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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number 000-29871
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RADVISION LTD.
(Exact name of registrant as specified in its charter)
Israel N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Raoul Wallenberg Street
Tel Aviv 69719, Israel
(Address of principal executive offices)
011-972-3-645-5220
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Ordinary Shares, NIS 0.1 par value
(Title of class)
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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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] (Not applicable. See Preliminary Notes on page
4.)
As of June 28, 2002, 18,150,070 ordinary shares of RADVISION Ltd. were
outstanding (not including treasury shares). The aggregate market value of the
ordinary shares held by non-affiliates was approximately $66.2 million.
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DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
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PART I.........................................................................5
Item 1. Business...........................................................5
Item 2. Properties........................................................35
Item 3. Legal Proceedings.................................................36
Item 4. Submission of Matters to a Vote of Security Holders...............36
PART II.......................................................................37
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................37
Item 6. Selected Financial Data...........................................40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................41
Item 7A. Qualitative and Qualitative Disclosures About Market Risk.........54
Item 8. Financial Statement and Supplementary Data........................55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................55
PART III......................................................................56
Item 10. Directors and Executive Officers of the Registrant................56
Item 11. Executive Compensation............................................64
Item 12. Security Ownership of Certain Beneficial Owners and Management....69
Item 13. Certain Relationships and Related Transactions....................70
Item 14. Controls and Procedures...........................................73
PART IV.......................................................................74
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..74
Preliminary Notes: RADVISION Ltd. is incorporated in Israel and is a
"foreign private issuer" as defined in Rule 3b-4 under the Securities Exchange
Act of 1934 (the "1934 Act") and in Rule 405 under the Securities Act of 1933.
As a result, it is eligible to file this annual report pursuant to Section 13 of
the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file its interim reports
on Form 6-K (in lieu of Forms 10-Q and 8-K). However, RADVISION Ltd. elected to
file its annual and interim reports on Forms 10-K, 10-Q and 8-K.
This annual report and the exhibits thereto and any other document we
file pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference room: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549, on the Securities and Exchange Commission Internet site
(http://www.sec.gov) and on our website www.radvision.com.
Pursuant to Rule 3a12-3 under the 1934 Act regarding foreign private
issuers, the proxy solicitations of RADVISION Ltd. are not subject to the
disclosure and procedural requirements of Regulation 14A under the 1934 Act, and
transactions in its equity securities by its officers and directors are exempt
from Section 16 of the 1934 Act. However, we distribute annually to our
shareholders an annual report containing financial statements that have been
examined and reported on, with an opinion expressed by, an independent public
accounting firm.
This Annual Report on Form 10-K contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs, "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "understands" and other verbs suggesting uncertainty. We remind
readers that forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known and
unknown risks that could cause the actual results, performance, levels of
activity, or our achievements, or industry results, to be materially different
from any future results, performance, levels of activity, or our achievements
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section
which appears in Item 1 - Business.
4
PART I
Item 1. Business
General
We were incorporated under the laws of the State of Israel in
January1992, commenced operations in October 1992 and commenced sales of our
products in the fourth quarter of 1994. Before that time, our operations
consisted primarily of research and development and recruiting personnel. We are
a public limited liability company under the Israeli Companies Law 1999 and
operate under this law and associated legislation. Our registered offices and
principal place of business are located at 24 Raoul Wallenberg Street Tel Aviv
69719, Israel. Our address on the Internet is www.radvision.com. The information
on our website is not incorporated by reference into this annual report.
With over a decade in business, RADVISION is the industry's leading
provider of high quality, scalable and easy-to-use products and technologies for
videoconferencing, video telephony, and the development of converged voice,
video and data over IP and 3G networks. Hundreds of thousands of end-users
around the world today communicate over a wide variety of networks using
products and solutions based on or built around RADVISION's rich media
communications platforms and software development solutions.
We have approximately 400 customers worldwide including Alcatel, Cisco,
FastWeb, NTT/DoCoMo, Philips, Panasonic, Samsung, Shanghai Bell, Siemens, Sony
and Tandberg.
In the beginning of 2001, we created two separate business units
corresponding to our two product lines to enable our product development and
product marketing teams to respond quickly to evolving market needs with new
product introductions.
Our Networking Business Unit, or NBU, offers one of the broadest and
most complete set of videoconferencing network solutions for IP, ISDN, SIP and
3G-based networks, supporting most end points in the industry. These products
are sold primarily to resellers and OEMs who use this infrastructure to develop
and install advanced IP and ISDN-based videoconferencing systems. The NBU also
provides businesses and service providers with integrated solutions that deliver
converged IP-based video telephony applications to employee computer desktops,
residential broadband homes, and 3G video phones worldwide.
Our Technology Business Unit, or TBU, is a one-stop-shop of V2oIP
Ensemble Development toolkits. The TBU provides protocol development tools and
platforms, enabling equipment vendors and service providers to develop and
deploy new converged networks, services, and technologies. Our TBU also provides
professional services to our customers, assisting them to integrate our
technology into their products. RADVISION's enabling technologies for OEM
systems include developer toolkits for SIP, MEGACO/H.248, MGCP, H.323, 3G-324M
wireless multimedia delivery, and the ProLab(TM) Test Management Suite.
5
Today you may find RADVISION toolkits implemented in a wide range of
environments from chipsets to simple user devices like IP phones, and video
systems through carrier class network devices like gateways, switches, soft
switches and 3G multimedia gateways.
Our Strategy
Our goal is to be the leading provider of innovative products and
technologies that enable real-time multimedia collaboration (voice, video and
data) communications over packet networks. The combination of offering
IP-centric networking products and software toolkits uniquely positions us in
the center of the IP communication revolution. Both of our product lines are
essential for building IP networks that support real time voice and video
communication - with full interoperability with legacy ISDN/PSTN networks and
technologies. Key elements of our strategy include the following:
Maintain and Extend our Technology Leadership. We believe that we have
established ourselves as a technology leader in providing core-enabling
technology for a broad range of IP and 3G communications products and
services. We have accumulated extensive knowledge and expertise as
designers and developers of commercial products and technology for
real-time packet-based communications. We place considerable emphasis on
research and development to expand the capabilities of our existing
products, to develop new products and to improve our existing technology
and capabilities. We believe that our future success will depend upon
our ability to maintain our technological leadership, to enhance our
existing products and to introduce on a timely basis new commercially
viable products addressing the needs of our customers. We intend to
continue to devote a significant portion of our personnel and financial
resources to research and development.
Enable the migration of visual communications from the conference room
(videoconferencing) to the desk top, the home, and on the road over 3G.
RADVISION has been working with leading technology vendors as well as
aggressively developing partnerships with broadband and wireless service
providers to transform videoconferencing from a meeting application to a
new mode of personal communications.
Strengthen and expand our relationships with OEM customers. We have
established and continue to maintain collaborative working relationships
with many OEMs in the IP communications market, including Cisco,
Samsung, Siemens, Sony and Tandberg. We work closely with our OEM
customers to integrate our products and core technology into their
solutions. Our core technology and our system design expertise enable us
to assist these customers in the development of complete solutions that
contain enhanced features and functionality compared to competitive
alternatives. We strive to establish long-term relationships with our
OEM customers by starting with a few products and subsequently expanding
these relationships by increasing the number and range of products sold
to these customers. We intend to expand the depth and breadth of our
existing OEM relationships while initiating similar new relationships
with leading OEMs focused on the IP communications market.
6
Continue to offer new and enhanced products and features. We believe we
have consistently been either first, or among the first, to market
products that support real-time voice, video and data communications
over packet networks. We were the first to market with IP gateways that
provide combined voice, video and data functionality, and first to
market with software development kits for the development of
H.323-compliant IP communications products and applications. We intend
to utilize our technological expertise as a basis for market leadership
by striving to be first-to-market with new and enhanced products and
features that address the increasingly sophisticated needs of our
customers and the evolving markets they serve. In addition, we believe
that our participation in the drafting of industry standards gives us
the ability to quickly identify emerging trends enabling us to develop
new products and technologies that are at the forefront of technological
evolution in the IP communications industry.
In 2002, our TBU expanded its product offering to include a key 3G
toolkit for wireless devices and infra-structure; an SIP Server product targeted
to SIP network products; an IP Phone Toolkit for IP Phone development; and the
unveiling of out Ensemble Duet professional services. These introductions have
helped us firm our position as the premier, one-stop-shop for all voice and
video technologies over IP and 3G and reinforces RADVISION's leadership position
as the protocol toolkit technology experts.
In 2002, our NBU introduced a number of new technologies and platforms
for videoconferencing. These introductions included an MCU version 2 (Multipoint
Conferencing Unit) which provide our customers with enhanced media handling and
advanced conference functionality. Of additional note were the introductions of
our viaIP 100 platform for distributed networks and our INVISION line of
videoconferencing network appliances for enterprise applications. All of these
products and other introductions in 2002 were driven by the evolution of the
videoconferencing market from early adopters to mainstream where networks were
looking for smaller, easier to use videoconferencing devices for quick
implementation and roll out of visual communications services. Our NBU also
introduced a gateway for 3G networks to enable video telephony to move from the
enterprise onto the road and into the hands of the public, enabling visual
communications anytime, anywhere.
We will continue to introduce new or enhanced products in 2003. We plan
to introduce upgrades to our software toolkits and improvements to our
videoconferencing product lines that include added functionality. We plan to:
Deepen the distribution channels for our products. We intend to continue
to focus our sales and marketing efforts on deepening the relationship
with our distribution channels. Channel partners provide us feedback
from their customers, the end-users of our products, which gives us
valuable insight into evolving industry trends and customer
requirements. OEMs, resellers and systems integrators are all important
channel partners for our products. They provide us with increased market
presence through their distributor relationships and existing customer
base. In addition, endorsements by key channel partners strengthen our
brand name awareness.
7
Continue our active involvement in shaping industry standards for IP
communications. We actively participate in and contribute to the
formulation of standards for IP communications. We intend to continue
our active involvement in the organizations that define the standards
for real-time communications over next generation packet networks. Our
knowledge and expertise gained in participating in the development of
these industry standards enable us to be among the first to market our
Products and Technology products based on new standards adopted. We are
continually improving, enhancing and expanding our core competency in
real time IP communications protocols including H.323, SIP, MGCP and
MEGACO. Because of our involvement in defining these IP communications
standards, we believe we are well-positioned to quickly develop enhanced
functionality and new products based on multiple protocols.
The following discussion of our business is separated into two sections:
the first addresses our videoconferencing network infrastructure section, or
NBU, and the second addresses our software developer toolkit, or TBU, business.
In each section we will provide an overview of our products, our competitive
advantage, and industry trends that are beneficial to our business.
Networking Business Unit
NBU Products
RADVISION's award-winning videoconferencing network infrastructure
products provide both the platform and applications to enable advanced
conferencing and collaboration functionality between any video-enabled device,
such as a meeting room and desktop videoconferencing end point, with other
telephony and videoconferencing systems. Regardless of the communications
network used, from IP and SIP to ISDN and next generation 3G, institutions and
enterprises can use the RADVISION solution to create high quality, easy-to-use
voice, video, and data communication and collaboration environments.
RADVISION provides two lines of videoconferencing solutions:
OnLAN - Our stand-alone OnLAN gateways provide an interface between
traditional circuit-switched telephone networks and the new packet-based
networks. A gateway converts voice, video and data signals received from a
circuit-switched 1network. When the direction of the communication is reversed,
the gateway converts the packets back into circuit-switched signals. Our
stand-alone OnLAN gateways were designed for small to medium sized networks and
can support up to 16 voice calls or 8 multimedia calls simultaneously in a 1.75"
by 19" (1U) system.
viaIP - Our viaIP solution is a customizable, scalable array of ports,
management solutions, and custom functionality with which customers can design
and quickly deploy a highly configured, high scalable visual communications
network ideal for each client's unique needs. With the viaIP product line the
customer simply chooses the ideal port configuration, management solution and
additional applications and the entire solution is delivered in an integrated
chassis.
8
INVISION is a new product from the viaIP product line, and is a suite of
plug-and-play videoconferencing network appliances that offer an off-the-shelf,
completely pre-configured solution with all the functionality of an entire
IP/ISDN videoconferencing infrastructure, from centralized management and
multipoint conferencing to gateway services and value-added applications, in an
integrated, easy-to-order and easy-to-install device.
We also offer iVIEW, a suite of world class management applications for
every videoconferencing need, including robust network management and intuitive
conference scheduling.
Both the OnLan and viaIP product lines feature RADVISION's award winning
infrastructure solutions of:
o Gateways - Provide videoconferencing interoperability between IP,
circuit-switched ISDN, and next generation 3G end points and networks.
o Gatekeepers - Control, manage, and monitor real-time voice, video and
data traffic over the visual communications networks.
o Conferencing Bridges (or multipoint conferencing units/MCUs) - Enable
voice or multimedia conferencing over packet and ISDN networks among
three or more participants.
o Data Collaboration Server - Enable conference participants to
collaborate and share applications. Allows users to view diagrams,
graphic presentations and slide lectures simultaneously with other
videoconferencing participants. The DCS also makes possible text
chats, whiteboard exchanges, and rapid file transfers during a
multipoint videoconference of three or more participants.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations for financial information relating to our NBU.
NBU Product Benefits
While our products thoroughly support ISDN, the real competitive
advantage of RADVISION's family of solutions is its IP expertise. RADVISION's
products are the leading visual communications infrastructure solutions in the
industry today by virtue of its unmatched technological innovation in five key
areas.
Native IP Routing. All competing solutions come from the legacy ISDN
world, with an ISDN-based switching fabric (TDM backplane). This means that for
an IP end point to IP end point session, every IP stream has to be translated to
"ISDN" in order to be switched by the system, and then translated back to IP to
be forwarded on. RADVISION, in contrast, has an IP backplane, meaning IP
sessions are routed natively, with no translation.
RADVISION solutions all perform flawlessly in supporting ISDN-only or
hybrid IP/ISDN networks, making it an ideal platform as a network migrates from
ISDN to IP while preserving its earlier investment in legacy equipment.
9
Distributed Architecture. The capacity of the viaIP400 is unmatched in
the industry. Because of its unique architecture the viaIP system is not limited
to a single chassis. As such, a single MCU (multiconferencing unit) can support
up to six gateway boards, achieving a capacity of up to 600 hundred simultaneous
calls on the same chassis and limitless calls on a stacked multi chassis system.
Additionally, due to the system's IP architecture, the entire
infrastructure does not need to be mounted in a single integrated rack but can
be distributed throughout a network. By distributing intelligence throughout the
network, the enterprise benefits with increased redundancy, network traffic
optimization, resource management, and high scalability.
Specialized Network Architecture Provides Unparalleled Redundancy.
RADVISION has taken advantage of advanced chipsets to put an entire voice and
video processing matrix, with multiple chips, on a single board. Each board
supports a portion of the total calls. The boards are wired in parallel over a
shared backplane. In the event of a board failure, the system would shift
ongoing calls to another board, thereby reducing the overall capacity of the
device but not dropping any calls.
Advanced Chips Provide Superior Performance and Functionality at a Lower
Cost. As an IP-centric platform with ISDN interworking, the RADVISION solution
is able to take advantage of the advances in integrated IP multifunction chip
technology. The system's on board CPU is a PPC 400Mhz. We also use Texas
Instrument's revolutionary C6x programmable 100Mhz chipset for call
functionality.
By using advanced DSPs and chips, the RADVISION solution is both future
proof (compatible with new technologies and products) and software upgradeable
for the easy additional of new features and functionality of solutions as they
become available. For example, when our platform supports SIP (an up and coming
voice/video over IP protocol) in early Q2, 2003, all RADVISION installed devices
in the market can be easily upgraded with a simple software download.
IP Protocol Expertise. RADVISION is a leader in developing and
delivering advanced voice and video protocols over IP networks, primarily H.323
and SIP. RADVISION's videoconferencing systems leverage this expertise to
provide a powerful IP-centric platform that can be easily integrated into an
enterprise's LAN network. As most IP videoconferencing endpoints in the market
use RADVISION protocol stacks, our solution are completely interoperable with
every end point on the market today.
Specific Break Down of Features and Functionality
o Greater port density for IP video and voice calls - The RADVISION
platform supports on a single MCU card 70 IP video calls at 384Kbps
and 150 voice calls.
o Number of conferences - A conference with RADVISION is a logic entity.
As such, there can be as many conferences as the number of calls to
the MCU.
o Multiple layouts - RADVISION supports a maximum of 16 (4*4) layouts.
10
o In addition to ISDN (H.320) and IP (H.323), RADVISION's platform also
supports a wide variety of additionally voice and video protocols,
including SIP, MEGACO and 3G-324M (for 3G wireless videoconferencing).
Visual Communications Market Trends
- -----------------------------------
Evolution in the way people communicate. With the difficulties in the
economy, companies are turning to new way of communicating with remote parties
as if they were in the same room. Telephone and e-mail usage has increased
dramatically and Instant Massaging (IM) has become ubiquitous in the enterprise
and home. This trend to new communications has also driven enterprises to use
multimedia applications that provide advanced voice, video and data experiences
to maximize information flow, whether in a conference room meeting with dozens
of people or two people speaking casually.
This move to multimedia communications is moving towards the
videoconferencing and video telephony markets, and RADVISION is a recipient of
this trend as it continued to see increased sales during every quarter in 2002.
The Spread of Video Telephony Out of the Enterprise and Into the Home
and On the Road. End users are beginning to use multimedia applications for
their communication not only in the enterprise through meeting rooms and
desktops, but also at home and on the road. We are experiencing this trend and
are realizing benefits for service providers as they are beginning to use our
technology to deliver video telephony services to residential homes as just
another broadband application like Internet access and video-on-demand.
Additionally, 3G wireless providers are using RADVISION technology to deliver
video telephony services to 3G broadband handsets. Today in Japan, tomorrow in
Europe and possibly in the United States once 3G has taken hold as analysts
predict.
