because none of our revenue is currently derived from sales
to
these countries, we believe that the boycott has not had a material adverse
effect on us. However, restrictive laws, policies or practices directed towards
Israel or Israeli businesses could have an adverse impact on the expansion
of
our business.
All
male
adult citizens and permanent residents of Israel under the age of 51 are,
unless
exempt, obligated to perform military reserve duty annually. Additionally,
these
residents are subject to being called to active duty at any time under emergency
circumstances. Many of our officers and employees are currently obligated
to
perform annual reserve duty. Given these requirements, we believe that we
have
operated relatively efficiently since beginning operations in 1991 and since
increased hostilities with the Palestinians beginning in October 2000. In
addition, our operations were not materially affected by the war with Lebanon
that took place during the third quarter of 2006. However, we cannot assess
what
the full impact of these requirements on our workforce or business would
be if
the situation with the Palestinians changed, and we cannot predict the effect
on
our business operations of any expansion or reduction of these military reserve
requirements.
We
may be adversely affected if the rate of inflation in Israel exceeds the
rate of
devaluation of the New Israeli Shekel against the dollar, and if the value
of
the New Israeli Shekel against the dollar increases.
A
portion
of our expenses, primarily labor expenses, is incurred in NIS. As a result,
we
are exposed to the risk that the rate of inflation in Israel will exceed
the
rate of devaluation of the NIS in relation to the dollar or that the timing
of
this devaluation will lag behind inflation in Israel. Further, during 2007
the
dollar decreased in value relative to the NIS by about 9%. This trend has
continued during the first five months of 2008 by an additional devaluation
of
the dollar relative to the NIS by about 10% . If this trend towards devaluation
continues, it, coupled with a high inflation rate in Israel, may result in
higher dollar costs for our operations in Israel, adversely affecting our
dollar-measured results of operations.
We
currently benefit from government programs and tax benefits that may be
discontinued or reduced.
We
currently receive grants and potential tax benefits under Government of Israel
programs. In order to maintain our eligibility for these programs and benefits,
we must continue to meet specific conditions, including making specific
investments in fixed assets and paying royalties with respect to grants
received. In addition, some of these programs restrict our ability to
manufacture particular products outside of Israel or to transfer particular
technology. If we fail to comply with these conditions in the future, the
benefits received could be canceled and we could be required to refund any
payments previously received under these programs, or pay increased taxes.
The
Government of Israel has reduced the benefits available under these programs
in
recent years and these programs and tax benefits may be discontinued or
curtailed in the future. If we do not receive these grants in the future,
we
will have to allocate funds to product development at the expense of other
operational costs. The amount, if any, by which our taxes will increase depends
upon the rate of any tax increase, the amount of any tax benefit reduction
and
the amount of any taxable income that we may earn in the future. If the
Government of Israel ends these programs and tax benefits, our business,
financial condition and results of operations could be materially adversely
affected.
Provisions
of Israeli law may delay, prevent or make difficult a merger or acquisition
of
us, which could prevent a change of control and depress the market price
of our
shares.
The
Israeli Companies Law (the “Companies Law”) generally requires that a merger be
approved by a company’s board of directors and by a majority of the shares
voting on the proposed merger. Unless a court rules otherwise, the statutory
merger will not be deemed approved if shares representing a majority of the
voting power present at the shareholders meeting, and which are not held
by the
potential merger partner (or by any person who holds 25% or more of the shares
of capital stock or the right to appoint 25% or more of the directors of
the
potential merger partner or its general manager), vote against the merger.
Upon
the request of any creditor of a party to the proposed merger, a court may
delay
or prevent the merger if it concludes that there is a reasonable concern
that,
as a result of the merger, the surviving company will be unable to satisfy
its
obligations. In addition, a merger may generally not be completed unless
at
least (i) 50 days have passed since the filing of the merger proposal with
the
Israeli Registrar of Companies by each of the merging companies, and (ii)
30
days have passed since the merger was approved by the shareholders of each
of
the parties to the merger.
Finally,
Israeli tax law treats some acquisitions, such as stock-for-stock exchanges
between an Israeli company and a foreign company less favorably than do U.S.
tax
laws. For example, Israeli tax law may, under certain circumstances, subject
a
shareholder who exchanges his ordinary shares for shares in another corporation
to taxation prior to the sale of the shares received in such a stock-for-stock
swap.
These
provisions of Israeli corporate and tax law and the uncertainties surrounding
such law may have the effect of delaying, preventing or making more difficult
a
merger with us or an acquisition of us. This result could prevent a change
of
control over us and depress our ordinary shares’ market price which otherwise
might rise as a result of such a change of control.
It
may be difficult to (i) effect service of process, (ii) assert
U.S. securities laws claims and (iii) enforce U.S. judgments in Israel
against directors, officers and auditors named in this annual
report.
We
are
incorporated in Israel. All of our executive officers and directors named
in
this annual report are non-residents of the United States, except for Avi
Zamir
who is a resident of the United States. A substantial portion of our assets
and
the assets of such persons are located outside the United States. Therefore,
it
may be difficult to enforce a judgment obtained in the United States against
us
or any of those persons or to effect service of process upon those persons.
It
may also be difficult to enforce civil liabilities under U.S. federal securities
laws in original actions instituted in Israel.
Our
ordinary shares are listed for trading in more than one market and this may
result in price variations.
Our
ordinary shares are listed for trading on the NASDAQ, and since February
20,
2006, on the Tel-Aviv Stock Exchange (the “TASE”). Trading in our ordinary
shares are traded on these markets in different currencies (U.S. dollars
on the
NASDAQ and New Israeli Shekels on the TASE), and at different times (resulting
from different time zones, different trading days and different public holidays
in the United States and Israel). Actual trading volume on the TASE is expected
to be lower compared to the trading volume on the NASDAQ, and as such, could
be
subject to higher volatility. The trading prices of our ordinary shares on
these
two markets are expected to often differ, resulting from as a result of the
factors described above, as well as in this paragraph, and because of
differences in exchange rates. Any decrease in the trading price of our ordinary
shares on one of these markets could cause a decrease in the trading price
of
our ordinary shares on the other market.
ITEM
4.
INFORMATION
ON THE COMPANY
A.
HISTORY
AND DEVELOPMENT OF THE COMPANY
Both
our
legal and commercial name is RADCOM Ltd, and we are an Israeli company. RADCOM
Ltd. was incorporated in 1985 under the laws of the State of Israel, and
we
commenced operations in 1991. The principal legislation under which we operate
is the Israeli Company Laws 1999 (the “Israeli Companies Law”). Our principal
executive offices are located at 24 Raoul Wallenberg Street, Tel Aviv 69719,
Israel, and our telephone and fax numbers are 972-3-645-5055 and 972-3-647-4681,
respectively. Our website is www.radcom.com. Information on our website and
other information that can be accessed through it are not part of, or
incorporated by, reference into this annual report.
In
1993,
we established a wholly-owned subsidiary in the United States, RADCOM Equipment,
Inc. (“RADCOM Equipment, Inc.”), a New Jersey corporation, which serves as our
agent for service of process in the United States. RADCOM Equipment is located
at 6 Forest Avenue, Paramus, New Jersey 07652, and its telephone number is
(201) 518-0033. In 1996, we incorporated a wholly-owned subsidiary in
Israel, RADCOM Investments (1996) Ltd. (“RADCOM Investments”), located at our
office in Tel Aviv, Israel; its telephone number is the same as ours
(972-3-645-5055). In 2001, we established a wholly-owned subsidiary in the
United Kingdom, RADCOM (UK) Ltd., a United Kingdom corporation. RADCOM (UK)
Ltd.
is located at 2440 The Quadrant, Aztec West, Almondsbury, Bristol, BS32 4AQ
England, and its telephone number is 44-1454-878827.
For
a
discussion of important events in the development of the Company’s business, see
“—Business Overview. For a discussion of our capital expenditures and
divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity
and Capital Resources.”
BUSINESS
OVERVIEW
Below
are
the definitions of certain technical terms that are used throughout this
20-F
and that are important for understanding our business.
GLOSSARY
3G
3.5G
|
|
A
third-generation digital cellular telecommunication.
3.5
generation digital cellular networks.
|
Asynchronous
Transfer Mode
(ATM)
|
|
A
cell-based network technology protocol that supports simultaneous
transmission of data, voice and video typically at T1/E1 or higher
speeds.
|
Code
Division Multiple Access
(CDMA)
|
|
A
digital wireless technology that uses a modulation technique in
which many
channels are independently coded for transmission over a single
wideband
channel.
|
CDMA2000
1X (EV-DO)
|
|
A
third-generation digital high-speed wireless technology for packet-based
transmission of text, digitized voice, video, and multimedia that
is the
successor to CDMA.
|
Time
Division Synchronous Code Division Multiple Access (TD-SCDMA)
|
|
A
3G mobile telecommunications standard, being pursued in the People's
Republic of China by the Chinese Academy of Telecommunications
Technology
(CATT).
|
Global
System for Mobile
Communications
(GSM)
|
|
A
digital wireless technology that is widely deployed in Europe and,
increasingly, in other parts of the world.
|
General
Packet Radio Service
(GPRS)
|
|
A
packet-based digital intermediate speed wireless technology based
on GSM.
(2.5 generation)
|
Universal
Mobile Telecommunications Service (UMTS)
|
|
A
third-generation digital high-speed wireless technology for packet-based
transmission of text, digitized voice, video, and multimedia that
is the
successor to GSM.
|
Voice
Over IP (VoIP)
|
|
A
telephone service that uses the Internet as a global telephone
network.
|
IP
Multimedia Subsystem
(IMS)
|
|
An
internationally recognized standard defining a generic architecture
for
offering Voice over IP and multimedia services to multiple-access
technologies.
|
Triple
Play
|
|
A
marketing term for the provisioning of the three services: high-speed
Internet, television (Video on Demand or regular broadcasts) and
telephone
service over a single broadband connection.
|
Internet
Protocol TV (IPTV)
|
|
Transmitting
video in IP packets. Also called “TV over IP,” IPTV uses streaming video
techniques to deliver scheduled TV programs or video on demand
(VOD).
|
Protocol
|
|
A
specific set of rules, procedures or conventions governing the
format,
means and timing of transmissions between two devices.
|
Session
|
|
A
lasting connection between a user (or user agent) and a peer, typically
a
server, usually involving the exchange of many packets between
the user's
computer and the server. A session is typically implemented as
a layer in
a network protocol.
|
Overview
We
develop, manufacture, market and support innovative network test and service
assurance solutions for communications service providers and equipment vendors.
We specialize in next generation cellular as well as voice, data and video
over
IP networks. Our solutions are used in the development and installation of
network equipment and in the maintenance of operational networks. Our products
facilitate fault management, network service performance monitoring and
analysis, troubleshooting and pre-mediation (the ability to collect network
information for a third-party application).
We
currently offer the following solutions:
Network
Monitoring
Our
award-winning Omni-Q is a unique, next-generation network testing, monitoring
and performance management solution. The Omni-Q system consists of a powerful
and user-friendly central management module and a broad range of intrusive
and
non-intrusive probes covering various networks and services, including VoIP,
UMTS, CDMA, IPTV, IMS data and others. The Omni-Q’s central management module is
designed to exploit the unique capabilities and feature set of our probes.
It
consolidates captured information into a comprehensive, integrated network
service view that facilitates performance monitoring, fault detection, and
network and service troubleshooting.
Protocol
Analyzers
Our
award-winning network protocol analyzers offer a powerful network analysis
and
test solutions available to the Cellular, VoIP and data communications industry.
Our network analyzers support over 700 protocols with multiple interfaces,
allowing users to troubleshoot and analyze the most complex and advanced
networks, quickly and simply.
Our
Customers and the Market for Our Solutions
The
key
benefits of our solutions to markets and customers are described
below:
For
Developers
:
Reduced
time to market, reduced development costs, automated testing and application
versatility from research and development(“ R&D”) to QA (quality assurance)
through final testing and field service.
For
Service Providers/Enterprises:
|
·
|
reduced
quality degradation, reduced outages, improved network utilization
and
longer customer hold times;
|
|
·
|
ability
to employ fewer and less experienced maintenance staff due to the
utilization of a single test system environment, controlled by
a central
console, ensuring ease of use and reduced learning curves;
and
|
|
·
|
decreased
support costs through centralized management, portable high-end
solutions
for in-depth troubleshooting, ability to offer premium SLAs (service
level
agreements) and LOE (level of experience) parameters based on measurable
parameters and all-inclusive, probe-based
solution.
|
The
market for our products consists of the following types of
end-users:
Telecommunications
Service Providers (Cellular and Wireline
)
are
organizations responsible for providing telecommunications services. This
group
of companies uses of our product fall into four main categories:
|
·
|
Fault
detection – to detect when there is a
problem;
|
|
·
|
Performance
– to analyze the behavior of network components and customer network
usage
in order to understand trends, performance and optimization (to
help
identify faults before the customer
complains);
|
|
·
|
Troubleshooting
– to drill down to resolve specific issues; and
|
|
·
|
Pre-Mediation
– to provide call detail records or CDR information to third-party
operations support systems (OSS) or other
solutions.
|
Labs
of Telecommunication Service Providers.
This
group of customers includes companies that buy specific equipment and networks
from manufacturers, and provide services to their customers. Our products
may be
used by these customers to evaluate the quality and performance of this
equipment and networks and verify the conformance and interoperability between
vendors.
Data
Communications and Telecommunications Equipment Developers and
Manufacturers.
This
group of customers includes companies that develop, manufacture and market
data
communications and telecommunications equipment.
Our
Strategy
Our
objective is to become a market leader in network test and service monitoring
solutions. To this end, we seek to deliver customer-oriented, technically
advanced and cost-effective products and to support them according to
world-class standards. Key elements of our strategy include:
·
|
Capitalizing
on the growth in the Cellular network and the move of wireline
networks to
IP technology markets and their associated monitoring
needs;
|
·
|
Leveraging
and expanding our top-tier customer base and distribution channels
to gain
access to the service providers who are offering these new
technologies;
|
·
|
Broadening
our penetration of major service providers and
vendors;
|
·
|
Extending
our sales capabilities and distribution
channels;
|
·
|
Repeating
sales to our existing customers;
|
·
|
Leveraging
our experience and knowledge in the area of converged networks
and
technology platforms to produce comprehensive testing and analysis
solutions for triple-play networks;
|
·
|
Maintaining
technological leadership while addressing the needs of emerging
technology
markets;
|
·
|
Partnering
with companies that offer complementary solutions and applications;
and
|
·
|
Carrying
out synergistic acquisitions of companies in tangent markets to
broaden
our solution portfolio and our sales and marketing
reach.
|
Our
sales
network includes North America through our wholly-owned U.S. subsidiary,
RADCOM
Equipment, a sales office in China and, in the rest of the world, a network
of
more than 35 distributors selling in over 35 countries. RADCOM Equipment
sells our products to end-users through a direct sales force and through
9
independent sales representatives. Our testing and monitoring equipment has
been
sold to a number of international companies and government agencies, including
Hutchison, British Telecom, Telstra, Deutsche Telekom, Verizon Wireless,
Vodafone, KPN, Nortel Networks, Lucent, Siemens, Cisco, NTT, NEC, Nokia,
ZTE,
Huawei, Detang, Alcatel and Ericsson.
Industry
Background
Service
providers deploy unified, packet-based platforms with broadband and 3G
technologies to enhance the value proposition of converged networks. These
technologies allow service providers to offer new types of revenue-enhancing
services, such as voice calls, video calls, video streaming, IPTV, music
downloading
and
messaging solutions. Mainstream deployment of converged networks has begun
and
equipment vendors are under pressure to develop and improve the required
technologies. Both types of our main market players equipment vendors and
service providers need sophisticated testing solutions. Equipment vendors
need
these solution to speed time-to-market while achieving the highest standard
of
products, and service providers need to evaluate vendors' products and to
monitor customer experience and quality of service (QoS) on an ongoing basis.
For these reasons, the demand for new testing and monitoring equipment is
growing. For example, analysis from Frost & Sullivan predicts that the VoIP
testing and monitoring market will grow from $379 million in 2006 to $1.9
billion in 2013 for a compound annual growth rate (CAGR) of 25.7% during
that
period and IMS test and monitoring market will grow from an estimated $274.1
million in 2007 to $1.2 billion in 2013, for a compound annual growth rate
of
27.9%
Products
and Solutions
We
categorize our products into two primary lines: (i) the
Omni-Q
network monitoring solution
and
(ii) the Performer family.
The
Omni-Q Network Monitoring Solution
|
·
|
The
Omni-Q is a unique, comprehensive, next-generation probe base service
assurance solution for network and service monitoring. The Omni-Q
solution
consists of a powerful and user-friendly central management server
and a
broad range of intrusive and non-intrusive probes covering various
networks and services, including VoIP, UMTS, CDMA and data. These
probes
are based on the R70 probe and Performer family platforms, enabling
the
Omni-Q to deliver full visibility at the session and application
level
(and not only at the single packet or message level), with full
7-layer
analysis. The R70 probe platform is an embedded Linux platform,
based on
our GearSet technology. The GearSet is a technology extension of
our
successful GEAR chip technology, allowing a full session tracing
and
analysis in a chip set and permitting wirespeed analysis of network
services.
|
|
·
|
In
addition, the Omni-Q benefits global telecommunications carriers,
by
providing end-to-end voice quality monitoring and management. The
Omni-Q
is designed to enable service providers and vendors to successfully
face
significant challenges in the coming years,
including:
|
|
o
|
deployment
of next-generation networks such as UMTS, CDMA2000 and triple-play;
|
|
o
|
integration
of new architectures such as high-speed downlink packet access
(HSDPA),
high-speed uplink packet access (HSUPA), long-term evolution (LTE),
IMS,
UMTS Release 6 and CDMA Rev’ A or evolution data voice (EVDV);
|
|
o
|
successful
delivery of advanced services such as VoIP, IPTV and video conferencing;
and
|
|
o
|
proactive
management of call quality on existing and next-generation service
providers’ production networks, along with maintenance of
high-availability, high-quality voice services over packet telephony.
|
|
·
|
Telecommunications
Service Providers (Cellular and Wireline) use the Omni-Q in four
main
areas:
|
|
o
|
Performance
monitoring – to analyze the behavior of network components and customer
network usage in order to understand trends, performance and optimization
(i.e., to help identify faults before the customer
complains).
|
|
o
|
Fault
detection – to detect when and where there is a
problem.
|
|
o
|
Troubleshooting
– to drill down to resolve specific
issues.
|
|
o
|
Pre-Mediation
– to provide call detail records or CDR information to third-party
operations support systems (OSS) or other
solutions.
|
|
·
|
The
Omni-Q is comprised of the following components:
|
|
o
|
The
Omni-Q’s central management module is designed to take advantage of the
unique capabilities and feature set of our platform by consolidating
the
monitoring and analysis information into a comprehensive, integrated
view
that enables visibility, fault detection, performance and troubleshooting.
|
|
o
|
The
Omni-Q Wireline monitoring solution gives service providers, incumbent
local exchange carriers(ILECs) and cable/multi-system operators(MSOs)
complete visibility into the voice, video or TV service running
over the
network, enabling early-stage fault detection, pre-emptive maintenance
and
optimization, and drill-down troubleshooting that leads to quick
and easy
fault resolution.
|
|
o
|
The
Omni-Q UMTS/CDMA2000 Network Monitoring gives cellular service
providers
complete visibility into their networks, enabling long-term real-time
traffic analysis, fault detection, troubleshooting and data collection.
It
monitors and analyzes the performance of Radio Access, Core Signaling
and
Core IP components. It provides extensive and flexible Key Performance
Indicators (KPIs) and Key Quality Indicators (KQIs) analyses with
real-time alarms that allow operators to detect faults before their
customers experience problems.
|
The
Performer Family
The
Performer family is an open platform that supports a wide range of test
applications over a variety of technologies. With simplified control from
a
central console, the Performer hardware and software suite tests the quality
and
grade of service of a real-world network environment. The Performer family
is a
PC-based system, utilizing our generic analyzer processor, or GEAR-based,
hardware. Our GEAR (GenEric AnalyzeR processor) chip is our main differentiating
technology. It is a proprietary, one-chip analyzer processor designed to
provide
on all layers wirespeed testing performance, independent of protocols and
technologies. The GEAR processor positions us as the industry leader in the
high-performance, communication test-equipment market. It allows one platform
to
carry out both network troubleshooting and analysis as well as packet and
cell
analysis in real time, at up to 2.5 gigabytes per second (Gbps), with no
limitation on interface type or protocols. The GEAR technology also allows
us to
rapidly develop and roll out new interfaces by merely adding a new interface
with the appropriate functionality. The Performer family is unique for its
combination of strong hardware performance and flexible software
use.
The
Performer’s architectural advantages include:
|
·
|
Single
Platform - Our single-platform technology enables all functions
to be
performed on one platform, as opposed to the multi-system architecture
of
its competitors;
|
|
·
|
Scalable
- Our systems are fully scalable, can migrate quickly to new applications,
and can be easily integrated with third-party applications;
and
|
|
·
|
Distributed
system - Our solution is based on a GPS synchronization technology,
IP
connectivity and management console/server
architecture.
|
The
Performer family response to customer needs is twofold:
|
·
|
Post-deployment/quality
management solutions and troubleshooting for convergence service
providers, and
|
|
·
|
Pre-deployment,
predictive test systems for convergence vendors.
|
Our
system solutions are critical for the successful rollout of next-generation
3G
Cellular networks, Voice over IP and Video over IP technologies. Our solutions
lead the market in their ability to troubleshoot connectivity problems and
analyze network performance, helping equipment vendors and service providers
to
ensure a trouble-free network environment and a high-quality user experience.
We
continuously extend our solutions in response to rapidly changing technology
and
customer requirements, evolving industry standards and frequent new product
introductions. In addition, our ability to provide highly cost-effective
solutions has been a critical asset in this competitive market.
Network
Protocol Analyzer
The
Performer’s innovative approach provides customers with real-time cell and
packet analysis and troubleshooting capabilities at all seven telecommunications
layers, including, basic physical and link layer testing, complex tracing
of NAS
layer voice, IP session signaling and data/voice quality of service validation.
This analyzer supports Ethernet, WAN, ATM and POS interfaces, and can decode
over 700 communication protocols. The Network Protocol Analyzer, a fully
distributed system, is an ideal solution for vendor research and development,
quality assurance and integration labs, as well as for use by operators during
network setup and operation for protocol verification, cell/frame-level
analysis, voice call and IP session analysis and streaming media and voice
quality testing.
The
Cellular Performer
The
Cellular Performer is an application that runs on our Performer platform
launched in February 2003. The Cellular Performer is a multi-layer session-level
analysis of applications and services that gives users a simple, intuitive
and
powerful troubleshooting tool. Used for drilling down to each of a cellular
networks interfaces, our cellular protocol analysis tools enable users to
trace
a call over a whole network, and identify the source of network problems.
This
allows users to quickly pinpoint specific problems, and to smooth out the
performance of highly complex networks. The product supports all major 2.5
and
third-generation networks, including GPRS, UMTS, CDMA2000, Enhanced Data
Rates
for Global Revolution Standard (Edge) and Time Division Synchronous CDMA
(TD-SCDMA).
The
Network Consultant is an advanced cellular network analysis application that
enables mobile operators to quickly verify subscriber connectivity and
proactively monitor end-to-end network performance. The Network Consultant
gathers and processes data from multiple server links from the Radio Access
Network, Core signaling, and Core IP. It enables full drill-down analysis
capabilities of the call session, voice calls and video calls. Using it,
customers can zoom in and view the signaling and procedures on each interface
separately – online and offline.
The
RANalysis is a solution that enables fast and easy RAN analysis in UMTS
networks. With the RANalysis, different types of RAN problems can be identified.
And with the number of services, mobile devices, and customers expected to
grow
every year, radio-optimization engineers need a long-term solution that can
provide a quick and easy view of problems in the cells. RANalysis offers
engineers rich functionality, with an easy-to-use application and focused
reports. RANalysis changes the way deep UMTS radio analysis is done. Based
on a
vast amount of detailed radio measurements, RANalysis supports the RAN
optimization process, reduces the huge expenses involved in drive-testing
and
helps shorten radio troubleshooting turnaround time.
The
Voice-over-IP Performer
|
·
|
The
Voice-over-IP Performer is designed to support pre-deployment testing
of
current and emerging convergence technologies. The Voice-over-Data
Performer is the first performance testing solution that we launched.
|
The
following are some of the highlights of the Voice-over-IP
Performer:
|
·
|
SIPSim
– The SIPSim is a SIP services load generator that focuses on high-stress
load testing of any SIP application. The SIPSim provides high industry
performance while retaining the flexibility needed to emulate all
types of
services. By emulating up to hundreds of thousands of users over
the
SIPSim’s Triple M capability (multi-IP, multi-MAC and multi-VLAN), any
service can be emulated over any type of network configuration.
The SIPSim
is capable of stress-testing different SIP services and network
elements,
including softswitch, SBC and IMS networks. Using the SipStudio,
the user
can build scripts to customize the SipSim to simulate almost any
call
flow. This is especially important in the IMS environment, where
network
topology is complex and each new service introduces a new flow;
|
|
·
|
MediaPro
– A real-time hardware-based, multi-protocol, multi-technology VoIP
and
Video analyzer, capable of analyzing a wide variety of VoIP signaling
protocols and media CODECs; and
|
|
·
|
QPro
– The QPro is a multi-technology call quality analyzer that enables
users
to test many call quality parameters over a variety of
interfaces.
|
The
following table shows the breakdown of our consolidated sales for the fiscal
years 2005, 2006 and 2007 by product:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(in
thousands of U.S. dollars)
|
|
The
Omni-Q family
|
|
$
|
3,940
|
|
$
|
15,765
|
|
$
|
9,537
|
|
The
Performer family and others
|
|
$
|
18,400
|
|
$
|
7,776
|
|
$
|
3,960
|
|
Total
|
|
$
|
22,340
|
|
$
|
23,541
|
|
$
|
13,497
|
|
Sales
and Marketing
We
sell
our products in North America through our wholly-owned U.S. subsidiary,
RADCOM
Equipment, which sells our products to end-users primarily directly or through
independent representatives. Most of these representatives have exclusive
rights
to the distribution of our products in their respective geographical areas
throughout North America (with the exception of some accounts and the Omni-Q,
our monitoring solution which we handle directly) and are compensated by
us on a
commission basis. The activities of our representatives and our other sales
and
marketing efforts in North America are coordinated by
RADCOM
Equipment’s employees, who also provide product support to our North American
customers. The independent representatives do not hold any of our inventory,
and
they do not buy products from us. Our representatives locate customers, provide
a demo if needed (in which case they use our demo equipment), and in some
cases
they provide training to the end-users. The customers submit orders directly
to
our wholly owned subsidiary,
RADCOM
Equipment, which invoices the end-user customers and collects payment directly,
and then pays commissions to the representative for the sales in their
territory. The commission is between 7.5% and 15%, depending on the agreement
RADCOM
Equipment has with the individual representative.
Outside
North America, we sell our products through a global network of distributors
who
market data communications-related hardware and software products. We currently
have more than 35 independent distributors, some of whom have exclusive rights
to sell our products in their respective geographical areas. We have opened
regional sales support offices in China, Singapore, Korea and Spain. These
offices support our distributors in these regions. We continue to search
for new
distributors to penetrate new geographical markets or to better serve our
target
markets.
Our
distributors serve as an integral part of our marketing and service network
around the world. They offer technical support in the end-user’s native
language, attend to customer needs during local business hours, organize
user
programs and seminars and, in some cases, translate our manuals and product
and
marketing literature into the local language.
We
have a
standard contract with our distributors. Based on this agreement, sales to
distributors are final, and distributors have no right of return or price
protection. The distributors do not need to disclose to us their customers’
names, prices or date of order. To the best of our knowledge, a distributor
places an order with us after it receives an order from its end-user, and
does
not hold our inventory for sale. Usually, we are not a party to the agreements
between distributors and their customers. Distributors may hold products
for a
demo or as repair parts in order to keep their service agreement with a
customer. According to our agreement with the distributors, a distributor
generally should buy at least one demo unit in order to present the equipment
to
their customers. This is a final sale, and there are no rights of return.
The
distributor cannot sell this equipment to the end-user; the license is only
for
the distributor. We do not consider this a benefit to the distributors since
we
sell only the demo systems with a special software discount.
We
focus
a significant amount of our sales and marketing resources on our distributors,
providing them with ongoing communications and support, and our employees
regularly visit distributors’ sites. We organize annual distributors’ meetings
to further our relationships with our distributors and familiarize them with
our
products. In addition, in conjunction with our distributors, we participate
in
the exhibitions of our products worldwide, place advertisements in local
publications, encourage exposure in the form of editorials in communications
journals and prepare direct mailings of flyers and advertisements. The table
below indicates the approximate breakdown of our revenue by territory:
|
|
Year
ended December 31,
|
|
Year
ended December 31,
|
|
|
|
(in
millions of U.S. dollars)
|
|
(in
percentages)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
2007
|
|
North
America
|
|
|
8.8
|
|
|
7.6
|
|
|
4.3
|
|
|
39.5
|
%
|
|
32.3
|
%
|
|
31.8
|
%
|
Europe
|
|
|
8.6
|
|
|
9.4
|
|
|
5.7
|
|
|
38.5
|
|
|
40.0
|
|
|
42.2
|
|
Far
East
|
|
|
3.3
|
|
|
2.6
|
|
|
1.6
|
|
|
14.8
|
|
|
11.1
|
|
|
11.9
|
|
South
America
|
|
|
0.7
|
|
|
2.6
|
|
|
1.2
|
|
|
3.2
|
|
|
11.1
|
|
|
8.9
|
|
Others
|
|
|
0.9
|
|
|
1.3
|
|
|
0.7
|
|
|
4.0
|
|
|
5.5
|
|
|
5.2
|
|
Total
revenues
|
|
|
22.3
|
|
|
23.5
|
|
|
13.5
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Seasonality
of Our Business
Generally,
we are affected by the capital spending of the end-users of our products.
These
end-users tend to spend more towards the end of their fiscal year, which
is
typically the end of the calendar year, resulting in more orders during the
second half of the year compared to the first half of the year. This has
been
the pattern over the last few years.
Customer
Service and Support
We
believe that providing a high level of customer service and support to end-users
is essential to the acceptance of our products. We offer a toll-free technical
support help desk to our representatives in the United States and a technical
support help desk to our distributors worldwide. We also support our customers
via fax, email and cellular phone service, and provide additional technical
information on our Internet home page. We also offer an E-Learning system,
which
provides technical courses to our distributors, representatives and sales
and
technical support people at remote locations. These services are partially
available to end-users. We regularly produce a newsletter which is sent to
representatives and distributors, and we publish application notes and technical
briefs for representatives, distributors and end-users to assist them in
using
our products more efficiently.
In
addition to our direct service and support activities, our representatives
in
North America and our distributors worldwide provide to end-user customers
sales, service and technical support functions for our products in their
respective territories. We organize annual technical seminars in different
areas
of the world every year to increase the technical knowledge of distributors
in
the use of our products.
Our
products are designed and manufactured to meet standards required by our
customers. We provide a free one-year warranty, which includes bug-fixing
solutions and a hardware warranty on our products. After the initial update
period, our customers can purchase an extended warranty for one-, two- or
three-year periods. The extended warranty includes bug fixing and full hardware
repair of any faulty units. Generally the cost of the extended warranty is
based
on a percentage of the overall cost of the product as an annual maintenance
fee.
For the Prism products the cost is fixed.
Manufacturing
and Suppliers
Our
manufacturing facilities, which are located in Tel Aviv, Israel, consist
primarily of final assembly, testing and quality control. Electronic components
and subassemblies are prepared by subcontractors according to our designs
and
specifications.
Certain
components used in our products are presently available from, or supplied
by,
only one source and others are only available from limited sources. In addition,
some of the software packages that we include in our product line are being
developed by unaffiliated subcontractors. The manufacturing processes and
procedures are generally ISO 2000 and ISO 14000 certified.
Research
and Development
The
industry in which we compete is subject to rapid technological developments,
evolving industry standards, changes in customer requirements, and new product
introductions and enhancements. As a result, our success, in part, depends
upon
our ability, on a cost-effective and timely basis, to continue to enhance
our
existing products and to develop and introduce new products that improve
performance and reduce total cost of ownership. In order to achieve these
objectives, we work closely with current and potential end-users, distributors
and manufacturer’s representatives and leaders in certain data communications
and telecommunications industry segments to identify market needs and define
appropriate product specifications. We intend to continue developing products
that meet key industry standards and to support important protocol standards
as
they emerge. Still, there can be no assurances that we will be able to
successfully develop products to address new customer requirements and
technological changes, or that such products will achieve market
acceptance.
Our
gross
research and development costs were approximately $5.8 million in 2005, $6.8
million in 2006 and $7.4 million in 2007, representing 26.0%, 28.9% and 54.7%
of
our sales, respectively. Aggregate research and development expenses funded
by
the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade
and
Labor, (the “Chief Scientist”) were approximately $1.7 million in 2005, $1.9
million in 2006 and $2.1 million in 2007. For more information on the Office
of
the Chief Scientist, see “Israeli Office of the Chief Scientist” below. We
expect to continue to invest significant resources in research and
development.
As
of
December 31, 2007, our research and development staff consisted of 55
employees. Research and development activities take place at our facilities
in
Tel Aviv. We occasionally use independent subcontractors for portions of
our
development projects.
Israeli
Office of the Chief Scientist
From
time
to time we file applications for grants under programs of the Office of the
Chief Scientist. Grants received under such programs are repaid through a
mandatory royalty based on revenues from products (and related services)
incorporating know-how developed with the grants. This government support
is
contingent upon our ability to comply with certain applicable requirements
and
conditions specified in the Chief Scientist’s programs and with the provisions
of the Law for the Encouragement of Research and Development in Industry,
1984
and the regulations promulgated thereunder (the “R&D Law”).
Under
the
R&D Law, research and development programs that meet the specified criteria
and are approved by the Research Committee of the Chief Scientist (the “Research
Committee”) are usually eligible for grants of up to 50% of certain approved
expenditures of such programs, as determined by this Research
Committee.
In
exchange, the recipient of such grants is required to pay the Chief Scientist
royalties from the revenues derived from products incorporating know-how
developed within the framework of each such program or derived from such
program
(including ancillary services in connection with such products), usually
up to
an aggregate of 100% of the dollar-linked value of the total grants received
in
respect of such program, plus interest. As of January 1, 2007, our royalty
rate
was 3.5%.
In
2006
the Israeli government announced a process of formulating a proposed
amendment to the royalty regulations promulgated under the R&D Law. The
amendment is expected to include changes to the royalty rates, which
would vary from company to company based on the amount of its revenues and
the approval date of its program, up to a rate of 6%, and, as of 2006,
to increase the rate of interest accruing on grants by 1% per
year. The amendment may have a retroactive effect, although there is no
indication as to whether and when it will be adopted.
The
R&D Law generally requires that the product developed under a program be
manufactured in Israel. However, upon notification to the Chief Scientist,
up to
10% of the manufacturing volume may be performed outside of Israel; furthermore,
with the approval of the Chief Scientist, a greater portion of the manufacturing
volume may be performed outside of Israel, provided that the grant recipient
pays royalties at an increased rate, which may be substantial, and the aggregate
repayment amount is increased, which increase might be up to 300% of the grant,
depending on the portion of the total manufacturing volume that is performed
outside of Israel. The R&D Law further permits the Chief Scientist to
approve the transfer of manufacturing rights outside Israel in exchange for
an
import of different manufacturing into Israel as a substitute, in lieu of the
increased royalties. The R&D Law also allows for the approval of grants in
cases in which the applicant declares that part of the manufacturing will be
performed outside of Israel or by non-Israeli residents and the Research
Committee is convinced that doing so is essential for the execution of the
program. This declaration will be a significant factor in the determination
of
the Chief Scientist as to whether to approve a program and the amount and other
terms of benefits to be granted. The increased royalty rate and repayment amount
will be required in such cases.
The
R&D Law also provides that know-how developed under an approved research and
development program may not be transferred to another person or entity in Israel
without the approval of the Research Committee. Such approval is not required
for the sale or export of any products resulting from such research or
development. The R&D Law permits the transfer of Chief Scientist-funded
know-how outside of Israel, under certain circumstances and subject to the
Chief
Scientist’s prior approval, only in the following cases: (a) if the subject
company pays to the Chief Scientist a portion of the sale price paid in
consideration of such funded know-how; (b) if the subject company receives
know-how from a third party in exchange for its funded know-how; or (c) if
such
transfer of funded know-how arises in connection with certain types of
cooperation in research and development activities.
The
R&D Law imposes reporting requirements with respect to certain changes in
the ownership of a grant recipient. The law requires the grant recipient and
its
controlling shareholders and foreign interested parties to notify the Chief
Scientist of any change in control of the recipient or a change in the holdings
of the means of control of the recipient that results in a non-Israeli becoming
an interested party directly in the recipient, and requires the new interested
party to undertake to the Chief Scientist to comply with the R&D Law. In
addition, the rules of the Chief Scientist may require additional information
or
representations in respect of certain of such events. For this purpose,
“control” is defined as the ability to direct the activities of a company other
than any ability arising solely from serving as an officer or director of the
company. A person is presumed to have control if such person holds 50% or more
of the means of control of a company. “Means of control” refers to voting rights
or the right to appoint directors or the chief executive officer. An “interested
party” of a company includes a holder of 5% or more of its outstanding share
capital or voting rights, its chief executive officer and directors, someone
who
has the right to appoint its chief executive officer or at least one director,
and a company with respect to which any of the foregoing interested parties
owns
25% or more of the outstanding share capital or voting rights or has the right
to appoint 25% or more of the directors. Accordingly, any non-Israeli who
acquires 5% or more of our ordinary shares will be required to notify the Office
of the Chief Scientist that it has become an interested party and to sign an
undertaking to comply with the R&D Law.
The
funds
available for Chief Scientist grants made out of the annual budget of the State
of Israel were reduced in 1998, and the Israeli authorities have indicated
in
the past that the government may further reduce or abolish the Chief Scientist
grants in the future. Even if these grants are maintained, we cannot presently
predict the amounts of future grants, if any, that we might receive.
In
each
of the last ten fiscal years, we have received such royalty-bearing grants
from
the Chief Scientist. At December 31, 2007, our contingent liability to the
Office of the Chief Scientist in respect of grants received was approximately
$23.2 million.
Binational
Industrial Research and Development Foundation
We
received from the
Binational
Industrial Research and Development Foundation (the “
BIRD
Foundation”) funding for the research and development of products. At
December 31, 2007, our contingent liability to the BIRD Foundation for
funding received was approximately $319,000. We have not received grants from
the BIRD Foundation since 1995.
Proprietary
Rights
To
protect our rights to our intellectual property, we rely upon a combination
of
trademarks, contractual rights, trade secret law, copyrights, nondisclosure
agreements and technical measures to establish and protect our proprietary
rights in our products and technologies. We own registered trademarks for the
names PrismLite, Omni-Q, MediaPro, GearSet, SipSim and Wirespeed. In addition,
we sometimes enter into non-disclosure and confidentiality agreements with
our
employees, distributors and manufacturer’s representatives and with certain
suppliers with access to sensitive information. However, we have no registered
patents or trademarks (except for those listed above) and these measures may
not
be adequate to protect our technology from third-party infringement, and our
competitors may independently develop technologies that are substantially
equivalent or superior to ours.
Given
the
rapid pace of technological development in the communications industry, there
also can be no assurance that certain aspects of our internetworking test
solutions do not or will not infringe on existing or future proprietary rights
of others. Although we believe that our technology has been independently
developed and that none of our technology or intellectual property infringes
on
the rights of others, from time to time third parties may assert infringement
claims against us. If such infringement is found to exist, or if infringement
is
found to exist on existing or future proprietary rights of others, we may be
required to modify our products or intellectual property or obtain the requisite
licenses or rights to use such technology or intellectual property. However,
there can be no assurance that such licenses or rights can be obtained or
obtained on terms that would not have a material adverse effect on
us.
Competition
The
markets for our products are very competitive and we expect that competition
will increase in the future, both with respect to products that we are currently
offering and products that we are developing. We believe that the principal
competitive factors in the market for internetworking test and analysis
equipment include:
|
·
|
product
fit to customer workflow and
procedures;
|
|
·
|
support
of the required interfaces and
protocols;
|
|
·
|
support
of the right services;
|
|
·
|
quality
of the software and the hardware;
|
|
·
|
multitechnology
support;
|
|
·
|
customer
service and support;
|
|
·
|
ability
to integrate with other information
systems.
|
Our
principal competitors are Agilent , Tektronix, Tekelek, NetHawk, Anritsu
(Nettest), SPIRENT Communications, Sunrise Telecom Inc., Empirix and Brix
Networks. In addition to these competitors, we expect substantial competition
from established and emerging computer, communications, network management
and
test equipment companies. Many of these competitors have substantially greater
resources than we have, including financial, technological, engineering,
manufacturing and market and distribution capabilities, and some of them may
enjoy greater market recognition than we do.
Employees
As
of
December 31, 2007, we had 114 permanent employees and 1 temporary employee
located in Israel, 9 permanent employees of
RADCOM
Equipment
located in the United States and 9 permanent employees in total located in
Spain, Singapore, Korea and China, collectively. Of the 115 employees
located in Israel, 55 were employed in research and development, 15 in
operations (including manufacturing and production), 34 in sales and marketing
and 11 in administration and management. Of the 9 employees located in the
United States, 7 were employed in sales and marketing and 2 were employed in
administration and management. All the 9 employees located in Spain,
Singapore, Korea and China, were employed in sales and marketing. We
consider our relations with our employees to be good and we have never
experienced a labor dispute, strike or work stoppage. Most of our
permanent employees have employment agreements and none of our employees are
represented by labor unions. Our temporary employees are paid an hourly rate,
have employment agreements and are not represented by a labor
union.
Although
we are not a party to a collective bargaining agreement, we are subject to
certain provisions of general collective agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (including the Industrialists’ Association) that are applicable to
our employees by virtue of expansion orders of the Israeli Ministry of Labor
and
Welfare. In addition, Israeli labor laws are applicable to all of our employees
in Israel. These provisions and laws principally concern the length of the
work
day, minimum daily wages for workers, procedures for dismissing employees,
determination of severance pay and other conditions of employment.
In
Israel, a general practice we follow (although not legally required) is the
contribution of funds on behalf of most of our permanent employees to an
individual insurance policy known as “Managers’ Insurance.” This policy provides
a combination of savings plan, insurance and severance pay benefits to the
insured employee. It provides for payments to the employee upon retirement
or
death and accumulates funds on account of severance pay, if any, to which the
employee may be legally entitled upon termination of employment. Each
participating employee contributes an amount equal to 5% of such employee’s base
salary, and we contribute between 13.3% and 14.7% of the employee’s base salary.
Full-time employees who are not insured in this way are entitled to a savings
account, to which each of the employee and the employer makes a monthly
contribution of 5% of the employee’s base salary. We also provide our permanent
employees with an Education Fund, to which each participating employee
contributes an amount equal to 2.5% of such employee’s base salary and we
contribute an amount equal to 7.5% of the employee’s base salary. In the United
States we provide benefits, in the form of health, dental, vision and disability
coverage, in an amount equal to 14.49% of the employee’s base salary. All
Israeli employers, including us, are required to provide certain increases
in
wages as partial compensation for increases in the consumer price index. The
specific formula for such increases varies according to the general collective
agreements reached among the Manufacturers’ Association and the Histadrut.
Israeli employees and employers also are required to pay pre-determined sums
which include a contribution to national health insurance to the Israel National
Insurance Institute, which provides a range of social security
benefits.
C.
ORGANIZATIONAL
STRUCTURE
In
January 1993, we established our wholly-owned subsidiary in the United
States,
RADCOM
Equipment, which conducts the sales and marketing of our products in North
America. In July 1996, we incorporated a wholly-owned subsidiary in Israel,
Radcom Investments (1996) Ltd., for the purpose of making various investments,
including the purchase of securities. As of May 31, 2008, Radcom Investments
did
not hold any of our outstanding shares. In August 2001, we established our
wholly-owned subsidiary in the United Kingdom, RADCOM (UK) Ltd., which is
currently not active, but in the past conducted the sales and marketing of
our
products in the United Kingdom. In 2002, we established our wholly-owned
Representative Office in China, which conducts the marketing for our products
in
China. Following are our subsidiaries, all of which are
wholly-owned:
Name
of Subsidiary
|
|
Jurisdiction
of Incorporation
|
|
|
|
RADCOM
Equipment,
Inc.
|
|
United
States
|
RADCOM
Investments (1996) Ltd.
|
|
Israel
|
RADCOM
(UK) Ltd.
|
|
United
Kingdom
|
Yehuda
Zisapel and Zohar Zisapel are co-founders and principal shareholders of our
Company. Individually or together, they are also founders, directors and
principal shareholders of several other privately and publicly held high
technology and real estate companies which, together with us and the other
subsidiaries and affiliates, are known as the “RAD-Bynet Group.” In addition to
engaging in other businesses, members of the RAD-Bynet Group are actively
engaged in designing, manufacturing, marketing and supporting data
communications and telecommunications products. Our Company has limited
competition with RADVision Ltd., which supplies as part of its technology
package a protocol simulation that may serve some of the needs of our customers
for test equipment. Some of the products of members of the RAD-Bynet Group
are
complementary to, and have been and are currently used in connection with,
our
products.
D.
PROPERTY,
PLANTS AND EQUIPMENT
We
do not
own any real property. We currently lease an aggregate of approximately 2,442
square meters of office premises in Tel Aviv, which includes approximately
2,186
square meters from affiliates of our principal shareholders. Our manufacturing
facilities consist primarily of final assembly, testing and quality control
of
materials, wiring, subassemblies and systems. In 2007, aggregate annual lease
and maintenance payments for the Tel Aviv premises were approximately $585,000,
of which approximately $415,000 was paid to affiliates of our principal
shareholders. We may, in the future, lease additional space from affiliated
parties. We also lease premises in Paramus, New Jersey from an affiliate. In
2007, we leased approximately 6,131 square feet from an affiliate, approximately
276 square feet of which we now sub-lease to a related party. In 2007, aggregate
annual lease payments for the premises were approximately $126,000 and
we
received $5,000 from the related party for those sub-leases. We also lease
approximately 142 square meters in Beijing. In 2007, our aggregate annual lease
payments for those premises were approximately $27,000. The rental agreements
for the premises in Tel Aviv and New Jersey, United States, expire on December
31, 2008 and on January 15, 2011, respectively.
ITEM
4A.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
5.
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and the
related notes included elsewhere in this annual report.
This
discussion contains forward-looking statements regarding future events and
our
future results that are subject to the safe harbors created under the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). These statements are based on current expectations,
estimates, forecasts and projections about the industries in which we operate
and the beliefs and assumptions of our management. Words such as “expects,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “continues,” “may,” variations of such words, and similar
expressions are intended to identify such forward-looking statements. In
addition, any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our businesses, and other
characterizations of future events or circumstances are forward-looking
statements. Readers are cautioned that these forward-looking statements -
including those identified below, as well as certain factors - including, but
not limited to, those set forth in “Item 3—Key Information—Risk Factors” - are
only predictions and are subject to risks, uncertainties, and assumptions that
are difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. We undertake
no obligation to revise or update any forward-looking statements for any reason.
Overview
We
develop, manufacture, market and support innovative network test and service
monitoring solutions for communications service providers and equipment vendors.
We specialize in next generation cellular as well as voice, data and video
over
IP networks. Our solutions are used in the development and installation of
network equipment and in the maintenance of operational networks. Our products
facilitate fault management, network service performance monitoring and
analysis, troubleshooting and pre-mediation, the latter of which refers to
the
ability to collect network information for a third-party application.
General
Our
discussion and analysis of our financial condition and results of operation
are
based upon our consolidated financial statements, which have been prepared
in
accordance with generally accepted accounting principles in the United States.
Our operating and financial review and prospects should be read in conjunction
with our financial statements, accompanying notes thereto and other financial
information appearing elsewhere in this annual report.
We
commenced operations in 1991. Since then, we have focused on developing and
enhancing our products, building our worldwide direct and indirect distribution
network and establishing and expanding our sales, marketing and customer support
infrastructures.
Most
of
our revenues are generated in U.S. dollars or are dollar-linked and the majority
of our expenses are incurred in dollars and, as such, we use the dollar as
our
functional currency. Our consolidated financial statements are prepared in
dollars and in accordance with generally accepted accounting principles in
the
United States.
Our
technology vision is based on an architectural evolution of networking from
simple connectivity of products to application systems, or as we refer to it,
the “Application Provider.” As such, many of our strategic initiatives and
investments are aimed at meeting the requirements of Application Providers
of 3G
Cellular and triple-play networks. If networking evolves toward greater emphasis
on Application Providers, we believe we have positioned ourselves well relative
to our key competitors. If it does not, however, our initiatives and investments
in this area may be of no or limited value. As a result we cannot quantify
the
impact of new product introductions on our historical operations or anticipated
impact on future operations.
As
we
evaluate our growth prospects and manage our operations for the future, we
continue to believe that the leading indicator of our growth will be the
deployment of 3G Cellular and triple-play networks. During fiscal year 2007,
we
continued to focus our resources on the 3G Cellular segment and triple-play
networks. While this potentially increases our exposure to changes in
telecommunications industry conditions, we feel that this is a growing area
and
that we have the technology to capitalize on this market growth.
After
commencing sales of our Performer in the first quarter of 2003, our revenues
began to increase. Through 2005, our Performer family was the main driver
increasing our revenues. In 2006 our comprehensive monitoring solution started
to evolve as our main product. As a result of these developments, we enjoyed
increased sales across all converged network product lines and the average
size
of our deals began to rise.
Unfortunately,
this momentum did not continue in 2007. We view this as a temporary weakness
and
not as the new state for 2008 and onwards.
Our
net
sales for 2007 were $13.5 million, compared with $23.5 million in fiscal year
2006. Net loss for 2007 was $8.6 million, compared with net loss of $54,000
in
fiscal 2006. Our cash, cash equivalents and short-term deposits decreased by
$6.3 million in 2007 compared with a decrease of $0.5 million in 2006.
In
2008,
we are continuing to focus on our two major growth areas of 3G and 3.5G Cellular
and triple-play networks with the goal of continuing to expand our sales and
profits. With analysts (Informa Telecoms & Media, WCIS and 3G America)
projecting that the 3G market will eventually include 200-300 operators and
an
even larger number of next-generation wireline players, we believe there is
a
lot of room for additional growth. Among the key factors that will influence
our
2008 performance are the continued evolution of the global telecommunications
industry towards converged services and our customers’ perspective regarding the
prospects for improving conditions, together with our ability to continue to
improve the execution of our strategy.
Revenues.
Our
revenues are derived primarily from sales of our products and, to a lesser
extent, from sales of warranty services. Product revenues consist of gross
sales
of products, less discounts, refunds and returns.
Cost
of sales
.
Cost of
sales consists primarily of our manufacturing costs, warranty expenses,
allocation of overhead expenses and royalties to the Chief Scientist.
As
part
of our plan to reduce product cost and improve manufacturing flexibility, we
have
shifted
to a subcontracting model for the manufacturing of our products
.
Currently, the functions performed by us are the planning and integration of
other companies’ solutions into our products, while the subcontractors purchase
the component parts, assemble the product and test it. These functions can
be
divided as follows:
RADCOM
|
|
Subcontractor
|
Planning
|
|
Purchase
component parts
|
Integration
|
|
Assembly
|
|
|
Testing
|
We
provide a non-binding rolling forecast every quarter for the coming year, and
submit binding purchase orders quarterly for material needed in the next
quarter. Purchase orders are generally filled within three months of placing
the
order. We are charged by the unit, which ensures that unnecessary charges for
reimbursements are minimal. We are not required to reimburse subcontractors
for
losses that are incurred in providing services to us and there are no minimum
purchase requirements in our subcontracting arrangements. If we change
components in our products, however, and the subcontractor already bought
components based on a purchase order, we would reimburse the subcontractor
for
any losses incurred relating to the subcontractor’s disposal of such components.
The subcontracting arrangements are generally governed by one-year contracts
that are automatically renewable and that can be terminated by either party
upon
ninety days’ written notice.
By
reducing fixed manufacturing costs including by using the subcontractors, we
seek
to
ensure that our cost of goods sold fluctuates more directly in line with
revenues.
Our
gross
profit is affected by several factors, including the introduction of new
products, price erosion due to increasing competition, product mix and
integration of other companies’ solutions into our own. During the initial
launch and manufacturing ramp-up of a new product, our gross profit is generally
lower as a result of manufacturing inefficiencies during that period. As the
difficulties in manufacturing new products are resolved and the volume of sales
of such products increases, our gross profit generally improves. For example,
in
2003, during the initial launch of the Performer, our gross profit was lower
and
subsequently improved.
Most
of
our products consist of a combination of hardware and software. Following an
initial purchase of a product, a customer can add additional functions by
purchasing software packages. These packages may add functions to the product
such as providing additional testing data or adding the ability to test
equipment based on different transmission technologies. Since there are no
incremental hardware costs associated with the sale of the add-on software,
the
gross margins on these sales are higher. We also have higher gross profit on
sales in North America, where we sell directly and through representatives,
than
on sales outside North America where we sell through distributors.
Research
and Development
.
Research and development costs consist primarily of salaries and, to a lesser
extent, payments to subcontractors, raw materials and overhead expenses. We
use
raw materials to build prototypes of our hardware and software products. These
prototypes have no value since they cannot be sold or otherwise capitalized
as
inventory. The allocation of overhead expenses consists of a variety of costs,
including rent, office expenses (including telecommunications expenses) and
administrative costs, such as human resources activities. The methodology for
allocating these expenses depends on the nature of the expense. Costs such
as
rent and associated costs are based on the square meters used by the R&D
department. Administrative costs such as human resources activities are
allocated based on the number of employees in the department. There has been
no
change in methodology from year to year. These expenses have been partially
offset by royalty-bearing grants from the Chief Scientist.
Sales
and Marketing
.
Sales
and marketing expenses consist primarily of salaries, commissions to
representatives, advertising, trade shows, promotional expenses, web site
maintenance, and overhead expenses.
General
and Administrative Expenses
.
General
and administrative expenses consist primarily of salaries and related personnel
expenses for executive, accounting and administrative personnel, professional
fees (which include legal, audit and additional consulting fees), bad debt
expenses and other general corporate expenses.
Financial
Income, Net.
Financial income, net, consists primarily of interest earned on bank deposits,
gains and losses from the exchange rate differences of monetary balance sheet
items denominated in non-dollar currencies and interest expenses paid on bank
short-term loans.
Additional
Expense for Share-Based Compensation
SFAS
123(R), which requires all companies to measure compensation expense for all
share-based payments (including employee stock options) at fair value, became
effective for public companies for fiscal years beginning after June 15, 2005.
As a result of SFAS 123(R), we have been required to record an expense for
stock-based compensation plans; this has resulted in ongoing accounting charges
that have significantly reduced our net income. For further information, see
the
section entitled “Share-Based Compensation” in Note 6 of the Notes to our
Consolidated Financial Statements.
Summary
of Our Financial Performance in Fiscal Year 2007 Compared to Fiscal Year 2006
For
the
year
ended
December 31, 2007 our revenues decreased by 43% to $13.5 million, while our
loss
for the year increased to approximately $8.6 million.
During
fiscal 2007, our cash, cash equivalents and short-term deposits decreased by
$6.3 million, of which $6.0 million of our cash, cash equivalents and short-term
deposits was used in operating activities. Capital expenditures in fiscal 2007
amounted to $0.4 million.
Fiscal
2007 was a disappointing year for us and below our expectations. The combination
of weakness in the 3G and 3.5G Cellular market, longer-than-usual average sales
cycles and internal execution problems, led to a significant decrease in our
revenues compared to 2006.
During
2007 we carried out activities designed to return us to profitability as quickly
as possible. Among such activities were a cost-cutting program, including a
23%
reduction in the workforce and structural changes throughout the Company. In
making these cuts, we have been careful to maintain our focus on sales and
customers.
The
other
part of our program to return-us-to-profitability was focused on expanding
our
sales. This part included increasing our closing rate of deals strengthening
our
distributor network, especially in the Far East; increasing our sales efforts
in
the Emerging Markets instead of the saturated markets like North America; and
increasing our pipeline.
We
began
to see the fruits of the program in the fourth quarter of 2007 when we reported
breakeven results compared to losses in the first three quarters of the year.
These positive results continued in the first quarter of 2008 with an increase
of 40% to $4.5 million in revenues compared with the first quarter of 2007.
Our
forecast for 2008 is that our results will be better than 2007, both in revenues
and net income (loss).
Organization
of Our Business
Management
receives sales information by product groups and by geographical regions. The
cost of material and related gross profit for the Omni-Q and the Performer
family is almost identical. Research and development, sales and marketing,
and
general and administrative expenses are reported on a combined basis only (i.e.
they are not allocated to product groups or geographical regions). Because
a
measure of operating profit or loss by product groups or geographical regions
is
not presented to the Company’s management, we have concluded that we operate in
one reportable segment.
A.
OPERATING
RESULTS
The
following table sets forth, for the periods indicated, certain financial data
expressed as a percentage of sales:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
33.1
|
|
|
31.4
|
|
|
40.0
|
|
Gross
profit
|
|
|
66.9
|
|
|
68.6
|
|
|
60.0
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
26.0
|
|
|
29.0
|
|
|
54.7
|
|
Less
royalty-bearing participation
|
|
|
7.8
|
|
|
8.1
|
|
|
15.5
|
|
Research
and development, net
|
|
|
18.2
|
|
|
20.9
|
|
|
39.2
|
|
Sales
and marketing
|
|
|
35.3
|
|
|
39.1
|
|
|
68.7
|
|
General
and administrative
|
|
|
7.6
|
|
|
10.8
|
|
|
17.7
|
|
Total
operating expenses
|
|
|
61.1
|
|
|
70.8
|
|
|
125.6
|
|
Operating
income (loss)
|
|
|
5.8
|
|
|
(2.2
|
)
|
|
(65.6
|
)
|
Financial
income, net
|
|
|
1.0
|
|
|
2.0
|
|
|
2.0
|
|
Net
income (loss)
|
|
|
6.8
|
|
|
(0.2
|
)
|
|
(63.6
|
)
|
Financial
Data for Year Ended December 31, 2007 Compared with Year Ended December 31,
2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
%
Change
|
|
%
Change
|
|
|
|
(in
millions of U.S. dollars)
|
|
2006
vs.
|
|
2007
vs.
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
The
Omni-Q family
|
|
|
3.9
|
|
|
15.7
|
|
|
9.5
|
|
|
303
|
|
|
(39
|
)
|
The
Performer family and others
|
|
|
18.4
|
|
|
7.8
|
|
|
4.0
|
|
|
(58
|
)
|
|
(49
|
)
|
Total
revenues
|
|
|
22.3
|
|
|
23.5
|
|
|
13.5
|
|
|
5
|
|
|
(43
|
)
|
Revenues
.
In
2007, our revenue decreased by 43% compared to 2006 due to the combination
of
weakness in the 3G and 3.5G Cellular market, longer average sales cycles and
internal execution problems. As identified in the second half of 2006, during
2007, we continued to see an increase in triple-play network deployments, which
reflected a new scale of triple-play network deployments in the marketplace
and
which is indicative of the significant challenge the triple-play network
operators must overcome in order to maintain quality services. Due to the nature
of the service provider orders which represents a potential for larger sales
on
average than equipment vendor orders, both the average size of our transactions
and the length of the sales cycle have increased.
Our
sales
network includes
RADCOM
Equipment, our wholly-owned subsidiary in the United States, as well as nine
independent representatives, and more than 35 independent distributors in over
35 other countries. The table below shows the sales breakdown by territory:
|
|
Year
Ended December 31,
|
|
Year Ended December 31,
|
|
|
|
(in millions
of U.S. dollars)
|
|
(as
percentages)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
2007
|
|
North
America
|
|
|
8.8
|
|
|
7.6
|
|
|
4.3
|
|
|
39.5
|
%
|
|
32.3
|
%
|
|
31.8
|
%
|
Europe
|
|
|
8.6
|
|
|
9.4
|
|
|
5.7
|
|
|
38.5
|
|
|
40.0
|
|
|
42.2
|
|
Far
East
|
|
|
3.3
|
|
|
2.6
|
|
|
1.6
|
|
|
14.8
|
|
|
11.1
|
|
|
11.9
|
|
South
America
|
|
|
0.7
|
|
|
2.6
|
|
|
1.2
|
|
|
3.2
|
|
|
11.1
|
|
|
8.9
|
|
Others
|
|
|
0.9
|
|
|
1.3
|
|
|
0.7
|
|
|
4.0
|
|
|
5.5
|
|
|
5.2
|
|
Total
revenues
|
|
|
22.3
|
|
|
23.5
|
|
|
13.5
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
During
2005 we announced that we signed a multi-million dollar contract with a major
3G
CDMA mobile operator in North America. This major mobile operator in North
America accounted for more than 10% of our sales in both 2005 and 2006. One
of
our distributors in Europe accounted for more than 10% of our sales in 2005.
During 2007 no single customer accounted for more than 10% of our
sales.
Cost
of sales and Gross profit
|
|
Year
ended December 31,
|
|
|
|
(in
millions of U.S. dollars)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Cost
of sales
|
|
|
7.4
|
|
|
7.4
|
|
|
5.4
|
|
Gross
profit
|
|
|
14.9
|
|
|
16.1
|
|
|
8.1
|
|
Cost
of sales
.
Over
the years, we have increasingly shifted to a subcontracting model for the
manufacture of our products. We believe that this approach, which decreases
our
fixed cost, will ensure that our cost of sales fluctuates more directly in
line
with revenues. Our cost of sales consisted of fixed costs of approximately
$2.2
million in 2007 and $1.8 million in 2006.
Most
of
our revenues come from products that we develop internally, but in order to
able
to deliver a broader range of products and services to our customers in target
markets, we must integrate other companies’ solutions, mainly servers and
storage units, into our Omni-Q system. The gross margins on these integrated
sales are lower than the products that we develop internally.
In
2007
our gross margins were lower than expected because revenues were lower than
expected and decreased by 43% compared to 2006. In the future, assuming revenue
levels similar to 2006 or greater for the year, we expect gross margins to
improve.
Our
cost
of sales during 2007 included an expense of $18,000 for share-based compensation
and, $14,000 for share-based compensation in 2006.
The
following table provides the approximate operating costs and expenses of the
Company in the 2005, 2006 and 2007, as well as the percent change of such
expenses in 2006 compared to 2005 and in 2007 compared to 2006:
Operating
Costs and Expenses
|
|
Year
ended December 31,
|
|
%
Change
|
|
%
Change
|
|
|
|
(in
millions of U.S. dollars)
|
|
2006
vs.
|
|
2007
vs.
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
Research
and development
|
|
|
5.8
|
|
|
6.8
|
|
|
7.4
|
|
|
17.2
|
|
|
8.8
|
|
Less
royalty-bearing participation
|
|
|
1.7
|
|
|
1.9
|
|
|
2.1
|
|
|
11.8
|
|
|
10.5
|
|
Research
and development, net
|
|
|
4.1
|
|
|
4.9
|
|
|
5.3
|
|
|
19.5
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
7.9
|
|
|
9.2
|
|
|
9.3
|
|
|
16.5
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1.7
|
|
|
2.6
|
|
|
2.4
|
|
|
52.9
|
|
|
(7.7
|
)
|
Total
operating expenses
|
|
|
13.7
|
|
|
16.7
|
|
|
17.0
|
|
|
21.9
|
|
|
1.8
|
|
Research
and Development
.
The
increase in our gross research and development expenses from 2006 to 2007
reflects our policy to support our growing activities in various geographic
regions and our long-term development goals. Although the number of research
and
development employees decreased during the year from 71 to 55 employees, the
total expense increased. The reason for this is that the employees are in Israel
and are paid in NIS. As a result of the negative impact of the strengthening
of
the value of the NIS against the U.S. dollar the total expense is higher than
the previous year. Research and development expenses, gross, increased from
$6.8
million in 2006 to $7.4 million in 2007. As a percentage of total revenues,
research and development expenses, gross, increased from 29.0% in 2006 to 54.7%
in 2007. Our research and development costs during 2007 included an expense
of
$123,000 for share-based compensation, and $113,000 for share-based compensation
in 2006.
Sales
and Marketing
.
As part
of our cost-cutting program, we decreased our ongoing employee related expenses
and other expenses during the year in the different regions in which we operate,
mainly in North America. This decrease, however, has been
offset
by
the negative impact of the strengthening of the value of the NIS against the
U.S. dollar on our salaries paid in Israel and a liability of $0.4 million,
representing an arbitration verdict rendered in a dispute between the Company
and Qualitest Ltd., previously one of our non-exclusive distributors in Israel.
Sales
and
marketing expenses increased from approximately $9.2 million in 2006 to
approximately $9.3 million in 2007. As a percentage of total revenues, sales
and
marketing expenses increased from 39.1% in 2006 to 68.7% in 2007.
Our
sales
and marketing expenses during 2007 included an expense of $203,000 for
share-based compensation and $193,000 for share-based comp in 2006.
General
and Administrative
.
General
and administrative expenses for 2007 decreased by 6.3% compared to 2006. General
and administrative expenses included a provision for bad debts and other
expenses totaling approximately $(2,000) for 2007, $557,000 for 2006 and $17,000
for 2005. In 2007 there was an increase in salary and auditing expenses and
in
expenses related to compliance with the Sarbanes-Oxley Act. The expenses during
2007 included $220,000 for share-based compensation and $238,000 for share-based
compensation in 2006.
Financial
Income, Net.
Financial income, net, was approximately $265,000 in 2007 compared to $472,000
in 2006. The decrease in financial income, net, in 2007 compared to 2006 was
due
to lower cash levels and lower prevailing rates of return. The lower rates
of
return were due to general economic conditions.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
The
following discussion of 2006 compared with 2005 should be read in conjunction
with the section of this report above entitled “Financial Data for Year Ended
December 31, 2007 Compared to Year Ended December 31, 2006.”
Revenues
.
Our
revenue in 2006 increased by 5.4% compared to 2005 due to the continuing
improvement in market conditions discussed above and due to our success in
penetrating additional service providers around the world. During the first
half
of 2006, the main component of our sales was to 3G cellular operators. In the
second half of 20006, we began to see an increase in triple-play network
deployments. This reflects a new scale of triple-play network deployments in
the
marketplace, and is part of the significant challenge the triple-play network
operators must overcome in order to maintain quality services. Due to the nature
of the service provider orders which represents a potential for larger sales
on
average than equipment vendor orders, both the average size of our transactions
and the length of the sales cycle have increased.
Cost
of Sales
.
Since
2001, we have increasingly shifted to a subcontracting model for the manufacture
of our products. As a result, cost of sales consisted of fixed costs of
approximately $1.8 million for 2006 and $1.3 million for 2005. We believe that
the reduction of our fixed manufacturing costs will ensure that our cost of
sales fluctuates more directly in line with revenues.
Research
and Development
.
The
increase in gross research and development expenses from 2005 to 2006 reflects
our policy to support our growing activity
and
our
long-term development goals. This increase is indicative primarily of an
increase in the average number of our research and development personnel.
Research and development expenses, gross, increased from $5.8 million in 2005
to
$6.8 million in 2006. As a percentage of total revenues, research and
development expenses, gross, increased from 26.0% in 2005 to 29.0% in 2006.
Our
research and development costs during 2006 included an expense of $113,000
for
share-based compensation and $0 in 2005.
Sales
and Marketing
.
In
North America, we mainly sell our products to end-users directly compared to
2005 when we sold mainly via sales representatives, which has increased our
salary and other expenses. This increase, however, has been partially offset
by
lower commissions paid to sales representatives. We have also expanded our
sales
and marketing activities in China with the goal of preparing ourselves to
address the area’s emerging 3G market. We are still waiting for this development
to materialize. The increase in sales and marketing expenses from 2005 to 2006,
which included primarily an increase in the average number of sales personnel
and salary expenses, together with the expenses associated with opening our
new
sales offices in Singapore and Korea, reflects these activities. Sales and
marketing expenses increased from approximately $7.9 million in 2005 to
approximately $9.2 million in 2006. As a percentage of total revenues, sales
and
marketing expenses increased from 35.3% in 2005 to 39.1% in 2006.
General
and Administrative
.
General
and administrative expenses for 2006 increased by 51.2% compared to 2005.
General and administrative expenses included a provision for bad debts and
other
expenses totaling approximately $557,000 for 2006 and $17,000 for 2005. The
other main reason for the increase in general and administrative expenses during
2006 was an expense of $238,000 for share-based compensation and $12,000 for
share-based compensation in 2005.
Financial
Income, Net.
Financial income, net, was approximately $472,000 in 2006 compared to $235,000
in 2005. The increase in financial income, net, in 2006 compared to 2005 was
due
to higher prevailing rates of return.
B.
LIQUIDITY
AND CAPITAL RESOURCES
We
have
financed our operations through cash generated from operations, from the
proceeds of our 1997 initial public offering and from our 2004 private placement
transaction. Cash and cash equivalents, marketable securities and short-term
deposits at December 31, 2005, 2006 and 2007 were approximately $
10
.
5
million,
$10.1 million and $3.8 million, respectively. During the first two quarters
of
2008, we increased our cash balances by about $5 million: $2.5 million from
a
private placement transaction and the other $2.5 million from a venture lending
loan. For more information, see “Item 8—Financial Information—Significant
Changes” below. We believe that our existing capital will be sufficient for the
Company’s requirements for at least the next twelve months.
Net
Cash Generated by/Used in Operating Activities.
Net
cash
used in operating activities was approximately $2.6 million in 2006 and $6.0
million in 2007, while net cash generated from operations in 2005 was
approximately $
1
.
4
million.
The negative net cash flow in 2007 was primarily due to the Company’s loss of
approximately $8.6 million, an increase of approximately $1.1 million in
inventory, a decrease of approximately $1.1 million in trade payables and an
increase of approximately $195,000 in other current assets. This was partially
offset by a net decrease during the year of approximately $3.9 million in trade
receivables and by an increase of approximately $378,000 in other payables
and
accruals,, and also by employees’ share-option compensation of approximately
$564,000 and approximately $687,000 of depreciation expenses.
The
trade
receivables and days sales outstanding (DSO) are primarily impacted by payment
terms, shipment linearity in the quarter and collections performance. Trade
receivables decreased from 2006 to 2007 by $3.9 million due primarily to the
decrease in our total revenue.