The Changing Use of Videoconferencing in the Enterprise. More and more
enterprises that are using videoconferencing for their communications tool are
seeing multimedia, applications and video telephony in particular, as a
preferred method of Personal Communications. Where up until a year or two ago,
videoconferencing was an event that was planned with a group of people in a
meeting room using huge systems, more and more companies are installing small
videoconferencing units at the desktop, or using PCs as an end point, and are
enabling end users to use video as another way to "personally communicate." This
move and early adoption of videoconferencing on the personal level has long
range implication for the entire industry and RADVISION in particular, as
RADVISION's product is a low cost, network based solution that is tailor made
for multiple personal low end points.
The Evolution from ISDN to IP. Traditional (legacy) videoconferencing
systems are ISDN-based. This means expensive technology, a separate high-speed
line into the office for video only, and a separation between video running over
ISDN and data running over IP. However, recently IP-based videoconferencing has
been gaining greater acceptance. As companies put voice over their IP network
(VoIP) so too are they beginning to put video over their IP network. RADVISION
is the pioneer in videoconferencing over IP and its technology, sitting in the
core of the IP network, enabling network managers to leverage their installed
high
11
speed data network, merge video with voice and data applications (running over
the same IP connection) and centrally manage a host of video end points, from
meeting room to desktop to PC based systems, and eventually to wireless video
phones.
Technology Business Unit
RADVISION's Technology Business Unit (TBU) provides standards-based
toolkits and testing systems for the development of real-time voice, video and
data communications solutions over packet networks and 3G networks.
TBU Products
As a driving force behind evolving technologies of real-time IP
communications, RADVISION is in the advantageous position of offering one of the
most complete sets of V2oIP Ensemble Development toolkits. We sell the core
enabling technology for real-time IP and 3G-based communications in the form of
software development kits. Communications equipment providers and developers
seeking to market industry standard compliant IP telephony and multimedia
products, systems and applications need core IP communication protocol software
to develop their IP-centric solutions. The same holds true for developers of
3G-based multimedia solutions. Rather than dedicate in-house resources to
developing this core technology, these providers seek to build upon our proven
enabling technologies. RADVISION toolkits enables our customers to focus on
their core competencies and dramatically reduces the time to market of industry
standard compliant IP communications products, systems and applications.
RADVISION SIP Development Toolkit
SIP is a relatively new signaling protocol for initiating, managing and
terminating voice and video sessions across packet networks. SIP was designed,
from conception, for building high performance user agents. The "SIP toolkit" is
ideal for developing products that require full user/agent functionality. The
SIP Toolkit is designed to provide high scalability and extensibility for both
small and large-scale projects. It is ideal for implementing all types of
feature rich SIP entities such as application servers, softswitches, IP-PBXs,
gateways and conferencing bridges. We have developed a SIP Server toolkit to
target the specific needs of customers developing infra-structure devices based
on the SIP protocol.
RADVISION H.323 Development Toolkit
H.323 is currently the most widely deployed standard for real-time IP
communications. All components of an H.323-compliant network, including
terminals, gateways, gatekeepers and conferencing bridges, use the H.323
protocol to communicate. Our RADVISION H.323 software development kits provide
developers with the core software building blocks needed to develop
H.323-compliant products, systems and applications. Our RADVISION H.323 software
development kit is an integrated set of software programs which execute the
H.323 protocol and perform the functions necessary to establish and maintain
real-time voice, video and data communications over packet-based networks. Our
RADVISION H.323 software development kits can be used to develop a broad
spectrum of products, including gateways, gatekeepers, conferencing bridges, IP
telephones and other H.323-compliant products.
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RADVISION MGCP Development Toolkit
Media gateway control protocol, commonly referred to as MGCP, provides
functions that complement H.323 and has been developed for large packet networks
operated by telecommunications carriers and service providers that require
gateways that can support a high number of calls. MGCP is the protocol by which
a centralized gateway controller communicates with and controls the numerous
gateways throughout a packet network and manages the network traffic through
those gateways. MGCP has been adopted by large telecommunications companies and
Internet service providers as well as by cable television companies building IP
communications solutions over their networks. Our RADVISION MGCP software
development kit is used to build MGCP compliant media gateways controllers and
media gateways.
RADVISION MEGACO Development Toolkit
MEGACO/H.248 is the official industry standard media gateway control
protocol for large-scale IP-centric communication networks. Like MGCP, it is an
internal protocol used between "intelligent" centralized gateway controllers and
numerous "dumb" media gateways that handle voice and video media streams. The
standard is the result of unique collaborative effort between the IETF and ITU
standards organizations. Derived from MGCP, MEGACO/H.248 offers several key
enhancements including support for multimedia and conferencing calls, improved
handling of protocol messages and a formal process for creating extensions to
support advanced functionality. RADVISION's MEGACO/H.248 Toolkit includes a
unique Media Device Manager to greatly simplify application development and
reduce development time by eliminating the need for developers to write code for
interpreting MEGACO/H.248 messages.
3G-324M Developer Toolkit
There is a newly approved standard, called 3G-324M, which supports the
real-time streaming of multimedia broadband wireless communications over 3G by
routing traffic over the circuit switched network. Being circuit-switched based,
the standard has all the hallmarks of a protocol ideal for streaming real-time
multimedia. 3G-324M enables the development, deployment and support of a wide
variety of delay-sensitive applications immediately. These include multimedia
conferencing with other 3G mobile end points, and wire lined H.323 or SIP
terminals, video streaming, cell phone TV, video-on-demand (news, sports, etc.),
and multimedia, multi-participant gaming, to name a few. RADVISION is one of the
first companies to introduce a toolkit for the development of 3G-324M-based
products.
IP Phone Toolkit
RADVISION recently introduced a product dedicated to manufacturers of IP
Phones. The toolkit bundles TBU toolkits along with call control and endpoint
management software to provide an IP Phone application. RADVISION is working
with key silicon manufacturers in the industry, like Texas Instruments to
provide pre-integrated packages including the IP Phone Toolkit running on the
OEM's chipset platform.
13
RADVISION ProLab Test Manager
RADVISION's ProLab is designed for debugging and simulating numerous
testing scenarios. Based on RADVISION's award-winning Sip and H.323 Protocol
Toolkit, this powerful testing tool simulates a full VoIP network with a
professional quality assurance laboratory, enabling developers or QA specialists
to test SIP and H.323 version compliance, version upgrade compliance, stress and
load. The ProLab(TM) Test Manager is a highly scalable tool designed to be aware
of any changes to the SIP and H.323 standards. It provides the:
o capability to run the same tests on the application each time the
underlying protocol version is upgraded;
o flexibility to mix and match scenarios to develop a broad range of
testing possibilities; and
o ability to define numerous scripts and scale up the test scenario by
linking them as the test plan progresses.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations relating to our TBU business.
TBU Product Benefits
Market Leading Technology for Standards Based Real-time IP
Communications. We were one of the original five members of the ITU-T committee
responsible for defining the H.323 standard, which has been adopted worldwide
for real-time packet-based communications. We believe our technology is
recognized as the market-leading implementation of the H.323 industry standard
for real-time voice, video and data communications over packet networks. We also
believe that our technology is recognized as one of the market-leading
implementations of the Session Initiation Protocol, or SIP, and other protocols
such as MGCP and MEGACO/ H.248. We have been actively involved in the
development of protocols for real-time communications since the inception of the
industry in 1994 and believe that we were the first-to-market with enabling
products and technology for voice, video and data communications over IP
networks. We continue to be actively involved in the specification of evolving
IP communications protocols and offer a complete suite of IP communications
software toolkits to developers of IP-centric products, applications and
services. We believe that our technology has become the technology of choice
among developers of standards-compliant IP communications systems. Because we
believe we were first to market and have achieved broad market penetration, our
customers benefit from our ability to develop and provide them market-tested,
proven products and technology. Using our products and technology, our customers
can develop unique capabilities with increased functionality that will
differentiate their IP communications solutions in the market. We believe that
the accumulated knowledge that we have gained participating in the development
of industry standards provides us with a competitive advantage, and positions us
to be among the first to market products and technology based on the latest
technological advances.
14
Interoperability. We provide our customers with products and technology
that are interoperable across a broad range of IP communications systems. Our
products and technology have been integrated into IP communications systems
developed by hundreds of communications equipment providers. Because our
products and technology are broadly deployed across various segments of the IP
communications industry, we believe that the interoperability of our products
and technology with products from different vendors is virtually assured. We
believe that our long-standing involvement in the definition of standards and
accumulated experience with product development across our broad customer base
provides us with a competitive advantage in addressing interoperability needs.
We continue to participate actively in defining industry standards by working
closely with industry consortia on a broad spectrum of IP communications
protocols to ensure continued interoperability of our products and technology
across multiple protocols.
Real-time Voice, Video and Data Communications Functionality. We are one
of the few companies that offer IP communications products which support both
voice-only, as well as combined voice, video and data communications. We believe
that this dual functionality is attractive to enterprises and service providers
that seek a flexible IP communications solution, which can provide enhanced
multimedia functionality in addition to IP telephony capabilities. We believe
our products enable developers of IP communications solutions to offer features
and functions generally unavailable in competitive solutions.
Improved Time to Market. Our customers rely on our accumulated expertise
with communications standards and core technology to significantly reduce their
development cycle and improve time to market. Communications equipment providers
seeking to market standards-compliant systems for real-time voice and video
communications over packet and 3G networks require standards-compliant building
blocks to develop their products. Implementing standards as deployable products
and technology is a complex task that requires significant technical knowledge
and expertise as well as substantial investments of time and resources. Our
products and technology enable our customers to shorten their own development
time by integrating our proven enabling products and technology into their
solutions. Rather than dedicate in-house resources to implementing industry
standards, these developers can use our products and technology and focus their
core competencies on building enhanced systems, products and applications.
Broad Range of Product Environments. Our products and technology provide
our customers with flexibility to design individual products and applications or
complete systems. Our customers can build a complete network solution for
real-time IP communications using our full suite of products or integrate
RADVISION products with their own products or other vendor products into their
real-time IP communications solution. Similarly, our technology has been
designed to enable the development of a broad range of products and
applications, from those that can service single users, including hand held
devices and residential IP phones, to multi-user products, like highly complex,
powerful carrier class gateways. Taken together, our products and technology
provide all of the key network components necessary to build a real-time IP
communications solutions.
15
Industry Trends That Benefit RADVISION's Developer Toolkits:
Growth in Communications
In the 1990's communications networks experienced dramatic growth in
traffic. After a decline in growth in the last three years due to what we
perceive as an industry trend, we believe this growth will resume within a few
years due to a number of factors, including:
o an increasing need for enterprises to expand their networks to enable
them to send, access and receive information quickly, economically and
globally;
o an increasing use of the Internet and other packet networks for
communicating and engaging in commercial transactions;
o an increase in available bandwidth at declining prices; and
o the introduction of new voice, video and data communications services
and applications.
Limitations of Traditional Networks
Traditionally, circuit-switched networks have been the principal medium
for the transmission of communications. Circuit-switched technology dedicates a
circuit with a fixed amount of bandwidth for the duration of the connection,
regardless of a user's actual bandwidth usage. The growth in data communications
traffic, particularly the growth in the number of Internet users, has placed
significant strains on the capacity of traditional circuit-switched networks.
Circuit-switched networks were initially deployed to handle only voice
communications. These networks were not designed to handle data efficiently and
cannot scale cost-effectively to accommodate the growth in data traffic.
Moreover, circuit-switched networks were built based on proprietary, complex
technologies, which have historically limited the entrance of new competitors
and hindered the development and introduction of new services.
Advantages of Packet-based Networks
While circuit-switched networks were principally designed to handle
analog voice traffic, packet-based networks were principally designed for
transmitting digital information. Packet-based networks, including IP networks,
transmit voice, video and data information in the form of small digital packages
called packets. Voice, video and data packets are sent over a single network
simultaneously and reassembled at the destination. Packet switching enables more
efficient utilization of available network bandwidth than circuit-switching,
allowing more calls to travel through a packet network at the same time.
Moreover, packet networks allow for the cost-efficient expansion of capacity as
communications traffic increases. In addition, packet networks are built using
open standards, like IP, which promote competition by allowing different vendors
to build products and applications that can interoperate with one another. By
using packet technologies based on open standards, new services can be deployed
rapidly and economically.
16
The Need for Products that Deliver Industry Standards for Real-time IP
Communications
Originally, enterprises and communications service providers deployed
packet networks primarily for handling data traffic and not for real-time IP
communications. Technical barriers initially hampered the use of packet networks
for real-time communications. For example, packet networks were not designed to
guarantee the sequential delivery of packets and packets could be lost. In
addition, the time of delivery of packets was dependent upon the amount of
packet traffic being transmitted over the network. For real-time communications,
it is critical that the packets associated with a specific voice or video
communication be transmitted in the correct sequence and in a timely manner.
Early attempts at real-time IP communications solved these technical problems by
using proprietary solutions developed by individual vendors. However,
proprietary solutions from different vendors meant that different vendor
products could not inter-operate with one another.
To enable the global deployment of real-time IP communications networks,
industry standards and protocols were developed to promote interoperability of
real-time communications over packet networks. H.323 is currently the most
widely deployed protocol for real-time IP communications. H.323 was developed by
a team of computing, telephony and networking experts under the auspices of the
International Telecommunications Union, or ITU-T, a United Nations organization,
with the goal of specifying a universal real-time standard that would ensure
interoperability of rich-media communications on packet-based networks. H.323
provides the technical framework for developing standards-compliant products and
systems for real-time voice and video communication over packet networks. All
components of an H.323 compliant network, including terminals, gateways,
gatekeepers and conferencing bridges, use the H.323 protocol to communicate.
Our leadership position stems from the pioneering work we began in 1993.
We were the first to develop and demonstrate commercially viable technology for
establishing real-time voice, video, and data on IP networks. Since our
inception, we have been helping to develop the industry standards that are
driving the emergence and growth of the use of packet networks for real-time
communications. RADVISION was an original member of the ITU (International
Telecommunications Union) team that defined the H.323 standard and we continue
to work closely with the ITU, the IETF, IMTC, and other industry consortia to
define a broad spectrum of IP telephony protocols for voice and video
communication including, Session Initiation Protocol (SIP), Media Gateway
Control Protocol (MGCP) and MEGACO/H.248.
Our protocol toolkits provide the underpinning technology required for
the rapid development of next generation products and applications for real-time
V2oIP. Industry giants and emerging technology companies use our family of IP
communication protocol toolkits to reduce their time to market for developing
interoperable, standards-compliant V2oIP products, applications and services.
Today you will find RADVISION protocols implemented in a wide range of
environments from chipsets to simple user devices like IP phones and video
systems through carrier class network devices like gateways, switches and
softswitches.
17
Growth in Real-time Voice and Video IP Communications
Due to the inherent benefits of packet networks and the advent of new
technologies and standards that have enabled real-time communications over these
networks, the use of packet networks for real-time voice, video and data
communications is expected to grow dramatically. This anticipated growth in
real-time IP communications is expected to be driven primarily by enterprises
and communications service providers migrating to packet networks. As
enterprises move from centralized organizations to distributed networks of
employees, customers, suppliers and business partners, they require more
effective communications capabilities to support their operations and remain
competitive in a global and rapidly changing market. Packet networks are well
suited for enterprises because they provide enterprises with the following
advantages:
cost-effective increases in capacity to meet increasing communications
traffic demands;
support for new communications applications, like video conferencing and
data collaboration, for improved workforce productivity;
interoperability with different network configurations of their
customers, suppliers and partners; and
cost savings associated with simplified network management resulting
from creating a single network that handles all communications, rather
than having to maintain separate telephone and computer networks.
Communications service providers have also begun to deploy packet
networks in an effort to compete more effectively in a deregulated market.
Global deregulation and rapid technological advances have resulted in the
emergence of many new communications service providers, increased competition
among traditional telecommunications carriers, lower prices, innovative new
product and service offerings and accelerated customer turnover. To remain
competitive, communications service providers must be able to develop and
introduce new services to differentiate themselves in the market and attract and
maintain customers. Packet networks are well suited to accomplish these
objectives because they enable the rapid deployment of new and differentiated
solutions. In addition, packet-based technology allows new competitors to enter
the market quickly without substantial investment in infrastructure.
Broadband Wireless
There has been a tremendous rush to acquire and roll out 3G broadband
wireless services in key markets. While these efforts have slowed significantly
in North America, Asia has already rolled out its first WCDMA network and Europe
is close behind.
Both 3G standards bodies, 3GPP & 3GPP2, envision 3G as running entirely
over an IP-based communications network (the Internet). However, the prevailing
business environment has pushed this vision out by quite a few years. The
current telecom downturn may further extend the length of time until 3G is
entirely IP-based.
The main problem is that today's IP network (the Internet) is not
sufficiently robust for delay sensitive applications and, in fact, will not be
so until service providers move to IPv6 and
18
SIP-based IP communications. IP, with its variant transmission delays (many hops
routing and congestion effects) and packet overheads, is ill equipped at this
time to provide high quality, real time multimedia delivery over 3G (WCDMA and
CDMA2000) networks.
While the vision of a true IP-based 3G network has been delayed, the
promise of a feature-rich, multimedia wireless experience has not. This is due
to the emergence of a standard, called 3G-324M, which addresses and supports the
real-time streaming of multimedia broadband wireless communications by routing
traffic over the circuit switched network. Being circuit-switched based, the
standard has all the hallmarks of a protocol ideal for streaming real-time
multimedia, including a fixed delay, low overhead of CODECS, and no IP/UDP/RTP
header overheads.
3G-324M, based on ITU H.324M and specified in detail by 3GPP (3GPP TS
26.112 and 3GPP TS 26.111 Working Groups), enables the development, deployment
and support of a wide variety of delay-sensitive applications immediately.
Enabled applications include multimedia conferencing with other 3G mobile end
points, and wire lined H.323 or SIP terminals, video streaming, cell phone TV,
video-on-demand (news, sports, etc.) and multimedia, multi-participant gaming.