The
overall increase in inventory in 2007 relative to 2006 was due to the impact
of
increased purchases in the first half of 2007 in anticipation of sales at least
at a similar level as 2006 during the year that did not materialize. All
inventories are accounted for at the lower of cost or market.
The
increase in other current assets from 2006 to 2007 was primarily a result of
a
temporary increase in prepaid expenses and Value Added Tax. The decrease in
trade payables was primarily due to the decrease in
purchases
of inventory
in
the
second half of the year. The increase in payables and accruals in 2007 was
primarily a result of an increase in advances from customers and our provision
for our dispute with Qualitest, which dispute is discussed in more detail in
“Item 8—Financial Information—Consolidated Statements and Other Financial
Information—Legal Proceedings.”
Net
Cash Provided by/Used in Investing Activities.
Our
investing activities generally consist of two components: purchase and sale
of
short-term deposits, and purchase of equipment. We invest cash that is surplus
to our operating requirements in our short-term deposit portfolio in order
to
maximize our interest rates. In 2005, we sold marketable securities which
provided us cash in the amount of $2.0 million. In 2006, we invested surplus
cash in the amount of $8.0 million. In 2007, we sold short-term deposits, which
provided us cash in the amount of $10.5 million and invested surplus cash in
the
amount of $2.5 million. Net cash provided by (used in) investing activities
in
2005, 2006 and 2007 was approximately $1.7 million, $(8.3) million and $7.6
million, respectively.
Purchase
of Equipment.
P
urchases
of equipment in 2005, 2006 and 2007 were approximately $336,000, $327,000 and
$437,000, respectively. These expenditures were principally for computers and
equipment purchases.
Net
Cash Provided by Financing Activities.
In
2005,
net cash provided by financing activities totaled approximately $909,000, of
which $184,000 came from the exercise of shares options and approximately
$725,000 from the exercise of warrants from the private placement as described
below. In 2006, net cash provided by financing activities totaled approximately
$2.4 million, $974,000 from the exercise of share options and approximately
$1.4
million from the exercise of warrants from the private placement as described
below under “—Private Placement.” In 2007, net cash provided by financing
activities totaled approximately $224,000, representing approximately $224,000
from the exercise of share options.
Private
Placement.
In
March
2004, we raised $5.5 million in a private placement, or PIPE, of ordinary shares
and warrants. This equity financing enabled us, among other things, to sustain
compliance with certain continued listing requirements of the NASDAQ Global
Market, from which we transferred to the NASDAQ Capital Market in October 2007.
(See “Item 3—Key Information—Risk Factors—We might not satisfy all the
requirements for continued listing on the NASDAQ Capital Market, and our shares
may be delisted.”) Under the PIPE transaction, we issued 3,851,540 of our
ordinary shares at an aggregate purchase price of $5.5 million, or $1.428 per
ordinary share. The investors in the PIPE included Star Ventures, B.C.S. Group,
Yehuda Zisapel, Zohar Zisapel, and others. We also issued to the investors
warrants to purchase up to 962,887 ordinary shares at an exercise price of
$2.253 per share. The warrants were exercisable for two years from the closing
of the PIPE. As part of the private placement, we filed with the SEC a resale
registration statement covering the shares purchased in the private placement
(including the shares underlying the warrants); our F-3 was filed with the
SEC
on May 13, 2004, while our amended F-3/As were filed on October 15, 2004 and
November 26, 2004. The registration was declared effective by the SEC
on
December
10,
2004. We
incurred expenses of approximately $189,000 in connection with the offering.
Our
net proceeds from the offering were approximately $5.3 million. In 2005 and
2006
the investors exercised warrants to purchase 328,256 ordinary shares and 625,877
ordinary shares, respectively. Our net proceeds from these exercises were
approximately $725,000 and $1.4 million, respectively.
Impact
of Related Party Transactions
We
have
entered into a number of agreements with certain companies, of which Yehuda
Zisapel and Zohar Zisapel are co-founders, directors and/or principal
shareholders (collectively, the “RAD-Bynet Group”). Of these agreements, the
office space leases and the distribution agreement with Bynet Electronics Ltd.
(described in the section entitled “Related Party Transactions” below) in Israel
are material to our operations. The pricing of the transactions was determined
based on negotiations between the parties. Members of our management reviewed
the pricing of the lease and distribution agreements and confirmed that these
agreements were not different from terms that could have been obtained from
unaffiliated third parties. We believe, however, that due to the affiliation
between us and the RAD-Bynet Group, we have greater flexibility on certain
issues than what may be available from unaffiliated third parties. In the event
that the transactions with members of the RAD-Bynet Group are terminated and
we
enter into similar transactions with unaffiliated third parties, that
flexibility may no longer be available to us.
In
February 2008, we completed a PIPE in which we raised $2.5 million from certain
investors, including our Chairman (Mr. Zohar Zisapel), Zohar Gilon (one of
our
directors) and his son (Amit Gilon). For more information regarding this PIPE,
see “Item 8—Financial Information—Significant Changes” below.
Impact
of Inflation and Foreign Currency Fluctuations
The
majority of our sales are denominated in U.S. dollars or are dollar-linked.
The
currency of the primary economic environment in which our operations are
conducted is, therefore, the dollar, which is our functional
currency.
Since
we
pay the salaries of our Israeli employees in NIS, the dollar cost of our
operations is influenced by the exchange rates between the NIS and the dollar.
While we incur some expenses in NIS, inflation in Israel will have a negative
affect on our profits for contracts under which we are to receive payment in
dollars or dollar-linked NIS, unless such inflation is offset on a timely basis
by a devaluation of the NIS in relation to the dollar.
Inflation
in Israel has occasionally exceeded the devaluation of the NIS against the
dollar or we have faced the strengthening of the value of the NIS against the
U.S. dollar. In the first quarter of 2008, for example, the value of the NIS
expressed in dollar terms increased significantly, raising our Israeli-based
costs as expressed in dollars. Under these conditions, we experienced higher
dollar costs for our operations in Israel, adversely affecting our
dollar-measured results of operations.
Because
exchange rates between the NIS and the dollar fluctuate continuously exchange
rate fluctuations will have an impact on our profitability and period-to-period
comparisons of our results. The effects of foreign currency re-measurements
are
reported in our financial statements as financial income or
expense.
Effective
Corporate Tax Rate
Israeli
companies were generally subject to corporate tax on their taxable income at
the
rate of 29% for the 2007 tax year. Following an amendment to the Israeli Income
Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), the corporate tax rate
is scheduled to continue to decrease as follows: 27% for the 2008 tax year,
26%
for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
companies are generally subject to capital gains tax at a rate of 25% for
capital gains (other than gains deriving from the sale of listed securities)
derived after January 1, 2003.
Our
manufacturing facilities have been granted “Approved Enterprise” status under
the “Investments Law” - the Law for the Encouragement of Capital Investments,
1959, as amended – and consequently are eligible, subject to compliance
with specific requirements,
for
tax
benefits beginning when such facilities first generate taxable income. (For
additional information on Approved Enterprise status, see “Item 10—Additional
Information—Taxation—Israeli Tax Considerations—Law for the Encouragement of
Capital Investments, 1959.”) The tax benefits under the Investment Law are not
available with respect to income derived from products manufactured outside
of
Israel. We have derived, and expect to continue to derive, a substantial portion
of our income from our Approved Enterprise facilities. We are entitled to a
tax
exemption for a period of two to four years (in respect of income derived from
our Tel Aviv facility), commencing in the first year in which such income is
earned, subject to certain time restrictions. These time periods have not yet
commenced because we have incurred net operating losses for Israeli tax
purposes. At December 31, 2007, we had net operating loss carry-forwards
(unlimited in time) of approximately $32.6 million.
Our
effective corporate tax rate may substantially exceed the Israeli tax rate.
Our
U.S. subsidiary will generally be subject to applicable U.S. federal, state,
local and foreign taxation, and we may also be subject to taxation in the other
foreign jurisdictions in which we own assets, have employees or conduct
activities. Our U.S. subsidiary had net operating loss carry-forwards of
approximately $11.2 million available at December 31, 2007 for U.S. federal
and state income tax purposes. These carry-forwards may offset future taxable
income and expire from 2008 through 2026 for U.S. federal income tax purposes.
Because of the complexity of these local tax provisions, we are unable to
anticipate the actual combined effective corporate tax rate that will apply
to
us. Our U.K. subsidiary had net loss carry-forwards available at December 31,
2007 of approximately $399,000 for U.K. tax purposes.
We
recorded a valuation allowance at December 31, 2007 for all of our deferred
tax
assets. Based on the weight of available evidence, it is more likely than not
that all of our deferred tax assets will not be realized.
Government
Grants and Related Royalties
The
Government of Israel, through the Office of the Chief Scientist, encourages
research and development projects pursuant to the R&D Law and the
regulations promulgated thereunder. We may receive from the Office of the Chief
Scientist up to 50% of certain approved research and development expenditures
for particular projects. We recorded grants from the Office of the Chief
Scientist totaling approximately $1.7 million in 2005, $1.9 million in 2006
and
$2.1 million in 2007. Pursuant to the terms of these grants, we are obligated
to
pay royalties of 3.5% of revenues derived from sales of products (and related
services) funded with these grants. In the event that a project funded by the
Office of the Chief Scientist does not result in the development of a product
which generates revenues, we would not be obligated to repay the grants we
received for the product’s development. Royalties’ expenses relating to the
Office of the Chief Scientist grants included in the cost of sales for years
ended December 31, 2005, 2006 and 2007 were $769,000, $807,000 and $412,000,
respectively. The total research and development grants that we have received
from the Office of the Chief Scientist as of December 31, 2007 were $27.1
million. For projects authorized since January 1, 1999, the repayment interest
rate is LIBOR. The accumulated interest as of December 31, 2007 was $3.3
million. As of December 31, 2007, the accumulated royalties paid to the Office
of the Chief Scientist were $7.2 million. At December 31, 2007, our
contingent liability to the Office of the Chief Scientist in respect of grants
received was approximately $23.2 million. For additional information, see “Item
4—Information on the Company—Business Overview—Israeli Office of the Chief
Scientist.”
We
are
also obligated to pay royalties to the BIRD Foundation, with respect to sales
of
products based on technology resulting from research and development funded
by
the BIRD Foundation. Royalties to the BIRD Foundation are payable at the rate
of
5% based on the sales revenues of such products, up to 150% of the grant
received, linked to the United States Consumer Price Index. As of
December 31, 2007, we had a contingent obligation to pay the BIRD
Foundation aggregate royalties in the amount of approximately $319,000. Since
1995 we have not received grants from the BIRD Foundation.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are more fully described in Note 2 to our Notes
to the Consolidated Financial Statements. However, 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 the
industry, information provided by our customers and information available from
other outside sources, as appropriate. These estimates are subject to an
inherent degree of uncertainty. With respect to our policies on revenue
recognition, warranty costs and inventories, our historical experience is based
principally on our operations since we commenced sales. Our critical accounting
policies include the following:
Revenue
recognition
.
Revenue
from product sales is recognized in accordance with Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition,” when the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred, (3) the vendor's fee is fixed or determinable and (4) collectibility
is probable. Amounts received from customers prior to product shipments are
classified as advances from customers. With our products, we provide a one-year
warranty, which includes bug fixing and a hardware warranty (the “Warranty”). We
record an appropriate provision for Warranty in accordance with SFAS No. 5,
“Accounting for Contingencies.”
After
the
Warranty period initially provided with our products, we may sell extended
warranty contracts, which includes bug fixing and a hardware warranty. In such
cases, revenues attributable to the extended warranty are deferred at the time
of the initial sale and recognized ratably over the extended contract warranty
period.
Most
of
our revenues are generated from sales to independent distributors. We have
a
standard contract with our distributors. Based on this agreement, sales to
distributors are final and distributors have no rights of return or price
protection. We are not a party to the agreements between distributors and their
customers.
We
also
generate sales through independent representatives. These representatives do
not
hold any of our inventories, and they do not buy products from us. We invoice
the end-user customers directly, collect payment directly and then pay
commissions to the representative for the sales in its territory. We report
sales through independent representatives on a gross basis, based on the
indicators of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as
an Agent.”
Allowance
for product Warranty
.
Our
products sold are generally covered by a warranty for a period of one year.
In
respect of contracts where the Warranty was recognized upon delivery, we
recorded an appropriate provision.
Trade
receivables
.
Trade
receivables are recorded less the related allowance for doubtful accounts
receivable. We consider accounts receivable to be doubtful when we think it
is
probable that we will be unable to collect all amounts, after taking into
account current information regarding the customer’s ability to repay its
obligations. The balance sheet allowance for doubtful accounts for all of the
reported periods through December 31, 2007, is determined as a specific amount
for those accounts the collection of which is uncertain. If our customers’
ability to repay their obligations diminishes in the future, the actual
allowance for doubtful accounts may not be adequate.
Inventories
.
Inventories are stated at the lower of cost or market, cost being determined
on
the basis of the average cost method for raw materials and on the basis of
actual manufacturing costs for work-in-progress and sub-contractors. Inventory
write-off and write-down provisions are provided to cover risks arising from
slow-moving items or technological obsolescence. Spare parts and raw materials
that are no longer used in producing our product are written down to their
fair
market value. If changes in the market conditions or changes in the Company’s
products occur in the future, it is possible that additional write-offs will
be
made at such time. In addition, we add to the cost of finished products and
work
in process held in inventory the overhead from our manufacturing process. If
these estimates change in the future, the amount of overhead allocated to cost
of revenues would change.
Share
option plans
.
On
January 1, 2006, we adopted SFAS No. 123(R), which requires the measurement
and
recognition of compensation expense for all share-based payment awards made
to
employees and directors based on estimated fair values. SFAS 123(R) supersedes
our previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in
fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
(“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
in its adoption of SFAS 123(R). We adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of the accounting
standard as of January 1, 2006. Our consolidated financial statements as of
and
for the years ended December 31, 2006 and December 31, 2007 reflect the impact
of SFAS 123(R). In accordance with the modified prospective transition method,
our consolidated financial statements for prior periods have not been restated
to reflect, and do not include, the impact of SFAS 123(R). Share-based
compensation expense recognized under SFAS 123(R) for fiscal 2007 was
$564,000.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards
on
the grant date using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our consolidated statements of operations. Prior
to
the adoption of SFAS 123(R), we accounted for share-based awards to employees
and directors using the intrinsic value method in accordance with APB 25 as
allowed under SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
Share-based compensation expense recognized during the current period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest.
SFAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately vest. The
estimate is based on our historical rates of forfeiture. Share-based
compensation expense recognized in our consolidated statement of operations
for
fiscal 2007 includes (i) compensation expense for share-based payment awards
granted prior to, but not yet vested as of December 31, 2006, based on the
grant-date fair value estimated in accordance with the pro forma provisions
of
SFAS 123 and (ii) compensation expense for the share-based payment awards
granted subsequent to December 31, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).
As
share-based compensation expense recognized in the consolidated statements
of
operations is based on awards ultimately expected to vest, it has been reduced
by estimated forfeitures. Upon adoption of SFAS 123(R), we did not change our
method of valuation for share-based awards which is the Black-Scholes option
pricing model . See also Notes 2P and 6C of the Notes to our Consolidated
Financial Statements, for further information.
Deferred
Income Tax.
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Deferred tax asset and liability account balances are recognized for the
future tax consequences attributable to differences between the financial
statements’ carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated statement
of operations in the period that includes the enactment date. We provide a
valuation allowance to reduce deferred tax assets to the extent we believe
it is
more likely than not that such benefits will not be realized.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation, No. 48,
(“FIN
48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109. FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No.
109.
The first step is to evaluate the tax position for recognition by determining
if
the weight of available evidence indicates it is more likely than not that
the
position will be sustained on audit, including resolution of related appeals
or
litigation processes, if any. The second step is to measure the tax benefit
as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments and which
may
not accurately anticipate actual outcomes. The adoption of FIN 48 did not have
a
material impact on our financial position or results of operations
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value Measurement. SFAS No. 157 defines fair value, establishes
a
framework for the measurement of fair value, and enhances disclosures about
fair
value measurements. The Statement does not require any new fair value measures.
The SFAS is effective for fair value measures already required or permitted
by
other standards for fiscal years beginning after November 15, 2007. The Company
is required to adopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157
is
required to be applied prospectively, except for certain financial instruments.
Any transition adjustment will be recognized as an adjustment to opening
retained earnings in the year of adoption. In February 2008, the FASB issued
SFAS No. 157-2, which grants a one-year deferral of SFAS No. 157’s fair-value
measurement requirements for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis. We are currently evaluating the impact of adopting SFAS
No. 157 on our results of operations and financial
position.
In
February 2007, the FASB issued “SFAS No. 159”, The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115, which permits entities to irrevocably choose to measure
many financial assets and liabilities at fair value that are not currently
required to be measured at fair value. If the fair value option is elected,
changes in fair value would be recorded in results of operations at each
subsequent reporting date. The Statement allows entities to achieve an offset
accounting effect for certain changes in fair value of certain related assets
and liabilities without having to apply complex hedge accounting provisions.
This Statement is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. We are currently evaluating the
effect, if any, that the adoption of SFAS No. 159 will have on our
future consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (Statement
141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements- an amendment to ARB No. 51 (Statement 160). Statements 141R and
160
require most identifiable assets, liabilities, noncontrolling interests, and
goodwill acquired in a business combination to be recorded at “full fair value”
and require noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, which changes the accounting
for transactions with noncontrolling interest holders. Both Statements are
effective for periods beginning on or after December 15, 2008, and earlier
adoption is prohibited. Statement 141R will be applied to business combinations
occurring after the effective date. Statement 160 will be applied prospectively
to all noncontrolling interests, including any that arose before the effective
date. We are currently evaluating the effect, if any, of the adoption of SFAS
No. 141R and SFAS 160 on our future consolidated results of operations and
financial condition.
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment to ARB No. 51 (“SFAS
160”). SFAS 160 requires noncontrolling interests (previously referred to as
minority interests) to be reported as a component of equity, which changes
the
accounting for transactions with noncontrolling interest holders. SFAS 160
is
effective for periods beginning on or after December 15, 2008, and earlier
adoption is prohibited. SFAS 160 will be applied prospectively to all
non-controlling interests, including any that arose before the effective date.
We are currently evaluating the effect, if any, that the adoption of SFAS 160
will have on our future consolidated results of operations and financial
condition.
In
March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand the
effects of the derivative instruments on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning on or after November
15,
2008, with early adoption encouraged.
We
are
currently evaluating the effect, if any, that the adoption of SFAS 161 will
have
on our future consolidated results of operations and financial
condition.
In
December 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB
110”), which, effective January 1, 2008, amends and replaces SAB 107,
Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding
the
use of a “simplified” method in developing the expected life assumption in
accordance with FASB Statement No. 123(R), Share-Based Payment. The use of
the “simplified” method, was scheduled to expire on December 31, 2007. SAB
110 extends the use of the “simplified” method in certain situations. The SEC
staff does not expect the “simplified” method to be used when sufficient
information regarding exercise behavior, such as historical exercise data or
exercise information from external sources, becomes available. We currently
use
simplified estimates and expect to continue using such method until historical
exercise data will provide useful information to develop expected life
assumption.
On
May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)." FSP APB 14-1 requires issuers of
convertible debt that may be settled wholly or partly in cash when converted
to
account for the debt and equity components separately. FSP APB 14-1 is effective
for fiscal years beginning after December 15, 2008 and must be applied
retrospectively to all periods presented. We are currently evaluating the
effect, if any, that the adoption of FSP APB 14-1 will have on our
consolidated results of operations and financial condition.
C.
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
See
“Item
4—Information on the Company—Business Overview—Research and Development” and
“Item 4—Information on the Company—Business Overview—Proprietary
Rights.”
D.
TREND
INFORMATION
In
2007,
there was increased spending in the industry by service providers, compared
to
2006, as they began to expand and upgrade their networks, including
next-generation wireless technologies and Voice over Internet Protocol, or
IP,
solutions. This increase in industry spending was strongest with the build-up
of
new technologies mainly in emerging markets. Our traditional large competitors
remain strong and focused on certain key factors, such as customer
relationships, repeat sales to their customer base, innovative and reliable
products, services and price.
Data
service adoption over the new 3G and 3.5G cellular networks is increasing but
at
a slower rate than expected. There is an increasing number of 3G and 3.5G
networks but most of them are used mainly for voice. We continue to believe
the
data service adoption will occur and will introduce an increased demand for
our
solutions.
There
is
a clear global trend pursuant to which government regulation is gradually
opening the communication market for competition. As a result, in each major
market, at least three service providers compete in the same segment and area.
This competition drives increased spending on introducing next-generation
services. The increase in service usage increases the potential need for service
assurance solutions. While services are getting more established and more
technologically advanced, the quality of services becomes an issue that our
potential customers, the service providers must address.
As
part
of this increase in competition, we have begun to see rapid adoption of SIGTRAN
technology to lower the operational cost for signaling networks and to handle
the increased network capacity. This move helps service providers justify the
move to NGN solutions and increases our potential customers.
Fixed
mobile Convergence (FMC) has become a significant challenge for most service
providers. As result we see a trend towards service provider consolidation.
Recent examples are the KPN and KPN mobile and Cingular, and the AT&T
mergers. These mergers influenced decision making processes, resulting in a
temporary slowdown in procurement and deployment of new telecommunications
equipment. From the technology side, IMS is being accepted as the technology
of
choice to implement and deliver converged network services. Different service
providers, mainly those that own both cellular and wireline operations, are
currently at the trial level and anticipate moving into operation of IMS
technology during 2008 - 2010. This movement could increase the need for service
monitoring solutions, as it is a new service platform and introduces new
challenges for service providers regarding how to monitor their
networks.
Another
area which has growth potential in the future is IPTV. Wireline service
providers, mainly the incumbent carriers, are starting to spend money on TV
over
IP solutions. In 2007 spending was limited mainly for trial networks, and this
trend is expected to continue in 2008. Following the trial period, we expect
spending to increase in the years 2009 - 2011. This trend is part of a
triple-play strategy aimed at competing with the cable operators offering
digital TV.
E.
OFF-BALANCE
SHEET ARRANGEMENTS
None.
F.
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The
following table of our material contractual obligations as of December 31,
2007,
summarizes the aggregate effect that these obligations are expected to have
on
our cash flows in the periods indicated:
|
|
Payments
due by period
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
|
|
|
|
(in
thousands of U.S. dollars)
|
|
Property
Leases
|
|
$
|
932
|
|
$
|
699
|
|
$
|
229
|
|
$
|
4
|
|
|
|
|
Open
Purchase Orders
|
|
|
650
|
|
|
650
|
|
|
—
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
784
|
|
|
444
|
|
|
326
|
|
|
14
|
|
|
—
|
|
Total
|
|
$
|
2,366
|
|
$
|
1,793
|
|
$
|
555
|
|
$
|
18
|
|
|
—
|
|
Open
purchase orders
.
We
purchase components from a variety of suppliers and use several contract
manufacturers to provide manufacturing services for our products. During the
normal course of business, in order to manage manufacturing lead times and
help
assure adequate component supply, we enter into agreements with contract
manufacturers and suppliers that allow them to procure inventory based upon
criteria as defined by our requirements. In certain instances, we provide a
non-binding forecast every 12 months, and we submit binding purchase orders
quarterly for material needed in the next quarter. These agreements allow us
the
option to cancel, reschedule, and adjust our requirements based on our business
needs prior to firm orders being placed. There are no penalties incurred for
not
taking delivery; however, if we alter the components in our products, when
the
manufacturer has bought components based on a purchase order, we reimburse
the
manufacturer for any losses incurred relating to the manufacturer’s disposal of
such components. Consequently, only a portion of our reported purchase
commitments
arising
from these agreements are firm, non-cancelable, and unconditional
commitments
and
included in the table above
.
Our
liability for severance pay for Israeli employees is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet date.
After completing one full year of employment, our Israeli employees are entitled
to one month's salary for each year of employment or a portion thereof. Our
total liability at December 31, 2007 was $3,240,000. Timing of payment of this
liability is dependant on the timing of the departure of the
employees.
In
addition, we are required to pay royalties as percentages of the revenues
derived from products incorporating know-how developed from research and
development grants from the Office of the Chief Scientist. Royalty rates were
3%
- 3.5% in 2003 and 3.5% in 2004 and subsequent years. As of December 31,
2007, our contingent liability to the Office of the Chief Scientist in respect
of grants received was approximately $23.2 million and our contingent liability
to the BIRD Foundation in respect of funding received was approximately
$319,000. If we do not generate revenues from products incorporating know-how
developed within the framework of these programs, we will not be obligated
to
pay royalties.
Further,
we
provided
performance
guarantees in favor of two customers from Bank Hapoalim in Israel amounting
to
$
4
89,000
as
of December 31,
2007.
ITEM
6.
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS
AND SENIOR MANAGEMENT
The
following table lists our current directors and executive officers:
Name
|
|
Age
|
|
Position
|
Zohar
Zisapel(5)(6)
|
|
59
|
|
Chairman
of the Board of Directors
|
David
Ripstein
|
|
41
|
|
President,
Chief Executive Officer
|
Jonathan
Burgin
|
|
47
|
|
Chief
Financial Officer
|
Shahaf
Kieselstein
|
|
36
|
|
Vice
President, Research and Development
|
Eyal
Harari
|
|
31
|
|
Vice
President, Products and Marketing
|
Dana
Shahar-Gara
|
|
34
|
|
Vice
President, Human Resources
|
Miki
Shilinger
|
|
53
|
|
Vice
President, Operations
|
Uzi
Yahav
|
|
53
|
|
Vice
President, Business Development
|
Avi
Zamir
|
|
51
|
|
President,
RA
DCOM
Equipment
|
Uri
Har (1)(2)(3)(4)(5)
|
|
71
|
|
Director
|
Zohar
Gilon (2)(4)(6)
|
|
60
|
|
Director
|
Irit
Hillel (1)(2)(4)(5)(6)
|
|
44
|
|
Director
|
(1)
External Director
(2)
Independent Director
(3)
Chairman of Audit Committee
(4)
Audit
Committee Member
(5)
Nominating Committee
(6)
Compensation Committee
Mr. Zohar
Zisapel, a co-founder of our Company, has served as our Chairman of the Board
since our inception. Mr. Zisapel is also a founder and a director of RAD
Data Communications Ltd., a worldwide data communications company headquartered
in Israel, for which he currently serves as Chairman of the Board and served
as
President from 1982 to 1997. Mr. Zisapel is the Chairman of two other
public companies RADVision Ltd., and Ceragon Ltd. as well as a director or
Chairman of several private companies. Mr. Zisapel has a B.Sc. and a M.Sc.
degree in Electrical Engineering from the Technion and an M.B.A. degree from
Tel-Aviv University.
Mr. David
Ripstein, our President and Chief Executive Officer
since
April 1, 2007, joined RADCOM in 2000 as General Manager of the Quality
Management Unit, a position under which he formed and executed RADCOM’s service
quality management strategy and spearheaded the development of its
differentiating R70 technology platform. In 2002, Mr. Ripstein was nominated
to
head the Company’s R&D and marketing activities. In May 2006, Mr. Ripstein
was appointed as RADCOM’s Chief Operating Officer. Prior to joining RADCOM, Mr.
Ripstein served for 11 years as an officer of an elite R&D unit within the
Israel Defense Forces (IDF) Intelligence Division, and then co-founded two
startups: Firebit, a provider of ISP security service solutions, and Speedbit,
a
developer of Internet download acceleration tools. Mr. Ripstein earned
B.Sc. and M.Sc. degrees in Electronic Engineering from the
Technion.
Mr. Jonathan
Burgin, our Chief Financial Officer, joined us in July 2006. Prior to
joining us, Mr. Burgin was Chief Financial Officer of XTL
Biopharmaceuticals (NASDAQ: XTLB; LSE: XTL; TASE:XTL) beginning in 1999, where
he took an active part in the process of listing its shares on the NASDAQ,
London, and TASE and raising $110 million in four financing rounds. Previously,
Mr. Burgin served as Chief Financial Officer of YLR Capital Markets, a
publicly-traded Israeli investment bank, and as Senior Manager at Kesselman
& Kesselman, the Israeli member of PricewaterhouseCoopers International Ltd.
Mr. Burgin earned an M.B.A. and a B.A. in Accounting and Economics from Tel-Aviv
University and is certified in Israel as a CPA.
Mr.
Shahaf Kieselstein
,
our
Vice President of Research and Development, joined us in September 2006. Prior
to joining RADCOM, he was with Intel’s LAN Division for eight years, beginning
as a Software Team Manager and moving on to the position of Project Manager
of
large-scale networking software at Intel’s Oregon plant. In 2002, he returned to
Israel to take on the position of Software Manager of Intel’s Israel LAN
Division. Prior to his tenure at Intel, Mr. Kieselstein spent several years
as a
software engineer at Digital Semiconductor. Mr. Kieselstein holds B.Sc. and
M.Sc. degrees in Computer Science, as well as a B.A. in Accounting from Hebrew
University.
Mr.
Eyal
Harari
,
our Vice
President of Products and Marketing, has been with RADCOM since 2000. Mr.
Harari began in the Development side of RADCOM in 2000 as a software R&D
group manager, later becoming the Director of Product Management for VoIP
Monitoring Solutions, and finally the Senior Director of RADCOM’s Product
Management department. Before joining RADCOM, Mr. Harari served from 1995 in
the
Communication, Computers & Electronics Corps of the Israel Defense Forces,
managing large-scale software projects. Mr. Harari received a B.A. in
Computer Science from the Open University of Tel Aviv, and also holds
an M.B.A. from Tel-Aviv University and an LL.M in Business Law from
Bar Ilan University.
Ms.
Dana
Shahar-Gara has been with the Company since 2000, when she was the Company's
Recruitment and Training Manager. In 2002, she took on the role of Human
Resources Manager, and in 2007, she was appointed Vice President of Human
Resources. Before joining RADCOM, Ms. Gara was a Placement Consultant for
the Keinan-Sheffi Institute. She has a B.A. in Behavioral Science and
Communication from Israel's Management College and an M.A. in Social Psychology
from Bar Ilan University.
Mr. Miki
Shilinger, our Vice President of Operations, joined us in June 1999. From
May 1997 to May 1999 he was Director of Purchasing and Logistics for
Tadiran - Telematics Ltd., an Israeli company involved in the marketing,
development and production of systems for the location of vehicles, cargo and
people. Prior to that Mr. Shilinger was a Director of Logistics at
Galtronics Ltd., one of the leading companies in the manufacture of portable
antennas for cellular systems. Prior to that Mr. Shilinger was the owner of
a Management Information Systems Consulting firm implementing ERP Systems.
Mr. Shilinger has a B.Sc. degree in Industry and Management from Ben-Gurion
University.
Mr.
Uzi
Yahav, our Vice President of Business Development, joined us in November 2005.
From 2002 to October 2005, he was the Vice President of Marketing and Business
Development at Optibase Ltd. a developer of IPTV solutions for major operators
and carriers worldwide. From 1999 to 2002, Mr. Yahav was the Vice President
of
Marketing at Be Connected Ltd. a subsidiary of Telrad Networks Ltd., a developer
of integrated telecommunication solution for carriers. Prior to that, he was
the
Product Manager for advanced wireless solutions at Teledata Networks Ltd. Mr.
Yahav has a B.Sc. degree in Electrical Engineering from Ben Gurion University,
and an M.B.A. degree from Haifa University.
Mr.
Avi
Zamir, President of our wholly-owned U.S. subsidiary,
RADCOM
Equipment,
rejoined us in May 2004. Mr. Zamir also serves as a director of RADCOM
Equipment. From 1999 to 2004, Mr. Zamir was co-founder of Business Layers Inc.,
a company that focuses on eProvisioning solutions, which allow organizations
to
transform business rules and changes into a set of corresponding IT activities.
Prior to that, from 1993 to 1999 Mr. Zamir was the President of
RADCOM
Equipment.
Mr. Zamir has a Practical Engineering qualification from Ort Yad-Singalovski,
Tel-Aviv.
Mr.
Uri
Har has served as a director since October 2007. He was the Director General
of
the Electronics and Software Industries of Israel from 1984 until 2006. Prior
to
that, Mr. Har served for 26 years in engineering and managerial positions in
the
Israeli Navy where his last assignment was the Israeli Naval Attache in the
United States and Canada. Among his various positions in the Israeli Navy,
he
served for three years (1977 - 1980) as Head of the Budget and Comptroller
Department. Mr. Har serves as a director of another public company, Formula
Vision Ltd. He holds a B.Sc. degree and a M.Sc. degree in Mechanical Engineering
from the Technion.
Mr. Zohar
Gilon has served as a director since June 1995. He serves as a General
Partner and Managing Director of Tamar Technologies Ventures, a venture capital
fund investing in Israel and the United States. From 1993 until 1995, he
served as President of W.S.P. Capital Holdings Ltd., which provides investment
banking and underwriting services in Israel and invests in real estate and
high-technology investments in Israel and abroad. Mr. Gilon serves as a director
of another public company, Radware Ltd., and of several private companies.
Mr. Gilon is also a private investor in numerous high-technology companies,
including affiliates of ours in Israel. He holds a B.Sc. degree in Electrical
Engineering from the Technion and an M.B.A. degree from Tel-Aviv
University.
Ms.
Irit
Hillel has served as a director since October 2007. She has spent the last
15
years as an entrepreneur and senior executive in a number of high tech and
financial services firms. She founded and served as the executive vice president
for business development and as a board member for PrintPaks, which was acquired
by Mattel Inc. (NYSE: MAT) in 1997. After leading the PrintPaks disposition
effort, Ms. Hillel became the Managing Director of Mattel Interactive Europe.
At
Mattel, she led a multi-functional team located in six countries, bringing
to
market some of Europe’s best-selling computer game titles. She has also served
as a vice president at Power Paper Ltd. and worked with Hewlett Packard Co.
(NYSE: HPQ) and Mirage Innovations Ltd. in strategy, capital raising and
business development roles. Earlier in her career, Ms. Hillel was an investment
manager in the high yield bonds and equities investment department at Columbia
Savings in Beverly Hills, California. Ms. Hillel has an M.B.A. degree from
the
Anderson Graduate School of Business at University of California-Los Angeles,
and a B.Sc. in Mathematics and Computer Science from Tel Aviv University.
B.
COMPENSATION
The
aggregate direct remuneration paid to all of our directors and officers as
a
group (16 persons) for the year ended December 31, 2007 was approximately
$1.8 million. This amount includes approximately $292,000, which was set aside
or accrued to provide pension, retirement or similar benefits, but does not
include any amounts we paid to reimburse our affiliates for costs incurred
in
providing services to us during such period. These amounts include payments
to 4
persons who are no longer officers of the Company - $0.5 million and $86,000,
respectively. These amounts do not include the expense of share-based
compensation as per SFAS 123(R).
As
of
December 31, 2007, our directors and officers as a group held options to
purchase an aggregate of 367,439 ordinary shares. Other than the options granted
to our directors under the Directors Share Incentive Plan (1997), the 2001
Share
Option Plan, the International Employee Stock Option Plan and the 2003 Share
Option Plan and reimbursement for expenses, we did not compensate our directors
for serving on our Board of Directors during 2007. Starting in May 2008, our
external directors will also receive a monetary compensation for each meeting
NIS 1,060 per meeting and an annual fee NIS 18,300 per year as per a recent
amendment to the regulations promulgated pursuant to the Israeli Companies
Law.