RADVISION has taken a pioneering role in providing 3G-324 developer
toolkits that enable equipment developers to develop products, ranging from 3G
handsets to gateways and media servers, that will deliver real time multimedia
services over 3G.
Products and Technology Under Development
We intend to capitalize upon our technological leadership in real-time
IP communications and visual communications network appliance and functionality
to develop new products and technology that meet the evolving needs of the IP,
3G, and visual communications market. Our future product and technology
offerings are expected to include platforms and tools needed for creating
value-added IP-centric enhanced services.
Customers
We sell our NBU products to OEMs, systems integrators and value added
resellers, or VARs. Our OEM customers purchase our products to integrate with
products that they developed in-house to build complete IP communications
solutions. Our systems integrator customers either purchase our full suite of
products or integrate our individual products with products of other
manufacturers to build complete IP communications solutions. Our VAR customers
purchase our products to resell to end-users as separate units, or as part of a
family of related product offerings, either under our RADVISION label or under
their private label.
We sell our TBU products in the form of software development kits
directly to developers of IP communications products, systems and applications
for developing their own IP communications solutions based on our core enabling
technology.
The following is a representative list of our customers who purchased
more than $250,000 of our products or technology during the year 2002:
19
Networking Products
-------------------
ADL Macnica
Alcatel Ltd. Orient
FastWeb Shanhai Zijiang
Broadreach Shanhai Jonya
Cisco Systems Target Sales
Control Tech Jiarrhua Chemical
First Virtual SKC
GBH Sony
H.S. Digital Tandberg
MVC Mobile Video VTEL
NTT - ME Corp VCON Ltd.
IPEX York Telecom
ReView Video Wire One
Critical
Technology Products
-------------------
Bynet MAG Industries
H.S. DigitalI Iwatsu Nortel
Intel NTT - ME Corp
Sales and Marketing
Sales organization. We market and sell our products through multiple
channels in North and South America, Europe, the Middle East and the Far East.
Our networking products are sold to end-users principally through indirect
channels by OEMs, system integrators and value added resellers. We market and
sell our technology products, primarily in the form of software development
kits, directly to developers of IP and 3G communications products and
applications. In several countries in the Far East we sell our software
development kits indirectly through local sales representatives.
We currently have sales offices in the United States in New Jersey,
California, Maryland and Texas. We also have sales offices in Tel Aviv, Israel,
and marketing offices in Hong Kong, China, the United Kingdom, Brazil, Japan and
India. The geographic breakdown of our total sales for the year ended December
31, 2002 was: 50.1% in North America, 29.1% in Europe and the Middle East and
20.8% in the Far East.
We have dedicated sales teams to support our large strategic accounts as
well as to identify potential strategic customers who would deploy our products
on large scales and generate significant revenues for us.
Marketing organization. Our marketing organization develops strategies
and implements programs to support the sale of our products and technology and
to sustain and enhance our market position as an industry leader. Our current
marketing efforts include various sales and channel support programs designed to
drive sales, and marketing communication programs
20
designed to increase industry visibility, including press/analyst tours, trade
shows and events, speaking engagements and ongoing interaction with analysts and
the media as well as targeted marketing programs. Additional programs include
technical seminars where customers and other industry participants are educated
in real-time IP communications technology and the benefits of our products and
technology. We also view our web site as an important marketing tool for lead
generation, customer relations and to support our market position as the
communications experts through quality content including providing information
related to issues relevant to the communications industry, as well as important
product and market trends.
To reinforce and further strengthen our market position as a technology
leader in the field of real-time IP, 3G and visual communications, we actively
participate in key industry consortia and standards bodies. We are also active
in defining and reviewing evolving IP communications standards that are being
developed by international standards bodies including:
o the ITU-T, which has published the H.323 and MEGACO standards;
o the Internet Engineering Task Force, or IETF, which has published the
SIP and MEGACO standards;
o CableLabs, an organization of cable operators, which is currently
working on defining the MGCP standard; and
o IMTC, a global organization to promote interoperable multimedia
communications solutions based on international standards.
We regularly participate in IMTC-sponsored InterOP events, a
vendor-neutral forum where IMTC members test the interoperability of their
products.
Customer Care and Support
Our ability to provide our customers with responsive and qualified
customer care and support services globally is essential to attract and retain
customers, build brand loyalty and maintain our leadership position in the
market. We believe our customer care and support organizational structure
enables us to provide superior technical support and customer service on a cost-
and time-efficient basis.
We provide global customer care and support for our products and
technology. Our customer care and technical support teams are located in Tel
Aviv, Israel, Glen Rock, New Jersey, Sunnyvale, California, Hong Kong and China
and recently went to a 24x7x365 support timeline to better serve our networking
customers who desire the expanded service. We assist our networking customers
with the initial installation, set-up and training. In addition, our technical
support team trains and certifies our networking customers to provide local
support in each of the geographical areas in which our products are sold.
In addition, customers who purchase our software development kits
generally request that we provide them with ongoing engineering and technical
support services to integrate our technology into their products, although these
services are not essential for the use of our software development kits. In 2003
we are developing and rolling out a professional services
21
model where we will make such services available to our customers. Our standard
software development kit contract provides for one year of support services,
renewable annually at the customer's option. Customers who have contracted for
support services receive all relevant software updates and enhancements as well
as access to our customer care and technical support teams.
Intellectual Property
We rely on copyright, trademark and trade secret laws, confidentiality
agreements and other contractual arrangements with our customers, third-party
distributors, employees and others to protect our intellectual property.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products and technology or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products and technology is difficult. In addition, the laws of some foreign
countries in which we currently or may in the future sell products do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around our intellectual property.
We rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. For example, we license T.120
data collaboration software from Data Connection Limited and voice compression
technology from Siemens. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
our products or will be required to reduce the functionality of our products
until equivalent technology can be identified, licensed or developed, and
integrated into our current products.
Research and Development
We place considerable emphasis on research and development to expand the
capabilities of our existing products and technology, to develop new products
and to improve our existing technologies and capabilities. We believe that our
future success will depend upon our ability to maintain our technological
leadership, to enhance our existing products and technology and to introduce on
a timely basis new commercially viable products and technology addressing the
needs of our customers. Our gross investment in research and development for the
years ended December 31, 2000, 2001 and 2002 was $14.3 million, $17.9 million
and $15.3 million, respectively. We intend to continue to devote a significant
portion of our personnel and financial resources to research and development. As
part of our product development process, we seek to maintain close relationships
with our customers to identify market needs and to define appropriate product
specifications.
As of December 31, 2002, our research and development staff consisted of
approximately 117 employees. Our research and development activities are
conducted at our facilities in Tel Aviv, Israel. To introduce new, high quality
products, we deploy procedures for the design, development and quality assurance
of our new product developments. Our team is divided
22
according to our existing product lines. Each product line team is headed by a
team leader and includes software or hardware engineers and quality control
technicians.
Competition
We compete in a new, rapidly evolving and highly competitive and
fragmented market. We expect competition to intensify in the future. We believe
that the main competitive factors in our market are time to market, product
quality, features, cost, technological performance, scalability, compliance with
industry standards and customer relationships.
The principal competitors in the market for our products and software
development kits currently include:
Networking Products Software development kits
- ----------------------------------------- -----------------------------------
o Ezenia!, formerly known as o DynamicSoft Inc.
Video-Server
o Trillium Digital Systems,
o CUseeMe Networks Inc. (formerly known acquired by Continuous
as White Pine Software Inc., merged Computing.
with First Virtual Communications)
o Hughes Software Systems
o Polycom Networks, a division of
Polycom Inc., formerly known o DCL
as Accord Networks
o In-house developers employed by
o Tandberg manufacturers of
telecommunications equipment and
systems
Additional competitors may enter any of our markets at any time.
Both Vovida Networks (now part of Cisco Systems, Inc.) and OpenH323
offer H.323 source code for free. In addition, Vovida offers MGCP and SIP source
code for free. If our customers choose to use the free source code offered by
these organizations instead of purchasing our technology, our revenues from the
sale of our software development kits will decline.
Manufacturing
Our manufacturing operations consist of materials planning and
procurement, out-sourcing of sub-assemblies, final assembly, product assurance
testing, quality control and packaging and shipping. We assemble our products in
a subcontractor's facilities in Israel and test our products at our facilities
in Tel Aviv, Israel. We test our products both during and after the assembly
process using internally developed product assurance testing procedures. We have
a flexible assembly process that enables us to configure our products at the
final assembly stage
23
for customers who require that our products be modified to bear their private
label. This flexibility is designed to reduce our assembly cycle time and reduce
our need to maintain a large inventory of finished goods. We use an enterprise
resource planning, or ERP, system that we purchased from BAAN Systems that we
modified to our specific needs. This system allows us to use just in time
procurement and manufacturing procedures. We believe that the efficiency of our
assembly process to date is largely due to our product architecture and our
commitment to assembly process design. We manufacture our software development
kits on CD-ROMs and package and ship them accompanied by relevant documentation.
As part of our commitment to quality, we have been certified as an ISO
9002 supplier. The ISO 9002 standard defines the procedures required for the
manufacture of products with predictable and stable performance and quality. We
are continuously trying to improve our quality based on the guidelines dictated
by the ISO 9002 standard.
Employees
As of December 31, 2002, we had 245 employees worldwide, of whom 116
were employed in research and development, 94 in sales and marketing, 23 in
management and administration and 12 in operations. We have standard employment
agreements with all of our employees located in Israel. Of our employees, 172
are based in Israel, 50 are based in the United States, 21 are based in Hong
Kong and China and two are based in the United Kingdom.
Our relationships with our employees in Israel are governed by Israeli
labor legislation and regulations, extension orders of the Israeli Ministry of
Labor and Welfare and personal employment agreements. Israeli labor laws and
regulations are applicable to all of our employees in Israel. The laws concern
various matters, including severance pay rights at termination, notice period
for termination, retirement or death, length of workday and workweek, minimum
wage, overtime payments and insurance for work-related accidents. We currently
fund our ongoing legal severance pay obligations by paying monthly premiums for
our employees' insurance policies.
In addition, Israeli law requires Israeli employees and employers to pay
specified sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Since January 1, 1995, such
amounts also include payments for national health insurance. The payments to the
National Insurance Institute that include health insurance fees are
approximately 14.5% of wages, of which the employee contributes approximately
66.0% and the employer contributes approximately 34.0%. The majority of our
permanent employees are covered by life and pension insurance policies providing
customary benefits to employees, including retirement and severance benefits. We
contribute 13.3% to 15.8%, depending on the employee, of base wages to such
plans and the employee contributes 5.0%. RADVISION and its employees are not
parties to any collective bargaining agreements. However, certain provisions of
the collective bargaining agreements between the Histadrut, the General
Federation of Labor in Israel, and the Coordination Bureau of Economic
Organizations, including the Manufacturers' Association of Israel, are
applicable to our employees by "extension orders" of the Israeli Ministry of
Labor and Welfare. These provisions principally concern periodic cost of living
adjustments, procedures for dismissing employees, travel allowances,
recuperation pay and other conditions of employment.
24
At the start of their employment, our employees in North America
generally sign offer letters specifying basic terms and conditions of employment
as well as non-disclosure agreements. At the start of their employment, our
employees in Israel generally sign written employment agreements that include
confidentiality and non-compete provisions.
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and
uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our ordinary shares. If any of the following risks
actually occurs, our business, prospects, financial condition and results of
operations could be harmed. In that case, the value of our ordinary shares could
decline, and you could lose all or part of your investment.
Risks Relating to Our Business
We have a history of losses and we cannot assure you that we will operate
profitably in the future.
Although we operated profitably in 2002 we cannot assure you that we
will continue to operate profitably in the future. We incurred significant
losses in every fiscal year from our inception until 1999, and we incurred
operating losses in 2000 and 2001. As of December 31, 2002, our accumulated
deficit was $7.9 million.
Our quarterly financial performance is likely to vary significantly in the
future. Our revenues and operating results in any quarter may not be indicative
of our future performance and it may be difficult for investors to evaluate our
prospects.
Our quarterly revenues and operating results have varied significantly
in the past and are likely to continue to vary significantly in the future.
Fluctuations in our quarterly financial performance may result from the fact
that we may receive a small number of relatively large orders in any given
quarter. Because these orders generate disproportionately large revenues, our
revenues and the rate of growth of our revenues for that quarter may reach
levels that may not be sustained in subsequent quarters. In addition, some of
our products have lengthy sales cycles. For example, it typically takes from
three to twelve months after we first begin discussions with a prospective
customer before we receive an order from that customer. We also have a limited
order backlog, which makes revenues in any quarter substantially dependent upon
orders we deliver in that quarter. Because of these factors, our revenues and
operating results in any quarter may not meet market expectations or be
indicative of future performance and it may be difficult for investors to
evaluate our prospects.
Unless our revenues grow in excess of our increasing expenses, we will not be
profitable.
We expect that our operating expenses will increase significantly in the
future, both to finance the planned expansion of our sales and marketing and
research and development activities and to fund the anticipated growth in our
revenues. However, our revenues may not grow apace or even continue at their
current level. If our revenues do not increase as anticipated or if expenses
increase at a greater pace than our revenues, we will not be profitable. Even if
we
25
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis.
If the use of packet-based networks as a medium for real-time voice, video and
data communications does not continue to grow, the demand for our products and
technology will slow and our revenues will decline.
Our future success depends on the growth in the use of packet-based
networks, including the Internet and other IP networks, as a medium for
real-time voice, video and data communications. If the use of packet-based
networks does not expand, the demand for our products and technology will slow
and our revenues will decline. Market acceptance of packet-based networks as a
viable alternative to circuit-switched networks for the transmission of
real-time voice and video communications is not proven and may be inhibited by
concerns about quality of service and potentially inadequate development of the
necessary infrastructure.
We must develop new products and technology and enhancements to existing
products and technology to remain competitive. If we fail to do so, we may lose
market share to our competitors and our revenues may decline.
The market for our products and technology is characterized by rapid
technological change, new and improved product introductions, changes in
customer requirements and evolving industry standards. Our future success will
depend to a substantial extent on our ability to:
timely identify new market trends; and
develop, introduce and support new and enhanced products and technology
on a successful and timely basis.
If we fail to develop and deploy new products and technology or product
and technology enhancements on a successful and timely basis, we may lose market
share to our competitors and our revenues may decline.
We are currently developing new products and technology and enhancements
to our existing products and technology. We may not be successful in developing
or introducing these or any other new products or technology to the market.
We have invested, and will continue to invest, in products and technology which
comply with those industry standards which we believe have been, or will be,
broadly adopted. If one or more alternative standards were to gain greater
acceptance than the standards which we believe have or will be broadly adopted,
sales of our products and technology might suffer.
Currently, we offer networking products that comply with the H.323
industry standard for real-time voice, video and data communications over packet
networks. During 2000, we expanded our enabling technology product family to
include additional key IP protocols. Our current suite of IP communication
protocol toolkits include H.323, SIP, MGCP, MEGACO and H.324M. We believe that
IP networks will be designed with components built around each of
26
these protocols. If these expectations ultimately prove to be incorrect, our
investments may be of little or no value.
We rely on a small number of marketing partners who distribute our products
either under our name or as private label products for a significant portion of
our business.
We rely in great measure on OEMs, systems integrators and value added
resellers, or VARs, to sell our products. Our OEM customers purchase our
products to integrate with products that they developed in-house to build
complete IP communications solutions. Our systems integrator customers either
purchase our full suite of products or integrate our individual products of
other manufacturers to build complete IP communications solutions. Our VAR
customers purchase our products to resell to end-users as separate units, or as
part of a family of related product offerings, either under our RADVISION label
or under their private label. If we are unable to maintain these marketing
partners or obtain new marketing partners, our future revenues and profitability
will be affected and we may lose market share.
Competition in the markets for our products and technology is intense. We may
not be able to compete effectively in these markets and we may lose market share
to our competitors.
The markets for our products and technology are highly competitive and
we expect competition to intensify in the future. We may not be able to compete
effectively in these markets and we may lose market share to our competitors.
The principal competitors in the market for our products currently include
Polycom Inc., which acquired Accord Networks Inc., First Virtual Communications,
which merged with CUseeMe Networks Inc. (formerly known as White Pine Software
Inc.), Ezenia (formerly known as Video-Server), and the in-house developers
employed by manufacturers of telecommunications equipment and systems. Our
principal competitors in the market for our technology which is primarily sold
in the form of software development kits, currently include DynamicSoft,
Trillium Digital Systems (acquired by Intel in late 2000 and by Continuous
Computing in late 2002) and Hughes Software Systems. Additional competitors may
enter each of our markets at any time. Moreover, our customers may seek to
develop internally the products that we currently sell to them and compete with
us.
Our software development kit revenues will decrease if our customers choose to
use source code which is available for free.
Both Vovida Networks, Inc. (part of Cisco Systems Inc.) and OpenH323
offer H.323 source code for free. In addition, Vovida offers MGCP and SIP source
code for free. If our customers choose to use the free source code offered by
these organizations instead of purchasing our technology, our revenues from the
sale of our software development kits will decline. Other companies, including
Microsoft, may offer similar development kits as part of their product
offerings.
27
Most of our competitors have greater resources than we do. This may limit our
ability to compete effectively with them and discourage customers from
purchasing our products and technology.
Most of our competitors have greater financial, personnel and other
resources than we do, which may limit our ability to compete effectively with
them. These competitors may be able to respond more quickly to new or emerging
technologies or changes in customer requirements. These competitors may also:
o benefit from greater economies of scale;
o offer more aggressive pricing; or
o devote greater resources to the promotion of their products.
Any of these advantages may discourage customers from purchasing our
products and technology. If we are unable to compete successfully against our
existing or potential competitors, our revenues and margins will decline.
Our agreements with our customers generally do not have minimum purchase
requirements. If our customers decrease or cease purchasing our products and
technology, our revenues will decline.
Our agreements with our customers generally do not have minimum purchase
requirements nor do they require our customers to purchase any products from us.