Share
Option Plans
We
have
the following eight share option plans for the granting of options to our
employees, officers, directors and consultants: (i) the Directors Share
Incentive Plan (1997); (ii) the 1998 Employee Bonus Plan; (iii) the
1998 Share Option Plan; (iv) the International Employee Stock Option Plan;
(v) the 2000 Share Option Plan; (vi) the 2001 Share Option Plan; and
(vii) the 2003 Share Option Plan. Options granted under our option plans
generally vest over a period of between two and four years, and generally expire
seven to ten years from the date of grant. The stock options plans are
administered either by the Board of Directors or, subject to applicable law,
by
the Share Incentive Committee, which has the discretion to make all decisions
relating to the interpretation and operation of the options plans, including
determining who will receive an option award and the terms and conditions of
the
option awards.
In
December 2004, the FASB issued SFAS 123(R), which requires all companies to
measure compensation expense for all share-based payments (including employee
stock options) at fair value, and became effective for public companies for
annual reporting periods of fiscal years beginning after June 15, 2005. Our
adoption of SFAS 123(R) required us to record an expense of $564,000 for
share-based compensation plans during 2007 and will result in ongoing accounting
charges that will significantly reduce our net income. See Notes 2P and 6C
of
the Notes to the Consolidated Financial Statements for further information.
As
of
December 31, 2007, we have granted options to purchase 1,323,296
ordinary shares, of which options to purchase 362,715 ordinary shares have
been
exercised and options to purchase 773,889 ordinary shares remain outstanding.
In
August
2006 we elected, pursuant to Rule 4350(a) of the NASDAQ Marketplace Rules,
to
follow our home country practice in lieu of the NASDAQ Marketplace Rules with
respect to the approvals required for the establishment and for material
amendments to our share option plans. Consequently, the establishment of share
option plans and material amendments thereto is now subject to the approval
of
our Board of Directors and is no longer subject to our shareholders’
approval.
C.
BOARD
PRACTICES
Terms
of Office
The
current Board of Directors is comprised of Zohar Zisapel, Zohar Gilon, Uri
Har
and Irit Hillel. Our directors are elected by the shareholders at the annual
general meeting of the shareholders, except in certain cases where directors
are
appointed by the Board of Directors and their appointment is later ratified
at
the first meeting of the shareholders thereafter. With the exception of external
directors (Meses. Har and Hillel), whose terms expire in 2010, our directors
serve until the next annual general meeting (in 2008). None of our directors
have service contracts with the Company relating to their serving as a director,
and none of the directors will receive benefits upon termination of their
position as a director.
External
Directors
We
are
subject to the provisions of the new Israeli Companies Law, 5759-1999, which
became effective on February 1, 2000, superseding most of the provisions of
the Israeli Companies Ordinance (New Version), 5743-1983.
Under
the
Companies Law, companies incorporated under the laws of Israel whose shares
have
been offered to the public in or outside of Israel are required to appoint
at
least two external directors. The Companies Law provides that a person may
not
be appointed as an external director if the person or the person’s spouse,
siblings, parents, grandparents, descendants, spouses’ descendants of the spouse
of any of the foregoing (collectively, a “relative”), partner, employer or any
entity under the person’s control, has, as of the date of the person’s
appointment to serve as external director, or had during the two years preceding
that date, any affiliation with the company, any entity controlling the company
or any entity controlled by the company or by such controlling entity. The
term
affiliation includes:
|
·
|
an
employment relationship;
|
|
·
|
a
business or professional relationship maintained on a regular
basis;
|
|
·
|
service
as an office holder (defined in the Israeli Companies Law as a
(i) director, (ii) general manager, (iii) chief business
manager, (iv) deputy general manager, (v) vice general manager, (vi)
executive vice president, (vii) vice president, (viii) another manager
directly subordinate to the general manager and (ix) any other person
assuming the responsibilities of any of the forgoing positions without
regard to such person’s title), excluding service as a director who was
appointed to serve as an office holder during the three-month period
in
which the company first offers its shares to the
public.
|
No
person
may serve as an external director if the person’s position or other business
creates, or may create, a conflict of interest with the person’s
responsibilities as an external director or if his or her position or business
may interfere with his or her ability to serve as a director. Until the lapse
of
two years from termination of service as an external director, a company may
not
engage an external director to serve as an office holder and cannot employ
or
receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.
External
directors are to be elected by a majority vote at a shareholders meeting,
provided that either:
|
·
|
a
majority of the shares voted at the meeting, including at least one
third
of the shares of non-controlling shareholders, vote in favor of the
election; or
|
|
·
|
the
total number of shares voted against the election of the external
director
does not exceed one percent of the aggregate number of voting shares
of
the company.
|
The
initial term of an external director is three years and may be extended for
an
additional three years. In certain special situations, the term may be extended
beyond these periods. Each committee of a company’s board of directors is
required to include at least one external director. Both Uri Har and Irit Hillel
qualify as external directors under the Companies Law, and both are members
of
the Company’s Audit Committee.
Audit
Committee
NASDAQ
Requirements
Our
ordinary shares are listed for quotation on the NASDAQ Capital Market (to which
we transferred from the NASDAQ Global Market in October 2007), and we are
subject to the rules of the NASDAQ Marketplace Rules applicable to listed
companies. Under the current NASDAQ rules, a listed company is required to
have
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. Uri Har, Irit Hillel and Zohar Gilon qualify
as
independent directors under the current NASDAQ requirements, and all are members
of the Audit Committee. Zohar Gilon is our “audit committee financial expert.”
In addition, we have adopted an Audit Committee charter, which sets forth the
Audit Committee’s responsibilities.
As
stated
in our Audit Committee charter, the Audit Committee assists our board in
fulfilling its responsibility for oversight of the quality and integrity of
our
accounting, auditing and financial reporting practices and financial statements
and the independence qualifications and performance of our independent auditors.
The Audit Committee also has the authority and responsibility to oversee our
independent auditors, to recommend for shareholder approval the appointment
and,
where appropriate, replacement of our independent auditors and to pre-approve
audit engagement fees and all permitted non-audit services and fees.
Companies
Law Requirements
Under
the
Companies Law, the board of directors of a public company is required to appoint
an audit committee, which must be comprised of at least three directors and
include all of the external directors, but may not include:
|
·
|
the
chairman of the board of directors;
|
|
·
|
any
controlling shareholder or any relative of a controlling shareholder;
and
|
|
·
|
any
director employed by the company or providing services to the company
on a
regular basis.
|
The
duty
of the audit committee is to identify irregularities in the management of the
company’s business, including in consultation with the internal auditor and the
company’s independent accountants, and to recommend remedial action relating to
such irregularities. In addition, the approval of the audit committee is
required under the Companies Law to effect certain related-party
transactions.
An
audit
committee of a public company may not approve a related-party transaction under
the Companies Law unless at the time of such approval the external directors
are
serving as members of the audit committee and at least one of them is present
at
the meeting at which such approval is granted.
Under
the
Companies Law, the board of directors of a public company must also appoint
an
internal auditor proposed by the audit committee. The duty of the internal
auditor is to examine, among other things, whether the company’s conduct
complies with applicable law and orderly business procedure. Under the Companies
Law, the internal auditor may not be an interested party, an office holder,
or
an affiliate, or a relative of an interested party, an office holder or
affiliate, nor may the internal auditor be the company’s independent accountant
or its representative. An interested party is defined in the Companies Law
as a
5% or greater shareholder, any person or entity who has the right to designate
at least one director or the general manager of the company and any person
who
serves as a director or as a general manager.
Mr.
Joseph Ginossar a partner of Fahn Kanne & Co., a member of Grant Thornton,
serves as our internal auditor.
Exculpation,
Indemnification and Insurance of Directors and Officers
We
have
agreed to exculpate and indemnify our office holders to the fullest extent
permitted under the Companies Law. We have also purchased a directors and
officers liability insurance policy. For information regarding exculpation,
indemnification and insurance of directors and officers under applicable law
and
our articles of association, see “Item 10—Additional Information—Memorandum and
Articles of Association.”
Management
Employment Agreements
We
maintain written employment agreements with substantially all of our key
employees. These agreements provide, among other matters, for monthly salaries,
our contributions to Managers’ Insurance and an Education Fund and severance
benefits. Most of our agreements with our key employees are subject to
termination by either party upon the delivery of notice of termination as
provided therein.
Nominating
Committee
The
nominees to our Board are selected or recommended to the Board by our Nominating
Committee. The written procedures addressing the nominating process, were
approved by our Board. Zohar Zisapel, Uri Har and Irit Hillel constitute our
Nominating Committee.
Compensation
Committee
The
compensation payable to executive officers must be approved either by a majority
of the independent directors on our board or by a Compensation Committee. Our
Compensation Committee is comprised
of
Zohar
Zisapel, Zohar Gilon and Irit Hillel.
D.
EMPLOYEES
As
of
December 31, 2007, we had 133 permanent and temporary employees worldwide,
of which 55 were employed in research and development, 50 in sales and
marketing, 13 in management and administration and 15 in operations. As of
December 31, 2007, 115 of our employees were based in Israel, 9 were based
in the United States and 9 were based in Spain, Singapore, Korea and China.
All
of our employees have executed employment agreements, including confidentiality
and non-compete provisions, with us. We are subject to labor laws and
regulations in Israel and the United States. We and our Israeli employees are
also subject to certain provisions of the general collective agreements between
the Histadrut (General Federation of Labor in Israel) and the Coordination
Bureau of Economic Organizations (including the Industrialists Association)
by
order of the Israeli Ministry of Labor and Welfare. None of our employees are
represented by a labor union and we have not experienced any work
stoppages.
E.
SHARE
OWNERSHIP
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares by our directors and officers as of May 31,
2008. The percentage of outstanding ordinary shares is based on
5,075,910
(3)(6)
ordinary
shares outstanding as of May 31, 2008.
Name
|
|
Number of Ordinary
Shares Beneficially
Owned
(1)
|
|
Percentage of
Outstanding Ordinary
Shares Beneficially
Owned
(2)(3)
|
|
Zohar Zisapel
(4)
|
|
|
1,993,447
|
|
|
33.3
|
%
|
All
directors and executive officers as a group, except Zohar Zisapel
(11
persons)
(1)
(2) (5)
|
|
|
166,107
|
|
|
2.9
|
%
|
________________________
|
|
(1)
|
Pursuant
to applicable community property laws, each person named in the table
has
sole voting and investment power with respect to all ordinary shares
listed as owned by such person. Shares beneficially owned include
shares
that may be acquired pursuant to options to purchase ordinary shares
that
are exercisable within 60 days of May 31, 2008.
|
(2)
|
For
determining the percentage owned by each person or group, ordinary
shares
for each person or group include ordinary shares that may be acquired
by
such person or group pursuant to options to purchase ordinary shares
that
are exercisable within 60 days of May 31, 2008.
|
(3)
|
The
number of outstanding ordinary shares does not include 30,843 shares
that
were repurchased by us.
|
(4)
|
Includes
beneficial ownership of ordinary shares held by RAD Data Communications
Ltd and Klil and Michael Ltd, Israeli companies and 239,844 ordinary
shares issuable upon exercise of options and warrants exercisable
within
60 days of May 31, 2008. This information is based on Mr. Zisapel’s
Schedule 13G/A, filed with the SEC on February 12, 2008.
|
(5)
|
Each
of the directors and executive officers not separately identified
in the
above table beneficially own less than 1% of our outstanding ordinary
shares (including options or warrants held by each such party, and
which
are vested or shall become vested within 60 days of May 31, 2008)
and have
therefore not been separately disclosed. The amount of shares includes
139,076 ordinary shares issuable upon exercise of options and warrants
exercisable within 60 days of May 31, 2008.
|
(6)
|
On
May 6, 2008, our shareholders approved a one-to-four reverse share
split,
which we effected in June 2008.
|
ITEM
7.
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of May 31, 2008, by each person or entity
known to own beneficially more than 5% of our outstanding ordinary shares based
on information provided to us by the holders or disclosed in public filings
with
the SEC.
The
voting rights of our major shareholders do not differ from the voting rights
of
other holders of our ordinary shares. As of May 31, 2008, our ordinary shares
had a total of 61 holders of record, of which 30 were registered with addresses
in the United States. We believe that the number of beneficial owners of our
shares is substantially greater than the number of record holders, because
a
large portion of our ordinary shares is held of record in broker “street name.”
As of May 31, 2008, U.S. holders of record held approximately 58% of our
outstanding ordinary shares.
Name
|
|
Number of Ordinary
Shares
(1)
|
|
Percentage of
Outstanding Ordinary
Shares
(2)
|
|
Zohar Zisapel
(3)(4)
|
|
|
1,770,961
|
|
|
33.3
|
%
|
Yehuda
Zisapel
(3)(5)
|
|
|
506,790
|
|
|
10.0
|
%
|
RAD
Data Communications Ltd.
(6)
|
|
|
44,460
|
|
|
0.9
|
%
|
______________
(1)
|
Except
as otherwise noted and pursuant to applicable community property
laws,
each person named in the table has sole voting and investment power
with
respect to all ordinary shares listed as owned by such person. Shares
beneficially owned include shares that may be acquired pursuant to
options
that are exercisable within 60 days of May 31, 2008.
|
(2)
|
The
percentage of outstanding ordinary shares is based on 5,075,910 ordinary
shares outstanding as of May 31, 2008. For determining the percentage
owned by each person, ordinary shares for each person includes ordinary
shares that may be acquired by such person pursuant to options to
purchase
ordinary shares that are exercisable within 60 days of May 31, 2008.
The
number of outstanding ordinary shares does not include 30,843 shares
that
were repurchased by us.
|
(3)
|
Includes
beneficial ownership of Messrs. Zohar Zisapel and Yehuda Zisapel of
ordinary shares held by RAD Data Communications Ltd., an Israeli
company.
|
(4)
|
Includes
44,460 ordinary shares owned of record by RAD Data Communications,
13,625
ordinary shares owned of record by Klil and Michael Ltd., an Israeli
company and 239,844 ordinary shares issuable upon exercise of options
and
warrants exercisable within 60 days of May 31, 2008. Zohar Zisapel
is a
principal shareholder and director of each of RAD Data Communications
Ltd.
and Klil and Michael Ltd. and, as such, Mr. Zisapel may be deemed to
have voting and dispositive power over the ordinary shares held by
RAD
Data Communications and Klil and Michael Ltd. Mr. Zisapel disclaims
beneficial ownership of these ordinary shares except to the extent
of his
pecuniary interest therein. This information is based on Mr. Zohar
Zisapel’s Schedule 13G/A, filed with the SEC on February 12, 2008.
|
(5)
|
Includes
44,460 ordinary shares owned of record by RAD Data Communications
and
227,590 ordinary shares owned of record by Retem Local Networks Ltd.,
an
Israeli company. Yehuda Zisapel is a principal shareholder and director
of
each of RAD Data Communications and Retem Local Networks and, as
such,
Mr. Zisapel may be deemed to have voting and dispositive power over
the ordinary shares held by RAD Data Communications and Retem Local
Networks. Mr. Zisapel disclaims beneficial ownership of these
ordinary shares except to the extent of his pecuniary interest therein.
This information is based on Mr. Yahuda Zisapel’s Schedule 13G/A, filed
with the SEC on February 14, 2007.
|
(6)
|
Messrs.
Zohar and Yehudah Zisapel have shared voting and
disposit
i
ve
power with respect to the shares held by Rad Data Communications
Ltd. The
shares held by Rad Data Communications Ltd. are reflected under Zohar
Zisapel’s and Yehuda Zisapel’s names in the
table.
|
B.
RELATED
PARTY TRANSACTIONS
The
RAD-BYNET Group
Messrs. Yehuda
and Zohar Zisapel are the founders and principal shareholders of our Company.
Zohar Zisapel is our Chairman of the Board of Directors. One or both of
Messrs. Yehuda Zisapel and Zohar Zisapel are also founders, directors and
principal shareholders of several other companies which, together with us and
their respective subsidiaries and affiliates, are known as the RAD-BYNET Group.
Such other corporations include, without limitation: RAD Data Communications
Ltd.; RADVision Ltd.; BYNET Data Communications Ltd.; BYNET SAMECH LTD.; BYNET
SYSTEMS APPLICATIONS LTD.; BYNET ELECTRONICS LTD. (a non-exclusive distributor
in Israel for us); and AB-NET Communication Ltd.
Members
of the RAD-BYNET Group, each of which is a separate legal entity, are actively
engaged in designing, manufacturing, marketing and supporting data
communications and telecommunications products, none of which is currently
the
same as any product of ours. One or both of Messrs. Yehuda Zisapel and
Zohar Zisapel are also founders, directors and principal shareholders of several
other real estate, services, holdings and pharmaceutical companies. The above
list does not constitute a complete list of the investments of Messrs. Yehuda
and Zohar Zisapel.
We
and
other members of the RAD-BYNET Group also market certain of our products through
the same distribution channels. Certain products of members of the RAD-BYNET
Group are complementary to, and may be used in connection with, products of
ours, and others of such products may be used in place of (and thus may be
deemed to be competitive with) our products. We incorporate into our product
line a software package for voice-over-IP simulation (H.323, SIP), which we
purchased from a member of the RAD-BYNET Group. The aggregate amounts of such
purchases were approximately $30,000, $4,000 and $2,000 in 2005, 2006 and 2007,
respectively.
We
purchase certain products and services from members of the RAD-BYNET group,
on
terms that are either beneficial to us or are no less favorable than terms
that
might be available to us from unrelated third parties, based on quotes we
received from unrelated third parties. In some cases, the RAD-BYNET Group
obtains volume discounts for services from unrelated parties, and we pay our
pro
rata cost of such services. Based on our experience, the volume discounts
provide better terms than we would be able to obtain on our own. The aggregate
amounts of such purchases were approximately $63,000, $38,000 and $71,000 in
2005, 2006 and 2007, respectively.
Each
of
RAD and BYNET provides legal, tax, personnel and administrative services to
us
and leases space to us, and each is reimbursed by us for its costs in providing
such services. The aggregate amounts of such reimbursements were approximately
$45,000, $43,000 and $40,000 in 2005, 2006 and 2007, respectively.
We
currently lease office premises in Tel Aviv and Paramus, New Jersey, from an
affiliate. When these agreements were signed, the lease payments were at fair
market prices based on quotes we received from third parties for similar space.
Historically, we have had some additional flexibility to change the leased
space, which we might not have had with unrelated third parties. The aggregate
amount of lease payments were approximately $516,000, $502,000 and $526,000
in
2005, 2006 and 2007, respectively. We also sub-lease 276 square feet of the
New
Jersey premises to a related party, and received aggregate rental payments
of
approximately $5,000 for 2006 and 2007.
We
are
party to a non-exclusive distribution agreement with BYNET ELECTRONICS LTD.,
a
related party. We sell our products and services to BYNET on the same terms
and
conditions as it sells to unrelated Israeli distributors with whom it has
distribution agreements. The aggregate amounts of such sales were approximately
$773,000, $335,000 and $407,000 in 2005, 2006 and 2007,
respectively.
In
February 2008, we completed a PIPE in which we raised $2.5 million from certain
investors, including our Chairman, Mr. Zohar Zisapel Zohar Gilon, one of our
directors; and his son, Amit Gilon. For more information, see “Item 8—Financial
Information—Significant Changes” below.
We
believe that the terms of the transactions in which we have entered and are
currently engaged with other members of the RAD-BYNET Group are beneficial
to us
and no less favorable to us than terms that might be available to us from
unaffiliated third parties. All future transactions and arrangements (or
modifications of existing ones) with members of the RAD-BYNET Group in which
our
office holders have a personal interest or which raise issues of such office
holders’ fiduciary duties will require approval by our Audit Committee and, in
certain circumstances, approval of our shareholders under the Companies
Law.
Registration
Rights
As
part
of the two PIPEs we completed in 2004 and 2008, we have entered into agreements
with certain of our directors and principal shareholders entitling them to
certain registration rights. Pursuant to such agreements, such parties have
the
right to demand registration of their shares purchased in these PIPEs. We
discharged our registration obligations with respect to the shares and warrants
purchased in the 2004 PIPE transaction. For more information on the 2004 PIPE
transaction, see “Item 5—Operating and Financial Review and Prospects—Liquidity
and Capital Resources—Private Placement.”
C.
INTERESTS
OF EXPERTS AND COUNSEL
Not
applicable.
ITEM
8.
FINANCIAL
INFORMATION
A.
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
Our
consolidated financial statements and other financial information, which can
be
found at the end of this Annual Report on Form 20-F beginning on page F-1,
are
incorporated herein by reference to “Item 18—Financial Statements” below.
Export
Sales
In
2007,
the amount of our export sales was approximately $13.0 million, which
represented 96.5% of our total sales.
Legal
Proceedings
In
November 2005, we were served with a claim in the amount of approximately
$623,000 by Qualitest Ltd. an Israeli company which used to be a nonexclusive
distributor of our products in Israel. Qualitest claims that we breached an
exclusive distribution agreement. In December 2005, we filed a statement of
defense against the claim asserting that an exclusive distribution agreement
was
never signed between the parties, and included a counterclaim in the amount
of
approximately $131,000 for unpaid invoices. The case has been brought before
an
arbitrator, the Honorable Judge (Retired) Amnon Strashnov. In June 2006,
Qualitest paid us $69,000 in accordance with a partial verdict of the
arbitrator. In June 2007, Qualitest paid the Company $18,000 and by that and
the
partial verdict, settled the Company’s counterclaim. In July 2007 the arbitrator
accepted Qualitest's claim against us and instructed us to pay $310,000 to
Qualitest, in addition to $31,000 as expenses to Qualitest. We included an
expense for the full amount in our statement of operations "Sales and marketing
expenses". In August 2007, we filed a request with the District Court in Tel
Aviv to annul the arbitration award. In June 2008, the District Court denied
our
request.
Dividend
Policy
We
have
never declared or paid any cash dividends on our ordinary shares. We currently
intend to retain any future earnings to finance operations and to expand our
business and, therefore, do not expect to pay any cash dividends in the
foreseeable future.
B.
SIGNIFICANT
CHANGES
Private
Placement
In
February 2008, we completed a PIPE in which we raised $2.5 million from certain
investors, including our Chairman, Mr. Zohar Zisapel, who invested in this
PIPE
approximately $1.65 million, Zohar Gilon, one of our directors and his son,
Amit
Gilon. We issued in the 2008 PIPE 976,563 ordinary shares at a price per share
of $2.56, as well as 325,520 warrants to purchase ordinary shares at an exercise
price per warrant of $3.20. The warrants are exercisable for a period of three
years. In connection with the PIPE, we undertook to file a registration
statement covering the resale of the shares and warrants purchased in the PIPE.
We expect to file this registration statement during the third quarter of
2008.
Venture
Loan from Plenus
In
April
2008, we closed a $2.5 million venture loan from Plenus, a leading Israeli
venture-lending firm. The loan is for a period of three years, and bears
interest at the rate of 10% per annum. In addition, we granted Plenus a warrant
to purchase our ordinary shares in the amount of $450,000. The warrant is
exercisable for a period of five years, and its exercise price is $2.56 per
share. We also granted Plenus registration rights in respect of the shares
underlying the warrant. In connection with the loan from Plenus, we granted
Plenus a fixed charge over our intellectual property assets and a floating
charge over our assets. Radcom Equipment Inc., our U.S. subsidiary, granted
Plenus a security interest over its assets, and our subsidiaries provided Plenus
with guaranties with respect to the loan. The loan also includes financial
covenants which relate to the level of revenues, operating income and cash
balances of the Company.for more details, see exhibit 4.19 – Loan Agreement
dated as of April 1, 2008.
Reverse
Share Split
In
May
2008, our shareholders approved a one-to-four reverse share split. The purpose
of the reverse share split was to enable the Company to continue to comply
with
the minimum $1.00 bid price of the NASDAQ Capital Market. We effected this
reverse share split in June 2008. Following the effactuation of the reverse
split, the total number of ordinary shares was reduced from 20,303,638 to
approximately 5,075,910.
Except
as
otherwise disclosed in this Annual Report on Form 20-F, there has been no
material change in our financial position since December 31,
2007.
ITEM
9.
THE
OFFER AND LISTING
A.
OFFER
AND LISTING DETAILS
NASDAQ
Capital Market
The
following table sets forth the high and low bid prices of our ordinary shares
as
reported by the NASDAQ Global Market and the NASDAQ Capital Market, as
applicable, for the calendar periods indicated:
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
2003
|
|
$
|
8.76
|
|
$
|
2.56
|
|
2004
|
|
$
|
11.12
|
|
$
|
4.00
|
|
2005
|
|
$
|
14.36
|
|
$
|
5.40
|
|
2006
|
|
$
|
20.20
|
|
$
|
6.96
|
|
2007
|
|
$
|
12.72
|
|
$
|
2.80
|
|
2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
20.20
|
|
$
|
12.64
|
|
Second
Quarter
|
|
$
|
11.96
|
|
$
|
8.00
|
|
Third
Quarter
|
|
$
|
12.72
|
|
$
|
6.96
|
|
Fourth
Quarter
|
|
$
|
13.04
|
|
$
|
9.44
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
12.72
|
|
$
|
10.40
|
|
Second
Quarter
|
|
$
|
11.28
|
|
$
|
5.32
|
|
Third
Quarter
|
|
$
|
5.60
|
|
$
|
2.80
|
|
Fourth
Quarter
|
|
$
|
4.20
|
|
$
|
2.88
|
|
2008
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.40
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
Mos
t
recent six m
onths
|
|
|
|
|
|
|
|
December
2007
|
|
$
|
3.44
|
|
$
|
2.88
|
|
January
2008
|
|
$
|
3.04
|
|
$
|
2.72
|
|
February
2008
|
|
$
|
3.40
|
|
$
|
2.76
|
|
March
2008
|
|
$
|
2.80
|
|
$
|
1.80
|
|
April
2008
|
|
$
|
2.64
|
|
$
|
2.20
|
|
May
2008
|
|
$
|
2.72
|
|
$
|
2.24
|
|
June
2008 (through June 24)
|
|
$
|
2.80
|
|
$
|
2.06
|
|
Dual
Listing
In
addition to trading on the NASDAQ Capital Market, on February 20, 2006, our
ordinary shares began trading on the TASE. According to a publication of the
Israeli Tax Authorities, sales of securities of an industrial company, such
as
us, by individuals and companies to whom Chapter B of the Inflationary Law
does
not apply will continue to enjoy benefits of a lower Israeli capital gains
tax
after a dual listing.
Tel-Aviv
Stock Exchange
The
following table sets forth the high and low bid prices of our ordinary shares
as
reported by the TASE for the calendar periods indicated:
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
2006
(February 20, 2006 through December 31, 2006)
|
|
|
NIS
96.16
|
|
|
NIS
31.48
|
|
First
Quarter (February 20, 2006 through March 31, 2006)
|
|
|
NIS
96.16
|
|
|
NIS
76.32
|
|
Second
Quarter
|
|
|
NIS
81.32
|
|
|
NIS
37.92
|
|
Third
Quarter
|
|
|
NIS
52.04
|
|
|
NIS
31.48
|
|
Fourth
Quarter
|
|
|
NIS
55.00
|
|
|
NIS
42.00
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
NIS
53.44
|
|
|
NIS
42.48
|
|
Second
Quarter
|
|
|
NIS
47.80
|
|
|
NIS
21.70
|
|
Third
Quarter
|
|
|
NIS
23.80
|
|
|
NIS
12.08
|
|
Fourth
Quarter
|
|
|
NIS
16.36
|
|
|
NIS
11.12
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
NIS
12.24
|
|
|
NIS
6.76
|
|
|
|
|
|
|
|
|
|
Most
recent six months
|
|
|
|
|
|
|
|
December
2007
|
|
|
NIS
13.20
|
|
|
NIS
11.12
|
|
January
2008
|
|
|
NIS
11.24
|
|
|
NIS
9.88
|
|
February
2008
|
|
|
NIS
12.24
|
|
|
NIS
10.20
|
|
March
2008
|
|
|
NIS
11.00
|
|
|
NIS
6.76
|
|
April
2008
|
|
|
NIS
9.20
|
|
|
NIS
7.60
|
|
May
2008
|
|
|
NIS
10.00
|
|
|
NIS
7.88
|
|
June
2008 (through June 24)
|
|
|
NIS
8.80
|
|
|
NIS
7.74
|
|
B.
PLAN
OF DISTRIBUTION
Not
applicable.
C.
MARKETS
Since
our
initial public offering on September 24, 1997 and until September 30, 2007
our ordinary shares have been traded on the NASDAQ Global Market under the
symbol RDCM, and since October 1, 2007 our shares have been traded on the NASDAQ
Capital Market. In addition, since February 20, 2006, our ordinary shares have
been traded also on the TASE under the symbol
"רדקם"
. Prior
to September 24, 1997, there was no market for our ordinary
shares.
Our
ordinary shares are currently listed on the NASDAQ Capital Market and are
thereby subject to the rules and regulations established by NASDAQ and
applicable to listed companies. Rule 4350 of the NASDAQ Marketplace Rules
imposes various corporate governance requirements on listed securities. Section
(a)(1) of Rule 4350 provides that foreign private issuers are required to comply
with certain specific requirements of Rule 4350, but, as to the balance of
Rule
4350, foreign private issuers may comply with the laws of their home
jurisdiction in lieu of the requirements of such sections of Rule 4350.
We
have
chosen to follow the rules of our home jurisdiction, the Israeli Companies
Law,
in lieu of the requirements of (i) Rule 4350(b) regarding the requirement
to distribute an annual report to our shareholders prior to our annual meeting
of shareholders; (ii) Rule 4350
(i)(1)(A)
relating
to the solicitation of shareholder approval prior to the issuance of designated
securities when a stock option or purchase plan is to be established or
materially amended; and (iii) Rule 4350(l) relating to the direct
registration program. These requirements of Rule 4350 are not required under
the
Israeli Companies Law.
D.
SELLING
SHAREHOLDERS
Not
applicable.
E.
DILUTION
Not
applicable.
F.
EXPENSES
OF THE ISSUE
Not
applicable.
ITEM
10.
ADDITIONAL
INFORMATION
A.
SHARE
CAPITAL
Not
applicable.
B.
MEMORANDUM
AND ARTICLES OF ASSOCIATION
The
following is a summary description of certain provisions of our memorandum
of
association and articles of association.
Objects
and Purposes
We
were
first registered by the Israeli Registrar of Companies on July 5, 1985, as
a private company. We later became a public company, registered by the Israeli
Registrar of Companies on October 1, 1997 with the company number
52-004345-6.
The
full
details of all our objects and purposes can be found in Section 2 of our
memorandum of association, as filed with the Israeli Registrar of Companies
and
amended from time to time by resolution of our shareholders. One of our
objectives listed is to manufacture, market and deal - in all ways - with
computer equipment, including communications equipment and all other equipment
related in any way to such equipment. Some additional objects of our listing
include: having business relationships with representatives and agents; engaging
in research and development; acquiring intellectual property; engaging in
business actions with other business owners; lending money when we deem it
proper; dealing in any form of business (e.g., import, export, marketing, etc.);
and many other general business activities, whether in Israel or in any other
country.
Directors
According
to our articles of association, our Board of Directors is to consist of not
less
than three and not more than nine directors (which may be changed by resolution
of our shareholders).
Election
of Directors
Directors,
other than external directors, are elected by the shareholders at the annual
general meeting of the shareholders or appointed by the board of directors.
In
the event that any directors are appointed by the board of directors, their
appointment is required to be ratified by the shareholders at the next
shareholders’ meeting following such appointment. Our shareholders may remove a
director from office in certain circumstances. There is no requirement that
a
director own any of our capital shares. Directors may appoint alternative
directors in their place, with the exception of external directors, who may
appoint an alternate director only in very limited circumstances.
Remuneration
of Directors
Directors’
remuneration is subject to shareholder approval, except for reimbursement of
reasonable expenses incurred in connection with carrying out directors’ duties,
and except for the monetary compensation to external directors mandated by
recent Israeli regulations, which is subject to approval by the board of
directors only.
Powers
of the Board
The
board
of directors may resolve to take action at a meeting when a quorum is present,
and each resolution must be passed by a vote of at least a majority of the
directors present at the meeting who are entitled to participate in the meeting.
A quorum of directors requires at least a majority of the directors then in
office. The board of directors may elect one director to serve as the chairman
of the board of directors to preside at the meetings of the board of directors,
and may also remove such director.
The
board
of directors retains all power in running the Company that is not specifically
granted to the shareholders. The board of directors may, at its discretion,
cause us to borrow or secure the payment of any sum or sums of money for our
purposes at such times and upon such terms and conditions in all respects as
it
deems fit, and, in particular, through the issuance of bonds, perpetual or
redeemable debentures, debenture stock, or any mortgages, charges, or other
securities on the undertaking or the whole or any part of our property, both
present and future, including our uncalled or called but unpaid capital for
the
time being.
Dividends
The
board
of directors may declare dividends as it deems justified, but the final dividend
for any fiscal quarter must be proposed by the board of directors and approved
by the shareholders. Dividends may be paid in assets or shares of capital stock,
debentures or debenture stock of us or of other companies. The board of
directors may decide to distribute our profits among the shareholders. Dividends
that remain unclaimed after seven years will be forfeited and returned to us.
Unless there are shareholders with special dividend rights, any dividend
declared will be distributed among the shareholders in proportion to their
respective holdings of our shares for which the dividend is being
declared.
Neither
our memorandum of association or our articles of association nor the laws of
the
State of Israel restrict in any way the ownership or voting of ordinary shares
by non-residents of Israel, except with regard to subjects of countries which
are in a state of war with Israel who may not be recognized as owners of
ordinary shares. If we are wound up, then aside from any special rights of
shareholders, our remaining assets will be distributed among the shareholders
in
proportion to their respective holdings.
Our
articles of association allows us to create redeemable shares, although at
the
present time we do not have any such redeemable shares.
External
Directors
See
“Item
6—Directors, Senior Management and Employees—Board Practices—External
Directors.”
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 level of care with which
a
reasonable office holder in the same position would have acted under the same
circumstances. The duty of care of an office holder includes a duty to utilize
reasonable means to obtain:
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information
regarding the advisability of a given action submitted for his or
her
approval or performed by him or her by virtue of his position;
and
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all
other important information pertaining to such
actions.
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The
duty
of loyalty of an office holder includes a duty to:
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refrain
from any conflict of interest between the performance of his or her
duties
for the company and the performance of his or her other duties or
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 to receive
a
personal gain for himself or herself, or for others;
and
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disclose
to the company any information or documents relating to the company’s
affairs which the office holder has received due to his or her position
as
an office holder.
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Each
person listed in the table above under “Item 6—Directors, Senior Management and
Employees—Directors and Senior Management” above is an office holder. Under the
Companies Law, the approval of the board of directors is required for all
compensation arrangements of office holders who are not directors. Under the
Companies Law, directors’ compensation arrangements require the approval of the
audit committee and the board of directors, in such order, and in a public
company, require the approval of the audit committee, the board of directors
and
the shareholders, in that order.
Conflict
of Interest
The
Companies Law requires that an office holder of a company disclose to the
company, promptly and in any event no later than the board of directors meeting
in which the transaction is first discussed, any personal interest that he
or
she may have and all related material information known to him or her in
connection with any existing or proposed transaction by the company. A personal
interest of an office holder includes an interest of a company in which the
office holder is a 5% or greater shareholder, director or general manager or
in
which the office holder has the right to appoint at least one director or the
general manager. In the case of an extraordinary transaction, the office
holder’s duty to disclose applies also to the personal interest of the office
holder’s relative, which term is defined in the Companies Law. See “Item
6—Directors, Senior Management and Employees—Board Practices” for the complete
definition. Under Israeli law, an extraordinary transaction is a transaction
which is:
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not
in the ordinary course of business;
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not
on market terms; or
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is
likely to have a material impact of the company’s profitability, assets or
liabilities.
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Under
the
Companies Law, the board of directors may approve a transaction between the
company and an office holder or a third party in which an office holder has
a
personal interest. A transaction that is adverse to the company’s interest may
not be approved. If the transaction is an extraordinary transaction, the
transaction requires the approval of the audit committee and the board of
directors, in that order. In certain circumstances, shareholder approval may
also be required. An office holder who has a personal interest in a transaction
that is considered at a meeting of the board of directors or the audit committee
generally may not be present at such meeting or vote on such transaction, unless
a majority of the members of the board of directors or the audit committee,
as
the case may be, also have a personal interest. If a majority of the members
of
the board of directors or the audit committee, as the case may be, also have
a
personal interest, shareholder approval is also required.
Changing
Rights of the Shareholders
The
company may change the rights of owners of shares of capital stock only with
the
approval of a majority of the holders of such class of stock present and voting
at a separate general meeting called for such class of stock. An enlargement
of
a class of stock is not considered changing the rights of such class of
stock.
Shareholder
Meetings
The
company has two types of general shareholder meetings: the annual general
meeting and the extraordinary general meeting. An annual general meeting must
be
held once in every calendar year, but not more than 15 months after the last
annual general meeting. We are required to give notice of general meetings
no
less than seven days before the general meetings. A quorum in a general meeting
consists of two or more holders of ordinary shares (present in person or by
proxy), who together hold at least one-third (1/3) of the voting power of the
company. If there is no quorum within an hour of the time set, the meeting
is
postponed until the following week (or any other time upon which the chairman
of
the board and the majority of the voting power represented at the meeting
agree). Every ordinary share has one vote. A shareholder may only vote the
shares for which all calls have been paid, except in separate general meetings
of a particular class. A shareholder may vote in person or by proxy, or, if
the
shareholder is a corporate body, by its representative. We are exempted by
the
NASDAQ Marketplace Rules from the requirement to distribute our annual report
to
our shareholders, but we have undertaken to post a copy of it on our website,
www.radcom.com, after filing it with the SEC.
Duties
of Shareholders
Under
the
Companies Law, the disclosure requirements that apply to an office holder also
apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of
a
company, including a shareholder that holds 25% or more of the voting power
of a
company if no other shareholder owns more than 50% of the voting power of the
company, but excluding a shareholder whose power derives solely from his or
her
position as a director of the company or any other position with the company.
Extraordinary transactions of a public company with a controlling shareholder
or
with a third party in which a controlling shareholder has a personal interest,
and the terms of engagement of a controlling shareholder as an office holder
or
employee, require the approval of the audit committee, the board of directors
and the shareholders of the company, in such order. The shareholder approval
must be by a majority vote, provided that either:
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at
least one-third of the shares of shareholders who have no personal
interest in the transaction and are present and voting, in person,
by
proxy or by written ballot, at the meeting, vote in favor of the
transaction; or
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the
shareholders who have no personal interest in the transaction who
vote
against the transaction do not represent more than one percent of
the
voting power of the company.
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For
information concerning the direct and indirect personal interests of certain
of
our office holders and principal shareholders in certain transactions with
us,
see “Item 7—Major Shareholders and Related Party Transactions.”
In
addition, under the Companies Law each shareholder has a duty to act in good
faith in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing any power
he or she has in the company, such as in shareholder votes. In addition, certain
shareholders have a duty of fairness toward the company, although such duty
is
not defined in the Companies Law. These shareholders include any controlling
shareholder, any shareholder who knows that he or she possesses the power to
determine the outcome of a shareholder vote and any shareholder who, pursuant
to
the provisions of the articles of association, has the power to appoint or
to
prevent the appointment of an office holder or any other power in regard to
the
company.
Exculpation
of Office Holders
Under
the
Companies Law, an Israeli company may not exempt an office holder from liability
with respect to a breach of his duty of loyalty, but may exempt in advance
an
office holder from his liability to the company, in whole or in part, with
respect to a breach of his duty of care (except in connection with
distributions), provided that the articles of association of the company permit
it to do so. Our articles of association allow us to exempt our office holders
to the fullest extent permitted by law.
Insurance
of Office Holders
Our
articles of association provide that, subject to the provisions of the Companies
Law, we may enter into a contract for the insurance of the liability of any
of
our office holders with respect to an act performed by such individual in his
or
her capacity as an office holder, for:
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a
breach of an office holder’s duty of care to us or to another
person;
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a
breach of an office holder’s duty of loyalty to us, provided that the
office holder acted in good faith and had reasonable cause to assume
that
his or her act would not prejudice our interests;
or
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a
financial liability imposed upon an office holder in favor of another
person concerning an act performed by an office holder in his or
her
capacity as an office holder.
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Indemnification
of Office Holders
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Our
articles of association provide that we may indemnify an office holder
with respect to an act performed in his capacity as an office holder
against:
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a
financial liability imposed on him or her in favor of another person
by
any judgment, including a settlement or an arbitration award approved
by a
court; such indemnification may be approved (i) after the liability
has
been incurred or (ii) in advance, provided that our undertaking to
indemnify is limited to events that our Board of Directors believes
are
foreseeable in light of our actual operations at the time of providing
the
undertaking and to a sum or criterion that our Board of Directors
determines to be reasonable under the circumstances ;
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reasonable
litigation expenses, including attorney’s fees, expended by the office
holder as a result of an investigation or proceeding instituted against
him or her by a competent authority, provided that such investigation
or
proceeding concluded without the filing of an indictment against
him or
her and either (i) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (ii) concluded with
the
imposition of a financial liability in lieu of criminal proceedings
but
relates to a criminal offense that does not require proof of criminal
intent; and
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reasonable
litigation expenses, including attorney’s fees, expended by the office
holder or charged to him or her by a court, in proceedings we institute
against him or her or instituted on our behalf or by another person,
a
criminal indictment from which he was acquitted, or a criminal indictment
in which he was convicted for a criminal offense that does not require
proof of criminal intent.
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Limitations
on Exculpation, Indemnification and Insurance
The
Companies Law provides that a company may not enter into a contract for the
insurance of its office holders nor indemnify an office holder nor exempt an
officer from responsibility toward the company, for any of the
following:
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a
breach by the office holder of his or her duty of loyalty, unless,
with
respect to insurance coverage or indemnification, the office holder
acted
in good faith and had a reasonable basis to believe that such act
would
not prejudice the company;
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a
breach by the office holder of his or her duty of care if the breach
was
committed intentionally or
recklessly;
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any
act or omission committed with the intent to unlawfully yield a personal
profit; or
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any
fine imposed on the office holder.
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In
addition, under the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our Audit
Committee and Board of Directors and, if the beneficiary is a director, by
our
shareholders. Our Audit Committee, Board of Directors and shareholders resolved
to indemnify and exculpate our office holders by providing them with
indemnification agreements and approving the purchase of a directors and
officers liability insurance policy.
Anti-Takeover
Provisions; Mergers and Acquisitions
The
Companies Law allows for mergers, provided that each party to the transaction
obtains the approval of its board of directors and shareholders. For the purpose
of the shareholder vote of each party, unless a court rules otherwise, a
statutory merger will not be deemed approved if shares representing a majority
of the voting power present at the shareholders meeting and which are not held
by the other party to the potential merger (or by any person who holds 25%
or
more of the shares of the other party to the potential merger, or the right
to
appoint 25% or more of the directors of the other party to the potential merger)
have voted against the merger. Upon the request of a creditor of either party
to
the proposed merger, the court may delay or prevent the merger if the court
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 such party.
Finally, a merger may not be completed unless at least (i) 50 days have passed
from the time that the requisite proposals for approval of the merger were
filed
with the Israeli Registrar of Companies and (ii) 30 days have passed since
the
merger was approved by the shareholders of each merging company.
In
addition, provisions of the Companies Law that address “arrangements” between a
company and its shareholders allow for “squeeze-out” transactions in which a
target company becomes a wholly-owned subsidiary of an acquiror. These
provisions generally require that the merger be approved by a majority of the
participating shareholders (excluding those abstaining) holding at least 75%
of
the shares voted on the matter. In addition to shareholder approval, court
approval of the transaction is required, which entails further delay. The
Companies Law also provides for a merger between Israeli companies after
completion of the above procedure for an “arrangement” transaction and court
approval of the merger.
The
Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of such acquisition,
the
purchaser would become a 25% shareholder of the company. This rule does not
apply if there is already another 25% shareholder of 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 45% or greater shareholder of the company, unless
there
is already a 45% or greater shareholder of the company. These requirements
do
not apply if, in general, the acquisition (i) was made in a private placement
that received shareholder approval , including with respect to the fact that
as
a result of the transaction a party would become a shareholder of 25% or more,
(ii) was from a 25% or greater shareholder of the company which resulted in
the
acquiror becoming a 25% or greater shareholder of the company, or (iii) was
from
a 45% or greater shareholder of the company which resulted in the acquiror
becoming a 45% or greater shareholder of the company. The tender offer must
be
extended to all shareholders, but the offeror is not required to purchase more
than 5% of the company's outstanding shares, regardless of how many shares
are
tendered by shareholders. The tender offer may be consummated only if (i) at
least 5% of the company’s outstanding shares will be acquired by the offeror and
(ii) the number of shares tendered in the offer exceeds the number of shares
whose holders objected to the offer.
If,
as a
result of an acquisition of shares, the acquirer will hold more than 90% of
a
company’s outstanding shares, the acquisition must be made by means of a tender
offer for all of the outstanding shares. If less than 5% of the outstanding
shares are not tendered in the tender offer, all the shares that the acquirer
offered to purchase will be transferred to it. The Companies Law provides for
appraisal rights if any shareholder files a request in court within three months
following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquiror
may
not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding shares.
Israeli
tax law treats stock-for-stock acquisitions between an Israeli company and
another company less favorably than does U.S. tax law. For example, Israeli
tax
law may, under certain circumstances, subject a shareholder who exchanges his
or
her ordinary shares for shares of another corporation to taxation prior to
the
sale of the shares received in such stock-for-stock swap.
C.
MATERIAL
CONTRACTS
For
a
summary of our material contracts, see “Item 7—Major Shareholders and Related
Party Transactions” and “Item 4—Information on the Company—Property, Plants and
Equipment,” which is incorporated herein by reference.
D.
EXCHANGE
CONTROLS
There
are
currently no Israeli currency control restrictions on payments of dividends
or
other distributions with respect to our ordinary shares or the proceeds from
the
sale of our ordinary shares, except for the obligation of Israeli residents
to
file reports with the Bank of Israel regarding certain transactions. However,
legislation remains in effect pursuant to which currency controls can be imposed
by administrative action at any time and from time to time.
E.
TAXATION
Israeli
Tax Considerations
The
following is a summary of the current tax structure applicable to companies
incorporated in Israel, with special reference to its effect on us. The
following also contains a discussion of the material Israeli consequences to
purchasers of our ordinary shares and Israeli government programs benefiting
us.
This
summary does not discuss all the aspects of Israeli tax law that may be relevant
to a particular investor in light of his or her personal investment
circumstances or to some types of investors subject to special treatment under
Israeli law. To the extent that the discussion is based on new tax legislation
which has not been subject to judicial or administrative interpretation, we
cannot assure you that the views expressed in the discussion will be accepted
by
the appropriate tax authorities or the courts. The discussion is not intended,
and should not be construed, as legal or professional tax advice and is not
exhaustive of all possible tax considerations.
Holders
of our ordinary shares should consult their own tax advisors as to the United
States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
foreign state or local taxes.
General
Corporate Tax Structure
Israeli
companies are generally subject to Corporate Tax on their taxable income at
the
rate of 29% for the 2007 tax year. Following an amendment to the Tax Ordinance
,
which became effective on January 1, 2006, the Corporate Tax rate was decreased
to 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010
tax
year and thereafter. Israeli companies are generally subject to Capital Gains
Tax at a rate of 25% for capital gains (other than gains deriving from the
sale
of listed securities) derived after January 1, 2003. However, the effective
tax
rate payable by a company that derives income from an approved enterprise (as
further discussed below) may be considerably less.
Tax
Benefits and Grants for Research and Development
Israeli
tax law allows, under specified conditions, a tax deduction for expenditures,
including capital expenditures, for the year in which they are incurred. These
expenses must relate to scientific research and development projects and must
be
approved by the relevant Israeli government ministry, determined by the field
of
research, and the research and development must be for the promotion of the
company and carried out by or on behalf of the company seeking such deduction.
However, the amount of such deductible expenses shall be reduced by the sum
of
any funds received through government grants for the finance of such scientific
research and development projects. Expenditures not so approved are deductible
over a three-year period.
Tax
Benefits Under the Law for the Encouragement of Industry (Taxes),
1969
Under
the
Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement
Law”), Industrial Companies (as defined below) are entitled to the following tax
benefits, among others:
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deductions
over an eight-year period for purchases of know-how and
patents;
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deductions
over a three-year period of expenses involved with the issuance and
listing of shares on a stock
exchange;
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the
right to elect, under specified conditions, to file a consolidated
tax
return with other related Israeli Industrial Companies;
and
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accelerated
depreciation rates on equipment and
buildings.
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Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt
of
prior approval from any governmental authority. Under the Industry Encouragement
Law, an “Industrial Company” is defined as a company resident in Israel, at
least 90% of the income of which, in any tax year, is derived from an
“Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an
enterprise whose major activity in a given tax year is industrial production
activity.
We
believe that we currently qualify as an Industrial Company within the definition
of the Industry Encouragement Law. No assurance can be given that we will
continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.
Special
Provisions Relating to Taxation Under Inflationary
Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Its features which are material to us can be described as follows:
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When
the value of a company’s equity, as calculated under the Inflationary
Adjustments Law, exceeds the depreciated cost of Fixed Assets (as
defined
in the Inflationary Adjustments Law), a deduction from taxable income
is
permitted equal to the product of the excess multiplied by the applicable
annual rate of inflation. The maximum deduction permitted in any
single
tax year is 70% of taxable income, with the unused portion permitted
to be
carried forward, linked to the increase in the consumer price
index.
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If
the depreciated cost of Fixed Assets exceeds a company’s equity, then the
product of such excess multiplied by the applicable annual rate of
inflation is added to taxable
income.
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Subject
to certain limitations, depreciation deductions on Fixed Assets and
losses
carried forward are adjusted for inflation based on the increase
in the
consumer price index.
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On
February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments)
(Amendment No. 20) (Restriction of Period of Application) - 2008 (“the
Amendment”) was passed by the Knesset. According to the Amendment, the
Inflationary Adjustments Law will no longer be applicable subsequent to the
2007
tax year, except for certain transitional provisions. Further, according to
the
Amendment, commencing with the 2008 tax year, the adjustment of income for
the
effects of inflation for tax purposes will no longer be calculated.
Additionally, depreciation on fixed assets and tax loss carryforwards will
no
longer be linked to future changes in the CPI, such that these amounts will
continue to be linked only to the CPI as of the end of the 2007 tax year and
will not be linked to CPI changes after such date.
The
Israeli Income Tax Ordinance and regulations promulgated thereunder allow
“Foreign-Invested Companies,” which maintain their accounts in U.S. dollars in
compliance with the regulations published by the Israeli Minister of Finance,
to
base their tax returns on their operating results as reflected in the dollar
financials statements or to adjust their tax returns based on exchange rate
changes rather than changes in the Israeli consumer price index, in lieu of
the
principles set forth by the Inflationary Adjustments Law.
For
these
purposes, a Foreign-Invested Company is a company, more than 25% of whose share
capital, in terms of rights to profits, voting and appointment of directors,
and
of whose combined share and loan capital, is held by persons who are not
residents of Israel.
A
company
that elects to measure its results for tax purposes based on the dollar exchange
rate cannot change that election for a period of three years following the
election.
We
believe that we qualify as a Foreign Investment Company within the meaning
of
the Inflationary Adjustments Law. We have not yet elected to measure our results
for tax purposes based on the U.S. dollar exchange rate, but may do so in the
future.
In
March
2008, an amendment to the Inflationary Adjustments Law went into effect.
Pursuant to this amendment, as of the 2008 tax year, most of the provisions
of
the Inflationary Adjustments Law will no longer be in force, except for certain
transitional provisions.
Capital
Gains Tax on Sales of Our Ordinary Shares
Israeli
law generally imposes a capital gains tax on the sale of any capital assets
by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by
non-residents of Israel, unless a specific exemption is available or unless
a
tax treaty between Israel and the shareholder’s country of residence provides
otherwise. The law distinguishes between real gain and inflationary surplus.
The
inflationary surplus is equal to the increase in the purchase price of the
relevant asset attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the
date
of purchase and the date of sale. The real gain is the excess of the total
capital gain over the inflationary surplus.
Generally,
the tax rate applicable to capital gains derived from the sale of shares,
whether listed on a stock market or not, is 20% for Israeli individuals, unless
such shareholder claims a deduction for financing expenses in connection with
such shares, in which case the gain will generally be taxed at a rate of 25%.
Additionally, if such shareholder is considered a “Significant Shareholder” at
any time during the 12-month period preceding such sale, i.e. such shareholder
holds directly or indirectly, including with others, at least 10% of any means
of control in the company, the tax rate shall be 25%. Israeli Companies are
subject to the Corporate Tax rate on capital gains derived from the sale of
listed shares, unless such companies were not subject to the Adjustments Law
(or
certain regulations) in which case the applicable tax rate is 25%. However,
the
foregoing tax rates will not apply to: (i) dealers in securities; and (ii)
shareholders who acquired their shares prior to an initial public offering
(that
may be subject to a different tax arrangement).
The
tax
basis of our shares acquired prior to January 1, 2003 will generally be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, a request may be made to the
tax authorities to consider the actual adjusted cost of the shares as the tax
basis if it is higher than such average price.
Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from
the sale of shares on the TASE, under certain conditions, or from the sale
of
shares of Israeli companies publicly traded on a recognized stock exchange
or
regulated market outside of Israel (such as RADCOM ), provided such shareholders
did not acquire their shares prior to the issuer’s initial public offering, that
the gains did not derive from a permanent establishment of such shareholders
in
Israel and that such shareholders are not subject to the Inflationary Adjustment
Law. However, non-Israeli corporations will not be entitled to such exemption
if
Israeli residents (i) have a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to
25%
or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In
some
instances where our shareholders may be liable to Israeli tax on the sale of
their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at source.
U.S.-Israel
Tax Treaty
Pursuant
to the Convention between the Government of the United States of America and
the
Government of Israel with Respect to Taxes on Income, as amended (the “the U.S.-
Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a
person who (i) holds the ordinary shares as a capital asset,
(ii) qualifies as a resident of the United States within the meaning of the
U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded
to such resident by the U.S.-Israel Tax Treaty generally will not be subject
to
Israeli capital gains tax unless either such resident holds, directly or
indirectly, shares representing 10% or more of the voting power of a company
during any part of the 12-month period preceding such sale, exchange or
disposition, subject to certain conditions, or the capital gains from such
sale,
exchange or disposition can be allocated to a permanent establishment in Israel.
In the event that the exemption shall not be available, the sale, exchange
or
disposition of ordinary shares would be subject to such Israeli capital gains
tax to the extent applicable; however, under the U.S.-Israel Tax Treaty, such
residents may be permitted to claim a credit for such taxes against U.S. federal
income tax imposed with respect to such sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits. The
U.S.-Israel Tax Treaty does not relate to state or local taxes.
Taxation
of Non-Residents on Dividends
Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in
Israel. Such sources of income include passive income such as dividends. On
distributions of dividends, income tax is withheld at the source at the rate
of
20%, or 25% for a shareholder that is considered a Significant Shareholder
at
any time during the 12-month period preceding such distribution, or 15% for
dividends deriving from income generated by an Approved Enterprise; unless
a
different rate is provided in a treaty between Israel and the shareholder’s
country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on
dividends paid to a holder of ordinary shares who is a U.S. resident will be
25%; provided, however, that under the Investments Law, dividends deriving
from
income generated by an Approved Enterprise (or Benefited Enterprise) are taxed
at the rate of 15%. Furthermore, dividends not generated by an Approved
Enterprise (or Benefited Enterprise) paid to a U.S. company holding at least
10%
of our issued voting power during the part of the tax year which precedes the
date of payment of the dividend and during the whole of its prior tax year,
are
generally taxed at a rate of 12.5%, provided that not more than 25% of our
gross
income consists of interests or dividends.
For
information with respect to the applicability of Israeli capital gains taxes
on
the sale of ordinary shares by United States residents, see “—Capital Gains Tax
on Sales of Our Ordinary Shares” above.
Law
for the Encouragement of Capital Investments, 1959
The
Law
for the Encouragement of Capital Investments, 1959, or the “Investments Law,” as
in effect until April 2005 provides that a capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry and Commerce of the State of Israel, be designated as an Approved
Enterprise. See discussion below regarding an amendment to the Investments
Law
that came into effect in 2005.
Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and by its physical characteristics, e.g., the equipment to be
purchased and utilized pursuant to the program. Taxable income of a company
derived from an Approved Enterprise is subject to company tax at the maximum
rate of 25% (rather than the regular Corporate Tax rates) for the “Benefit
Period,” a period of seven years commencing with the year in which the Approved
Enterprise first generated taxable income (limited to 12 years from commencement
of production or 14 years from the year of receipt of approval, whichever is
earlier) and, under certain circumstances (as further detailed below), extending
to a period of ten years from the commencement of the Benefit Period. Tax
benefits under the Investments Law shall also apply to income generated by
a
company from the grant of a usage right with respect to know-how developed
by
the Approved Enterprise, income generated from royalties, and income derived
from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the Approved Enterprise’s ordinary course
of business.
A
company
that has an Approved Enterprise program is eligible for further tax benefits
if
it qualifies as a “foreign investors’ company.” A “foreign investors’ company”
is a company more than 25% of whose shares of capital stock and combined share
and loan capital is owned by non-Israeli residents. A company that qualifies
as
a foreign investors’ company and has an approved enterprise program is eligible
for tax benefits for a ten year benefit period. As specified below, depending
on
the geographic location of the Approved Enterprise within Israel, income derived
from the Approved Enterprise program may be exempt from tax on its undistributed
income for a period of between two and ten years and will be subject to a
reduced tax rate for the remainder of the benefits period. The tax rate for
the
remainder of the benefits period is between 10% and 25%, depending on the level
of foreign investment in each year.
A
company
with an Approved Enterprise designation may elect (as we have done) to forego
certain Government grants extended to Approved Enterprises in return for an
“alternative package of benefits.” Under such alternative package of benefits, a
company’s undistributed income derived from an Approved Enterprise will be
exempt from Company Tax for a period of between two and ten years from the
first
year of taxable income, depending on the geographic location of the Approved
Enterprise within Israel, and such company will be eligible for the tax benefits
under the Investments Law for the remainder of such Benefits
Period.
A
company
that has elected such alternative package of benefits and that subsequently
pays
a dividend out of income derived from the Approved Enterprise(s) during the
tax
exemption period will be subject to Corporate Tax in respect of the amount
distributed (including the tax thereon) at the rate which would have been
applicable had the company not elected the alternative package of benefits
(10%-25%, depending on the extent of foreign shareholders holding the company’s
ordinary shares). The dividend recipient is taxed at the reduced rate applicable
to dividends from Approved Enterprises (15%), if the dividend is distributed
out
of the income derived in the tax exemption period. This tax must be withheld
by
the company at source, regardless of whether the dividend is converted into
foreign currency. See Note 7 to the Consolidated Financial Statements.
In
distributing dividends (if any), we may decide from which profits to declare
such dividends for tax purposes in any given year. However, we are not obliged
to distribute exempt retained profits under the alternative package of benefits,
and we may generally decide from which year’s profits to declare dividends. We
intend to permanently reinvest the amount of our tax-exempt income and not
to
distribute such income as a dividend. In the event that we pay a dividend from
income that is derived from our Approved 3Enterprise and, thus, is tax exempt,
we would be required to pay tax at the rate which would have been applicable
had
we not elected the alternative package of benefits (generally 10%-25%, as
described above), and to withhold 15% at source for the dividend recipient,
on
the amount distributed and the corporate tax thereon.
In
1994,
our investment program in our Tel Aviv facility was approved as an Approved
Enterprise under the Investments Law. We elected the alternative package of
benefits in respect thereof. Our program for expansion of our Approved
Enterprise to Jerusalem was submitted to the Investment Center for approval
in
October 1994 and the approval thereof was received in February 1995.
As we selected the alternative package of benefits for our program, once we
begin generating taxable net income we will be entitled to a tax exemption
with
respect to the additional income derived from that program for six years and
will be taxed at a rate of 10%-25%, depending on the level of foreign
investment, for one additional year. The period of benefits under such
approvals
expired
in 2006. The approval provides that the tax rates on income allocated to our
research and development and marketing and management activities (which are
located in Tel Aviv) are to be determined by the Israeli tax authorities. The
approval also provides that the six-year period may be extended to ten years
if
our application to the Investment Center for recognition as a “high technology”
facility is approved. In this case we would not be entitled to an additional
year at the 10%- 25% tax rate. In letters dated May 30, 1996 and
June 16, 1996, the Israeli tax authorities provided that, for the purpose
of determining our tax liability, our income will be allocated to our
manufacturing plant (which is located in Jerusalem) and to our research and
development center (in Tel Aviv), according to the formula described below.
Income allocated to the manufacturing plant will benefit from a six-year tax
exemption , and for the year immediately following, will be taxed at a rate
of
10%-25%, depending on the level of foreign investment, or benefit from a ten
year tax exemption , while income allocated to the research and development
center will benefit from a two-year exemption and for a five-year period
immediately following will be taxed at a 10%-25% rate. The tax authorities
further provided that the income allocated to our research and development
center will be in an amount equal to the expenses of such center (after
deducting the grants from the Office of the Chief Scientist and adding royalties
paid to the Office of the Chief Scientist as well as a pro rata portion of
our
general and administrative expenses) plus a certain portion of our profit
derived from our industrial activities, calculated as follows. If we are not
profitable, no profits before tax will be allocated to the research and
development center. If profits do not exceed 35% of sales, the profits allocated
to the research and development center will be at a rate equal to our rate
of
profits on our sales, plus 5%, up to a maximum of 35%. In the event that profits
exceed 35% of sales, the research and development center will be allocated
profits at a 35% rate. The letter also states that the Israeli tax authorities
may reexamine the above arrangement in 1998 or when we are granted an approval
for an additional expansion, whichever is earlier, based on development in
the
manufacturing plant, the number of employees employed therein and its location.
Any such new arrangement would be applied only with respect to tax years
following the year in which we were notified of an intention to reexamine the
arrangement.
In
December 1996, our request for a second expansion of our Approved
Enterprise in Jerusalem was approved by the Investment Center. The investments
relating to this expansion were completed as of April 15, 1998.
Each
application to the Investment Center is reviewed separately and a decision
as to
whether or not to approve such application is based, among other things, on
the
then prevailing criteria set forth in the law, on the specific objectives of
the
applicant company set forth in such application and on certain financial
criteria of the applicant company. Accordingly, there can be no assurance that
any such application will be approved. In addition, the benefits available
to an
Approved Enterprise are conditional upon the fulfillment of certain conditions
stipulated in the law and its regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that these
conditions are violated, in whole or in part, we would be required to refund
the
amount of tax benefits, with the addition of the consumer price index linkage
adjustment and interest.
We
believe our Approved Enterprise operates in substantial compliance with all
such
conditions and criteria although none of the tax benefits have been utilized
by
RADCOM to date. We cannot assure you that our program will continue to be
approved and/or that we will continue to receive benefits for it at the current
level, if at all. See “Item 3—Key Information—Risk Factors—Risks Relating to Our
Location in Israel.”
Amendment
of the Investments Law
On
April
1, 2005, an amendment to the Investments Law went into effect. Pursuant to
the
amendment, a company’s facility will be granted the status of “Approved
Enterprise” only if it is proven to be an industrial facility (as defined in the
Investments Law) that contributes to the economic independence of the Israeli
economy and is a competitive facility (as defined in the Investments Law) that
contributes to the Israeli gross domestic product. The amendment provides that
the Israeli Tax Authority and not the Investment Center will be responsible
for
an Approved Enterprise under the alternative package of benefits, referred
to as
a Benefited Enterprise. A company wishing to receive the tax benefits afforded
to a Benefited Enterprise is required to select the tax year from which the
period of benefits under the Investments Law are to commence by simply notifying
the Israeli Tax Authority within 12 months of the end of that year. In order
to
be recognized as owning a Benefited Enterprise, a company is required to meet
a
number of conditions set forth in the amendment, including making a minimal
investment in manufacturing assets for the Benefited Enterprise and having
completed a cooling-off period of no less than three years from the company’s
previous year of commencement of benefits under the Investments
Law.
Pursuant
to the amendment, a company with a Benefited Enterprise is entitled, in each
tax
year, to accelerated depreciation for the manufacturing assets used by the
Benefited Enterprise and to certain tax benefits, provided that no more than
12
years have passed since the beginning of the year of election under the
Investments Law. The tax benefits granted to a Benefited Enterprise are
determined, as applicable to RADCOM, according to one of the following new
tax
routes:
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Similar
to the currently available alternative route, exemption from corporate
tax
on undistributed income for a period of two to ten years is available,
depending on the geographic location of the Benefited Enterprise
within
Israel, and a reduced corporate tax rate of 10 to 25% for the remainder
of
the benefits period, depending on the level of foreign investment
in each
year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the company. If the
company pays a dividend out of income derived from the Benefited
Enterprise during the tax exemption period, such income will be subject
to
corporate tax at the applicable rate (10%-25%). The company is required
to
withhold tax at the source at a rate of 15% from any dividends distributed
from income derived from the Benefited Enterprise;
and
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A
special tax route enabling companies owning facilities in certain
geographical locations (zone A) in Israel to pay corporate tax at
the rate
of 11.5% on income of the Benefited Enterprise. The benefits period
is ten
years. Upon payment of dividends, the company is required to withhold
tax
at source at a rate of 15% for Israeli residents and at a rate of
4% for
foreign residents.
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Generally,
a company that is Abundant in Foreign Investment (as defined in the Investments
Law) is entitled to an extension of the benefits period by an additional five
years, depending on the rate of its income that is derived in foreign
currency.
The
amendment changes the definition of “foreign investment” in the Investments Law
so that the definition now requires a minimal investment of NIS five million
by
foreign investors. Furthermore, such definition now also includes the purchase
of shares of a company from another shareholder, provided that the company’s
outstanding and paid-up share capital exceeds NIS five million. Such changes
to
the aforementioned definition retroactive from 2003.
The
amendment will apply to Benefited Enterprise programs in which the year of
election under the Investments Law is 2004 or later, unless such programs
received “Approved Enterprise” approval from the Investment Center on or prior
to December 31, 2004 in which case the amendment provides that terms and
benefits included in any certificate of approval already granted will remain
subject to the provisions of the law as they were on the date of such
approval.
In
December 2005, based on this amendment, we notified the Income Tax Authorities
that 2004 fiscal year was chosen as the selected year for additional expansion
of our Approved Enterprise.
Israeli
Transfer Pricing Regulations
In
November 2006, Israeli Income Tax Regulations (Determination of Market Terms),
2006, promulgated under Section 85A of the Israeli Income Tax Ordinance went
into effect. Section 85A of the Israeli Income Tax Ordinance generally requires
that all cross-border transactions carried out between related parties be
conducted on arm’s length terms and be taxed accordingly.
United
States Federal Income Tax Considerations
Subject
to the limitations described herein, the following discussion summarizes certain
U.S. federal income tax consequences to a U.S. Holder of our ordinary shares.
A
“U.S. Holder” means a holder of our ordinary shares who is:
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an
individual who is a citizen or resident of the United States
for U.S. federal income tax purposes;
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a
corporation
(or
other entity taxable as a corporation
for
U.S. federal income tax purposes) created or organized in the United
States or under the laws of the United States or any political subdivision
thereof or the District of
Columbia;
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an
estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
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a
trust (i) if, in general, a court within the United States is able
to
exercise primary supervision over its administration and one or more
U.S.
persons have the authority to control all of its substantial decisions,
or
(ii) that has in effect a valid election under applicable U.S. Treasury
Regulations to be treated as a U.S.
person.
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Unless
otherwise specifically indicated, this discussion does not consider the U.S.
tax
consequences to a person that is not a U.S. Holder (a “Non-U.S. Holder”). This
discussion considers only U.S. Holders that will own our ordinary shares as
capital assets (generally, for investment) and does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to each U.S. Holder’s person’s decision to purchase our ordinary shares.
This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the “Code”), current and proposed Treasury Regulations promulgated
thereunder, and administrative and judicial decisions as of the date hereof,
all
of which are subject to change, possibly on a retroactive basis. This discussion
does not address all aspects of U.S. federal income taxation that may be
relevant to any particular U.S. Holder in light of such holder
’s
individual circumstances. In particular, this discussion does not address the
potential application of the alternative minimum tax or U.S. federal income
tax
consequences to
U.S.
Holders
that are subject to special treatment, including
U.S.
Holders
that:
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are
broker-dealers or insurance companies;
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have
elected mark-to-market accounting;
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are
tax-exempt organizations or retirement plans;
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are
financial institutions or “financial services entities
;”
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hold
our
ordinary
shares as part of a straddle, “hedge” or “conversion transaction” with
other investments;
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acquired
our ordinary
shares upon the exercise of employee stock options or otherwise
as
compensation;
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own
directly, indirectly or by attribution at least 10% of our voting
power;
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have
a functional currency that is not the U.S.
dollar;
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are
certain former citizens or long-term residents of the United States;
or
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are
real estate investment trusts or regulated investment companies.
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If
a
partnership (or any other entity treated as a partnership for U.S. federal
income tax purposes) holds our ordinary shares, the tax treatment of the
partnership and a partner in such partnership will generally depend on the
status of the partner and the activities of the partnership. Such a partner
or
partnership should consult its own tax advisor as to its tax consequences.
In
addition, this discussion does not address any aspect of state, local or
non-United States laws or the possible application of United States federal
gift
or estate tax.
Each
holder of
our
ordinary shares is advised to consult such person’s own tax advisor with respect
to the specific tax consequences to such person of purchasing, holding or
disposing of our ordinary shares, including the applicability and effect of
federal, state, local and foreign income tax and other tax laws in such person’s
particular circumstances.
Taxation
of Ordinary Shares
Taxation
of Distributions Paid on Ordinary Shares.
Subject
to the discussion below under “Passive Foreign Investment Company Status,” a
U.S. Holder will be required to include in gross income as ordinary dividend
income the amount of any distribution paid on
our
ordinary
shares, including any non-U.S. taxes withheld from the amount paid, to the
extent the distribution is paid out of our current or accumulated earnings
and
profits as determined for U.S. federal income tax purposes. Distributions in
excess of such earnings and profits will be applied against and will reduce
the
U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such
basis, will be treated as gain from the sale or exchange of our ordinary shares.
The dividend portion of such distributions generally will not qualify for the
dividends received deduction available to corporations.