If any or all of our customers cease to purchase or reduce their purchases of
our products and technology at any time, our revenues will decline. We cannot
assure you that our customers will not choose to independently develop for
themselves, or purchase from others, products and technology similar to our
products and technology. Moreover, if our customers do not successfully market
and sell the systems and products into which they incorporate our products and
technology, the demand of these customers for our products and technology will
decline. Our customers' sales of systems and products containing our products
and technology may be adversely affected by circumstances over which we have no
control and over which our customers may have little, if any, control.
We are dependent upon a limited number of suppliers of key components. If these
suppliers delay or discontinue manufacture of these components, we may
experience delays in shipments, increased costs and cancellation of orders for
our products.
We currently obtain key components used in the manufacture of our
products from a single supplier or from a limited number of suppliers. We do not
have long-term supply contracts with our suppliers. Any delays in delivery of or
shortages in these components could interrupt and delay manufacturing of our
products and result in the cancellation of orders for our products. In addition,
these suppliers could discontinue the manufacture or supply of these components
at any time. We may not be able to identify and integrate alternative sources of
supply in a timely fashion or at all. Any transition to alternate suppliers may
result in delays in shipment and increased expenses and may limit our ability to
deliver products to our customers.
Furthermore,
28
if we are unable to identify an alternative source of supply, we would have to
modify our products to use a substitute component, which may cause delays in
shipments, increased design and manufacturing costs and increased prices for our
products.
We intend to manufacture and maintain an inventory of customized products for
some customers who will have no obligation to purchase these products. If these
customers fail to purchase these products, our financial results may be harmed.
To satisfy the timing requirements of some of our larger customers, we
intend to manufacture and maintain an inventory of some of our products that we
will customize to the specifications of these customers. The size of this
inventory will be based upon the purchasing history and forecasts of these
customers, which we currently estimate to be approximately two months of sales
to these customers. These customers will have no obligation to purchase the
inventoried products at any time. If the customers for whom the inventoried
products are manufactured do not purchase them, we may be required to modify the
products for sale to others and we may be unable to find other purchasers. In
either case, the value of the products may be materially diminished which may
have a negative impact on our financial results.
Undetected errors may increase our costs and impair the market acceptance of our
products and technology.
Our products and technology have occasionally contained, and may in the
future contain, undetected errors when first introduced or when new versions are
released. Our customers integrate our products and technology into systems and
products that they develop themselves or acquire from other vendors. As a
result, when problems occur in equipment or a system into which our products or
technology have been incorporated, it may be difficult to identify the cause of
the problem. Regardless of the source of these errors, we must divert the
attention of our engineering personnel from our research and development efforts
to address the errors. We cannot assure you that we will not incur warranty or
repair costs, be subject to liability claims for damages related to product
errors or experience delays as a result of these errors in the future. Any
insurance policies that we may have, may not provide sufficient protection or
coverage should a claim be asserted. Moreover, the occurrence of errors, whether
caused by our products or technology or the products of another vendor, may
result in significant customer relations problems and injury to our reputation
and may impair the market acceptance of our products and technology.
We rely on third party technology licenses. If we are unable to continue to
license this technology on reasonable terms, we may face delays in releases of
our products and may be required to reduce the functionality of our products
derived from this technology.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
products to perform key functions. For example, we license T.120 data
collaboration software from Data Connection Limited and voice compression
technology from Siemens. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
our products or will be required to reduce the functionality of our products
until equivalent technology can be identified, licensed or developed, and
integrated into our current products.
29
Third parties may infringe upon or misappropriate our intellectual property,
which could impair our ability to compete effectively and negatively affect our
profitability.
Our success depends upon the protection of our technology, trade secrets
and trademarks. Our profitability could suffer if third parties infringe upon
our intellectual property rights or misappropriate our technology and other
assets or the intellectual property rights licensed from third parties. To
protect our rights to our intellectual property, we rely on a combination of
trade secret protection, trademark law, confidentiality agreements and other
contractual arrangements. We rely on third parties to protect their intellectual
property which is licensed to us, but we do not generally investigate to what
extent such intellectual property is protected. The protective steps we have
taken may be inadequate to deter infringement or misappropriation. We may be
unable to detect the unauthorized use of our intellectual property or take
appropriate steps to enforce our intellectual property rights. Policing
unauthorized use of our products and technology is difficult. In addition, the
laws of some foreign countries in which we currently or may in the future sell
our products do not protect our proprietary rights to as great an extent as do
the laws of the United States. Failure to adequately protect or to promptly
detect unauthorized use of our intellectual property could devalue our
proprietary content and impair our ability to compete effectively. Further,
defending our intellectual property rights could result in the expenditure of
significant financial and managerial resources, whether or not the defense is
successful.
Our products may infringe on the intellectual property rights of others, which
could increase our costs and negatively affect our profitability.
Third parties may assert against us infringement claims or claims that
we have infringed a patent, copyright, trademark or other proprietary right
belonging to them. For example, in 1998, Lucent alleged that some products
manufactured by us infringed specified Lucent patents. See "Item 3. Legal
Proceedings." Any infringement claim, even if not meritorious, could result in
the expenditure of significant financial and managerial resources and could
negatively affect our profitability.
We are dependent on our senior management. Any loss of the services of our
senior management could negatively affect our business.
Our future success depends to a large extent on the continued services
of our senior management and key personnel. We do not carry key-man life
insurance for any of our senior management. Any loss of the services of members
of our senior management or other key personnel could negatively affect our
business.
Our failure to retain and attract personnel could harm our business, operations
and product development efforts.
Our products require sophisticated research and development, marketing
and sales, and technical customer support. Our success depends on our ability to
attract, train and retain qualified research and development, marketing and
sales and technical customer support personnel. We intend to increase
substantially the number of our employees who perform these functions.
Competition for personnel in all of these areas is intense and we may not be
able to
30
hire sufficient personnel to achieve our goals or support the anticipated growth
in our business. The market for the highly-trained personnel we require is very
competitive, due to the limited number of people available with the necessary
technical skills and understanding of our products and technology. If we fail to
attract and retain qualified personnel, our business, operations and product
development efforts would suffer.
Our non-competition agreements with our employees may not be enforceable. If any
of these employees leaves us and joins a competitor, our competitor could
benefit from the expertise our former employee gained while working for us.
We currently have non-competition agreements with our key employees in
Israel. These agreements prohibit those employees, if they cease to work for us,
from directly competing with us or working for our competitors. Under current
U.S. and Israeli law, we may not be able to enforce these non-competition
agreements. If we are unable to enforce any of these agreements, our competitors
that employ our former employees could benefit from the expertise our former
employees gained while working for us. In addition, we do not have
non-competition agreements with our employees outside of Israel.
Government regulation could delay or prevent product offerings, resulting in
decreased revenues.
Our products are designed to operate with local telephone systems
throughout the world and therefore must comply with the regulations of the
Federal Communications Commission and other regulations affecting the
transmission of voice, video and data over telecommunications and other media.
Each time we introduce a new product, we are required to obtain regulatory
approval in the countries in which it is offered. In addition, we must
periodically obtain renewals of the regulatory approvals for the use of our
products in countries where we have already obtained approval. We cannot assure
you that regulatory approval for our current products will be renewed or that
regulatory approval for future products will be obtained. If we do not obtain
the necessary approvals and renewals, we may be required to delay the sales of
our products in those countries until approval for use is granted or renewed.
This could result in decreased revenues.
Risks Relating to Our Location in Israel
Conditions in Israel affect our operations and may limit our ability to produce
and sell our products, which could decrease our revenues.
We are incorporated under the laws of Israel, and most of our offices and
our production facilities are located in the State of Israel. As a result, the
political, economic and military conditions in Israel directly influence us. Any
major hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could have a material adverse
effect on our business, financial condition and results of operations. Since the
establishment of the State of Israel in 1948, a state of hostility has existed,
varying in degree and intensity, between Israel and the Arab countries. While
Israel has entered into peace agreements with both Egypt and Jordan and several
other countries have announced their intentions to establish trade and other
relations with Israel, Israel has not entered into any additional peace
31
agreements with such countries or with Syria or Lebanon. Since September 2000,
there has been a significant deterioration in the relationship between Israel
and the Palestinian Authority, and as a result of riots in Gaza and the West
Bank and a spate of terrorist attacks inside Israel, the peace process between
the parties has stagnated. Efforts to resolve the problem have failed to result
in an agreeable solution. Since the beginning of 2002, there has been a marked
acceleration in the number and frequency of hostile incidents, which culminated
in numerous lethal suicide attacks in Israeli. In response, the Israeli Army
made incursions into Palestinian-controlled cities and towns and refugee camps.
Since then, acts of terrorism have continued to occur in various locations in
Israel. The continued hostilities between the Palestinian community and Israel
and the failure to settle the conflict has had and continues to have a material
adverse effect on the Israeli economy and a material adverse effect on our
business and us. Further expansion of hostilities might require more widespread
military reserve service by some of our employees, which may have a material
adverse effect on our business. Moreover, any war in Iraq might result in direct
damage to Israel and may have a harmful effect on the Israeli economy, our
business and us.
Economic conditions in Israel have deteriorated.
As a result of political instability, the increased level of hostilities
with the Palestinian Authority and the world-wide economic crisis in the hi-tech
and communication industries, during 2001 and 2002, the Israel rate of economic
growth has deteriorated, the Israeli currency has been devaluated and the rate
of inflation has increased. The Israeli Government has proposed certain
budgetary cuts and other changes, including increasing the value added tax rate
by 1% to 18%, which were recently adopted by the Israeli Parliament. However,
the impact on the Israeli economy of these and other measures that may
eventually be adopted is uncertain. In addition, certain credit agencies have
stated that they are reviewing Israel's credit rating. Should such agencies
lower Israel's credit rating, the ability of the Israeli government to generate
foreign financial and economic assistance may be adversely affected. We cannot
assure you that the Israeli government will be successful in its attempts to
stabilize the Israeli economy or to maintain Israel's current credit rating.
Economic decline as well as price and exchange rate instability may have a
material adverse effect on us.
Some of our directors, officers and employees are obligated to perform annual
military reserve duty in Israel. We cannot assess the potential impact of
these obligations on our business.
Our directors, officers and employees who are male adult citizens and
permanent residents of Israel under the age of 48 are, unless exempt, are
obligated to perform annual military reserve duty and are subject to being
called to active duty at any time under emergency circumstances. We cannot
assess the full impact of these requirements on our workforce or business if
conditions should change, and we cannot predict the effect on our business in
the event of an expansion or reduction of these obligations.
32
Because most of our revenues are generated in U.S. dollars or are linked to
the U.S. dollar while a portion of our expenses are incurred in new Israeli
shekels, our results of operations would be adversely affected if
inflation in Israel is not offset on a timely basis by a devaluation of the new
Israeli shekel against the U.S. dollar.
Most of our revenues are in dollars or are linked to the dollar, while a
portion of our expenses, principally salaries and the related personnel
expenses, are in new Israeli shekels, or 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 lags
behind inflation in Israel. This would have the effect of increasing the dollar
cost of our operations. In 1997 and 1998, the rate of devaluation of the NIS
against the dollar exceeded the rate of inflation, a reversal from prior years.
However, in 1999 and 2000 while the rate of inflation was low, there was a
devaluation of the dollar against the NIS. In the years 2001 and 2002 the rate
of devaluation of the NIS against the dollar exceeded the rate of inflation. We
cannot predict any future trends in the rate of inflation in Israel or the rate
of devaluation of the NIS against the dollar. If the dollar cost of our
operations in Israel increases, our dollar-measured results of operations will
be adversely affected.
The tax benefits that we currently receive from our approved enterprise programs
require us to satisfy specified conditions. If we fail to satisfy these
conditions, we may be required to pay additional taxes and would likely be
denied these benefits in the future.
The Investment Center of the Israeli Ministry of Industry and Trade has
granted approved enterprise status to several investment programs at our
manufacturing facility. The portion of our income derived from these approved
enterprise programs commencing when we begin to generate net income from these
programs will be exempt from tax for a period of two years and will be subject
to a reduced tax rate for an additional five to eight years, depending on the
percentage of our share capital held by non-Israelis. The benefits available to
an approved enterprise program are dependent upon the fulfillment of conditions
stipulated in applicable law and in the certificate of approval. If we fail to
comply with these conditions, in whole or in part, we may be required to pay
additional taxes during the period in which we would have benefited from the tax
exemption or reduced tax rates and would likely be denied these benefits in the
future.
It may be difficult to enforce a U.S. judgment against us and most of our
officers and directors or to assert U.S. securities laws claims in Israel or
serve process on most of our officers and directors.
We are incorporated in Israel. Many of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Therefore, it may be difficult for an investor, or any other person or
entity, to enforce a U.S. court judgment based upon the civil liability
provisions of the U.S. federal securities laws in an Israeli court against us or
any of those persons or to effect service of process upon these persons in the
United States. Additionally, it may be difficult for an investor, or any other
person or entity, to enforce civil liabilities under U.S. federal securities
laws in original actions instituted in Israel.
33
Risks Relating to Our Ordinary Shares
Holders of our ordinary shares who are United States residents face income tax
risks.
There is a substantial risk that we will be classified as a passive
foreign investment company, or PFIC. Our treatment as a PFIC could result in a
reduction in the after-tax return to the holders of our ordinary shares and
would likely cause a reduction in the value of such shares. For U.S. Federal
income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) at
least 50% of the average value of all of our assets for the taxable year produce
or are held for the production of passive income. For this purpose, passive
income includes dividends, interest, royalties, rents, annuities and the excess
of gains over losses from the disposition of assets which produce passive
income. If we were determined to be a PFIC for U.S. federal income tax purposes,
highly complex rules would apply to U.S. Holders owning ordinary shares.
Accordingly, you are urged to consult your tax advisors regarding the
application of such rules.
As a result of our substantial cash position and the decline in the
value of our stock, there is a substantial risk that we will be classified as a
PFIC under the asset test described in the preceding paragraph. However, based
on an independent third party opinion, we believe that we were not deemed to be
classified as a PFIC in 2002. We have, however, no assurance that the U.S.
Internal Revenue Services will accept this determination and there can be no
assurance that we will not be classified as a PFIC in the future.
United States residents should carefully read "Item 10E. Additional
Information - Taxation, United States Federal Income Tax Consequences" for a
more complete discussion of the U.S. federal income tax risks related to owning
and disposing of our ordinary shares.
Our share price has been volatile in the past and may decline in the future.
Our ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
o announcements of technological innovations or new products by us
or our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o changes in the status of our intellectual property rights;
34
o announcements by third parties of significant claims or
proceedings against us;
o additions or departures of key personnel;
o future sales of our ordinary shares; and
o stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general
political and economic conditions, such as a recession or interest rate
or currency rate fluctuations or political events or hostilities in or
surrounding Israel, could adversely affect the market price of our
ordinary shares.
In the past, securities class action litigation has been brought against
a company following periods of volatility in the market price of its securities.
We could potentially in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
Anti-takeover provisions could negatively impact our shareholders.
The new Israeli 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 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Israeli 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% shareholder of the company. There
is an exception to this provision, if someone else is already a majority
shareholder of the company. Regulations under the Companies Law provide that the
Companies Law's tender offer rules do not apply to a company whose shares are
publicly traded outside of Israel, if pursuant to the applicable foreign
securities laws and stock exchange rules there is a restriction on the
acquisition of any level of control of the company, or if the acquisition of any
level of control of the company requires the purchaser to make a tender offer to
the public shareholders.
Finally, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his company shares for shares in a foreign
corporation to immediate taxation.
Item 2. Properties
Our headquarters and principal administrative, finance, sales and
marketing and promotion operations are located in approximately 60,079 square
feet of leased office space in Tel Aviv, Israel at an approximate rental cost of
$ 1,178,000 in 2002. The lease for our principal offices expires in June 2005.
In the United States, we lease approximately 10,380 square feet of office space
in Glen Rock, New Jersey expiring in July 2004 and approximately 3,156 square
feet in Sunnyvale, California expiring in April 2004. We also lease
approximately 2,651 square feet in Hong Kong expiring in May 2004, approximately
872 square feet in China expiring in
35
April 2003 and approximately 500 square feet in the United Kingdom expiring in
February 2004. The aggregate annual rent for our sales and service offices in
the United States, Hong Kong, China and the United Kingdom was approximately
$378,000 in 2002.
Item 3. Legal Proceedings
In January 2001, we entered into an agreement with Zohar Zisapel
Properties Inc. and Yehuda Zisapel Properties Inc. (entities that are wholly
owned by Zohar Zisapel, our Chairman of the Board and a principal shareholder,
and Yehuda Zisapel, a principal shareholder and our former Chairman,
respectively) to lease approximately 24,000 feet square of office space in
Paramus, New Jersey for a period of 5 years, which space we subsequently
surrendered. The parties disagree as to the extent of damages caused by this
action, if any. We cannot predict the final outcome of this dispute. Other than
the above, we are not involved in any legal proceedings that are material to our
business or financial condition.
In 1998, Lucent sent correspondence to our affiliate, RAD Data
Communications Ltd., alleging that some products manufactured by RAD and some of
its affiliates, including us, infringe upon specified Lucent patents and
offering to license these patents to RAD and its affiliates. In subsequent
correspondence, RAD requested that Lucent specifically substantiate each
allegation of infringement before RAD or any of its affiliates considers
entering into any licensing arrangements. RAD has recently received further
correspondence from Lucent in which Lucent has reiterated its claims. RAD does
not believe Lucent has substantiated its claims and has communicated this belief
to Lucent. RAD advises us that the alleged infringement claims are unresolved.
The elements of our products that Lucent has alleged infringe upon its
patents are contained within components which we obtain from a third party
manufacturer. We believe that the third party manufacturer has a license to use
these patents and that we may be entitled to the benefits of this license.
In addition, based on Lucent's fee and royalty schedule for licensing
the relevant patents, we believe that any licensing fee and royalty payments
that we may be required to pay for the right to use Lucent's patents would not
have a material impact on our earnings. As a result, we do not believe that
Lucent's allegations will have a material adverse effect upon us, our business,
financial condition or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 2002.
36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our ordinary shares are traded on the Nasdaq National Market under the
symbol RVSN since our initial public offering on March 14, 2000. Since October
20, 2002, our ordinary shares have also traded on the Tel Aviv Stock Exchange.
The following table sets forth, for the periods indicated, the high and
low sale prices of our ordinary shares as reported by the Nasdaq National Market
and the Tel Aviv Stock Exchange:
Nasdaq National Market Tel Aviv Stock Exchange
---------------------- -----------------------
High Low High Low
---- --- ---- ---
2001
- ----
First Quarter........ $16.25 $6.16 $ -- $ --
Second Quarter....... 8.34 5.02 -- --
Third Quarter........ 5.84 4.70 -- --
Fourth Quarter....... 8.85 4.85 -- --
2002
- ----
First Quarter........ $7.9 $5.39 $ -- $ --
Second Quarter....... 6.8 4.4 -- --
Third Quarter........ 5.45 4.05 -- --
Fourth Quarter....... 6.71 4.48 5.95 4.70
As of March 24, 2003 we had approximately 3,029 beneficial shareholders
including 46 holders of record.
We have never paid dividends on our ordinary shares since our inception
and we do not anticipate paying any dividends in the foreseeable future. If we
were able to distribute cash dividends out of income that had been exempt from
tax because of our investment program's Approved Enterprise status (for
description of such status please refer to the section entitled "Effective
Corporate Tax Rate" in "Item 7. Management's Division and Analysis of Financial
Conditions and Results of Operations") such income would become subject to
Israeli corporate tax.
If we were to declare dividends in the future, we would declare those
dividends in NIS but pay those dividends to our non-Israeli shareholders in U.S.
dollars. Because exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder would be subject to currency fluctuation
between the date when the dividends were declared and the date the dividends
were paid.
37
Exchange Controls
Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.
Non-residents of Israel who purchase our ordinary shares will be able to
convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
Dual Listing
In addition to trading on Nasdaq, on October 20, 2002, our ordinary
shares began trading on the Tel Aviv Stock Exchange. 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.
Taxation of Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. These sources of income include passive income,
such as dividends, royalties and interest, as well as non-passive income from
services provided in Israel. On distributions of dividends other than bonus
shares or stock dividends, income tax is withheld at the source. Unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence, the withholding rate is as follows:
Dividends not generated by an
approved enterprise
---------------------------------------------
U.S. company
Dividends generated by holding 10% or Other
an approved enterprise more of our shares non-resident
- ------------------------------- ------------------------ -----------------
15% 12.5% 25%
Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations may be subject to Israeli taxes on the sale of publicly traded
securities of an Israeli company, subject to the provisions of any applicable
double taxation treaty.
38
Securities Authorized for Granting under Equity Compensation Plans
The following table sets forth, for the compensation plans indicated,
the number of securities to be issued upon exercise of outstanding options,
warrants and rights, the weighted average exercise price of outstanding options,
warrants and rights and the number of securities remaining available for future
issuance under our equity compensation plans as of December 31, 2002:
- ------------------------------------------------------------------------------------------------
Weighted average Number of securities
Number of Securities exercise price of remaining available for
Compensation to be issued upon outstanding options, future issuance under
Plans* exercise of warrants and rights equity compensation
outstanding options plans**
- ------------------------------------------------------------------------------------------------
1996 Stock Option
Plan 1,511,684 $10.03 0
- ------------------------------------------------------------------------------------------------
2000 Stock Option
Plan 2,862,052 $5.42 455,280
- ------------------------------------------------------------------------------------------------
Consultants
Option Plan 37,200 $1.18 12,660
- ------------------------------------------------------------------------------------------------
Total 4,410,936 $6.99 467,940
=================-==============================================================================
* All our compensation plans were approved by our shareholders.
** Excluding securities reflected in the first column.
Changes in Securities and Use of Proceeds.
The following information required by Item 701(f) of Regulation S-K
relates to our initial public offering of ordinary shares of our company on
March 14, 2000. The following table sets forth, with respect to the ordinary
shares registered, the amount of securities registered, the aggregate offering
price of amount registered, the amount sold and the aggregate offering price of
the amount sold, for both the account of our company and the account of any
selling security holder.
For the account
For the account of the selling
of our company shareholder
--------------- ---------------
Number of ordinary shares registered .. 4,370,000 N/A
Aggregate offering price of shares
registered ......................... $87,400,000 N/A
Number of ordinary shares sold ........ 4,370,000 N/A
Aggregate offering price of shares sold $87,400,000 N/A
The following table sets forth the expenses incurred by us in connection
with our public offering during the period commencing the effective date of the
Registration Statement and ending December 31, 2002. None of such expenses were
paid directly or indirectly to directors,
39
officers, persons owning 10% or more of any class of equity securities of our
company or to our affiliates.
Direct or indirect payments to
persons other than affiliated
persons
------------------------------
$6,118,000
Underwriting discounts and commissions
Finders' fees 550,000
Expenses paid to or for underwriters 41,290
Other expenses 2,241,113
---------
Total expenses $8,950,403
=========
The net public offering proceeds to us, after deducting the total
expenses (set forth in the table above), were $78,449,597.
The following table sets forth the amount of net public offering
proceeds used by us for the purposes listed below. None of such payments were
paid directly or indirectly to directors, officers, persons owning 10% or more
of any class of our equity securities or to our affiliates.
Direct or indirect payments
to persons other than to
Purpose affiliated persons
- ----------------------------------------------- ---------------------------
Acquisition of other companies and
business(es) .............................. N/A
Construction of plant, building and facilities N/A
Purchase and installation of machinery
and equipment ............................ N/A
Purchase of real estate .................... N/A
Repayment of indebtedness .................. N/A
Working capital ............................ $58,448,000
Temporary investments ...................... N/A
Other purposes ............................. N/A
Item 6. Selected Financial Data
The following selected consolidated financial data for and as of the
five years ended December 31, 2002, are derived from our audited consolidated
financial statements which have been prepared in accordance with U.S. GAAP. Our
consolidated financial statements for the four years ended December 31, 2001
were audited by Luboshitz Kasierer, a member firm of Arthur Andersen, and our
consolidated financial statements for the year ended December 31, 2002 were
audited by Kost Forer & Gabbay, a member of Ernst & Young Global, independent
auditors whose report with respect to the year ended December 31, 2002 appears
in this Annual Report. A copy of the report issued by Luboshitz Kasierer for the
two years ended December 31, 2001 also appears in this Annual Report.
40
Year ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues......................... $ 8,894 $ 17,550 $ 45,911 $ 46,227 $ 49,095
Cost of revenues................. 1,412 2,853 11,446 10,362 10,946
----- ----- ------ ------ ------
Gross profit..................... 7,482 14,697 34,465 35,865 38,149
----- ------ ------ ------ ------
Operating expenses:
Research and development......... 4,379 7,667 14,263 17,933 15,338
Less participation by the Chief
Scientist...................... 1,140 1,097 353 - -
----- ----- --- --- ---
Research and development, net.... 3,239 6,570 13,910 17,933 15,338
Marketing and selling, net....... 4,425 9,502 17,358 16,735 18,624
General and administrative....... 670 1,426 3,458 4,438 4,098
Restructuring costs.............. - - - 3,023 -
Royalties to Chief Scientist..... - - 3,666 - -
--- --- ----- --- ---
Total operating expenses......... 8,334 17,498 38,392 42,129 38,060
----- ------ ------ ------ ------
Operating income (loss).......... (852) (2,801) (3,927) (6,264) 89
Financial income, net............ 23 105 4,176 4,652 2667
-- --- ----- ----- ----
Net income (loss)................ $ (829) $ (2,696) $ 249 $ (1,612) $ 2,756
======== ======== ======== ======== ========
Basic net earnings (loss) per
ordinary share................... $ (0.08) $ (0.26) $ 0.014 $ (0.09) $ 0.15
Weighted average number of
ordinary shares............... 10,492 10,538 17,174 18,943 18,353
Diluted net earnings (loss) per
ordinary share................ $ (0.08) $ (0.26) $ 0.013 $ (0.09) $ 0.15
Weighted average number of
ordinary shares............... 10,492 10,538 19,873 18,943 18,983
December 31,
------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents........ $ 3,305 $ 2,605 $ 41,617 $ 6,717 $ 13,825
Working capital.................. 4,318 814 73,660 53,377 38,158
Total assets..................... 9,371 13,261 116,351 99,767 106,671
Total bank debt, less current 130 67 19 - -
maturities.......................
Shareholders' equity............. 5,450 3,481 94,345 83,549 85,015
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Results
The following discussion of our operating results of operations should
be read together with our consolidated financial statements and the related
notes, which appear elsewhere in this annual report. The following discussion
contains forward-looking statements that reflect our current plans, estimates
and beliefs and involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements. Factors that
could
41
cause or contribute to such differences include those discussed below and
elsewhere in this annual report.
All of our revenues are generated in U.S. dollars or are linked to the
dollar and a majority of our expenses are incurred in U.S. dollars.
Consequently, we use the dollar as our functional currency. Transactions and
balances in other currencies are remeasured into dollars according to the
principles in Financial Accounting Standards Board Statement No. 52. Gains and
losses arising from remeasurment are reflected in the statements of operations
as financial income or expenses as appropriate.
Overview
We are a leading designer, developer and supplier of products and
technology that enable real-time voice, video and data communications over
packet networks, including the Internet and other IP networks.
We were incorporated in January 1992, commenced operations in October
1992 and commenced sales of our products in the fourth quarter of 1994. Before
that time, our operations consisted primarily of research and development and
recruiting personnel. In 1995, we established a wholly owned subsidiary in the
United States, RADVISION Inc., which conducts our sales and marketing activities
in North America. We currently have sales offices in the United States, Hong
Kong, China, Brazil, the United Kingdom and Israel.
Critical Accounting Policies
We have identified the following policies as critical to the
understanding of our financial statements. The preparation of our financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting periods. Areas where significant
judgments are made include, but are not limited to, inventory valuation and
revenue recognition. Actual results could differ materially from these
estimates. Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
Inventories. Inventories are stated at the lower of cost or market.
Cost is determined by the moving average method, inventories write-offs and
write-down provisions are provided to cover risks arising from slow-moving items
or technological obsolescence.
Revenue Recognition. Revenues from sales of products and technology are
recognized in accordance with Statement of Position (SOP) 97-2, as amended by
SOP 98-9, upon delivery, when collection is probable, the vendor's fee is fixed
or determinable and persuasive evidence of an arrangement exists. Provided that
all other elements of SOP 97-2 are met, revenues are recognized upon delivery,
whether the customer is a distributor or the final end user. Revenues for
maintenance and support services are deferred and recognized ratably over the
service period.
In accordance with SOP 97-2, revenues for multi-element arrangements,
that is, sales of products or technology in conjunction with post-contract
customer support services, are
42
segregated. Revenues allocated to the delivered elements are recognized upon
delivery, provided that the other elements of SOP 97-2 are satisfied. Revenues
allocated to the undelivered elements (post-contract customer support services)
are deferred and recognized ratably over the service period. The portion of the
fee for multi-element arrangements allocated to the undelivered elements
(post-contract customer support services) is based on vendor-specific objective
evidence determined, in the case of post-contract customer support services,
based on the annual renewal rate for such services actually charged to customers
for years subsequent to the first year following sale. The remaining portion of
the fee is allocated to the delivered elements based on the residual value
method.
Revenues from products sales are recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
No. 101") when the following criteria are met: persuasive evidence of an
arrangement exists, delivery of the product has occurred, the fee is fixed or
determinable and collectibility is probable. We have no obligation to customers
after the date on which products are delivered. Revenues from maintenance and
updates are recognized over the term of agreement.
Deferred revenues include unearned amounts received under maintenance
contracts, and amounts billed to customers but not yet recognized as revenues.
Revenues
We generate revenues from sales of our networking products that are
primarily sold in the form of stand-alone products, and our technology products
that are primarily sold in the form of software development kits, as well as
related maintenance and support services. We generally recognize revenues from
the sale of our products upon shipment and when collection is probable. Revenues
generated from maintenance and support services are deferred and recognized
ratably over the period of the term of service. We price our networking products
on a per unit basis, and grant discounts based upon unit volumes. We price our
software development kits on the basis of a fixed-fee plus royalties from
products developed using the software development kits. We sell our products and
technology through direct sales and various indirect distribution channels in
North America, Europe, the Middle East and Far East. For the year ended December
31, 2002, approximately 49.0% of our revenues were generated in the United
States.
43
Significant Costs and Expenses
Cost of Revenues Our cost of revenues consists of component and material
costs, direct labor costs, subcontractor fees, overhead related to manufacturing
and depreciation of manufacturing equipment. Our gross margin is affected by the
selling prices for our products as well as the proportion of our revenues
generated from the sale of our technology products as compared to our networking
products. Our revenues from the sale of our technology products have higher
gross margins than our revenues from the sale of our networking products and we
offer greater discounts to our high volume OEM customers. As the relative
proportion of our revenues from our networking products increases as a
percentage of our total revenues and we generate a higher percentage of our
revenues from sales to our high volume OEM customers, our gross margins will
decline.
Research and development expenses, net. Our research and development
expenses consist primarily of compensation and related costs for research and
development personnel, expenses for testing facilities and depreciation of
equipment.
Research and development costs, net are charged to operations as
incurred. Software development costs are considered for capitalization when
technological feasibility is established according to SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Costs incurred after achievement of technological feasibility in the process of
software production have not been material. Therefore, we have not capitalized
any of our research and development expenses and do not anticipate that our
development process will differ materially in the future.
Historically our research and development expenses were presented net of
payments received from the Office of the Chief Scientist of Israeli Ministry of
Industry and Trade, or the Chief Scientist. In 2000 we voluntarily repaid
$3,666,000 in future royalty payments to the Chief Scientist and discontinued
our relationship with the Chief Scientist in order to reduce certain
restrictions on our business and to avoid paying increased interest rates in the
future on royalty payments. We do not currently intend to apply for grants from
the Chief Scientist in the future. However, we expect to continue to make
substantial investments in research and development.
Marketing and selling expenses, net. Our marketing and selling expenses
consist primarily of compensation and related costs for sales personnel,
marketing personnel, sales commissions, marketing programs, public relations,
promotional materials, travel expenses, trade show exhibit expenses and
royalties paid to the Government of Israel. Marketing and selling expenses until
December 31, 1999 are presented net of marketing grants received from the
Government of Israel. We do not intend to apply for any grants from the
Government of Israel in the future.
General and administrative expenses. Our general and administrative
expenses consist primarily of salaries and related expenses for executive,
accounting and human resources personnel, professional fees, provisions for
doubtful accounts and other general corporate expenses.
44
Operating expenses also include amortization of stock-based
compensation, which is allocated among research and development expenses,
marketing and selling expenses and general and administrative expenses based on
the division in which the recipient of the option grant is employed.
Amortization of stock-based compensation results from the granting of options to
employees with exercise prices per share determined to be below the fair market
value per share of our ordinary shares on the dates of grant. The stock-based
compensation is being amortized to operating expenses over the vesting period of
the individual options.
Financial income, net. Our financial income consists primarily of
interest earned on bank deposits and other liquid investments, gains and losses
from the remeasurment of monetary balance sheet items denominated in non-dollar
currencies into dollars and interest expense incurred on outstanding debt.
Taxes. Israeli companies are generally subject to income tax at the
corporate tax rate of 36%. However, several of our investment programs at our
manufacturing facility in Tel Aviv have been granted approved enterprise status
and, therefore, we are eligible for tax benefits. These benefits should result
in income recognized by us being tax exempt or taxed at a lower rate for a
specified period after we begin to report taxable income and exhaust any net
operating loss carry-forwards. However, these benefits may not be applied to
reduce the tax rate for any income derived by our U.S. subsidiary.
Results of Operations
The following discussion of our results of operations for the years
ended December 31, 2000, 2001 and 2002, including the percentage data in the
following table, is based upon our statements of operations contained in our
financial statements for those periods, and the related notes, included in this
annual report:
2000 2001 2002
---- ---- ----
Revenues.................................. 100.0% 100.0% 100.0%
Cost of revenues.......................... 24.9 22.4 22.3
Gross profit.............................. 75.1 77.6 77.7
Operating expenses:
Research and development................ 31.1 38.8 31.2
Less participation by the Chief Scientist 0.8 - -
Research and development, net........... 30.3 38.8 31.2
Marketing and selling, net.............. 37.8 36.2 37.9
General and administrative.............. 7.5 9.6 8.4
One time charge/repayment of future 8.0 6.5 -
royalties.............................
Total operating expenses................. 83.6 91.1 77.5
Operating profit (loss)................... (8.5) (13.5) 0.2
Financial income, net..................... 9.1 10.1 5.4
--- ---- ---
Net income (loss)......................... 0.6% (3.4)% 5.6%
==== ======= =====
45
Year Ended December 31, 2002 as Compared with Year Ended December 31, 2001
Revenues. Revenues increased from $46.2 million for the year ended
December 31, 2001 to $49.1 million for the year ended December 31, 2002. This
increase was due to increased sales of networking products.
Revenues from networking products increased from $29.7million for the
year ended December 31, 2001 to $36.3 million for the year ended December 31,
2002. The increase in revenue from networking products is attributable to an
increase in demand for these units as customers moved from integrated services
digital networks, or ISDN, to IP-based networks, as well as from the sale of an
integrated videoconferencing solution to FastWeb, a Milan-based service provider
that provides bundled broadband voice, video and data services to consumers and
businesses throughout Italy. Revenues from technology products decreased from
$16.5 million for the year ended December 31, 2001 to $12.8 million for the year
ended December 31, 2002. This decrease in revenues from technology products was
primarily attributable to decreased market demand as budgets for these products
declined due to the worldwide economic downturn.