Subject
to the discussion below under “Passive Foreign Investment Company Status,”
dividends that are received by U.S. Holders that are individuals, estates or
trusts will be taxed at the rate applicable to long-term capital gains (a
maximum rate of 15% for taxable years beginning on or before December 31, 2010),
provided that such dividends meet the requirements of “qualified dividend
income.” For this purpose, qualified dividend income generally includes
dividends paid by a non-U.S. corporation if certain holding period and other
requirements are met and either (i) the stock of the non-U.S. corporation with
respect to which the dividends are paid is readily tradable on an established
securities market in the U.S. (e.g., the NASDAQ Global Market and the NASDAQ
Capital Market) or (ii) the non-U.S. corporation is eligible for benefits of
a
comprehensive income tax treaty with the United States, which benefits include
an information exchange program and is determined to be satisfactory by the
U.S.
Secretary of the Treasury. The United States Internal Revenue Service (the
“IRS”) has determined that the U.S.-Israel Tax Treaty is satisfactory for this
purpose. Dividends that fail to meet such requirements, and dividends received
by corporate U.S. Holders, are taxed at ordinary income rates. No dividend
received by a U.S. Holder will be a qualified dividend (i) if the U.S.
Holder held the ordinary share with respect to which the dividend was paid
for
less than 61 days during the 121-day period beginning on the date that is 60
days before the ex-dividend date with respect to such dividend, excluding for
this purpose, under the rules of Code Section 246(c), any period during which
the U.S. Holder has an option to sell, is under a contractual obligation to
sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such
ordinary share (or substantially identical securities); or (ii) to the
extent that the U.S. Holder is under an obligation (pursuant to a short sale
or
otherwise) to make related payments with respect to positions in property
substantially similar or related to the ordinary share with respect to which
the
dividend is paid. If we were to be a “passive foreign investment company” (as
such term is defined in the Code) for any taxable year, dividends paid on our
ordinary shares in such year or in the following taxable year would not be
qualified dividends. In addition, a non-corporate U.S. Holder will be able
to
take a qualified dividend into account in determining its deductible investment
interest (which is generally limited to its net investment income) only if
it
elects to do so; in such case the dividend will be taxed at ordinary income
rates.
Distributions
of current or accumulated earnings and profits paid in foreign currency to
a
U.S. Holder (including any non-U.S. taxes withheld therefrom) will be includible
in the income of a U.S. Holder in a U.S. dollar amount calculated by reference
to the exchange rate on the day the distribution is received. A U.S. Holder
that
receives a foreign currency distribution and converts the foreign currency
into
U.S. dollars subsequent to receipt may have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against
the U.S. dollar, which will generally be U.S. source ordinary income or
loss.
U.S.
Holders will have the option of claiming the amount of any non-U.S. income
taxes
withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their U.S. federal income tax liability.
Individuals who do not claim itemized deductions, but instead utilize the
standard deduction, may not claim a deduction for the amount of the non-U.S.
income taxes withheld, but such amount may be claimed as a credit against the
individual’s U.S. federal income tax liability. The amount of non-U.S. income
taxes which may be claimed as a credit in any taxable year is subject to complex
limitations and restrictions, which must be determined on an individual basis
by
each shareholder. These limitations include, among others, rules which limit
foreign tax credits allowable with respect to specific classes of income to
the
U.S. federal income taxes otherwise payable with respect to each such class
of
income. A U.S. Holder will be denied a foreign tax credit with respect to
non-U.S. income tax withheld from a dividend received on the ordinary shares
if
such U.S. Holder has not held the ordinary shares for at least 16 days of the
31-day period beginning on the date which is 15 days before the ex-dividend
date
with respect to such dividend, or to the extent such U.S. Holder is under an
obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the required 16
-
day
holding period. Distributions of current or accumulated earnings and profits
generally will be foreign source passive income for United States foreign tax
credit purposes; however, special rules will apply if we are a “United
States-owned foreign corporation.” In that case, distributions of current or
accumulated earnings and profits will be treated as U.S. source and foreign
source income in proportion to our earnings and profits in the year of the
distribution allocable to U.S. and foreign sources. We will be treated as a
U.S.-owned foreign corporation as long as stock representing 50% or more of
the
voting power or value of our ordinary shares is owned, directly or indirectly,
by U.S. persons. Foreign taxes allocable to the portion of our distributions
treated as from U.S. sources under these rules may not be creditable against
a
U.S. Holder’s U.S. federal income tax liability on such portion.
Taxation
of the Disposition of Ordinary Shares.
Subject
to the discussion below under “Passive Foreign Investment Company Status,” upon
the sale, exchange or other disposition of our ordinary shares, a U.S. Holder
will recognize capital gain or loss in an amount equal to the difference between
such U.S. Holder’s basis in such ordinary shares, which is usually the cost of
such shares, and the amount realized on the disposition. A U.S. Holder that
uses
the cash method of accounting calculates the U.S. dollar value of the proceeds
received on the sale as of the date that the sale settles, while a U.S. Holder
that uses the accrual method of accounting is required to calculate the value
of
the proceeds of the sale as of the “trade date,” unless such U.S. Holder has
elected to use the settlement date to determine its proceeds of sale. Capital
gain from the sale, exchange or other disposition of ordinary shares held more
than one year is long-term capital gain, and is eligible for a reduced rate
of
taxation for individuals (currently a maximum rate of 15% for taxable years
beginning on or before December 31, 2010). Gains recognized by a U.S. Holder
on
a sale, exchange or other disposition of ordinary shares generally will be
treated as United States source income for U.S. foreign tax credit purposes.
A
loss recognized by a3 U.S. Holder on the sale, exchange or other disposition
of
ordinary shares generally is allocated to U.S. source income. The deductibility
of a capital loss recognized on the sale, exchange or other disposition of
ordinary shares is subject to limitations. A U.S. Holder that receives foreign
currency upon disposition of ordinary shares and converts the foreign currency
into U.S. dollars subsequent to the settlement date or trade date (whichever
date the taxpayer was required to use to calculate the value of the proceeds
of
sale) may have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar,
which
will generally be U.S. source ordinary income or loss.
Passive
Foreign Investment Company Status
.
We
would be a passive foreign investment company (a “PFIC”) for 2007 if (taking
into account certain “look-through” rules with respect to the income and assets
of our corporate subsidiaries) either (i) 75 percent or more of our gross income
for the taxable year was passive income or (ii) the average percentage (by
value) of our total assets that are passive assets during the taxable year
was
at least 50 percent. As discussed below, we believe that we were not a PFIC
for
2007.
If
we
were a PFIC, each U.S. Holder would (unless it made one of the elections
discussed below on a timely basis) be taxable on gain recognized from the
disposition of our ordinary shares (including gain deemed recognized if the
ordinary shares are used as security for a loan) and upon receipt of certain
excess distributions (generally, distributions that exceed 125% of the average
amount of distributions in respect to such ordinary shares received during
the
preceding three taxable years or, if shorter, during the U.S. Holder’s holding
period prior to the distribution year) with respect to our ordinary shares
as if
such income had been recognized ratably over the U.S. Holder’s holding period
for the ordinary shares. The U.S. Holder’s income for the current taxable year
would include (as ordinary income) amounts allocated to the current taxable
year
and to any taxable year period prior to the first day of the first taxable
year
for which we were a PFIC. Tax would also be computed at the highest ordinary
income tax rate in effect for each other taxable year period to which income
is
allocated, and an interest charge on the tax as so computed would also apply.
Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares
from decedents (other than nonresident aliens) would be denied the
normally-available step-up in basis for such shares to fair market value at
the
date of death and, instead, would have a tax basis in such shares equal to
the
decedent’s basis, if lower.
As
an
alternative to the tax treatment described above, a U.S. Holder could elect
to
treat us as a “qualified electing fund” (a “QEF”), in which case the U.S. Holder
would be taxed currently, for each taxable year that we are a PFIC, on its
pro
rata share of our ordinary earnings and net capital gain (subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge). Special rules apply if a U.S. Holder makes a QEF election after the
first taxable year in its holding period in which we are a PFIC. We have agreed
to supply U.S. Holders with the information needed to report income and gain
under a QEF election if we were a PFIC. Amounts includable in income as a result
of a QEF election will be determined without regard to our prior year losses
or
the amount of cash distributions, if any, received from us. A U.S. Holder’s
basis in its ordinary shares will increase by any amount included in income
and
decrease by any amounts not included in income when distributed because such
amounts were previously taxed under the QEF rules. So long as a U.S. Holder’s
QEF election is in effect with respect to the entire holding period for its
ordinary shares, any gain or loss realized by such holder on the disposition
of
its ordinary shares held as a capital asset ordinarily will be capital gain
or
loss. Such capital gain or loss ordinarily would be long-term if such U.S.
Holder had held such ordinary shares for more than one year at the time of
the
disposition. For non-corporate U.S. Holders, long-term capital gain is generally
subject to a maximum U.S. federal income tax rate of 15% for taxable years
beginning on or before December 31, 2010. The QEF election is made on a
shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by an electing U.S. Holder and can be revoked only with
the consent of the IRS.
As
an
alternative to making a QEF election, a U.S. Holder of PFIC stock that is
“marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) may,
in certain circumstances, avoid certain of the tax consequences generally
applicable to holders of stock in a PFIC by electing to mark the stock to market
as of the beginning of such U.S. Holder’s holding period for the ordinary
shares. As a result of such an election, in any taxable year that we are a
PFIC,
a U.S. holder would generally be required to report gain or loss to the extent
of the difference between the fair market value of the ordinary shares at the
end of the taxable year and such U.S. Holder’s tax basis in its ordinary shares
at that time. Any gain under this computation, and any gain on an actual
disposition of the ordinary shares, would be treated as ordinary income. Any
loss under this computation, and any loss on an actual disposition of the
ordinary shares, generally would be treated as ordinary loss to the extent
of
the cumulative net-mark-to-market gain previously included. Any remaining loss
from marking ordinary shares to market will not be allowed, and any remaining
loss from an actual disposition of ordinary shares generally would be capital
loss. A U.S. Holder’s tax basis in its ordinary shares is adjusted annually for
any gain or loss recognized under the mark-to-market election. There can be
no
assurances that there will be sufficient trading volume with respect to the
ordinary shares for the ordinary shares to be considered “regularly traded” or
that our ordinary shares will continue to trade on the NASDAQ Capital Market.
Accordingly, there are no assurances that our ordinary shares will be marketable
stock for these purposes. As with a QEF election, a mark-to-market election
is
made on a shareholder-by-shareholder basis, applies to all ordinary shares
held
or subsequently acquired by an electing U.S. Holder and can only he revoked
with
consent of the IRS (except to the extent the ordinary shares no longer
constitute “marketable stock”).
We
believe that we were not a PFIC for 2007, 2006, 2005, 2004 or any year prior
to
2001, based upon our income, assets, activities and market capitalization during
each such year. Based upon independent valuations of our assets as of the end
of
each quarter of 2001, 2002 and 2003, we believe that we were not a PFIC for
2001, 2002 or 2003 despite the relatively low market price of our ordinary
shares during much of those taxable years. The tests for determining PFIC status
are applied annually and it is difficult to make accurate predictions of future
income and assets or the future price of our ordinary share, which are all
relevant to this determination. Accordingly, there can be no assurance that
we
will not become a PFIC. If we determine that we have become a PFIC, we will
notify our U.S. Holders and provide them with the information necessary to
comply with the QEF rules. U.S. Holders who hold ordinary shares during a period
when we are a PFIC will be subject to the foregoing rules, even if we cease
to
be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF,
mark-to-market or certain other special elections. U.S. Holders are urged to
consult their tax advisors about the PFIC rules, including the consequences
to
them of making a mark-to-market or QEF election with respect to our ordinary
shares in the event that we qualify as a PFIC.
Tax
Consequences for Non-U.S. Holders of Ordinary Shares
Except
as
described in “—Information Reporting and Back-up Withholding” below, a Non-U.S.
Holder of ordinary shares will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and/or the proceeds from the
disposition of, our ordinary shares, unless, in the case of U.S. federal income
taxes:
|
·
|
such
item is effectively connected with the conduct by the Non-U.S. Holder
of a
trade or business in the United States and, in the case of a resident
of a
country which has a treaty with the United States, such item is
attributable to a permanent establishment or, in the case of an
individual, a fixed place of business, in the United States;
or
|
|
·
|
the
Non-U.S. Holder is an individual who holds the ordinary shares as
a
capital asset and is present in the United States for 183 days or
more in
the taxable year of the disposition and certain other conditions
are
met.
|
Information
Reporting and Backup Withholding
U.S.
Holders (other than exempt recipients, such as corporations) generally are
subject to information reporting requirements with respect to dividends paid
on,
or proceeds from the disposition of, our ordinary shares. U.S. Holders are
also
generally subject to backup withholding (currently at a rate of 28%) on
dividends paid on, or proceeds from the disposition of, our ordinary shares
unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an
exemption.
Non-U.S.
Holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the proceeds from the
disposition of, our ordinary shares, provided that such Non-U.S. Holder provides
taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption.
The
amount of any back-up withholding will be allowed as a credit against a U.S.
or
Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder
to a refund, provided that certain required information is furnished to the
IRS.
F.
DIVIDENDS
AND PAYING AGENTS
Not
applicable.
G.
STATEMENT
BY EXPERTS
Not
applicable.
H.
DOCUMENTS
ON DISPLAY
We
are
required to file reports and other information with the SEC, under the Exchange
Act and the regulations thereunder applicable to foreign private issuers. We
are
subject to the informational requirements of the Exchange Act, applicable to
foreign private issuers and fulfill the obligation with respect to such
requirements by filing reports with the SEC. You may read and copy any document
we file with the SEC without charge at the SEC’s public reference room, located
at 100 F Street, N.E ., Washington, D.C. 20549. Copies of such material may
be
obtained by mail from the Public Reference Branch of the SEC at such address,
at
prescribed rates. Please call the SEC at l-800-SEC-0330 for further information
on the public reference room. In addition, some of our filings are available
to
the public at the SEC’s website (www.sec.gov). We also generally make available
on our own web site (www.radcom.com) our annual reports as well as other
information. Our website is not part of this annual report.
Any
statement in this annual report about any of our contracts or other documents
is
not necessarily complete. If the contract or document is filed as an exhibit
to
this annual report, the contract or document is deemed to modify the description
contained in this annual report. We urge you to review the exhibits themselves
for a complete description of the contract or document.
As
a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly
as
United States companies whose securities are registered under the Exchange
Act.
A copy of each report submitted in accordance with applicable United States
law
is available for public review at our principal executive offices.
I.
SUBSIDIARY
INFORMATION
Not
applicable.
ITEM
11.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
are
exposed to a variety of risks, including changes in interest rates affecting
primarily the interest received on short-term deposits and foreign currency
fluctuations. We do not use derivative financial instruments. We may in the
future undertake hedging or other similar transactions or invest in market
risk
sensitive instruments if our management determines that it is necessary to
offset these risks.
Interest
Rate Risk
Our
exposure to market risks for changes in interest rates relates primarily to
our
cash and cash equivalents and to loans we take that are based on a
floating/fixed interest rate. Our cash and cash equivalents are held
substantially in U.S. dollars with financial banks and bear annual interest
of
approximately 2.95%. For purposes of specific risk analysis, we use sensitivity
analysis to determine the impact that market risk exposure may have on the
financial income derived from our cash and cash equivalents.
Foreign
Currency Exchange Risk
Our financial results may be negatively impacted by foreign currency
fluctuations. Our foreign operations are generally transacted through our U.S.
subsidiary and through our representatives and distributors. Typically, these
sales and related expenses are denominated in U.S. dollars or in Euro for
European countries, while most of our expenses are denominated in NIS. Because
our financial results are reported in U.S. dollars, our results of operations
may be adversely impacted by fluctuations in the rates of exchange between
the
U.S. dollar and other currencies, mainly the NIS.
ITEM
12.
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable
PART
II
ITEM
13.
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
Not
applicable.
ITEM
14.
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Use
of Proceeds
Initial
Public Offering.
The
initial public offering of our ordinary shares, NIS 0.20 per share, commenced
on
September 24, 1997, and terminated after the sale of all the securities
registered. On June 12, 1996, we filed this registration statement with the
SEC
on Form F-1 (File No. 333-05022); we filed amended F-1s on August 1, 1997,
September 4, 1997 and September 12, 1997. The managing underwriters of the
offering were Unterberg Harris, Pennsylvania Merchant Group Ltd. and Fahnestock
& Co., Inc. We registered 661,250 ordinary shares in the offering, including
shares issued pursuant to the exercise of the underwriter’s over--allotment
option. Of such shares, we sold 661,250 ordinary shares at an aggregate offering
price of approximately $25.1 million ($38.00 per share). Under the terms of
the
offering, we incurred underwriting discounts and commissions of approximately
$1.7 million. We also incurred estimated expenses of $1.3 million in connection
with the offering. None of the expenses consisted of amounts paid directly
or
indirectly to any of our directors, officers, general partners or their
associates, any persons owning 10% or more of any class of our equity securities
or any of our affiliates. The net proceeds that we received as a result of
the
offering were approximately $22.1 million. As of December 31, 2007,
approximately $0.4 million of the net proceeds has been used for the
construction of facilities; $8.3 million has been used for the purchase and
installation of machinery and equipment; approximately $0.3 million has been
used for the repurchase of 30,843 of our ordinary shares; and approximately
$13.1 million has been used for operational expenditures.
Private
Placement - 2004.
In
March
2004, we raised $5.5 million in our PIPE transaction (i.e., the private
placement of ordinary shares and warrants). For additional information on this
PIPE transaction, see “Item 5—Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Private Placement.” Under the PIPE
transaction, we issued, in March 2004, 962,885 of our ordinary shares at an
aggregate purchase price of $5.5 million, or $5.712 per ordinary share. We
also
issued to the investors warrants to purchase up to 240,722 ordinary shares
at an
exercise price of $9.012 per share. The warrants were exercisable for two years
from the PIPE’s date of closing. As part of the private placement, we filed with
the SEC a resale registration statement covering the shares purchased in the
private placement (including the shares underlying the warrants); our F-3 (File
No. 333-115475) was filed with the SEC on May 13, 2004, while our amended F-3/As
were filed on October 15, 2004 and November 26, 2004. The registration was
declared effective by the SEC on December 10, 2004. We incurred expenses of
approximately $189,000 in connection with the offering. Our net proceeds from
the offering were approximately $5.3 million. In 2005 and 2006, our investors
exercised warrants to purchase 82,064 ordinary shares and 156,469 ordinary
shares, respectively. Our net proceeds from these exercises were approximately
$725,000 and $1.4 million, respectively. The net proceeds of the exercise of
the
warrants have been, and will continue to be, used for working capital and
general corporate purposes, and in accordance with our budget, as it is
periodically approved by our Board of Directors. As of December 31, 2007,
approximately $3.5 million has been used for operational expenditures.
Private
Placement - 2008.
In
February 2008, we raised $2.5 million in our PIPE transaction (i.e., the private
placement of ordinary shares and warrants). For additional information on this
PIPE transaction, see “Item 8—Financial Information- Significant Changes—Private
Placement.” Under the PIPE transaction, we issued, in February 2008, 976,563 of
our ordinary shares at an aggregate purchase price of $2.5 million, or $2.56
per
ordinary share. We also issued to the investors warrants to purchase up to
325,520 ordinary shares at an exercise price of $3.20 per share. The warrants
are exercisable for three years from the PIPE’s date of closing.
ITEM
15T.
CONTROLS
AND PROCEDURES
a.
Disclosure
Controls and Procedures
The
Company’s management, with the participation of its chief executive officer and
chief financial officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures over financial reporting (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of December 31,
2007. Based on this evaluation, the Company’s chief executive officer and chief
financial officer concluded that, as of December 31, 2007, the Company’s
disclosure controls and procedures were: (1) designed to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is accumulated and communicated to the Company’s management,
including the Company’s chief executive officer and chief financial officer, and
by others within those entities, as appropriate to allow timely decisions
regarding required disclosure, particularly during the period in which this
report was being prepared; and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by the Company
in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms.
b.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management, under the supervision of the Company’s principal executive
and principal financial officers, is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) of the
Exchange Act as a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers and effected by
the Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transaction and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; (3) provide
reasonable assurance that our receipts and expenditures are made only in
accordance with authorizations of our management and Board of Directors (as
appropriate); and (4) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use of disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under
the
supervision and with the participation of Company’s management, including its
principal executive and financial officers, the Company conducted an evaluation,
and assessed the effectiveness of, our internal control over financial reporting
as of December 31, 2007, based on the framework set forth by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control —Integrated Framework
.
Based
on
our assessment under that framework and the criteria established therein, our
management concluded that, as of December 31, 2007, the Company’s internal
control over financial reporting was effective.
c.
Attestation
Report of the Registered Public Accounting Firm
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report.
d.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
that occurred during the year ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
16A.
AUDIT
COMMITTEE FINANCIAL EXPERT
Our
Board
of Directors has determined that Zohar Gilon is our “audit committee financial
expert” (as defined in the Instruction to paragraph (a) of Item 16A of Form
20-F) serving on our Audit Committee, as defined in the applicable regulations,
including Item 16A(b) of Form 20-F. Mr. Gilon qualifies as an “independent”
director under the NASDAQ rules.
ITEM
16B.
CODE
OF ETHICS
On
February 1, 2004, our Board of Directors adopted a our Code of Ethics and
Business Conduct, a code that applies to all our directors, officers and other
employees of the Company, including our Chief Executive Officer and President,
and our Chief Financial Officer and Vice President of Finance. A copy of the
Code of Ethics and Business Conduct was filed as Exhibit 11 to our Annual Report
on Form 20-F, filed with the SEC on May 6, 2004.
Our
Code
of Ethics is publicly also available on our website at
www.radcom.com.
ITEM
16C.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
In
the
Company’s annual meeting held in October 2007, our shareholders re-appointed
Somekh Chaikin, an independent registered public accounting firm, a member
of
KPMG International, or KPMG Somekh Chaikin, to serve as our independent
auditors.
KPMG
Somekh Chaikin charged the following fees to us for professional services in
each of the last two fiscal years:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Audit
Fees
|
|
$
|
120,000
|
|
$
|
110,000
|
|
Audit-Related
Fees
|
|
|
-
|
|
|
-
|
|
Tax
Fees
|
|
$
|
5,000
-
|
|
|
-
|
|
All
Other Fees
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
125,000
|
|
$
|
110,000
|
|
“Audit
Fees” are the aggregate fees billed or billable (for the year) for the audit of
our annual financial statements and reviews of interim financial statements
that
are normally provided in connection with statutory and regulatory filings or
engagements.
“Audit-Related
Fees” are the aggregate fees billed (for the year) for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements and are not reported under Audit Fees.
“Tax
Fees” are the aggregate fees billed (in the year) for professional services
rendered for tax compliance.
Audit
Committee’s Pre-Approval Policies and Procedures
Our
Audit
Committee oversees our independent auditors. See also the description under
the
heading “Board Practices” in “Item 6—Directors, Senior Management and
Employees.” Our Audit Committee’s policy is to approve any audit or permitted
non-audit services proposed to be provided by our independent auditors before
engaging our independent auditors to provide such services. Pursuant to this
policy, which is designed to assure that such engagements do not impair the
independence of our auditors, the Chairperson of our Audit Committee is
authorized to approve any such services between the meetings of our Audit
Committee, subject to ratification by the Audit Committee, and to report any
such approvals to the Audit Committee at its next meeting.
ITEM
16D.
EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not
applicable.
ITEM
16E.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not
applicable.
PART
III
ITEM
17.
FINANCIAL
STATEMENTS
We
have
responded to Item 18 in lieu of this item.
ITEM
18.
FINANCIAL
STATEMENTS
Our
consolidated financial statements and the report of independent registered
public accounting firm in connection therewith are filed as part of this Annual
Report on Form 20-F, as noted below:
Index
to the Consolidated Financial Statements
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006
and
2005
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December
31, 2007, 2006 and 2005
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006
and
2005
|
|
|
F-7
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-9
|
|
ITEM 19.
EXHIBITS
The
exhibits filed with or incorporated into this Annual Report on Form 20-F are
listed below.
Exhibit
No.
|
|
Description
|
1.1
|
|
Memorandum
of Association
(1)
|
1.2
|
|
Articles
of Association, as amended
(13)
|
2.1
|
|
Form
of ordinary share certificate
(1)
|
4.1
|
|
2000
Share Option Plan
(2)
|
4.2
|
|
1998
Employee Bonus Plan
(3)
|
4.3
|
|
1998
Share Option Plan
(4)
|
4.4
|
|
International
Employee Stock Option Plan
(5)
|
4.5
|
|
Directors
Share Incentive Plan (1997)
(6)
|
4.6
|
|
Key
Employee Share Incentive Plan (1996)
(7)
|
4.7
|
|
2001
Share Option Plan
(8)
|
4.8
|
|
2003
Share Option Plan
(9)
|
4.9
|
|
Lease
Agreement, dated November 15, 2000, among Vitalgo Textile Industries
Ltd., Zisapel Properties (1992) Ltd., Klil and Michael Properties
(1992)
Ltd. and RADCOM Ltd. (English summary accompanied by Hebrew
original)
(10)
|
4.10
|
|
Lease
Agreement, dated March 1, 2001, among Zisapel Properties (1992) Ltd.,
Klil and Michael Properties (1992) Ltd. and RADCOM Ltd. (English
summary
accompanied by Hebrew original)
(10)
|
4.11
|
|
Lease
Agreement, dated August 12, 1998, between RAD Communications Ltd. and
RADCOM Ltd. (English summary accompanied by Hebrew original)
(10)
|
4.12
|
|
Lease
Agreement, dated December 1, 2000, among Zohar Zisapel Properties,
Inc., Yehuda Zisapel Properties, Inc. and RADCOM Equipment,
Inc.
(10)
|
4.13
|
|
Lease
Agreement, dated January 22, 2002, between Regus Business Centre
and
RADCOM Ltd.
(11)
|
4.14
|
|
Software
License Agreement, dated as of January 13, 1999, between RADVision,
Ltd. and RADCOM Ltd., and Supplement No. 1 thereto, dated as of
January 24, 2001
(10)
|
4.15
|
|
Share
and Warrant Purchase Agreement, dated as of March 17, 2004, by and
between
RADCOM Ltd. and the purchasers listed therein
(12)
|
4.16
|
|
Form
of Warrant
(12)
|
4.17
|
|
Share
and Warrant Purchase Agreement, dated as of December 19, 2007, by
and
between RADCOM Ltd. and the purchasers listed therein
(13)
|
4.18
|
|
Form
of Warrant - Share and Warrant Purchase Agreement dated December
19,
2007
(13)
|
4.19
|
|
Loan
Agreement, dated as of April 1, 2008, by and between RADCOM Ltd.,
Plenus
Management (2004) and the other parties thereto
(13)
|
Exhibit
No.
|
|
Description
|
4.20
|
|
Fixed
Charge Agreement, dated as of April 1, 2008, by and between RADCOM
Ltd.,
Plenus Management (2004) and the other parties thereto
(13)
|
4.21
|
|
Floating
Charge Agreement, dated as of April 1, 2008, by and between RADCOM
Ltd.,
Plenus Management (2004) and the other parties thereto
(13)
|
4.22
|
|
Security
Agreement, dated as of April 1, 2008, by and between RADCOM Equipment
Inc., Plenus Management (2004) and the other parties thereto
(13)
|
4.23
|
|
Form
of Warrant - Loan Agreement, dated as of April 1, 2008
(13)
|
8.1
|
|
List
of Subsidiaries
(13)
|
11.1
|
|
Code
of Ethics
(12)
|
12.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(13)
|
12.2
|
|
Certification
of
the
Chief Financial Officer
pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(13)
|
13.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(13)
|
13.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(13)
|
14.1
|
|
Consent
of KPMG Somekh Chaikin, a member firm of KPMG International, dated
June
27, 2007
(13)
|
(1)
|
Incorporated
herein by reference to the Registration Statement on Form F-1
of RADCOM
Ltd. (File No. 333-05022), filed with the SEC on June 12,
1996.
|
(2)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13244), filed with the SEC on March 7,
2001.
|
(3)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13246), filed with the SEC on March 7,
2001.
|
(4)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13248) filed with the SEC on March 7,
2001.
|
(5)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13250), filed with the SEC on March 7,
2001.
|
(6)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13254), filed with the SEC on March 7,
2001.
|
(7)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-13252), filed with the SEC on March 7,
2001.
|
(8)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-14236), filed with the SEC on December 28,
2001.
|
(9)
|
Incorporated
herein by reference to the Registration Statement on Form S-8 of
RADCOM
Ltd. (File No. 333-111931), filed with the SEC on January 15,
2004.
|
(10)
|
Incorporated
herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
year
ended December 31, 2000, filed with the SEC on June 29,
2001.
|
(11)
|
Incorporated
herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
year
ended December 31, 2001, filed with the SEC on March 27,
2002.
|
(12)
|
Incorporated
herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
year
ended December 31, 2003
,
filed with the SEC on May 6, 2004.
|
SIGNATURE
The
registrant hereby certifies that it meets all of the requirements for filing
on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
RADCOM
LTD.
|
|
|
By:
|
/s/
David Ripstein
|
Name:
David Ripstein
|
Title:
Chief Executive Officer
|
Date:
June 30, 2008
|
Radcom
Ltd.
and
its Subsidiaries
Consolidated
Financial Statements
As
of December 31, 2007 and 2006
and
for the years ended December 31, 2007, 2006 and 2005
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Financial Statements as of December 31, 2007 and 2006
and
for the years ended December 31, 2007, 2006 and 2005
Table
of Contents
|
|
Page
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the years ended
|
|
|
|
|
December
31, 2007, 2006 and 2005
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders' Equity and Comprehensive Income
(Loss)
|
|
|
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended
|
|
|
|
|
December
31, 2007, 2006 and 2005
|
|
|
F-7
|
|
|
|
|
|
|
Notes
to the Consolidated Financial Statements
|
|
|
F-9
|
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders
Radcom
Ltd.
We
have
audited the accompanying consolidated balance sheets of Radcom Ltd. (an Israeli
Corporation) and its subsidiaries (collectively, the "Company") as of December
31, 2007 and 2006, and the related consolidated statements of operations,
shareholders' equity and comprehensive income (loss) and cash flows for each
of
the years in the three-year period ended December 31, 2007. These consolidated
financial statements are the responsibility of the Company's Board of Directors
and of its management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by the board of directors and management, as well
as
evaluating the overall financial statements presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Radcom Ltd.
and
its subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
As
explained in Note 2P to the consolidated financial statements, effective
January
1, 2006, the Company changed its method of accounting for share-based
compensation upon adoption of Statement of Financial Accounting Standards
No.
123(R),"Share-Based Payment".
Somekh
Chaikin
Certified
Public Accountants (Isr.)