Revenue from sales to customers in the United States decreased from
$28.3 million, or 61.3% of revenue, for the year ended December 31, 2001, to
$24.1million, or 49.0% of revenue, for the year ended December 31, 2002, a
decrease of $4.2 million, or 14.8%. Revenue from sales to customers in Europe
increased from $8.1 million, or 17.5% of revenue, for the year ended December
31, 2001, to $12.1 million, or 24.5% of revenue, for the year ended December 31,
2002, an increase of $4.0 million, or 49.4%. This increase in sales to customers
in Europe was primarily attributable to increased market demand for our products
in this region and due to the FastWeb sale.
Revenue from sales to customers in the Far East increased from $6.9
million, or 15.0% of revenue, for the year ended December 31, 2001, to $10.2
million, or 20.8 % of revenue, for the year ended December 31, 2002, an increase
of $3.3 million, or 47.8%. This increase in sales to customers in this region
was primarily attributable to increased sales efforts for our networking
products.
Revenue from sales to customers in Israel increased from $1.9 million,
or 4.2% of revenue, for the year ended December 31, 2001, to $2.3 million, or
4.6% of revenue, for the year ended December 31, 2002, an increase of $0.4
million, or 21.1%. This increase in sales to customers in Israel was primarily
attributable to increased sales efforts for our networking products.
Cost of Revenues. Cost of revenues increased from $10.4 million for the
year ended December 31, 2001 to $10.9 million for the year ended December 31,
2002, an increase of $0.5 million, or 4.8%. Gross profit as a percentage of
revenues increased from 77.6% for the year ended December 31, 2001 to 77.7% for
the year ended December 31, 2002.
Research and Development, Net. Research and development expenses, net
decreased from $17.9 million for the year ended December 31, 2001 to $15.3
million for the year ended
46
December 31, 2002, a decrease of $2.6 million, or 14.5%. We have decreased our
research and development personnel consistent with the scope of our research and
development programs. Research and development expenses, net as a percentage of
revenues decreased from 38.8% for the year ended December 31, 2001 to 31.2% for
the year ended December 31, 2002.
Marketing and Selling, Net. Marketing and selling expenses, net
increased from $16.7 million for the year ended December 31, 2001 to $18.6
million for the year ended December 31, 2002, an increase of $1.9 million,
or11.4%. We increased our sales and marketing expenses in response to current
and expected continued improvement in the market for our networking products.
Marketing and selling expenses, net as a percentage of revenues increased from
36.2% for the year ended December 31, 2001 to 37.9% for the year ended December
31, 2002.
General and Administrative. General and administrative expenses
decreased from $4.4 million for the year ended December 31, 2001 to $4.1 million
for the year ended December 31, 2002, a decrease of $0.3 million or 6.8%. This
decrease was primarily attributable to a decrease in personnel expenses. General
and administrative expenses as a percentage of revenues decreased from 9.6% for
the year ended December 31, 2001 to 8.4% for the year ended December 31, 2002.
Operating Profit (Loss). Our operating results shifted from a loss of
$6.3 million for the year ended December 31, 2001 to a profit of $89,000 for the
year ended December 31, 2002.
Financial Income, net. Financial income decreased from $4.7 million for
the year ended December 31, 2001 to $2.7 million for the year ended December 31,
2002 principally as a result of lower interest rates.
Net Income(Loss). We reported net income of $2,756,000, for the year
ended December 31, 2002 as compared to a net loss of $1.6 million for the year
ended December 31, 2001.
Year Ended December 31, 2001 as Compared with Year Ended December 31, 2000
Revenues. Revenues increased from $45.9 million for the year ended
December 31, 2000 to $46.2 million for the year ended December 31, 2001. This
increase was due to a $3.1 million increase in sales of our networking products
offset by a decrease of $2.8 million from technology products.
Revenues from networking products increased from $26.6 million for the
year ended December 31, 2000 to $29.7million for the year ended December 31,
2001. The increase in revenue from networking products is attributable to an
increase in demand for these units as customers moved from integrated services
digital networks, or ISDN, to IP-based networks, as well as from OEM agreements
that generated additional product sales. Revenues from technology products
decreased from $19.3 million for the year ended December 31, 2000 to $16.5
million for the year ended December 31, 2001. This decrease in revenues from
technology products was primarily attributable to decreased market demand as
budgets for these products declined due to the worldwide economic downturn.
Revenue from sales to customers in the United States increased from
$27.9 million, or 60.9% of revenue, for the year ended December 31, 2000, to
$28.3 million, or 61.3% of revenue,
47
for the year ended December 31, 2001, an increase of $0.4 million, or 1.4%.
Revenue from sales to customers in Europe increased from $7.3 million, or 16.0%
of revenue, for the year ended December 31, 2000, to $8.1 million, or 17.5% of
revenue, for the year ended December 31, 2001, an increase of $0.8 million, or
11.0%. This increase in sales to customers in Europe was primarily attributable
to increased market demand for our products in this region.
Revenue from sales to customers in the Asian/Pacific region increased
from $5.3 million, or 11.5% of revenue, for the year ended December 31, 2000, to
$6.9 million, or 15.0% of revenue, for the year ended December 31, 2001, an
increase of $1.6 million, or 30.2%. This increase in sales to customers in this
region was primarily attributable to increased sales efforts for our networking
products.
Revenue from sales to customers in Israel decreased from $4.5 million,
or 9.7% of revenue, for the year ended December 31, 2000, to $1.9 million, or
4.2% of revenue, for the year ended December 31, 2001, a decrease of $2.6
million, or 57.8%. This decrease in sales to customers in Israel was primarily
attributable to the depressed economy in this region.
Cost of Revenues. Cost of revenues decreased from $11.4 million for the
year ended December 31, 2000 to $10.3 million for the year ended December 31,
2001, a decrease of $1.1 million, or 9.6%. Gross profit as a percentage of
revenues increased from 75.1% for the year ended December 31, 2000 to 77.6% for
the year ended December 31, 2001, due to the increased proportion of new
networking products sales with higher profit margins.
Research and Development, Net. Research and development expenses, net
increased from $13.9 million for the year ended December 31, 2000 to $17.9
million for the year ended December 31, 2001, an increase of $4.0 million, or
28.8%. This increase was primarily attributable to an increase in the number of
research and development personnel whom we employed. We have increased our
research and development personnel to support our existing and expected new
product lines and to accommodate, the expected future growth of our business.
Research and development expenses, net as a percentage of revenues increased
from 30.3% for the year ended December 31, 2000 to 38.8% for the year ended
December 31, 2001.
Marketing and Selling, Net. Marketing and selling expenses, net
decreased from $17.4 million for the year ended December 31, 2000 to $16.7
million for the year ended December 31, 2001, a decrease of $623,000, or 35.9%.
This decrease was primarily attributable to a reduction of our marketing
activities in the second half of the year as we reduced our sales and marketing
expenses in response to current conditions. Marketing and selling expenses, net
as a percentage of revenues decreased from 37.8% for the year ended December 31,
2000 to 36.2% for the year ended December 31, 2001.
General and Administrative. General and administrative expenses
increased from $3.5 million for the year ended December 31, 2000 to $4.4 million
for the year ended December 31, 2001, an increase of $980,000 or 28.0%. This
increase was primarily attributable to an increase of $581,000, or 29.3%, in
personnel expenses. General and administrative expenses as a percentage of
revenues increased from 7.5% for the year ended December 31, 2000 to 9.6% for
the year ended December 31, 2001.
48
One Time Charge / Royalty Payments to the Chief Scientist. In 2000 we
determined to repay all future royalty payments due to the Chief Scientist. This
decision made as part of our strategy to discontinue the relationship with the
Chief Scientist to reduce the growing restrictions imposed by the Chief
Scientist on our business. By doing so, we will also save the increased interest
rates that are imposed by the Chief Scientist on part of the royalties due. In
2001 we recorded a charge of $3.0 million, mainly for severance costs associated
with a 13.0% reduction in our workforce that was implemented as part of our
efforts to reduce operating expenses in light of the worsening economic climate.
Operating Loss. Our operating loss increased from $3.9 million for the
year ended December 31, 2000 to $6.3 million for the year ended December 31,
2001.
Financial Income, net. Financial income increased from $4.2 million for
the year ended December 31, 2000 to $4.7 million for the year ended December 31,
2001 principally as a result of the investment for a full year of the proceeds
of our March 2000 initial public offering and private placement.
Net Income(Loss). We reported net income of $249,000, for the year ended
December 31, 2000 as compared to a net loss of $1.6 million for the year ended
December 31, 2001.
Consolidated Balance Sheet Data
Trade Receivables. Trade receivables increased from $5.1 million at
December 31, 2001 to $9.5 million at December 31, 2002, an increase of $4.4
million, or $86.3%. This increase was primarily attributable to one-time event
associated with the FastWeb deal in the fourth quarter of 2002.
Allowance for Doubtful Accounts. Allowance for doubtful accounts
increased from $1,126,000 at December 31, 2001 to $1,593,000 at December 31,
2002, an increase of $467,000, or 41.5%. Allowance for doubtful accounts as a
portion of trade receivables decreased from 18.1% as of December 31, 2001 to
14.4% as of December 31, 2002.
Other Receivables and Prepaid Expenses. Other receivables and prepaid
expenses increased from $1.3 million at December 31, 2001 to $2.3 million at
December 31, 2002, an increase of $1.5 million, or 115.4%. This increase was
primarily attributable to an increase in prepaid rental expenses in
consideration for a discount on payment due.
Inventories. Inventories decreased from $1.9 million at December 31,
2001 to $1.0 million at December 31, 2002, a decrease of $0.9 million, or 47.4%.
This decrease was primarily attributable to our effort to reduce inventory
levels in light of the uncertain economic conditions.
Trade Payables. Trade payables increased from $765,000 at December 31,
2001 to $3.3 million at December 31, 2002, an increase of $2.5 million, or
326.8%, primarily due to the one time FastWeb deal that increased our trade
payables and trade receivables balances.
Other Payables and Accrued Expenses. Other payables and accrued expenses
increased from $13.6 million at December 31, 2001 to $15.2 million at December
31, 2002, an increase of
49
$1.6 million, or 11.8%. This increase was primarily attributable to an increase
of accruals, relating to a commitment to replace old products.
Quarterly Results of Operations
The following tables present consolidated statements of operations data
for each of the eight fiscal quarters ended December 31, 2002, in dollars and as
a percentage of revenues. In management's opinion, this unaudited information
has been prepared on the same basis as our audited consolidated financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of the unaudited information for
the quarters presented. The results of operations for any quarter are not
necessarily indicative of results that we might achieve for any subsequent
periods.
Mar.31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
Revenues.............. $14,895 $10,430 $10,208 $10,694 $11,557 $11,707 $12,158 $13,673
Cost of revenues...... (3,725) (2,240) (2,099) (2,298) (2,558) (2,571) (2,615) (3,202)
Gross profit.......... 11,170 8,190 8,109 8,396 8,999 9,136 9,543 10,471
Operating expenses:
Research and
development........ 4,757 4,563 4,319 4,294 4,041 3,870 3,815 3,612
Marketing and
selling, net....... 4,840 4,365 3,690 3,840 4,469 4,587 4,642 4,926
General and
administrative..... 1,169 1,308 1,057 904 969 1,073 1,071 985
One time
charge/repayment
of future royalties - 3,023 - - - - - -
Operating income
(loss).............. 404 (5,069) (957) (642) (480) (394) 15 948
Financial income, net. 1,404 1,264 1,118 866 752 686 634 595
Net income (loss). $ 1,808 $(3,805) $161 $ 224 $272 $292 $649 $1,543
As a percentage of
revenues:
Revenues.............. 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues...... (25) (21) (21) (21) (22) (22) (22) (23)
Gross profit.......... 75 79 79 79 78 78 78 77
Operating expenses:
Research and
development......... 32 44 42 40 35 33 31 27
Marketing and
selling, net........ 32 42 36 36 39 39 38 36
General and
administrative...... 8 13 10 9 8 9 9 7
One time
charge/repayment
of future
royalties......... - 29 - - - - - -
Operating income
(loss) ............... 3 (49) (9) (6) (4) (3) - 7
Financial income, net. 9 12 11 8 6 6 5 4
Net income (loss). 12% (37)% 2% 2% 2% 3% 5% 11%
We expect our operating results to fluctuate significantly in the future
as a result of various factors, many of which are outside our control.
Consequently, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful and, as a result, you should not rely
on them as an indication of future performance.
50
Liquidity and Capital Resources
From our inception until our initial public offering in March 2000, we
financed our operations through cash generated by operations and a combination
of private placements of our share capital and borrowings under lines of credit.
Through December 31, 1999, we raised a total of approximately $12.2 million in
aggregate net proceeds in four private placements. In March 2000, we sold
4,370,000 of our ordinary shares in an initial public offering and 590,822
ordinary shares in a private placement to Samsung Venture Investment
Corporation, a member of the Samsung group, and Siemens Aktiengesellschraft. We
received net proceeds of $89.2 million from the public offering and private
placement. As of December 31, 2002, we had approximately $13.8 million in cash
and cash equivalents, $29.6 million in short term investments and our working
capital was approximately $38.2 million. Taking into account long-term liquid
investments, we had $88.4 million in cash and liquid investments as of December
31, 2002.
Capital expenditures for the years ended December 31, 2000, 2001 and
2002 were approximately $4.2 million, $2.0 million and $1.7 million
respectively. These expenditures were principally for research and development
equipment, motor vehicles, office furniture and equipment and leasehold
improvements. We currently do not have significant capital spending or purchase
commitment, but we expect to continue to engage in capital spending consistent
with anticipated growth in our operations, infrastructure and personnel. Net
cash provided by operating activities was approximately $5.5 million for the
year ended December 31, 2002. This amount was primarily attributable to a net
profit of $2.8 million, an increase of $2.6 million in trade payables, an
increase of $1.7 million in other payables and accrued expenses and an increase
in depreciation of $2.7 million. These increases in cash provided by operating
activities were offset in part by an increase in trade receivables of $4.4
million and an increase in other receivables of $1.6 million.
The increase in accounts receivable and trade payables for the year
ended December 31, 2002 was primarily attributable to a one time FastWeb deal.
Net cash provided by investing activities was approximately $3.1 million for the
year ended December 31, 2002. For the year ended December 31, 2002, $23.2
million of cash provided by investing activities were from sales of short-term
deposits and $18.6 million were invested in long term investments. During the
year ended December 31, 2002, $1.7 million of cash used in investing activities
was for purchases of property and equipment.
On February 28, 2001, we announced that our board of directors
authorized the repurchase of up to 10% of our outstanding shares in open market
transactions at prevailing market prices. We completed the share repurchase
program in the first fiscal quarter of 2002 having purchased 1,866,117 ordinary
shares at a total cost of $11.8 million or an average price of $6.30 per share.
On August 28, 2002, we announced that our Board of Directors authorized
the repurchase of up to $10 million or 2 million of our ordinary shares in the
open market from time to time at prevailing market prices. Through December 31,
2002 we did not initiate the repurchase program. At the beginning of 2003, we
started to reissue the repurchased shares upon exercise of employee stock
options.
51
Net cash use by financing activities was $1.5 million for the year ended
December 31, 2002. For the year ended December 31, 2002, cash used in financing
activities was attributable principally to repurchase of ordinary shares for a
total of $1.9 million.
As of December 31, 2002, our principal commitments consisted of
obligations outstanding under operating leases. Our capital requirements are
dependent on many factors, including market acceptance of our products and the
allocation of resources to our research and development efforts, as well as our
marketing and sales activities. In the last three years, we have experienced
substantial increases in our expenditures as a result of the growth in our
operations and personnel. We intend to increase our expenditures in the future
consistent with our anticipated growth. We anticipate that our cash resources
will be used primarily to fund our operating activities, as well as for capital
expenditures.
As of December 31, 2002, we had an unused $2.5 million line of credit.
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax at the corporate
tax rate of 36%. However, several investment programs at our manufacturing
facility in Tel Aviv have been granted approved enterprise status and we are,
therefore, eligible for tax benefits under the Law for the Encouragement of
Capital Investments, 1959. We have derived, and expect to continue to derive, a
substantial portion of our income from the approved enterprise programs at our
manufacturing facility.
Subject to compliance with applicable requirements, the portion of our
income derived from the approved enterprise programs will be eligible for the
following tax benefits commencing in the first year in which it generates
taxable income:
Year after we
begin generating
taxable income Tax benefit
- ------------------ ------------------------------------------------
1-2............... Tax-exempt
3-7............... Corporate tax of up to 25%
8-10.............. Corporate tax of up to 25% if more than 25% of
our shares are held by (per Israeli Tax
Authorities' position - invested by) non-Israeli
investors
The period of tax benefits for our approved enterprise programs has not
yet commenced, because we have yet to realize taxable income. These benefits
should result in income recognized by us being tax exempt or taxed at a lower
rate for a specified period after we begin to report taxable income and exhaust
any net operating loss carry-forwards. However, these benefits may not be
applied to reduce the tax rate for any income derived by our U.S. subsidiary.
As of December 31, 2002, our net operating loss carry-forwards for
Israeli tax purposes amounted to approximately $18.0 million. Under Israeli law,
these net-operating losses may be carried forward indefinitely and offset
against future taxable income. We expect that, during the period in which these
tax losses are utilized, our income will be substantially tax-exempt. Therefore,
there will be no tax benefit available from these losses and no deferred income
taxes
52
have been included in our financial statements. Deferred taxes for other
temporary differences are immaterial.
As of December 31, 2002, the net operating loss carry-forwards of our
U.S. subsidiary for U.S. tax purposes amounted to approximately $8.5 million.
These losses are available to offset any future U.S. taxable income of our U.S.
subsidiary and will expire in the years 2010 through 2015.
Impact of Inflation and Currency Fluctuations
The dollar cost of our operations is influenced by the extent to which
any inflation in Israel is offset, is offset on a lagging basis, or is not
offset by the devaluation of the NIS in relation to the dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the
dollar, companies experience increases in the dollar cost of their operations in
Israel. Unless offset by a devaluation of the NIS, inflation in Israel will have
a negative effect on our profitability as we receive payment in dollars or
dollar-linked NIS for all of our sales while we incur a portion of our expenses,
principally salaries and related personnel expenses, in NIS.