Member
Firm of KPMG International
Tel
Aviv,
Israel
June
30,
2008
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Balance Sheets
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents (Note 8A1)
|
|
|
3,763
|
|
|
2,007
|
|
Short-term
deposits (Note 8A2)
|
|
|
-
|
|
|
8,060
|
|
Trade
receivables, net (Note 8A3)
|
|
|
6,589
|
|
|
10,461
|
|
Inventories
(Note 8A4)
|
|
|
3,454
|
|
|
2,675
|
|
Other
current assets (Note 8A5)
|
|
|
1,150
|
|
|
955
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
14,956
|
|
|
24,158
|
|
|
|
|
|
|
|
|
|
Assets
held for severance benefits (Note 4)
|
|
|
2,480
|
|
|
2,187
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net (Note 3)
|
|
|
1,460
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
18,896
|
|
|
27,753
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Balance Sheets
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Trade
payables
|
|
|
1,392
|
|
|
2,551
|
|
Current
deferred revenue
|
|
|
1,593
|
|
|
1,534
|
|
Other
payables and accrued expenses (Note 8A6)
|
|
|
4,668
|
|
|
4,290
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,653
|
|
|
8,375
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
Long-term
deferred revenue
|
|
|
425
|
|
|
1,109
|
|
Liability
for employees severance pay benefits (Note 4)
|
|
|
3,240
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
3,665
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
11,318
|
|
|
12,380
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity (Note 6)
|
|
|
|
|
|
|
|
Share
capital *
|
|
|
122
|
|
|
120
|
|
Additional
paid-in capital
|
|
|
48,328
|
|
|
47,542
|
|
Accumulated
deficit
|
|
|
(40,872
|
)
|
|
(32,289
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
7,578
|
|
|
15,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
|
18,896
|
|
|
27,753
|
|
|
|
|
|
|
Zohar
Zisapel
|
|
David
Ripstein
|
|
Jonathan
Burgin
|
Chairman
of the Board of Directors
|
|
Chief
Executive Officer
|
|
Chief
Financial Officer
|
Date:
June 30, 2008
*
|
9,997,670
Ordinary Shares of NIS 0.20 par value ("Ordinary Shares") authorized
as of
December 31, 2007 and 2006, respectively; 4,091,222 and 4,058,069
Ordinary
Shares issued and outstanding as of December 31, 2007 and 2006,
respectively.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Statements of Operations
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
Except
per share amounts
|
|
|
|
|
|
|
|
|
|
Revenues
(Note 8B1):
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
10,158
|
|
|
20,641
|
|
|
20,514
|
|
Services
|
|
|
3,339
|
|
|
2,900
|
|
|
1,826
|
|
|
|
|
13,497
|
|
|
23,541
|
|
|
22,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,927
|
|
|
7,213
|
|
|
7,290
|
|
Services
|
|
|
466
|
|
|
183
|
|
|
108
|
|
|
|
|
5,393
|
|
|
7,396
|
|
|
7,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,104
|
|
|
16,145
|
|
|
14,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
7,378
|
|
|
6,826
|
|
|
5,815
|
|
Less
- royalty-bearing participation (Note 5A1)
|
|
|
2,096
|
|
|
1,904
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development, net
|
|
|
5,282
|
|
|
4,922
|
|
|
4,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
9,279
|
|
|
9,196
|
|
|
7,881
|
|
General
and administrative
|
|
|
2,391
|
|
|
2,553
|
|
|
1,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
16,952
|
|
|
16,671
|
|
|
13,650
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(8,848
|
)
|
|
(526
|
)
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
income, net (Note 8B2):
|
|
|
|
|
|
|
|
|
|
|
Financing
income
|
|
|
280
|
|
|
497
|
|
|
270
|
|
Financing
expenses
|
|
|
(15
|
)
|
|
(25
|
)
|
|
(35
|
)
|
Financing
income, net
|
|
|
265
|
|
|
472
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income
|
|
|
(8,583
|
)
|
|
(54
|
)
|
|
1,527
|
|
Taxes
on income (Note 7)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) for the year
|
|
|
(8,583
|
)
|
|
(54
|
)
|
|
1,527
|
|
Income
(loss) per share :
|
|
|
|
|
|
|
|
Basic
net income (loss) per Ordinary Share (US$)
|
|
|
(2.10
|
)
|
|
(0.01
|
)
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per Ordinary Share (US$)
|
|
|
(2.10
|
)
|
|
(0.01
|
)
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary Shares used to
|
|
|
|
|
|
|
|
compute
basic net income (loss) per Ordinary Share
|
|
|
4,084,789
|
|
|
3,973,509
|
|
|
3,674,023
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary Shares used to
|
|
|
|
|
|
|
|
compute
diluted net income (loss) per Ordinary Share
|
|
|
4,084,789
|
|
|
3,973,509
|
|
|
3,890,396
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Statements of Shareholders' Equity and Comprehensive Income (Loss)
|
|
Share
capital
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
other
|
|
|
|
Total
|
|
|
|
Number
of
|
|
|
|
paid-in
|
|
comprehensive
|
|
Accumulated
|
|
Shareholders'
|
|
|
|
shares
|
|
Amount
|
|
capital
|
|
loss
|
|
deficit
|
|
equity
|
|
|
|
|
|
US$
(thousands)
|
|
US$
(thousands)
|
|
US$
(thousands)
|
|
US$
(thousands)
|
|
US$
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2005
|
|
|
3,609,587
|
|
|
101
|
|
|
43,698
|
|
|
(13
|
)
|
|
(33,762
|
)
|
|
10,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
during 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,527
|
|
|
1,527
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
for loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13
|
|
|
-
|
|
|
13
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,540
|
|
Employees'
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
compensation
|
|
|
-
|
|
|
-
|
|
|
12
|
|
|
-
|
|
|
-
|
|
|
12
|
|
Exercise
of options
|
|
|
47,968
|
|
|
2
|
|
|
182
|
|
|
-
|
|
|
-
|
|
|
184
|
|
Exercise
of warrants, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
issuance expenses of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$14
thousand
|
|
|
82,064
|
|
|
4
|
|
|
721
|
|
|
-
|
|
|
-
|
|
|
725
|
|
Balance
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
3,739,619
|
|
|
107
|
|
|
44,613
|
|
|
-
|
|
|
(32,235
|
)
|
|
12,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
during 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(54
|
)
|
|
(54
|
)
|
Employees'
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
compensation
|
|
|
-
|
|
|
-
|
|
|
558
|
|
|
-
|
|
|
-
|
|
|
558
|
|
Exercise
of options
|
|
|
161,981
|
|
|
7
|
|
|
967
|
|
|
-
|
|
|
-
|
|
|
974
|
|
Exercise
of warrants
|
|
|
156,469
|
|
|
6
|
|
|
1,404
|
|
|
-
|
|
|
-
|
|
|
1,410
|
|
Balance
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
4,058,069
|
|
|
120
|
|
|
47,542
|
|
|
-
|
|
|
(32,289
|
)
|
|
15,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
during 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,583
|
)
|
|
(8,583
|
)
|
Employees'
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
compensation
|
|
|
-
|
|
|
-
|
|
|
564
|
|
|
-
|
|
|
-
|
|
|
564
|
|
Exercise
of options
|
|
|
33,153
|
|
|
2
|
|
|
222
|
|
|
-
|
|
|
-
|
|
|
224
|
|
Balance
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
4,091,222
|
|
|
122
|
|
|
48,328
|
|
|
-
|
|
|
(40,872
|
)
|
|
7,578
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Statements of Cash Flows
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss) for the year
|
|
|
(8,583
|
)
|
|
(54
|
)
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
687
|
|
|
603
|
|
|
579
|
|
Increase
in value and accrued interest from
|
|
|
|
|
|
|
|
|
|
|
marketable
securities
|
|
|
-
|
|
|
-
|
|
|
5
|
|
Decrease
(increase) of accrued interest on short-term
|
|
|
|
|
|
|
|
|
|
|
bank
deposits
|
|
|
73
|
|
|
(73
|
)
|
|
-
|
|
Loss
from sale of property and equipment
|
|
|
-
|
|
|
7
|
|
|
-
|
|
Employees'
stock option compensation
|
|
|
564
|
|
|
558
|
|
|
12
|
|
Increase
(decrease) in severance pay, net
|
|
|
51
|
|
|
135
|
|
|
(44
|
)
|
Decrease
(increase) in trade receivables, net
|
|
|
3,872
|
|
|
(2,605
|
)
|
|
(2,515
|
)
|
Increase
(decrease) in deferred revenue
|
|
|
(625
|
)
|
|
(63
|
)
|
|
1,234
|
|
Decrease
(increase) in other current assets
|
|
|
(195
|
)
|
|
(575
|
)
|
|
500
|
|
Decrease
(increase) in inventories
|
|
|
(1,141
|
)
|
|
(1,180
|
)
|
|
143
|
|
Increase
(decrease) in trade payables
|
|
|
(1,099
|
)
|
|
380
|
|
|
138
|
|
Increase
(decrease) in other payables and
|
|
|
|
|
|
|
|
|
|
|
accrued
expenses
|
|
|
378
|
|
|
276
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(6,018
|
)
|
|
(2,591
|
)
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
-
|
|
|
-
|
|
|
2,000
|
|
Investment
in short-term deposits
|
|
|
(2,515
|
)
|
|
(7,987
|
)
|
|
-
|
|
Proceeds
from short-term deposits
|
|
|
10,502
|
|
|
-
|
|
|
-
|
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
8
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(437
|
)
|
|
(327
|
)
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
7,550
|
|
|
(8,306
|
)
|
|
1,664
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Consolidated
Statements of Cash Flows (cont'd)
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Exercise
of warrants
|
|
|
-
|
|
|
1,410
|
|
|
725
|
|
Exercise
of options
|
|
|
224
|
|
|
974
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
224
|
|
|
2,384
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
1,756
|
|
|
(8,513
|
)
|
|
3,962
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,007
|
|
|
10,520
|
|
|
6,558
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
|
3,763
|
|
|
2,007
|
|
|
10,520
|
|
Schedule
A - Non-Cash Investing Activities
Purchase
of property and equipment on credit aggregate US$12 thousand, US$72 thousand
and
US$49 thousand for the years ended December 31, 2007, 2006 and 2005,
respectively.
Inventories
capitalized as fixed assets aggregate US$362 thousand, US$443 thousand and
US$319 thousand for the years ended December 31, 2007, 2006 and 2005,
respectively.
The
accompanying notes are an integral part of the consolidated financial
statements.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
1 - General
Radcom
Ltd. (the “Company”) is an Israeli corporation that operates in one business
segment of communication networks. The Company provides innovative network
test
and service monitoring solutions for communications service providers and
equipment vendors. The Company specializes in Next Generation Wireless and
Wireline technologies for Voice, Data and Video. The Company’s products
facilitate fault management, network service performance monitoring and
analysis, troubleshooting and pre-mediation. RADCOM’ shares are listed on both
the NASDAQ Capital Market and the Tel Aviv Stock Exchange under the symbol
RDCM.
The
Company has a wholly-owned subsidiary in the United States, Radcom Equipment,
Inc. (the "US Subsidiary"), which was incorporated in 1993 under the laws
of the
State of New Jersey. The US Subsidiary is primarily engaged in the selling
and
marketing of the Company’s products in North America.
In
addition, the Company has two other subsidiaries, one in the United Kingdom
and
one in Israel. As of December 31, 2007, these subsidiaries had no business
activities.
Note
2 - Significant Accounting Policies
The
financial statements are presented in accordance with United States generally
accepted accounting principles (GAAP).
The
significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are as follows:
CPI
-
Israeli Consumer Price Index
NIS
- New
Israeli Shekel
|
B.
|
Financial
statements in US dollars (“dollar” or
"dollars")
|
Most
of
the Company's sales are denominated in dollars and are made outside Israel
(see
Note 8B1 regarding geographical distribution). Most purchases of materials
and
components, and most marketing costs, are incurred, primarily in transactions
denominated in dollars. Therefore, the currency of the primary economic
environment in which the operations of the Company are conducted is the United
States dollar, which is used as the functional currency of the
Company.
Transactions
and balances originally denominated in dollars are presented at their original
amounts. Transactions and balances in other currencies are remeasured into
dollars in accordance with the principles set forth in Statement of Financial
Accounting Standards ("SFAS") No.52.
All
exchange gains and losses from remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the consolidated statement
of operations when they arise.
Amounts
in the financial statements representing the dollar equivalent of balances
denominated in other currencies do not necessarily represent their real or
economic value and such amounts may not necessarily be exchangeable for
dollars.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
|
C.
|
Estimates
and assumptions
|
The
preparation of the consolidated financial statements in conformity with US
GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting years. Actual
results may vary from these estimates. Estimates and assumptions are
periodically reviewed and the effects of any material revisions are reflected
in
the period that they are determined to be necessary.
|
D.
|
Principles
of consolidation
|
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All intercompany transactions and balances
have
been eliminated in consolidation.
|
E.
|
Cash
and cash equivalents
|
The
Company considers all highly liquid deposit instruments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents.
In
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and
Equity Securities", during 2005 the Company classified all its marketable
securities as available-for-sale. Such marketable securities were stated
at
market value.
Unrealized
gains and losses were reported as a separate component of shareholders' equity
and comprehensive income (loss). Interest income was included in financing
income. Realized gains and losses were included in financing
income.
|
G.
|
Trade
receivables, net
|
Trade
receivables are recorded net of an allowance for doubtful accounts receivable.
Management considers current information and events regarding the customers'
ability to repay their obligations in estimating and establishing the allowance
for doubtful accounts receivable.
The
balance sheet allowance for doubtful accounts receivable for all of the reported
periods through December 31, 2007 is determined as a specific amount for
those
accounts for which collection is uncertain.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
Inventories
are stated at the lower of cost or market. Cost is determined on a "moving
average" basis.
Inventory
write-downs are provided to cover technological obsolescence, excess inventories
and discontinued products.
|
I.
|
Assets
held for severance
benefits
|
Assets
held for employee severance benefits represent contributions to severance
pay
funds and cash surrender value of life insurance policies that are recorded
at
their current redemption value.
|
J.
|
Property
and equipment
|
Property
and equipment are stated at cost less accumulated depreciation. Maintenance
and
repairs are charged to operations as incurred.
Products
used for research and development (unless no alternative future use exists)
and
demonstration equipment are capitalized at cost or, when applicable, at
production costs.
Depreciation
is calculated on the straight-line method over the estimated useful lives
of the
assets.
Annual
rates of depreciation are as follows:
|
|
|
%
|
|
Demonstration
and rental equipment
|
|
|
33
|
|
Research
and development equipment
|
|
|
25
- 50
|
|
Motor
vehicles
|
|
|
15
|
|
Manufacturing
equipment
|
|
|
15
- 33
|
|
Office
furniture and equipment
|
|
|
7
- 33
|
|
Leasehold
improvements
|
|
|
*
|
|
*
At the
shorter of the lease period or useful life of the leasehold
improvement.
|
K.
|
Impairment
of long-lived assets
|
The
Company’s long-lived assets (including intangible assets) are reviewed for
impairment in accordance with SFAS No. 144 “Accounting for the Impairment or
Disposal of Long- Lived Assets”, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of an asset to be held and used is assessed by a comparison
of
the carrying amount of the asset to the future undiscounted cash flows expected
to be generated by the asset. If such asset is considered to be impaired,
the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value. As of December 31, 2007, no
impairment losses had been identified.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
|
1.
|
Revenue
from product sales is recognized in accordance with Statement of
Position
("SOP") 97-2, "Software Revenue Recognition", when the following
criteria
are met: (1) persuasive evidence of an arrangement exists, (2)
delivery
has occurred, (3) the vendor's fee is fixed or determinable and
(4)
collectibility is probable.
Amounts
received from customers prior to product shipments are classified
as
advances from customers. With its products, the Company provides
a
one-year warranty, which includes bug fixing and a hardware warranty
("the
Warranty"). The Company records an appropriate provision for Warranty
in
accordance with SFAS No. 5, "Accounting for Contingencies".
|
|
2.
|
After
the Warranty period initially provided with the Company's products,
the
Company may sell extended warranty contracts, which includes bug
fixing
and a hardware warranty. In such cases, revenues attributable to
the
extended warranty are deferred at the time of the initial sale
and
recognized ratably over the extended contract warranty
period.
|
|
3.
|
Most
of the Company's revenues are generated from sales to independent
distributors. The Company has a standard contract with its distributors.
Based on this agreement, sales to distributors are final and distributors
have no rights of return or price protection. The Company is not
a party
to the agreements between distributors and their customers.
|
|
4.
|
The
Company also generates sales through independent representatives.
These
representatives do not hold any of the Company's inventories, and
they do
not buy products from the Company. The Company invoices the end-user
customers directly, collects payment directly and then pays commissions
to
the representative for the sales in its territory. The Company
reports
sales through independent representatives on a gross basis, based
on the
indicators of the Emerging Issues Task Force (“EITF”) No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an
Agent”.
|
|
M.
|
Research
and development costs
|
|
1.
|
Research
and development costs are expensed as incurred.
|
|
2.
|
The
Company applies the provisions of SFAS No. 86, "Accounting for
Costs of
Computer Software to be Sold, Leased or Otherwise Marketed". Expenditures
incurred during the period between attaining technological feasibility
and
general release of the associated product are deferred and amortized
over
the estimated product life, however the expenditures incurred to
date have
been immaterial and accordingly, such costs have been expensed
in the
period incurred.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
The
Company receives royalty-bearing participation, which represents participation
of the Government of Israel (specifically, the Office of the Chief Scientist
-
the "OCS") in approved programs for research and development. These amounts
are
recognized on the accrual basis as a reduction of research and development
costs
as such costs are incurred. Royalties to the OCS are recorded in cost of
sales,
when the related sales are recognized. See also Note 5A.
|
O.
|
Allowance
for product warranty
|
The
Company's policy is to grant a product warranty for a period of up to 12
months
on its products. The provision for warranties for all periods through December
31, 2007, is determined based upon the Company's past experience.
The
followings are the changes in the liability for product warranty from January
1,
2006 to December 31, 2007:
|
|
|
US$
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
|
229
|
|
Accrual
for warranties issued during the year
|
|
|
422
|
|
Reduction
for payments and costs to satisfy claims
|
|
|
(296
|
)
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
355
|
|
Accrual
for warranties issued during the year
|
|
|
193
|
|
Reduction
for payments and costs to satisfy claims
|
|
|
(328
|
)
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
220
|
|
|
P.
|
Share-based
compensation
|
On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees
and
directors based on estimated fair values. SFAS No. 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
beginning in fiscal 2006. In March 2005, the United States Securities and
Exchange Commissions (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB
107”) which relates to SFAS No. 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS No. 123(R). The Company adopted SFAS No.
123(R) using the modified prospective transition method, which requires the
application of the accounting standard as of January 1, 2006. In accordance
with
the modified prospective transition method, the Company’s consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R). Share-based compensation expense
recognized under SFAS No. 123(R) for fiscal 2007 and 2006 was US$564 thousand
and US$558 thousand, respectively.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
|
P.
|
Share-based
compensation (cont’d)
|
SFAS
No.
123 (R) requires companies to estimate the fair value of share-based payment
awards on the grant date using an option-pricing model. The value of the
portion
of the award that is ultimately expected to vest is recognized as expense
over
the requisite service periods in the Company’s consolidated statements of
operations. Prior to the adoption of SFAS No. 123 (R), the Company accounted
for
share-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123).
SFAS
No.
123 (R) requires forfeitures to be estimated at the time of grant in order
to
estimate the amount of share-based awards that will ultimately vest. The
estimate is based on the Company’s historical rates of forfeiture. Share-based
compensation expense recognized in the Company’s consolidated statement of
operations for fiscal 2006 and 2007 includes (i) compensation expense for
share-based payment awards granted prior to, but not yet vested as of December
31, 2005, based on the grant-date fair value estimated in accordance with
the
pro forma provisions of SFAS No. 123 and (ii) compensation expense for the
share-based payment awards granted subsequent to December 31, 2005, based
on the
grant-date fair value estimated in accordance with the provisions of SFAS
No.
123 (R).
Since
share-based compensation expense recognized in the consolidated statements
of
operations for fiscal 2007 and 2006 is based on awards ultimately expected
to
vest, it has been reduced for estimated forfeitures.
The
following table illustrates the effect on net income and income per share
if the
Company had applied the fair value recognition provisions of SFAS No. 123
to
options granted under the Company’s stock option plans in fiscal 2005. For
purposes of this pro forma disclosure, the value of the options is estimated
using a Black-Scholes option-pricing model and is amortized to expense over
the
options’ vesting period.
|
|
|
Year
ended
|
|
|
|
|
December
31
|
|
|
|
|
2005
|
|
|
|
|
US$
thousands
|
|
|
|
|
Except
per
|
|
|
|
|
share
amounts
|
|
|
|
|
|
|
Net
income as reported
|
|
|
1,527
|
|
|
|
|
|
|
Add:
compensation expenses according to APB 25
|
|
|
|
|
included
in the reported net income
|
|
|
12
|
|
Deduct:
compensation expenses according to SFAS No. 123
|
|
|
(669
|
)
|
|
|
|
|
|
Net
income - pro forma
|
|
|
870
|
|
|
|
|
|
|
Basic
net income per ordinary share as reported (US$)
|
|
|
0.42
|
|
|
|
|
|
|
Pro
forma basic net income per ordinary share (US$)
|
|
|
0.24
|
|
|
|
|
|
|
Diluted
net income per ordinary share as reported (US$)
|
|
|
0.39
|
|
|
|
|
|
|
Pro
forma diluted net income per ordinary share (US$)
|
|
|
0.22
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
2 - Significant Accounting Policies (cont'd)
The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". Deferred tax asset and liability account balances are
recognized for the future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets and liabilities
and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment
date. The Company provides a valuation allowance to reduce deferred tax assets
to the extent it believes it is more likely than not that such benefits will
not
be realized. Beginning with the adoption of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(
FIN
48)
as of January 1, 2007, the Company recognizes the effect of income tax positions
only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than
50%
likely of being realized. Changes in recognition or measurement are reflected
in
the period in which the change in judgment occurs. Prior to the adoption
of FIN
48, the Company recognized the effect of income tax positions only if such
positions were probable of being sustained.
|
R.
|
Income
(loss) per share
|
Basic
and
diluted income (loss) per ordinary share are presented in conformity with
SFAS
No. 128 "Earnings Per Share", for all years presented. Basic income (loss)
per
ordinary share is computed by the dividing net income (loss) for each reporting
period by the weighted average number of common shares outstanding during
the
period. Diluted income (loss) per common share is computed by dividing net
income (loss) for each reporting period by the weighted average number of
common
shares outstanding during the period plus any additional common shares that
would have been outstanding if potentially dilutive securities had been
exercised during the period, calculated under the treasury stock
method.
Due
to
the net loss incurred in fiscal 2007 and 2006, the diluted loss per share
was
the same as basic, because any potentially dilutive securities would have
reduced the loss per share.
In
2005,
the total number of shares relating to outstanding options and warrants included
in the calculation of the diluted income per share was 201,358 and 15,015,
respectively, using the treasury stock method.
Certain
securities (as of December 31, 2007: 773,889 stock options; as of December
31,
2006: 667,455 stock options; as of December 31, 2005: 249,011 stock options
and
89,724 warrants) were not included in the computation of diluted earning
(loss)
per share since they were anti-dilutive.
Acquisitions
of the Company's shares by the Company are deducted from the share capital
and
additional paid-in capital.
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
3 - Property and Equipment, Net
|
A.
|
Composition
of assets, grouped by major classification, is as
follows:
|
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
Demonstration
and rental equipment
|
|
|
2,067
|
|
|
2,039
|
|
Research
and development equipment
|
|
|
3,697
|
|
|
3,604
|
|
Motor
vehicles
|
|
|
3
|
|
|
3
|
|
Manufacturing
equipment
|
|
|
1,438
|
|
|
1,310
|
|
Office
furniture and equipment
|
|
|
1,051
|
|
|
1,104
|
|
Leasehold
improvements
|
|
|
384
|
|
|
338
|
|
|
|
|
8,640
|
|
|
8,398
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
Demonstration
and rental equipment
|
|
|
1,889
|
|
|
1,828
|
|
Research
and development equipment
|
|
|
2,970
|
|
|
2,921
|
|
Motor
vehicles
|
|
|
3
|
|
|
2
|
|
Manufacturing
equipment
|
|
|
1,151
|
|
|
1,055
|
|
Office
furniture and equipment
|
|
|
910
|
|
|
957
|
|
Leasehold
improvements
|
|
|
257
|
|
|
227
|
|
|
|
|
7,180
|
|
|
6,990
|
|
|
|
|
|
|
|
|
|
|
|
|
1,460
|
|
|
1,408
|
|
|
B.
|
Depreciation
expenses amounted to US$687 thousand, US$603 thousand and US$579
thousand
for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
Note
4 - Liability for Employees Severance Pay Benefits
The
Company's liability for severance pay for its Israeli employees is calculated
pursuant to Israeli severance pay law based on the most recent salary of
the
employees multiplied by the number of years of employment as of the balance
sheet date. After completing one full year of employment, the Company's Israeli
employees are entitled to one month's salary for each year of employment
or a
portion thereof. The Company's liability is partially provided by monthly
deposits with severance pay funds, insurance policies and by an accrual.
The
liability for employee severance pay benefits included in the balance sheet
represents the total liability for such severance benefits, while the assets
held for severance benefits included in the balance sheet represent the
Company's contributions to severance pay funds and to insurance
policies.
The
Company may make withdrawals from the funds only upon complying with the
Israeli
severance pay law or labor agreements. Severance pay expenses for the years
ended December 31, 2007, 2006 and 2005 amounted to US$766 thousand, US$725
thousand and US$434 thousand, respectively.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
5 - Commitments and Contingencies
|
1.
|
The
Company received research and development grants from the OCS.
In
consideration for the research and development grants received
from the
OCS, the Company has undertaken to pay royalties as a percentage
on
revenues from products developed from research and development
projects
financed. Royalty rates were 3.5% in 2004 and subsequent years.
If the
Company will not generate sales of products developed with funds
provided
by the OCS, the Company is not obligated to pay royalties or repay
the
grants.
|
Royalties
are payable from the time of commencement of sales of all of these products
until the cumulative amount of the royalties paid equals 100% of the
dollar-linked amounts of the grants received, without interest for projects
authorized until December 31, 1998. For projects authorized since January
1,
1999, the repayment bears interest at the LIBOR rate.
The
total
research and development grants that the Company has received from the OCS
as of
December 31, 2007 were US$27.1 million. The accumulated interest as of December
31, 2007 was US$3.3 million. As of December 31, 2007, the accumulated royalties
paid to the OCS were US$7.2 million. Accordingly, the Company's total commitment
with respect to royalty-bearing participation received or accrued, net of
royalties paid or accrued, amounted to approximately US$23.2 million as of
December 31, 2007.
Royalties
expenses relating to the OCS grants included in cost of sales for the years
ended December 31, 2007, 2006 and 2005 were US$412 thousand, US$807 thousand
and
US$769 thousand, respectively.
|
2.
|
According
to the Company's agreements with the Israel - US Bi-National Industrial
Research and Development Foundation ("BIRD-F"), the Company is
required to
pay royalties at a rate of 5% of sales of products developed with
funds
provided by the BIRD-F, up to an amount equal to 150% of BIRD-F's
grant
(linked to the United States Consumer Price Index) relating to
such
products. The last fund from the BIRD-F was received in 1996. In
the event
the Company does not generate sales of products developed with
funds
provided by BIRD-F, the Company is not obligated to pay royalties
or repay
the grants.
|
The
total
research and development funds that the Company has received from the BIRD-F
as
of December 31, 2007, were US$340 thousand. Accordingly, as of December 31,
2007, the Company is required to pay royalties up to an amount of US$510
thousand, plus linkage to the United States Consumer Price Index in the amount
of US$105 thousand, or a total of US$615 thousand. As of December 31, 2007,
the
accumulated royalties paid to the BIRD-F were US$296 thousand. Accordingly,
the
Company's total commitment with respect to royalty-bearing participation
received or accrued, net of royalties paid or accrued, amounted to approximately
US$319 thousand as of December 31, 2007.
Royalties
expenses relating to the BIRD-F grants included in cost of sales for the
years
ended December 31, 2007, 2006 and 2005 were less than US$1 thousand for each
of
these years.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
5 - Commitments and Contingencies (cont’d)
|
1.
|
Premises
occupied by the Company and the US Subsidiary are rented under
various
rental agreements with related parties (see Note
9).
|
The
rental agreements for the premises in Tel Aviv, China, Korea and New Jersey,
United States, expire up to January 15, 2011. Minimum future gross rental
and
maintenance payments due under the above agreements, at exchange rates in
effect
on December 31, 2007, were as follows:
Year
ended December 31
|
|
|
US$
thousands
|
|
|
|
|
|
|
2008
|
|
|
699
|
|
2009
|
|
|
133
|
|
2010
|
|
|
96
|
|
2011
|
|
|
4
|
|
Rental
and maintenance expenses (net of sublease income from premises under sublease
agreements) amounted to US$740 thousand, US$684 thousand and US$620 thousand,
for the years ended December 31, 2007, 2006 and 2005, respectively.
|
2.
|
The
Company leases motor vehicles under operating leases. The leases
typically
run for an initial period of three years with an option to renew
the
leases after that date.
|
As
of
December 31, 2007, non-cancelable operating rentals for motor vehicles were
payable as follows:
Year
ended December 31
|
|
|
US$
thousands
|
|
|
|
|
|
|
2008
|
|
|
444
|
|
2009
|
|
|
221
|
|
2010
|
|
|
105
|
|
2011
|
|
|
14
|
|
During
2007, 2006 and 2005, an amount of US$565 thousand, US$554 thousand and US$459
thousand, respectively, was recognized as an expense in the statement of
operations in respect of operating leases for motor vehicles.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
5 - Commitments and Contingencies (cont’d)
In
November 2005, the Company was served with a claim by Qualitest Ltd.
(“Qualitest”), an Israeli company that was formerly a nonexclusive distributor
for the Company's products in Israel, for the total sum of approximately
US$623
thousand. Qualitest claims that the Company breached an exclusive distribution
agreement. In December 2005, the Company filed a statement of defense against
the claim asserting that an exclusive distribution agreement was never signed
between the parties, and included a counterclaim in the amount of approximately
US$131 thousand for unpaid invoices. The claims have been brought before
an
arbitrator. In June 2006, Qualitest paid the Company US$69 thousand in
accordance with a partial verdict of the arbitrator. In June 2007, Qualitest
paid the Company US$18 thousand and by that and the partial verdict, settled
the
Company’s counterclaim. In July 2007 the arbitrator accepted Qualitest's claim
against the Company and instructed the Company to pay US$310 thousand to
Qualitest, in addition to US$31 thousand as expenses to Qualitest. The
Company has included an expense for the full amount in "Sales and marketing
expenses". In August 2007, the Company filed a request with the District
Court
in Tel Aviv to annul the arbitration award. In June 2008, the District Court
denied the Company's request.
The
Company has granted bank performance guarantees in favor of two of its customers
in the amount of US$ 489 thousand. US$ 189 thousand of the guarantees expire
in
December 31, 2007 and US$ 300 thousand of the guarantees expire in December
31,
2008.
Note
6 - Shareholders' Equity
|
1.
|
The
Company’s share capital is comprised of the
following:
|
|
|
|
December
31, 2007
|
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
Outstanding
|
|
|
|
|
Number
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Shares of NIS 0.20 par value (i)
|
|
|
9,997,670
|
|
|
*
4,091,222
|
|
|
*
4,091,222
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont’d)
|
A.
|
Share
capital (cont’d)
|
|
1.
|
The
Company’s share capital is comprised of the
following:
|
|
|
|
December
31, 2006
|
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
Outstanding
|
|
|
|
|
Number
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Shares of NIS 0.20 par value (i)
|
|
|
9,997,670
|
|
|
*
4,058,069
|
|
|
*
4,058,069
|
|
|
*
|
This
number does not include 5,189 Ordinary Shares, which are held by
a
subsidiary, and 30,843 Ordinary Shares which are held by the Company
(see
i (b) below).
|
|
(i)
|
(a)
|
Ordinary
Shares confer all rights to their holders, e.g. voting, equity
and receipt
of dividend.
|
|
(b)
|
In
March and April 2001, the Company purchased 30,843 shares of the
Company's
Ordinary Shares in the over-the-counter market. This purchase was
approved
by the Tel Aviv-Jaffa District
Court.
|
|
2.
|
On
March 29, 2004, the Company closed a private placement transaction
(the
"PIPE"). Under the PIPE investment, the Company issued 962,885
of the
Company's Ordinary Shares at an aggregate purchase price of US$5,500
thousand or US$5.712 per Ordinary Share. The Company also issued
to the
investors warrants to purchase up to 240,722 Ordinary Shares at
an
exercise price of US$9.012 per share. The warrants were exercisable
for
two years from the closing of the PIPE. 238,533 of the warrants
were
exercised during 2005 and 2006 and the remaining 2,189 warrants
expired
during 2006.
|
|
1.
|
The
Company has granted options under option plans as
follows:
|
|
a.
|
The
Radcom Ltd. 1998 Share Option Plan (the “Radcom 3(9)
Plan”)
|
Under
this plan, the Company grants options to purchase Ordinary Shares. The plan
is
made pursuant to the provisions of section 3(9) of the Israeli Income Tax
Ordinance.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont'd)
|
B.
|
Share
option plans (cont'd)
|
|
1.
|
The
Company has granted options under option plans as follows:
(cont'd)
|
|
b.
|
The
Radcom Ltd. 1998 Employees Bonus Plan (the "Radcom Bonus
Plan")
|
Under
this plan, the Company grants option to purchase Ordinary Shares. The options
allotted under the plan are deposited with a trustee. Exercise of the options
and sale of the shares issued as a result of the exercise can be implemented
only through the trustee.
If
on the
final exercise date the market price of the Ordinary Shares is lower than
115%
of the exercise price the options will lapse, will not be exercisable and
will
be cancelled.
Gains
from the sale of the shares are taxed in accordance with Section 102 of the
Income Tax Ordinance (New Version) - 1961, its related regulations and
arrangements with Tax Authorities.
|
c.
|
The
Radcom Ltd. International Employee Stock Option Plan (the "International
Plan")
|
The
plan
grants options to purchase Ordinary Shares for the purpose of providing
incentives to officers, directors, employees and consultants of its non-Israeli
subsidiaries.
|
d.
|
The
2000 Share Option Plan
|
The
2000
Share Option Plan (the "2000 Share Option Plan") grants options to purchase
Ordinary Shares. These options are granted pursuant to the 2000 Share Option
Plan for the purpose of providing incentives to employees, directors,
consultants and contractors of the Company. These options are granted pursuant
to Section 3(9) of the Income Tax Ordinance (New Version) - 1961.
|
e.
|
The
2001 Share Option Plan
|
The
2001
Share Option Plan (the "2001 Share Option Plan") grants options to purchase
Ordinary Shares. These options are granted pursuant to the 2001 Share Option
Plan for the purpose of providing incentives to employees, directors,
consultants and contractors of the Company. These options are granted pursuant
to Section 3(9) of the Income Tax Ordinance (New Version) - 1961.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont'd)
|
B.
|
Share
option plans (cont'd)
|
|
1.
|
The
Company has granted options under option plans as follows:
(cont'd)
|
|
f.
|
The
2003 Share Option Plan
|
The
2003
Share Option Plan (the "2003 Share Option Plan") grants options to purchase
Ordinary Shares. These options are granted pursuant to the 2003 Share Option
Plan for the purpose of providing incentives to employees, directors,
consultants and contractors of the Company.
With
respect to Section 102 Options, the Company’s Board of Directors (the “Board”)
elected the "Capital Gains Route".
|
2.
|
Generally,
grants in 2007, 2006 and 2005 were at exercise prices that reflect
the
market value of the Ordinary Shares at the date of
grant.
|
|
3.
|
Following
is the stock option data as of December 31, 2007 and 2006, the
Radcom 3(9)
Plan, the International Plan, the 2000 Share Option Plan, the 2001
Share
Option Plan and the 2003 Share Option
Plan:
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
(from
|
|
|
|
Vested
|
|
Unvested
|
|
Exercise
price
|
|
Vesting
period
|
|
resolution
date)
|
|
|
|
No.
of options
|
|
US$
|
|
Years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radcom
|
|
|
|
|
|
|
|
|
|
|
|
3(9)
Plan
|
|
|
86,250
|
|
|
-
|
|
|
9.5
- 23
|
|
|
3
- 6
|
|
|
10
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
55,809
|
|
|
39,013
|
|
|
0.00
- 11.88
|
|
|
3
- 4
|
|
|
7
- 10
|
|
2000
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
55,784
|
|
|
-
|
|
|
0.00
- 24.5
|
|
|
3
|
|
|
10
|
|
2001
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
47,937
|
|
|
-
|
|
|
5.796
- 7.36
|
|
|
3
- 4
|
|
|
10
|
|
2003
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
190,922
|
|
|
298,174
|
|
|
3.96
- 18.28
|
|
|
2
- 4
|
|
|
7
- 10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436,702
|
|
|
337,187
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
(from
|
|
|
|
Vested
|
|
Unvested
|
|
Exercise
price
|
|
Vesting
period
|
|
resolution
date)
|
|
|
|
No.
of options
|
|
US$
|
|
Years
|
|
Years
|
|
Radcom
|
|
|
|
|
|
|
|
|
|
|
|
3(9)
Plan
|
|
|
133,200
|
|
|
-
|
|
|
9.5
- 23
|
|
|
3-6
|
|
|
10
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
39,851
|
|
|
47,129
|
|
|
0.00
- 11.88
|
|
|
3-4
|
|
|
10
|
|
2000
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
66,909
|
|
|
-
|
|
|
0.00
- 24.5
|
|
|
3
|
|
|
10
|
|
2001
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
68,562
|
|
|
-
|
|
|
5.796
- 7.36
|
|
|
3-4
|
|
|
10
|
|
2003
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Plan
|
|
|
136,169
|
|
|
175,635
|
|
|
4.12
- 18.28
|
|
|
3-4
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444,691
|
|
|
222,764
|
|
|
|
|
|
|
|
|
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont'd)
|
B.
|
Share
option plans (cont
'
d)
|
|
4.
|
Stock
options under the Radcom 3(9) Plan, the International Plan, the
2000 Share
Option Plan, the 2001 Share Option Plan and the 2003 Share Option
Plan are
as follows for the periods
indicated:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
|
Number
of
|
|
|
exercise
|
|
|
|
|
options
|
|
|
price
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
Options
outstanding as at January 1, 2005
|
|
|
812,715
|
|
|
8.934
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
101,000
|
|
|
9.072
|
|
Exercised
|
|
|
(47,968
|
)
|
|
3.832
|
|
Expired
|
|
|
(63,419
|
)
|
|
12.124
|
|
Forfeited
|
|
|
(24,299
|
)
|
|
7.084
|
|
|
|
|
|
|
|
|
|
Options
outstanding as at December 31, 2005
|
|
|
778,029
|
|
|
9.064
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
79,549
|
|
|
10.792
|
|
Exercised
|
|
|
(161,981
|
)
|
|
6.012
|
|
Expired
|
|
|
(4,234
|
)
|
|
35.768
|
|
Forfeited
|
|
|
(23,908
|
)
|
|
8.416
|
|
|
|
|
|
|
|
|
|
Options
outstanding as at December 31, 2006
|
|
|
667,455
|
|
|
9.864
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
248,515
|
|
|
5.50
|
|
Exercised
|
|
|
(33,153
|
)
|
|
6.736
|
|
Expired
|
|
|
(58,606
|
)
|
|
16.952
|
|
Forfeited
|
|
|
(50,322
|
)
|
|
8.22
|
|
|
|
|
|
|
|
|
|
Options
outstanding as at December 31, 2007
|
|
|
773,889
|
|
|
8.169
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
average
|
|
Aggregate
|
|
|
|
Number
of
|
|
exercise
|
|
remaining
|
|
intrinsic
|
|
|
|
options
|
|
price
|
|
contractual
life
|
|
value
|
|
|
|
|
|
US$
|
|
In
years
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest
|
|
|
|
|
|
|
|
|
|
at
December 31, 2007
|
|
|
700,040
|
|
|
8.284
|
|
|
5.576
|
|
|
70.4
|
|
|
(1)
|
At
December 31, 2007, 2006 and 2005, the number of options exercisable
was
436,702, 444,691 and 503,584 respectively, and the total number
of
authorized options was 897,930, 788,081 and 953,396,
respectively.
|
|
(2)
|
The
aggregate intrinsic value of options exercised during 2007, 2006
and 2005
was approximately US$147 thousand, US$1,631 thousand and US$337
thousand,
respectively.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont'd)
|
B.
|
Share
option plans (cont
'
d)
|
|
5.
|
Stock
options under the Radcom 3(9) Plan, the Radcom Bonus Plan, the
International Plan, the 2000 Share Option Plan, the 2001 Share
Option Plan
and the 2003 Share Option Plan are as follows for the periods indicated:
(cont’d)
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
Options
exercisable at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
Exercise
price
|
|
|
Number
|
|
|
average
|
|
|
Contractual
|
|
|
Number
|
|
|
average
|
|
|
Contractual
|
|
(US$
per share)
|
|
|
outstanding
|
|
Exercise
Price
|
life
|
|
outstanding
|
|
Exercise
price
|
life
|
|
|
|
|
|
|
(in
US$)
|
|
|
(in
years)
|
|
|
|
|
|
(in
US$)
|
|
|
(in
years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
24,497
|
|
|
-
|
|
|
2.422
|
|
|
24,497
|
|
|
-
|
|
|
2.422
|
|
3.96
- 7.8
|
|
|
448,593
|
|
|
5.718
|
|
|
6.138
|
|
|
191,766
|
|
|
5.955
|
|
|
4.447
|
|
8.48
- 12.00
|
|
|
219,392
|
|
|
9.436
|
|
|
5.611
|
|
|
146,436
|
|
|
9.154
|
|
|
4.964
|
|
12.252
- 15.75
|
|
|
17,500
|
|
|
13.751
|
|
|
1.527
|
|
|
17,500
|
|
|
13.752
|
|
|
1.527
|
|
16.72
- 24.5
|
|
|
63,907
|
|
|
22.628
|
|
|
2.841
|
|
|
56,503
|
|
|
23.275
|
|
|
2.149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773,889
|
|
|
|
|
|
|
|
|
436,702
|
|
|
|
|
|
|
|
|
6.
|
The
weighted average fair values of options granted during the years
ended
December 31, 2007, 2006 and 2005
were:
|
|
|
For
exercise price on the grant date that:
|
|
|
|
Equals
market price of the underlying share
|
|
Less
than market price of the underlying share
|
|
|
|
Year
ended December 31
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
prices
|
|
|
5.508
|
|
|
10.792
|
|
|
9.072
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fair
values on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grant
date
|
|
|
3.596
|
|
|
7.66
|
|
|
5.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.
|
The
following table summarizes the departmental allocation of the Company’s
share-based compensation charge:
|
|
|
|
Year
ended December 31,
|
|
|
|
|
(*)
2007
|
|
|
(*)
2006
|
|
|
(**)
2005
|
|
|
|
|
US$
( (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
18
|
|
|
14
|
|
|
-
|
|
Research
and development
|
|
|
123
|
|
|
113
|
|
|
-
|
|
Selling
and marketing
|
|
|
203
|
|
|
193
|
|
|
-
|
|
General
and administrative
|
|
|
220
|
|
|
238
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564
|
|
|
558
|
|
|
12
|
|
|
(*)
|
Calculated
in accordance with SFAS No. 123R.
|
|
(**)
|
Calculated
in accordance with APB25.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
6 - Shareholders' Equity (cont'd)
|
C.
|
Share-based
compensation
|
The
unamortized balance of the compensation expenses according to SFAS No. 123
(R)
in respect of these stock options amounted to US$764 thousand as of December
31,
2007, of which US$460 thousand will be amortized in the year ended December
31,
2008 and US$304 thousand will be amortized in accordance with the vesting
period
of the options by the end of fiscal 2011.
The
Company adopted SFAS No. 123 (R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006. The Company’s consolidated financial statements as of and for the year
ended December 31, 2007 and 2006 reflect the impact of SFAS No. 123 (R). In
accordance with the modified prospective transition method, the Company’s
consolidated financial statements for prior periods have not been restated
to
reflect, and do not include, the impact of SFAS No. 123 (R). Share-based
compensation expense recognized under SFAS No. 123 (R) for fiscal 2007 and
2006
were US$564 and US$558 thousand, respectively (see Note 2(P)).
The
fair
value of stock-based compensation awards granted were estimated using the
Black-Scholes option pricing model with the following assumptions:
|
1.
|
The
current price of the stock on the grant date is the market value
of such
date;
|
|
2.
|
The
dividend yield is zero percent for all relevant
years;
|
|
3.
|
Risk
free interest rates are as follows:
|
|
|
|
%
|
|
Year
ended December 31, 2005
|
|
|
3.8
- 4.2
|
|
Year
ended December 31, 2006
|
|
|
4.5
- 5.0
|
|
Year
ended December 31, 2007
|
|
|
3.9
- 4.9
|
|
|
4.
|
Each
option granted has an expected life of 4 - 5.5 years (as of the
date of
grant); and
|
|
5.
|
Expected
annual volatility is 73% - 85%, 74% - 100% and 89% - 100% for the
years
ended December 31, 2007, 2006 and 2005, respectively. This is a
measure of
the amount by which a price has fluctuated or is expected to fluctuate.
Actual historical changes in the market value of the Company’s stock were
used to calculate the volatility assumption, as management believes
that
this is the best indicator of future
volatility.
|
Note
7 - Taxes on Income
|
1.
|
During
2003, tax reform legislation was enacted with effect from January
1, 2003,
which significantly changed the taxation basis of corporate and
individual
taxpayers from a territorial basis to a worldwide basis. From such
date,
an Israeli resident taxpayer will be taxed on income produced and
derived
both in and out of Israel.
|
|
2.
|
On
July 25, 2005, the Israeli Parliament passed the Law for the Amendment
of
the Income Tax Ordinance (No. 147 and Temporary Order) - 2005 (“Amendment
147”). Amendment 147 provides for a gradual reduction in the company
tax
rate in the following manner: in 2006 - 31%, in 2007 - 29%, in
2008 - 27%,
in 2009 - 26% and from 2010 onward the tax rate will be 25%. Furthermore,
beginning in 2010, upon Israel’s reduction of the company tax rate to 25%,
real capital gains will be subject to a tax of 25%.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont'd)
|
B.
|
Tax
benefits under the Israeli Law for the Encouragement of Capital
Investments, 1959
|
The
Law
for the Encouragement of Capital Investments, 1959, (“the Law”), provides that a
capital investment in eligible facilities may, upon application to the
Investment Center of the Ministry of Industry and Commerce of the State of
Israel, be designated as an “Approved Enterprise”.
Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its
capital
sources, and by its physical characteristics (e.g., the equipment to be
purchased and utilized pursuant to the program). Taxable income of a company
derived from an Approved Enterprise is subject to corporate tax at the
maximum rate of 25% (rather than the regular corporate tax rates) for a period
of seven years commencing with the year in which the Approved Enterprise
first
generated taxable income (the “Benefit Period”). The Benefit Period is limited
to 12 years from commencement of production or 14 years from the year of
receipt
of approval, whichever is earlier and, under certain circumstances, may be
extended to a maximum of ten years from the commencement of the Benefit Period.
Tax benefits under the Law shall also apply to income generated by a company
from the grant of a usage right with respect to know-how developed by the
Approved Enterprise, income generated from royalties, and income derived
from a
service that is auxiliary to such usage right or royalties, provided that
such
income is generated within the Approved Enterprise’s ordinary course of
business.
In
1994,
the Company’s investment program in its Tel Aviv facility was approved as an
Approved Enterprise under the Law. The Company elected the alternative Path
of
tax benefits in respect thereof. The Company’s program for expansion of its
Approved Enterprise to Jerusalem was submitted to the Investment Center for
approval in October 1994 and the approval thereof was received in
February 1995. In December 1996, the Company’s request for a second
expansion of its Approved Enterprise in Jerusalem was approved by the Investment
Center.
The
period of benefits remaining under such approvals
expired
in 2006.
The
Company has not utilized any of these benefits with respect to these
programs.
|
2.
|
Accelerated
depreciation
|
The
Company is entitled to claim accelerated depreciation for a period of five
years
in respect of property and equipment relating to its Approved Enterprise.
The
Company has not utilized this benefit.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont’d)
|
B.
|
Tax
benefits under the Israeli Law for the Encouragement of Capital
Investments, 1959 (cont’d)
|
On
March
30, 2005, the Israeli parliament approved a reform of the above Law. The
primary
changes were as follows:
|
·
|
Companies
that meet the criteria of the Alternate Path of tax benefits will
receive
those benefits without prior approval. In addition, there will
be no
requirement to file reports with the Investment Center. Audit will
take
place via the Income Tax Authorities as part of the tax audits.
Request
for pre-ruling is possible.
|
|
·
|
Tax
benefits of the Alternate Path include lower tax rates or no tax
depending
on the area and the path chosen, lower tax rates on dividends and
accelerated depreciation.
|
|
·
|
In
order to receive benefits in the Grant Path or the Alternate Path,
the
industrial enterprise must contribute to the economic independence
of Israel’s economy in one of the following
ways:
|
|
1.
|
Its
primary activity is in the Biotechnology or Nanotechnology fields
and,
pre-approval is received from the head of research and development
at the
OCS;
|
|
2.
|
Its
revenue from a specific country is not greater than 75% of its
total
revenues that year; or
|
|
3.
|
25%
or more of its revenues is derived from a specific foreign market
of at
least 12 million residents.
|
|
·
|
Upon
the establishment of an enterprise, an investment of at least NIS
300
thousand in production machinery and equipment within three years
is
required.
|
|
·
|
For
an expansion, a company is required to invest within three years
in the
higher of (i) NIS 300 thousand in production machinery and equipment
and
(ii) a certain percentage of its existing production machinery
and
equipment.
|
In
December 2005, based on the Law, the Company notified the Israeli Income
Tax
Authorities that the Company chose the 2004 fiscal year as the elected year
for
an additional expansion of its Approved Enterprise.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont’d)
|
B.
|
Tax
benefits under the Israeli Law for the Encouragement of Capital
Investments, 1959 (cont’d)
|
|
4.
|
Conditions
for entitlement to the
benefits
|
Entitlement
to the benefits of the Company’s “Approved Enterprise” is dependent upon the
Company fulfilling the conditions stipulated by the Law and the regulations
published thereunder, as well as the criteria set forth in the approval for
the
specific investment in the Company’s “Approved Enterprise”.
In
the
event of failure to comply with these conditions, the tax benefits may be
cancelled, and the Company may be required to refund the amount of the cancelled
benefits, with the addition of linkage differences and interest.
|
C.
|
Measurement
of results for tax purposes under the Israeli Inflationary Adjustments
Law, 1985 (the "Inflationary Adjustments
Law")
|
Under
the
Inflationary Adjustments Law, the Company's results for tax purposes are
measured in real terms, in accordance with the changes in the Israeli
CPI.
On
February 26, 2008, the Income Tax Law (Inflationary Adjustments) (Amendment
No.
20) (Restriction of Period of Application) - 2008 (“the Amendment”) was passed
by the Knesset. According to the Amendment, the Inflationary Adjustments
Law
will no longer be applicable subsequent to the 2007 tax year, except for
the
transitional provisions whose objectives are to prevent distortion of the
taxation calculations.
In
addition, according to the Amendment, commencing with the 2008 tax year,
the
adjustment of income for the effects of inflation for tax purposes will no
longer be calculated. Additionally, depreciation on protected assets and
tax
loss carryforwards will no longer be linked to the CPI subsequent to the
2007
tax year, and the balances that have been linked to the CPI through the end
of
the 2007 tax year will be used going forward.
The
Company received final tax assessments for all years up to and including
the tax
year ended December 31, 2003.
|
E.
|
Tax
loss carryforwards
|
The
Company's tax loss carryforwards were approximately US$32,529 thousand as
of
December 31, 2007. Such losses can be carried forward indefinitely to offset
any
future taxable income of the Company.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont'd)
|
1.
|
The
US subsidiary is taxed under United States federal and state tax
rules.
|
|
2.
|
The
US subsidiary's tax loss carryforwards amounted to approximately
US$11,177
thousand as of December 31, 2007 for federal and state tax purposes.
Such
losses are available to offset any future US taxable income of
the US
subsidiary and will expire in the years 2008 - 2026 for federal
tax
purpose and in the years 2008 - 2013 for state tax
purpose.
|
|
3.
|
The
US subsidiary has not received final tax assessments since incorporation.
In accordance with the tax laws, tax returns submitted up to and
including
the 2003 tax year can be regarded as
final.
|
The
UK
subsidiary is taxed under United Kingdom tax rules. The UK subsidiary's tax
loss
carryforwards amounted to approximately US$399 thousand as of December 31,
2007.
Such tax losses can be carried forward indefinitely to offset any future
taxable
income of the UK subsidiary.
Deferred
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and for
tax
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
|
|
|
December
31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Tax
loss carryforwards
|
|
|
12,988
|
|
|
9,467
|
|
Allowance
for doubtful accounts
|
|
|
143
|
|
|
160
|
|
Severance
pay
|
|
|
190
|
|
|
178
|
|
Vacation
pay
|
|
|
317
|
|
|
293
|
|
Research
and development
|
|
|
615
|
|
|
616
|
|
Employees’
stock option compensation
|
|
|
13
|
|
|
18
|
|
Other
|
|
|
6
|
|
|
60
|
|
|
|
|
14,272
|
|
|
10,792
|
|
Less:
valuation allowance
|
|
|
(14,272
|
)
|
|
(10,792
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
-
|
|
|
-
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont'd)
|
H.
|
Deferred
taxes (cont’d)
|
The
valuation allowance for deferred tax assets as of January 1, 2006, and 2005,
was
US$10,463 thousand and US$12,054 thousand, respectively. The net change in
the
total valuation allowance for each of the years ended December 31, 2007,
2006
and 2005, was an increase of US$3,480 thousand, US$329 thousand and a decrease
of US$1,591 thousand, respectively. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some or
all of the deferred tax assets will not be realized. The ultimate realization
of
deferred tax assets depends on the generation of future taxable income during
the periods in which those temporary differences and tax loss carryforwards
are
deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected taxable income in making this assessment. In
consideration of the Company’s accumulated losses and the uncertainty of its
ability to utilize its deferred tax assets in the future, management
believes that it is more likely than not that the Company will not realize
its
deferred tax assets at December 31, 2007 and accordingly recorded a valuation
allowance to fully offset all the deferred tax assets.
|
I.
|
Reconciliation
of the theoretical tax expense and the actual tax
expense
|
The
components of income (loss) before taxes on income are as follows:
|
|
|
Year
ended December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
(8,694
|
)
|
|
285
|
|
|
1,133
|
|
Non
Israel
|
|
|
111
|
|
|
(339
|
)
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income
|
|
|
(8,583
|
)
|
|
(54
|
)
|
|
1,527
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont'd)
|
I.
|
Reconciliation
of the theoretical tax expense and the actual tax expense
(cont’d)
|
A
reconciliation of the theoretical tax expense, assuming all income is taxed
at
the Israeli statutory rates of 29% for the year ended December 31, 2007,
of 31%
for the year ended December 31, 2006 and 34% for the year ended December
31,
2005, and the actual tax expense, is as follows:
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes, as reported in the
|
|
|
|
|
|
|
|
statements
of operations
|
|
|
(8,583
|
)
|
|
(54
|
)
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical
tax expense
|
|
|
(2,489
|
)
|
|
(17
|
)
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
effect on non-Israeli subsidiaries
|
|
|
(99
|
)
|
|
(40
|
)
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in income taxes
|
|
|
|
|
|
|
|
|
|
|
resulting
from:
|
|
|
|
|
|
|
|
|
|
|
Non-deductible
share-based compensation expenses
|
|
|
173
|
|
|
173
|
|
|
4
|
|
Other
non-deductible operating expenses
|
|
|
73
|
|
|
83
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and timing differences, net in respect of
|
|
|
|
|
|
|
|
|
|
|
which
no deferred taxes were recorded
|
|
|
2,966
|
|
|
441
|
|
|
(18
|
)
|
Utilization
of tax losses in respect of which
|
|
|
|
|
|
|
|
|
|
|
deferred
tax assets were not recorded in prior years
|
|
|
(31
|
)
|
|
(139
|
)
|
|
(861
|
)
|
Differences
in taxes arising from differences
|
|
|
|
|
|
|
|
|
|
|
between
Israeli currency income and dollar
|
|
|
|
|
|
|
|
|
|
|
income,
net *
|
|
|
(593
|
)
|
|
(501
|
)
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
*
|
Resulting
from the differences between the changes in the Israeli CPI (the
basis for
computation of taxable income of the Company) and the exchange
rate of
Israeli currency relative to the
dollar.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
7 - Taxes on Income (cont'd)
|
J.
|
Accounting
for uncertainty in income taxes
|
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FAS 109. This interpretation prescribes a minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition
of tax positions, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 requires
significant judgment in determining what constitutes an individual tax position
as well as assessing the outcome of each tax position.
The
Company adopted the provisions of FIN 48 on January 1, 2007 and there
was no material effect on the financial statements. As a result, the Company
did
not record any cumulative effect adjustment related to adopting FIN
48.
As
of
January 1, 2007 and for the twelve-month period ended December 31, 2007,
the Company did not have any unrecognized tax benefits. The Company does
not
expect that the amount of unrecognized tax benefits will change significantly
within the next 12 months.
The
Company accounts for interest and penalties related to unrecognized tax benefits
as a component of income tax expense. As of January 1, 2007 and for the
twelve-month period ended December 31, 2007, no interest and penalties related
to unrecognized tax benefits had been accrued.
The
Company and its subsidiaries file income tax returns in Israel and in the
U.S.
The Israeli tax returns of the Company are open to examination by the Israeli
Tax Authorities for the tax years beginning in 2004. The U.S. tax returns
of the
U.S. subsidiary remain subject to examination by the U.S. tax authorities
for
the tax years beginning in 2004.
Note
8 - Supplementary Financial Statement Information
|
1.
|
Cash
and cash equivalents
|
Cash
and
cash equivalents include short-term deposits denominated in US dollars of
approximately US$1,661 thousand as of December 31, 2007, bearing an average
annual interest of 4.241% (December 31, 2006 - US$1,573 thousand, bearing
an
average annual interest of 4.65%).
|
2.
|
Short-term
bank deposits
|
As
of
December 31, 2006, the short-term bank deposits denominated in U.S. dollars
with
original maturities of more than three months and less than one year were
bearing an average annual interest of 5.30%.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
8 - Supplementary Financial Statement Information (cont'd)
|
A.
|
Balance
Sheet (cont
'
d)
|
|
3.
|
Trade
receivables, net
|
As
of
December 31, 2007 and 2006, trade receivables were presented net of an allowance
for doubtful accounts of US$688 thousand and US$690 thousand, respectively.
The
following table reflects the changes in allowance for doubtful
accounts:
|
|
|
US$
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
133
|
|
Additions
during 2006
|
|
|
585
|
|
Deductions
during 2006
|
|
|
(28
|
)
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
690
|
|
Additions
during 2007
|
|
|
2
|
|
Deductions
during 2007
|
|
|
(4
|
)
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
688
|
|
|
|
|
December
31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
859
|
|
|
678
|
|
Work
in process
|
|
|
761
|
|
|
856
|
|
Finished
products
|
|
|
1,834
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
3,454
|
|
|
2,675
|
|
|
|
|
December
31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Value
Added Tax authorities
|
|
|
93
|
|
|
358
|
|
Government
of Israel - OCS receivable
|
|
|
268
|
|
|
54
|
|
Prepaid
expenses
|
|
|
373
|
|
|
343
|
|
Subcontractors
|
|
|
125
|
|
|
-
|
|
Others
|
|
|
291
|
|
|
200
|
|
|
|
|
1,150
|
|
|
955
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
8 - Supplementary Financial Statement Information (cont'd)
|
A.
|
Balance
Sheet (cont
'
d)
|
|
6.
|
Other
payables and accrued
expenses
|
|
|
|
December
31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Employees
and employee institutions
|
|
|
2,425
|
|
|
2,356
|
|
Royalties
- OCS payable
|
|
|
338
|
|
|
558
|
|
Commissions
payable
|
|
|
276
|
|
|
308
|
|
Other
royalties payables
|
|
|
41
|
|
|
55
|
|
Allowance
for product warranty
|
|
|
220
|
|
|
355
|
|
Advances
from customers
|
|
|
279
|
|
|
18
|
|
Government
of Israel tax authorities
|
|
|
50
|
|
|
128
|
|
Others
|
|
|
1,039
|
|
|
512
|
|
|
|
|
4,668
|
|
|
4,290
|
|
|
7.
|
Monetary
balances in non-dollar
currencies
|
|
|
|
December
31, 2007
|
|
|
|
|
Israeli
currency
|
|
|
Other
|
|
|
|
|
Not
linked
|
|
|
Linked
to the
|
|
|
non-dollar
|
|
|
|
|
to
the dollar
|
|
|
dollar
|
|
|
currency
|
|
|
|
|
US$
thousands
|
|
|
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
520
|
|
|
-
|
|
|
2,228
|
|
Current
liabilities
|
|
|
2,568
|
|
|
350
|
|
|
10
|
|
|
|
|
December
31, 2006
|
|
|
|
|
Israeli
currency
|
|
|
Other
|
|
|
|
|
Not
linked
|
|
|
Linked
to the
|
|
|
non-dollar
|
|
|
|
|
to
the dollar
|
|
|
dollar
|
|
|
currency
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
1,228
|
|
|
-
|
|
|
2
|
|
Current
liabilities
|
|
|
2,677
|
|
|
558
|
|
|
9
|
|
The
tables above reflect, at the balance sheet dates indicated, the exposure
of the
Company
'
s
monetary balances in non-dollar currencies to the effect of changes in the
rate
of exchange of the NIS or other non-dollar currencies, to the
dollar.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
8 - Supplementary Financial Statement Information (cont'd)
|
8.
|
Fair
value of financial
instruments
|
The
financial instruments of the Company consist mainly of cash and cash
equivalents, short-term deposits, trade receivables, trade and other accounts
payable and accrued expenses. Due to the short-term nature of such financial
instruments, their fair value approximates their carrying value.
|
B.
|
Statement
of operations
|
|
(a)
|
Sales
- classified by geographical
destination:
|
|
|
|
Year
ended December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
4,315
|
|
|
7,611
|
|
|
8,793
|
|
Europe
|
|
|
5,685
|
|
|
9,443
|
|
|
8,641
|
|
Far
East
|
|
|
1,541
|
|
|
2,590
|
|
|
3,313
|
|
South
America
|
|
|
1,248
|
|
|
2,622
|
|
|
712
|
|
Other
|
|
|
708
|
|
|
1,275
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,497
|
|
|
23,541
|
|
|
22,340
|
|
In
North
America, the Company sells its products directly to end-users or through
independent manufacturers’ representatives. Outside North America the Company
sells its products primarily through a global network of independent
distributors for resale to end-users.
In
2006
and 2005, the Company had one customer in North America whose purchases
contributed to more than 10% of the total consolidated sales in the amount
of
US$2,837 thousand and US$4,322 thousand, respectively. In addition in 2005,
the
Company had one distributor in Europe whose purchases were US$2,196
thousand.
Comprised
of:
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
Financing
income:
|
|
|
|
|
|
|
|
Interest
from banks
|
|
|
280
|
|
|
497
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
497
|
|
|
270
|
|
Financing
expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
and bank charges on short- term
|
|
|
|
|
|
|
|
|
|
|
bank
credit
|
|
|
15
|
|
|
19
|
|
|
15
|
|
Exchange
translation loss, net
|
|
|
-
|
|
|
6
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
25
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
income, net
|
|
|
265
|
|
|
472
|
|
|
235
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
9 - Related Party Balances and Transactions
The
Company carries out transactions with related parties as detailed below.
Certain
principal shareholders of the Company are also principal shareholders of
affiliates known as the RAD-BYNET Group. The Company's transactions with
related
parties are carried out on an arm's-length basis.
|
1.
|
Certain
premises occupied by the Company and the US subsidiary are rented
from
related parties (see Note 5B).
|
|
2.
|
Certain
entities within the RAD-BYNET Group provide the Company with
administrative services. Such amounts expensed by the Company are
disclosed in Note 9(B) below as "Cost of sales, sales and marketing,
general and administrative expenses". Additionally, certain entities
within the RAD-BYNET Group perform research and development on
behalf of
the Company. Such amounts expensed by the Company are disclosed
in Note
9(B) below as "Research and development,
gross".
|
|
3.
|
The
Company purchases from certain entities within the RAD-BYNET Group
software packages included in the Company's products and is thus
incorporated into its product line.
|
Such
purchases by the Company are disclosed in Note 9(B) as "Cost of Sales" and
as
"Research and development, gross".
|
4.
|
The
Company is party to a distribution agreement with Bynet Electronics
Ltd.
("BYNET"), a related party, giving Bynet the exclusive right to
distribute
the Company's products in Israel and in certain parts of the West
Bank and
Gaza Strip.
|
Revenues
related to this distribution agreement are included in Note 9(B) below as
"
Sales
"
.
The
remainder of the amount of
"
Sales
"
included
in Note 9(B) below comprised of sales of the Company's products to entities
within RAD-BYNET Group.
|
A.
|
Balances
with related parties
|
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
US$
thousands
|
|
US$
thousands
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
Trade
|
|
|
289
|
|
|
294
|
|
Other
current assets
|
|
|
235
|
|
|
163
|
|
Accounts
payable:
|
|
|
|
|
|
Trade
|
|
|
119
|
|
|
236
|
|
Other
payables and accrued expenses
|
|
|
6
|
|
|
6
|
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
9 - Related Party Balances and Transactions (cont'd)
|
B.
|
Expenses
to or income from related
parties
|
|
|
|
Year
ended December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
407
|
|
|
335
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
104
|
|
|
98
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development, gross
|
|
|
222
|
|
|
196
|
|
|
201
|
|
Sales
and marketing*
|
|
|
196
|
|
|
192
|
|
|
226
|
|
General
and administrative
|
|
|
88
|
|
|
90
|
|
|
91
|
|
|
*
|
Sales
and marketing includes US$5 thousand rental revenue from a sublease
agreement with an affiliate of the Company's principal
shareholders.
|
|
C.
|
Acquisition
of fixed assets from related parties amounted to US$24 thousand,
US$6
thousand and US$23 thousand in the years ended December 31, 2007,
2006 and
2005, respectively.
|
Note
10 - Financial Instruments and Risk Management
|
A.
|
Concentration
of credit risk
|
Financial
instruments that may subject the Company to significant concentrations of
credit
risk consist mainly of cash, assets held for severance benefit and trade
receivables.
Cash
and
cash equivalents are maintained with major financial institutions in Israel
and
in the United States. Assets held for severance benefits are maintained with
major insurance companies and financial institutions in Israel.
The
Company grants credit to customers without generally requiring collateral
or
security. The Company performs ongoing credit evaluations of the financial
condition of its customers. The risk of collection associated with trade
receivables is reduced by the large number and geographical dispersion of
the
Company's customer base.
|
B.
|
Concentrations
of business risk
|
Although
the Company generally uses standard parts and components for products, certain
key components used in the products are currently available from only one
source, and others are available from a limited number of sources. The Company
believes that it will not experience delays in the supply of critical components
in the future. If the Company experiences such delays and there is an
insufficient inventory of critical components at that time, the Company's
operations and financial results would be adversely affected.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
10 - Financial Instruments and Risk Management (cont’d)
|
B.
|
Concentrations
of business risk (cont’d)
|
The
Company’s revenues in any period generally have been, and may continue to be,
derived from relatively small numbers of sales with relatively high average
revenues per order. Therefore, the loss of any orders or delays in closing
such
transactions could have an adverse effect on the Company’s operations and
financial results.
Note
11 - Recently Issued Accounting Pronouncements
|
1.
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value Measurement. SFAS No. 157 defines fair
value,
establishes a framework for the measurement of fair value, and
enhances
disclosures about fair value measurements. The Statement does not
require
any new fair value measures. The SFAS is effective for fair value
measures
already required or permitted by other standards for fiscal years
beginning after November 15, 2007. The Company is required to adopt
SFAS
No. 157 beginning on January 1, 2008. SFAS No. 157 is required
to be
applied prospectively, except for certain financial instruments.
Any
transition adjustment will be recognized as an adjustment to opening
retained earnings in the year of adoption. In February 2008, the
FASB
issued SFAS No. 157-2, which grants a one-year deferral of SFAS
No. 157’s
fair-value measurement requirements for nonfinancial assets and
liabilities, except for items that are recognized or disclosed
at fair
value in the financial statements on a recurring basis. The Company
is
currently evaluating the impact of adopting SFAS No. 157 on its
results of
operations and financial position.
|
|
2.
|
In
February 2007, the FASB issued “SFAS No. 159”, The Fair Value Option
for Financial Assets and Financial Liabilities—including an amendment of
FASB Statement No. 115, which permits entities to irrevocably choose
to measure many financial assets and liabilities at fair value
that are
not currently required to be measured at fair value. If the fair
value
option is elected, changes in fair value would be recorded in results
of
operations at each subsequent reporting date. The Statement allows
entities to achieve an offset accounting effect for certain changes
in
fair value of certain related assets and liabilities without having
to
apply complex hedge accounting provisions. This Statement is effective
as
of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the effect, if
any, that the adoption of SFAS No. 159 will have on its future
consolidated results of operations and financial condition.
|
|
3.
|
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations
(Statement 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements- an amendment to ARB No. 51 (Statement
160). Statements 141R and 160 require most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in
a business
combination to be recorded at “full fair value” and require noncontrolling
interests (previously referred to as minority interests) to be
reported as
a component of equity, which changes the accounting for transactions
with
noncontrolling interest holders. Both Statements are effective
for periods
beginning on or after December 15, 2008, and earlier adoption is
prohibited. Statement 141R will be applied to business combinations
occurring after the effective date. Statement 160 will be applied
prospectively to all noncontrolling interests, including any that
arose
before the effective date. The Company is currently evaluating
the effect,
if any, of the adoption of SFAS No. 141R and SFAS 160 on its future
consolidated results of operations and financial condition.
|
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
11 - Recently Issued Accounting Pronouncements (cont’d)
|
4.
|
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements - an amendment to
ARB No.
51 (“SFAS 160”). SFAS 160 requires noncontrolling interests (previously
referred to as minority interests) to be reported as a component
of
equity, which changes the accounting for transactions with noncontrolling
interest holders. SFAS 160 is effective for periods beginning on
or after
December 15, 2008, and earlier adoption is prohibited. SFAS 160
will be
applied prospectively to all non-controlling interests, including
any that
arose before the effective date.
|
The
Company is currently evaluating the effect, if any, that the adoption of
SFAS
160 will have on its future consolidated results of operations and financial
condition.
|
5.
|
In
March 2008, the FASB issued FASB Statement No. 161, Disclosures
about
Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is
intended to improve financial reporting about derivative instruments
and
hedging activities by requiring enhanced disclosures to enable
investors
to better understand the effects of the derivative instruments
on an
entity’s financial position, financial performance, and cash flows. It
is
effective for financial statements issued for fiscal years and
interim
periods beginning on or after November 15, 2008, with early adoption
encouraged.
|
The
Company is currently evaluating the effect, if any, that the adoption of
SFAS
161 will have on its future consolidated results of operations and financial
condition.
|
6.
|
In
December 2007 the SEC staff issued Staff Accounting Bulletin No. 110
(“SAB 110”), which, effective January 1, 2008, amends and replaces
SAB 107, Share-Based Payment. SAB 110 expresses the views of the
SEC staff
regarding the use of a “simplified” method in developing the expected life
assumption in accordance with FASB Statement No. 123(R), Share-Based
Payment. The use of the “simplified” method, was scheduled to expire on
December 31, 2007. SAB 110 extends the use of the “simplified” method
in certain situations. The SEC staff does not expect the “simplified”
method to be used when sufficient information regarding exercise
behavior,
such as historical exercise data or exercise information from external
sources, becomes available. The Company currently uses simplified
estimates and expects to continue using such method until historical
exercise data will provide useful information to develop expected
life
assumption.
|
|
7.
|
On
May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1,
"Accounting
for Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires
issuers of convertible debt that may be settled wholly or partly
in cash
when converted to account for the debt and equity components separately.
FSP APB 14-1 is effective for fiscal years beginning after December
15,
2008 and must be applied retrospectively to all periods
presented.
|
The
Company is currently evaluating the effect, if any, that the adoption of
FSP APB
14-1 will have on its consolidated results of operations and financial
condition.
Radcom
Ltd. (An Israeli Corporation)
and
its
subsidiaries
Notes
to the Consolidated Financial Statements as of December 31, 2007
Note
12 - Subsequent Events
|
1.
|
On
December 19, 2007, the Company signed a definitive agreement
with
investors regarding a private placement transaction (the “PIPE”), at an
aggregate investment amount of $2.5 million. The agreement
was subject to,
among other conditions, the approval of the Company’s meeting of
shareholders which approved the PIPE at their meeting held
on January 30,
2008. On February 3, 2008, the Company closed the private placement
transaction. According to the terms of the agreement, the Company
issued
976,563 ordinary shares to the investors at a purchase price
per ordinary
share of $2.56 representing the average closing market price
of the
Company’s shares on the ten trading days prior to the shareholders
meeting
minus a discount of 10%. Each investor was also granted warrants
to
purchase one ordinary share for every three ordinary shares
purchased by
each investor in the PIPE for an exercise price of
$3.20.
|
|
2.
|
In
April 2008, the Company closed a US$2.5 million venture loan from
Plenus,
a leading Israeli venture-lending firm. The loan is for a period
of three
years, and bears interest at the rate of 10% per annum. In addition,
the
Company granted Plenus a warrant to purchase ordinary shares of
the
Company for a total amount of US$450 thousand with an exercise
price of
US$2.56 per share. The warrant is exercisable for a period of five
years.
The Company also granted Plenus registration rights in respect
of the
shares underlying the warrant. As part of the loan agreement, the
Company
granted Plenus a fixed charge over its’ intellectual property assets and a
floating charge over its’ assets and the US subsidiary granted Plenus a
security interest over its assets, and provided Plenus with guaranties
with respect to the loan. The loan also includes financial covenants
which
relate to the level of revenues, operating income and cash balances
of the
Company.
|
|
3.
|
In
May 2008, the Company’s shareholders approved a one-to-four reverse share
split. The purpose of the reverse share split was to enable the
Company to
continue to comply with the minimum $1.00 bid price of the Nasdaq
Capital
Market. The reverse share split became effective in June 2008.
Immediately
after the reverse share split, the total number of ordinary shares
was
reduced from 20,303,638 to approximately 5,075,910. Figures for
all
periods have been restated in order to reflect the impact of such
reverse
share split.
|
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