The following table presents information about the rate of inflation in
Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate
of inflation of Israel adjusted for the devaluation:
Israeli
Israeli Israeli inflation
Year ended inflation devaluation adjusted for
December 31, rate % rate % devaluation %
------------ --------- ----------- -------------
1996 10.6 3.7 6.6
1997 7.0 8.8 (1.7)
1998 8.6 17.6 (7.7)
1999 1.3 (0.1) 1.3
2000 0.0 (2.7) 2.8
2001 1.4 9.3 (7.8)
2002 6.5 7.3 (0.7)
We cannot assure you that we will not be materially and adversely
affected in the future if inflation in Israel exceeds the devaluation of the NIS
against the dollar or if the timing of the devaluation lags behind inflation in
Israel.
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS, unless these expenses or payables are linked to the dollar. This
devaluation also has the effect of decreasing the dollar value of any asset
which consists of NIS or receivables payable in NIS, unless the receivables are
linked to the dollar. Conversely, any increase in the value of the NIS in
relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses.
Because exchange rates between the NIS and the dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
exchange rate fluctuations and especially larger periodic devaluations will have
an impact on our profitability and period-to-period
53
comparisons of our results. The effects of foreign currency re-measurements are
reported in our consolidated financial statements in current operations.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 136"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
improves financial reporting by requiring that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS 146 is not expected to have a material effect on the
Company's financial position or operating results.
Item 7A. Qualitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest
rates and foreign currency fluctuations.
Interest Rate Risk
As of December 31, 2002, we had cash and cash equivalents and short-term
investments of $43.4 million. We invest our cash surplus in time deposits, cash
deposits, U.S. federal agency securities and corporate bonds with an average
credit rating of A2. These investments are not purchased for trading or other
speculative purposes. Due to the nature of these investments, we believe that we
do not have a material exposure to market risk.
Our exposure to market risks for changes in interest rates is limited
since we do not have any material indebtedness.
Foreign Currency Exchange Risk
We develop products in Israel and sell them in North America, Asia and
several European countries. As a result our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets.
Our foreign currency exposure with respect to our sales is mitigated,
and we expect it will continue to be mitigated, through salaries, materials and
support operations, in which part of these costs are denominated in NIS.
Since the beginning of 2002, the NIS has devalued approximately 7.3%
against the dollar. Among the factors contributing to the devaluation are the
political instability in Israel and uncertain economic conditions. The
devaluation has resulted in an increase in the rate of
54
inflation in Israel, which was approximately 6.5% for the year 2002 and higher
than the annual inflation rate for 2001.
Since most of our sales are quoted in $, and a portion of our expenses
are incurred in NIS, our results may be adversely affected by a change in the
rate of inflation in Israel or if such change in the rate of inflation is not
offset, or is offset on a lagging basis, by a corresponding devaluation of the
NIS against the dollar and other foreign currencies.
During 2002 we entered into one foreign exchange contract. The foreign
exchange contract was for 400,000 Euros and was closed in 2003 at a slight loss.
Item 8. Financial Statement and Supplementary Data
See Index to Financial Statements on page F-1 for a list of the
financial statements being filed therein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 26, 2002, our Board of Directors in accordance with the
recommendation of our Audit Committee decided to no longer utilize the services
of Luboshitz Kasierer, a Member Firm of Arthur Andersen, as our independent
auditors and engaged Kost Forer & Gabbay, a member of Ernst & Young
International, to serve as our independent auditors for the fiscal year ending
December 31, 2002. We had no disagreements with our former auditors on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure. The appointment of Kost Forer & Gabbay was ratified
by our shareholders at the 2002 Annual Meeting of Shareholders that was held on
June 9, 2002.
55
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors and executive officers are as follows:
Name Age Position
- ------------------------------- --- ------------------------------------
Zohar Zisapel.................. 54 Chairman of the Board of Directors
Gad Tamari..................... 58 Chief Executive Officer and Director
David Seligman................. 44 Chief Financial Officer
Dan Goldstein.................. 49 Director
Liora Katzenstein.............. 47 Director
Andreas Mattes................. 42 Director
Efraim Wachtel................. 58 Director
Zohar Zisapel, Gad Tamari, Andreas Mattes and Efraim Wachtel will serve
as directors until our 2003 annual general meeting of shareholders. Liora
Katzenstein is serving as outside director pursuant to the provisions of the
Israeli Companies Law for a three-year term ending December 2003. Dan Goldstein
served as outside director pursuant to the provisions of the Israeli Companies
Law for a three-year term ending January 2003. Their terms of service may be
renewed for one additional three-year term. Our company has renewed the
appointment of Dan Goldstein for a term ending in January 2006 and intends to
renew the appointment of Prof. Katzenstein for a term ending December 2006.
Zohar Zisapel has served as a director since November 1992, and as our
Chairman of our Board of Directors until August 1999. He again assumed the
position of Chairman in April 2001. During the last several years, Mr. Zisapel
has been engaged mainly in management of high technology companies. Mr. Zisapel
is a founder and a director of RAD Data Communications Ltd., of which he has
served as president from January 1982 until 1999, and a director of other public
companies including RADCOM Ltd., RIT Technologies Ltd., Ceragon Networks Ltd.
and Verisity Ltd. Mr. Zisapel has a B.Sc. from the Technion, Israel Institute of
Technology and M.Sc. degrees from Tel Aviv University.
Gad Tamari has served as our chief executive officer since April 2001.
From November 1999 to April 2001, Mr. Tamari was the vice president,
international operations of the OpenNet Softswitch organization, of Lucent
Technologies. Prior thereto and since 1996, Mr. Tamari was chief operating
officer of Excel Switching Corporation responsible for international sales,
operations, marketing and customer support. He also served for many years in
senior management positions with a number of telecommunications companies. Mr.
Tamari has a B.Sc. degree in mechanical engineering and a M.Sc. degree in
industrial engineering from the Technion, Israel Institute of Technology and
attended Harvard University's Advanced Management Program.
56
David Seligman has served as our chief financial officer since November
1999. From July 1996 until November 1999, Mr. Seligman was the chief financial
officer and secretary of LanOptics Ltd. From October 1993 until June 1996, Mr.
Seligman was a senior financial analyst for Fidelity Investments Systems
Company. Mr. Seligman has a B.A. in political science and geography and an
M.B.A. in accounting and finance from Tel Aviv University.
Dan Goldstein has served as an outside director of RADVISION since
January 2000. In 1985, Mr. Goldstein founded Formula Systems (1985) Ltd. and has
been its chief executive officer and chairman of the board of directors since
that time. Mr. Goldstein is also the chairman of the board of directors of other
companies in the Formula Systems group, including Magic Software Enterprises
Ltd., Sintec Advanced Technologies Ltd., F.C.T. Formula Computer Technologies
Ltd. and Applicom Software Industries (1990) Ltd., and is a director of Crystal
Systems Solutions Ltd. Mr. Goldstein has a B.Sc. degree in mathematics and
computer science and an M.B.A. in business administration from Tel Aviv
University.
Liora Katzenstein has served as an outside director of RADVISION since
December 2000. Prof. Liora Katzenstein specializes in Business Administration
and Entrepreneurship. During the last five years she founded, and serves as the
President and CEO of, ISEMI - Israel School of Entrepreneurial Management and
Innovation. Prof. Katzenstein has also served as a Senior Lecturer in various
academic institutions in Israel and abroad including the Harvard Business
School, Nanyang University and the Technion, Israel Institute of Technology.
Prof. Katzenstein currently serves as a director of Clal Industries &
Investments Ltd., Discount Issuers Ltd., Amanat Ltd. and Palafric Investments
Ltd., and holds various other academic and business related positions, including
as a member of the Israeli Governmental Committee on Start-Up Companies. Over
the last fifteen years Prof. Katzenstein served as a faculty member and on the
management of universities and management institutes both in Israel and abroad
and published numerous business articles in the Israeli professional press.
Andreas Mattes has served as a director since February 2000. Since April
1999, Mr. Mattes has been the president of enterprise networks of Siemens ICN.
From October 1998 until April 1999, Mr. Mattes was the president of central
sales of Siemens ICN. From June 1997 until October 1998, Mr. Mattes was the
president of international sales of Siemens PN. From January 1996 until June
1997, Mr. Mattes was the vice president of product management of Siemens PN.
From October 1985 until January 1996, Mr. Mattes held various sales, marketing
and business administration positions at Siemens.
Efraim Wachtel has served as a director since March 1998. Mr. Wachtel
has been president and chief executive officer of RAD Data Communications Ltd.,
or RAD since November 1997. From October 1985 to November 1997, Mr. Wachtel was
vice president of sales and marketing of RAD. Before October 1985, Mr. Wachtel
held various research and development positions in several companies in Israel
and in the U.S. Mr. Wachtel has a B.Sc. degree in electrical engineering from
the Technion, Israel Institute of Technology.
57
Other key managers are as follows:
Name Age Position
-------------------------- --- -------------------------------------------
Boaz Raviv................ 43 General Manager of the Technology Group
Avinoam Barak............. 41 General Manager of the Networking Group
Ofer Shapiro.............. 34 Senior Vice President, Business Development
Eli Doron................. 50 Chief Technical Officer and Executive Vice
President
Irit Machtey.............. 47 Senior Vice President Organization &
Human Resources
Arnie Taragin............. 47 Vice President and General Counsel
Boaz Raviv has served as general manager of the technology group since
December 2000. From December 1999 to December 2000, Mr. Raviv was the vice
president of business development and marketing at Elron TeleSoft. From January
1996 to November 1999, he was telecom division manager at Elron Software. From
July 1989 to December 1995, Mr. Raviv held various key positions at CAP GEMINI,
France. Mr. Raviv served his apprenticeship at Robotic in CEMAGREF and he holds
a bachelor's degree from the Technion, Israel Institute of Technology in Haifa.
Avinoam Barak has served as the general manager of our networking
business unit since June 2000. Prior to joining RADVISION and since 1989, Mr.
Barak held various positions at MLM, a division of Israel Aircraft Industries.
In his last position, he was a business manager for a communications-system
unit. Mr. Barak holds a B.Sc. in Computer Engineering from the Technion Israel
Institute of Technology and an M.B.A. in Information Systems and Finance from
Bar Ilan University.
Ofer Shapiro has served as our senior vice president of business
development since September 2000. While at RADVISION, Mr. Shapiro has held a
variety of key positions including vice president of strategic accounts and
leading the development of RADVISION's first gatekeeper and multipoint
conferencing unit products. Prior to joining us, Mr. Shapiro managed
electro-optics related projects in the Israeli Defense Force for five years. He
holds a B.Sc. degree in math and physics from the Hebrew University in Jerusalem
and an M.Sc. in applied physics from Tel Aviv University.
Eli Doron, our co-founder, has served as our executive vice president
and chief technical officer since July 1998. From October 1992 to July 1998, Mr.
Doron was our vice president of research and development. From October 1983 to
October 1992, Mr. Doron held senior engineering positions at Simtech Advanced
Training and Simulation Systems. Mr. Doron has a B.Sc. degree in electronics and
computer science from Ben Gurion University.
Irit Machtey has been responsible for our organization & human resources
department since July 31, 2002 when she joined our company as senior vice
president of human resources. Prior to that and since April 2000, Ms. Machtey
was a management and organizational consultant at My Time, a leading consultancy
for high tech and communications companies in Israel. Prior to joining My Time
and since 1986, Ms. Machtey held a series of senior level
58
positions at Cellcom Ltd., Sapiens Intentional, and National Semiconductor.
Ms. Machtey holds a bachelor's degree in behavioral science from the Ben-Gurion
University and an M.B.A. in organizational behavioral from the School of
Business Administration of Tel Aviv University.
Arnie Taragin joined our company in early 2003 as vice president and
general counsel. Prior to joining us and since April 1999, Mr. Taragin was
general counsel of Scitex Corporation, and when Scitex Corporation merged with
Creo Inc., he became vice president and general counsel of CreoScitex
Corporation Ltd. Prior thereto and since 1999 Mr. Taragin was employed by
Israeli Aircraft Industries as an attorney. Before moving to Israel in 1992, Mr.
Taragin practiced law in the United States, first as an associate and then in
1985 as a partner in a law firm, specializing in business law, international
commerce and regulatory matters. Mr. Taragin graduated with honors from the
Johns Hopkins University (1997) and the University of Maryland Law School
(1980) where he received national awards for achievement.
Election of Directors
Pursuant to our articles of association, all of our directors, other
than our outside directors, are elected at our annual general meeting of
shareholders by a vote of the holders of a majority of the voting power
represented and voting at such meeting. Outside directors are elected for a
three-year term. All the members of our Board of Directors, except the outside
directors, may be reelected upon completion of their term of office. In the
intervals between annual general meetings of the company, our Board of Directors
may elect new directors, whether to fill vacancies or in addition to those of
their body, but only if the total numbers of directors shall not at any time
exceed any maximum number, if any, fixed by or in accordance with our articles
of association. Five of our directors currently in office were elected by our
shareholders at our 2002 annual general meeting of shareholders.
Independent and Outside Directors
The Israeli Companies Law requires Israeli companies with shares that
have been offered to the public in or outside of Israel to appoint at least two
outside directors. No person may be appointed as an outside director if the
person or the person's relative, partner, employer or any entity under the
person's control has or had, on or within the two years preceding the date of
the person's appointment to serve as outside director, any affiliation with the
company or any entity controlling, controlled by or under common control with
the company. The term affiliation includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an officer holder.
No person may serve as an outside director if the person's position or
other activities create, or may create, a conflict of interest with the person's
responsibilities as an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at
59
the time outside directors are to be appointed, all current members of the Board
of Directors are of the same gender, then at least one outside director must be
of the other gender.
Outside directors are elected by shareholders. The shareholders voting
in favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who are present at the meeting. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company. Outside directors serve for
a three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company.
Any committee of the board of directors must include at least one
outside director and the audit committee must include all of the outside
directors. An outside director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
such service.
In addition, the Nasdaq Stock Market requires us to have at least three
independent directors on our Board of Directors and to establish an audit
committee, at least a majority of whose members are independent of management.
Our current audit committee complies with the Nasdaq rules.
Audit Committee
Our audit committee currently is composed of Dan Goldstein, Liora
Katzenstein and Efraim Wachtel. It is currently contemplated that the audit
committee will meet at least quarterly. The responsibilities of the audit
committee include: (i) examining the manner in which management ensures and
monitors the adequacy of the nature, extent and effectiveness of accounting and
internal control systems; (ii) reviewing prior to publication the statutory
accounts and other published financial statements and information; (iii)
monitoring relationships with our independent auditors, ensuring that there are
no restrictions on the scope of the statutory audit, making recommendations on
the auditors appointment and dismissal, and reviewing the activities, findings,
conclusions and recommendations of the independent auditors; (iv) reviewing
arrangements established by management for compliance with regulatory and
financial reporting requirements; (v) reviewing the scope and nature of the work
of the internal auditing unit; and (vi) approval of related party transactions
under the Companies Law.
The Audit Committee is authorized generally to investigate any matter
within the scope of its responsibilities and has the power to obtain from the
internal auditing unit, our independent auditors or any other officer or
employee any information that is relevant to such investigations.
Other Committees
In addition to our audit committee, our board of directors has
established an option and compensation committee and an executive committee.
60
Our option and compensation committee, whose members are Zohar Zisapel,
Efraim Wachtel and Gad Tamari, administers our consultants option plan and sets
the annual compensation for Gad Tamari, our chief executive officer. Our
executive committee, whose members are Zohar Zisapel, Dan Goldstein and Gad
Tamari is responsible for managing our daily operations and acting on behalf of
our board of directors in exigent circumstances.
Internal Audit
The Israeli Companies Law also requires the board of directors of a
public company to appoint an internal auditor nominated by the audit committee.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice. Our internal auditor complies with
the requirements of the Companies Law. Our Internal Auditor is currently Mr.
Gideon Duvshani, C.P.A. of Schwartz, Lerner, Duvshani & Co.
Approval of Related Party Transactions Under Israeli Law
The Companies Law codifies the fiduciary duties that "office holders",
including directors and executive officers, owe to a company. An "office holder"
is defined in the Companies Law as a director, general manager, chief business
manager, deputy general manager, vice general manager, other manager directly
subordinate to the managing director or any other person assuming the
responsibilities of any of the foregoing positions without regard to such
person's title. An office holder's fiduciary duties consist of a duty of care
and a duty of loyalty. The duty of care requires an office holder to act at a
level of care that a reasonable office holder in the same position would employ
under the same circumstances. This includes the duty to utilize reasonable means
to obtain (i) information regarding the appropriateness of a given action
brought for his approval or performed by him by virtue of his position and (ii)
all other information of importance pertaining to the foregoing actions. The
duty of loyalty includes avoiding any conflict of interest between the office
holder's position in the company and his personal affairs, avoiding any
competition with the company, avoiding exploiting any business opportunity of
the company in order to receive personal gain for the office holder or others,
and disclosing to the company any information or documents relating to the
company's affairs which the office holder has received due to his position as an
office holder. Each person identified as a director or executive officer in the
first table in the section is an office holder. Under the Companies Law and our
Articles of Association, all arrangements as to compensation of office holders
who are not directors require approval of our Audit Committee and Board of
Directors if the transaction is an "extraordinary transaction", or if such
transaction is not an "extraordinary transaction," the approval of our General
Manager according to guidelines of the Board of Directors. The compensation of
office holders who are directors must be approved by our Audit Committee, Board
of Directors and shareholders.
The Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
us. In addition, if the transaction is an extraordinary transaction, that is, a
transaction other than in the ordinary course of business, other than on market
terms, or likely to have a material impact on the company's profitability,
61
assets or liabilities, the office holder must also disclose any personal
interest held by the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of the foregoing, or by
any corporation in which the office holder or a relative is a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. Some transactions, actions
and arrangements involving an office holder (or a third party in which an office
holder has an interest) must be approved by the board of directors or as
otherwise provided for in a company's articles of association, as not being
adverse to the company's interest. In some cases, such a transaction must be
approved by the audit committee and by the board of directors itself (with
further shareholder approval required in the case of extraordinary
transactions). An office holder who has a personal interest in a matter, which
is considered at a meeting of the board of directors or the audit committee, may
not be present during the board of directors or audit committee discussions and
may not vote on this matter, unless the majority of the members of the board or
the audit committee have a personal interest, as the case may be, in which case
such transaction will also require the approval of shareholders.
The Companies Law also provides that some transactions between a public
company and a controlling shareholder, or transactions in which a controlling
shareholder of the company has a personal interest but which are between a
public company and another entity, require the approval of the board of
directors and of the shareholders. The Companies Law defines a controlling
shareholder as a person who holds 25% or more of the voting rights at the
company's general meeting, provided there is no other person that holds more
than 50% of the voting rights in the company; for purposes of holding, two or
more persons who hold voting rights in the company and each of whom has a
personal interest in the approval of the same transaction up for approval by the
company shall be deemed one holder. Moreover, an extraordinary transaction with
a controlling shareholder or the terms of compensation of a controlling
shareholder, or an extraordinary transaction with another person in whom the
controlling shareholder has a personal interest must be approved by the audit
committee, the board of directors and shareholders. The shareholder approval for
an extraordinary transaction must include at least one-third of the shareholders
who have no personal interest in the transaction and are present at the meeting.
The transaction can be approved by shareholders without this one-third approval,
if the total shareholdings of those shareholders who have no personal interest
and voted against the transaction do not represent more than one percent of the
voting rights in the company.
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds 5% or more of the company's
outstanding share capital or that will cause any person to become, as a result
of the issuance, a holder of more than five percent of the company's outstanding
share capital, requires approval by the board of directors and the shareholders
of the company. 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 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% shareholder of the company, unless
there is a 50% shareholder of the company. Regulations under the Companies
62
Law provide that the Companies Law's tender offer rules do not apply to a
company whose shares are publicly traded outside of Israel, if pursuant to the
applicable foreign securities laws and stock exchange rules there is a
restriction on the acquisition of any level of control of the company, or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
Indemnification of Directors and Officers
The Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his duty of loyalty,
but may exculpate 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. Our Articles
of Association provide that, subject to any restrictions imposed by the
Companies Law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to:
o a breach of his duty of care to us or to another person;
o a breach of his duty of loyalty to us, provided that the office holder
acted in good faith and had reasonable cause to assume that his act
would not prejudice our interests; or
o a financial liability imposed upon him in favor of another person in
respect of an act performed by him in his capacity as an office
holder. In addition, we may indemnify an office holder against:
o a financial liability imposed on him in favor of another person by any
judgment, including a settlement or an arbitrator's award approved by
a court in respect of an act performed in his capacity as an office
holder; and
o reasonable litigation expenses, including attorneys' fees, expended by
such office holder or charged to him by a court, in proceedings we
institute against him or instituted on our behalf or by another
person, or in a criminal charge from which he was acquitted, all in
respect of an act performed in his capacity as an office holder.
These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract that would provide coverage for any
monetary liability incurred as a result of any of the following:
o a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;
63
o a breach by the office holder of his duty of care if such breach was
done intentionally or in disregard of the circumstances of the breach
or its consequences;
o any act or omission done with the intent to derive an illegal personal
benefit; or
o any fine levied against the office holder as a result of a criminal
offense.
Under the Companies Law, our shareholders may amend our Articles of
Association to include either of the following provisions:
o Prospectively undertake to indemnify an office holder of the company,
provided that the undertaking is limited to types of events which our
board of directors deems to be anticipated and limited to an amount
determined by the board of directors to be reasonable under the
circumstances.
o Retroactively indemnify an office holder of the company.
In addition, pursuant to the Companies Law, indemnification of, and
procurement of insurance coverage for, our office holders must be approved by
our Audit Committee and our Board of Directors and, in specified circumstances,
by our shareholders.
On January 18, 2000, our shareholders agreed to indemnify our office
holders to the fullest extent permitted under the Companies Law. We have
obtained directors and officers liability insurance for the benefit of our
office holders.
Item 11. Executive Compensation
The following table sets forth information concerning the total
compensation paid to our executive officers in fiscal 2002:
Salaries, Pension,
fees, retirement and
commissions other similar
Name and Principal Position and bonuses benefits
- ------------------------------------- ----------- --------------
All officers and directors as a group
(7 persons).......................... $334,413 $17,433
The aggregate value of all other perquisites and other personal benefits
furnished to each of these executive officers was less than 10% of each
officer's salary for such year.
1996 Stock Option Plan
In April 1996, we adopted our key employee share incentive plan.
Employees of RADVISION and its subsidiaries of or affiliates of RADVISION
belonging to the RAD-BYNET group are eligible to participate in the plan.
Options granted under this plan are for a term of sixty-two months from the date
of the grant of the option. The following table presents option grant
information for this plan as of January 31, 2003:
64
Ordinary shares reserved Options Weighted average
for option grants granted exercise price
------------------------ --------- ----------------
3,163,523 3,100,223 $ 2.86
The 3,163,523 ordinary shares indicated in the table as having been
reserved for option grants reflect the total number of ordinary shares reserved
for grants under this plan and our consultants option plan in the aggregate. We
intend to grant further options under this plan to our executive officers and
employees.
Plan Administration
The share incentive committee of our board of directors administers the
plan subject to Board Ratification. Under the plan, the committee has the
authority to recommend to the Board:
o the persons to whom options are granted;
o the number of shares underlying each option award;
o the time or times at which the award shall be made;
o the exercise price, vesting schedule and conditions under which the
options may be exercised; and
o any other matter necessary or desirable for the administration of the
plan.
Option Trust
Under the plan, all options, or shares issued upon exercise of options,
are held in trust and registered in the name of a trustee selected by the share
incentive committee. The trustee may not release the options or ordinary shares
to the beneficiaries of these options or shares before the second anniversary of
the registration of the options in the name of the trustee.
During this period, voting rights attached to the ordinary shares issued
upon exercise of the options may be exercised by the trustee.
Termination and Amendment
Our board of directors may terminate or amend the plan, provided that
any action by our board of directors which will alter or impair the rights of an
option holder requires the prior consent of that option holder.
65
Consultants Option Plan
In March 1999, we adopted our consultants option plan. Our employees and
directors and consultants employed by us are eligible to participate in the
plan. Options granted under the plan are for a term of sixty-two months from the
date of grant of the option. The following table presents option grant
information for this plan as of January 31, 2003:
Ordinary shares Weighted average
reserved for option grants Options granted exercise price
-------------------------- --------------- ----------------
3,163,523 63,300 $1.18
The ordinary shares indicated in the table as having been reserved for
option grants reflect the total number of ordinary shares reserved for grants
under this plan and our key employee share incentive plan in the aggregate.
Plan Administration
The option and compensation committee of our board of directors
administers the plan, subject to Board ratification. Under the plan, the
committee has the authority to recommend to the Board:
o the persons to whom options are granted;
o the number of shares underlying each option award;
o the time or times at which the award shall be made;
o the exercise price, vesting schedule and conditions under which the
options may be exercised; and
o any other matter necessary or desirable for the administration of the
plan.
Option Trust
Under the plan, all options, or shares issued upon exercise of options,
are held in trust and registered in the name of a trustee selected by the share
option and compensation committee. The plan provides that the trustee will
empower Yehuda and Zohar Zisapel to exercise the voting rights attached to the
ordinary shares issued upon exercise of the options.
Termination and Amendment
Our board of directors may terminate or amend the plan, provided that
any action by our board of directors which will alter or impair the rights of an
option holder requires the prior consent of that option holder.
66
2000 Stock Option Plan
Our 2000 Employee Stock Option Plan, or the 2000 Plan, currently
authorizes the grant of options to purchase up to 3,321,552 ordinary shares.
Employees and consultants of our company and its subsidiaries are eligible to
participate in the 2000 Plan. The 2000 Plan also provides for the grant of
options equal in the amount of up to 4% of our share capital, on a fully diluted
basis, in each subsequent year following the year 2000 for issuance under the
2000 Stock Option Plan. An additional 894,945 ordinary shares were authorized
for grant in 2001 based on 4% of our share capital at December 31, 2000 and an
additional 887,630 ordinary shares were authorized for grant in 2002 based on 4%
of our share capital at December 31, 2001 an additional 748,997 ordinary shares
will be authorized for grant in 2003 based on 3.3% of our share capital at
December 31, 2002. Options, which are canceled or not exercised within the
option period will become available for future grants. Awards under the 2000
Plan may be granted in the form of incentive stock options as provided in
Section 422 of the U.S. Internal Revenue Code of 1986, as amended, non-qualified
stock options, options granted pursuant to Section 102 of the Israeli Tax
Ordinance and options granted pursuant to Section 3.(9) of the Israeli Tax
Ordinance.
Plan Administration
The option and compensation committee appointed by the Board of
Directors administers the 2000 Plan, subject to Board ratification. Subject to
the provisions of the 2000 Plan and applicable law, the option and compensation
committee has the authority to recommend to the Board:
o the persons to whom such awards are granted;
o the form, terms and conditions of the written stock option agreement
evidencing the option, including the type of option and the number of
shares to which it pertains, the option price, the option period and
its vesting schedule, and exercisability of the option in special
cases (such as death, retirement, disability and change of control);
and
o the form and provisions of the notice of exercise and payment of the
option.
Subject to the provisions of the 2000 Plan and applicable law, the Board
has the authority to:
o nominate a trustee for options issued under Section 102 of the Israeli
Tax Ordinance;
o adjust any or all of the number and type of shares that thereafter may
be made the subject of options, the number and type of shares subject
to outstanding options, and the grant or exercise price with respect
to any option, or, if deemed appropriate, make provision for a cash
payment to the holder of any outstanding option in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available under the 2000 Plan in the event of any
67
dividend or other distribution, recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of shares or other
securities;
o interpret the provisions of the 2000 Plan; and
o prescribe, amend, and rescind rules and regulations relating to the
2000 Plan or any award thereunder as it may deem necessary or
advisable.
Neither the Board of Directors nor the option and compensation committee
may, without the consent of the optionee, alter or in any way impair the rights
of such optionee under any award previously granted. Neither the termination of
the 2000 Plan nor the change of control of our company, except to the extent
provided in the 2000 Plan, will affect any option previously granted.
The option price per share may not be less than 100% of the fair market
value of such share on the date of the award; provided, however, that in the
case of an award of an incentive stock option made to a 10% owner, the option
price per share may not be less than 110% of the fair market value (as such term
is defined in the 2000 Plan) of such share on the date of the award.
An option may not be exercisable after the expiration of ten (10) years
from the date of its award. No option may be exercised after the expiration of
its term. In the case of an award of incentive stock options made to a 10%
owner, such options may not be exercisable after the expiration of five (5)
years from its date of award.
Options are not assignable or transferable by the optionee, other than
by will or the laws of descent and distribution, and may be exercised during the
lifetime of the optionee only by the optionee or his or her guardian or legal
representative; provided, however, that during the optionee's lifetime, the
optionee may, with the consent of the option and compensation committee transfer
without consideration all or any portion of his options to members of the
optionee's immediate family (as defined in the 2000 Plan), a trust established
for the exclusive benefit of members of the optionee's immediate family, or a
limited liability company in which all members are members of the optionee's
immediate family.
The following table presents option grant information for this plan as
of January 31, 2003:
Ordinary shares Range of exercise
reserved for option grants Options granted prices
-------------------------- --------------- -----------------
3,321,552 2,853,612 $4.57- $28.00
68
Exercise of Options During 2002
During the year ended December 31, 2002, we issued 262,355 ordinary
shares, par value NIS 0.1 per share each, at an average exercise price of $1.61
per share to employees and consultants as a result of the exercise of stock
options.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of the date of
this annual report, regarding the beneficial ownership by all shareholders known
to us to own beneficially more than 5% of our ordinary shares. The voting rights
of our major shareholders do not differ from the voting rights of other holders
of our ordinary shares. However, concurrent with our initial public offering in
March 2000, certain of our shareholders entered into a voting agreement. As a
result, such shareholders may be able to exercise control with respect to the
election of directors.
Number of ordinary Percentage of
shares outstanding
beneficially ordinary
Name owned (1) shares (2)
- --------------------------------------- ------------------ -------------
Yehuda Zisapel (3)(4).................. 1,964,561 10.69%
Zohar Zisapel (5)(6)................... 2,028,041 11.03%
Siemens Venture Capital GmbH (7)....... 1,389,378 7.56%
Samsung entities (8)................... 1,000,000 5.44%
The Baupost Group, L.L.C. (9) ......... 3,377,975 18.37%
- --------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to
options currently exercisable or exercisable within 60 days of the date
of this annual report are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned
by them.
(2) The percentages shown are based on 18,384,404 ordinary shares issued and
outstanding as of March 26, 2003.
(3) Includes 477,213 ordinary shares owned of record by Rad Data
Communications Ltd.
(4) The address of Mr. Yehuda Zisapel is 24 Raul Wallenberg Street, Tel Aviv
69719, Israel.
(5) Includes 477,213 ordinary shares owned of record by Rad Data
Communications Ltd., 310,856 ordinary shares owned of record by Michael
and Klil Holdings (93) Ltd., and 306,456 ordinary shares owned of record
by Lomsha Ltd.
69
(6) The address of Mr. Zohar Zisapel is 24 Raul Wallenberg Street, Tel Aviv
69719, Israel.
(7) The address of Siemens Venture Capital GmbH is Baierbrunner Str. 23,
81379, Munich, Germany.
(8) The address of Samsung Electro-Mechanics Co. Ltd. is 314 Maetan 3-Dong,
Paldal-Gu, Suwon, Kyunggi-D, Korea 442-743. The address of Samsung
Venture Investment Corporation is Samsung Yeok Sam Bldg. 647-9, Yeok
Sam-Dong, Kang Nam-Gu, Korea 135-080.
(9) Based solely upon, and qualified in its entirety with reference to, a
Schedule 13G filed with the Securities and Exchange Commission on
February 13, 2003.
Directors and Executive Officers
The following table and the footnotes thereto contain information
concerning the beneficial ownership of our ordinary shares by all of our
directors and executive officers as a group including currently exercisable
stock options.
Number of ordinary Percentage of outstanding
Name shares ordinary shares (1)(2)
- -------------------------------- ------------------ -------------------------
All directors and executive
officers as a group (7 persons). 2,467,254 13.42%
- -------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to
options currently exercisable or exercisable within 60 days of the date
of this annual report are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned
by them.
(2) The percentage of ordinary shares for each person and the group shown in
this table is based on the 18,384,404 ordinary shares outstanding on
March 26, 2003.
Item 13. Certain Relationships and Related Transactions
The RAD-BYNET Group
Zohar Zisapel our chairman and Yehuda Zisapel, our former director and
chairman, are principal shareholders of our company. Individually or together,
they are also directors and principal shareholders of several other companies
which, together with us and the other subsidiaries and affiliates, are known as
the RAD-BYNET group. These corporations include:
70
AB-NET Ltd. Ceragon Networks Ltd. RADView Software Ltd.
Axerra Networks Inc. Modules INC. RADWARE Ltd.
BYNET Data Communications Ltd. RADCOM Ltd. RADWIN Ltd.
BYNET Electronics Ltd. RAD Data Communications Ltd. RIT Technologies Ltd.
BYNET Properties Ltd. RADLAN Computer RND Operation Services Ltd.
BYNET SEMECH Outsourcing Ltd. Communications Ltd. Sanrad Inc.
BYNET Systems Applications Ltd. SILICOM Ltd.
BYNET Personal Computers Ltd. WISAIR Inc.
In addition to engaging in other businesses, members of the RAD-BYNET
group are actively engaged in designing, manufacturing, marketing and supporting
data communications products, none of which currently compete with our products.
Some of the products of members of the RAD-BYNET group are complementary to, and
may be used in connection with, our products.
Members of the RAD-BYNET group provide us with human resource and
administrative services, and we reimburse each company for its costs in
providing these services. The aggregate amount of these reimbursements was
approximately $107,000 and $54,000 in 2001 and 2002, respectively.
Agreement with Axerra Ltd. (formally named IP RAD Ltd)
In September 2000, we entered into an agreement to license our MGCP MG
software to Axerra Ltd., an affiliated company controlled by Yehuda and Zohar
Zisapel and a member of the RAD-BYNET group. The agreement, which was based on
our standard form, provides for an aggregate fee of $80,000. This fee includes
maintenance and support services for one year. In addition, the agreement
provides that Axerra has an option to extend the maintenance and support
services for additional annual periods.
Lease Arrangements
We leased from RAD Data Communications, an affiliated company controlled
by Yehuda Zisapel and Zohar Zisapel and a member of the RAD-BYNET group,
approximately 11,000 square feet of office space for our facility in New Jersey,
for a monthly rent of approximately $8,800. The lease terminated in May 2002.
The monthly rent payments included a 15% intra-group discount.
Supply Arrangement
We purchase from RAD Data Communications components that we integrate
into our multimedia RADVISION products. The aggregate purchase price of these
components was approximately $114,000 for the year ended December 31, 2001 and
$133,000 for the year ended December 31, 2002.
We generally ascertain the market prices for goods and services that can
be obtained at arms' length from unaffiliated third parties before entering into
any transaction with a member of
71
the RAD-BYNET group for those goods and services. In addition, all of our
transactions to date with members of the RAD-BYNET group were approved
unanimously by our shareholders. As a result, we believe that the terms of the
transactions in which we have engaged and are currently engaged with other
members of the RAD-BYNET group are beneficial to us and no less favorable to us
than terms which might be available to us from unaffiliated third parties. Any
future transactions and arrangements with entities, including other members of
the RAD-BYNET group, in which our office holders have a personal interest will
require approval by our audit committee, our board of directors and, if
applicable, our shareholders.
Registration Rights
In a private placement of our ordinary shares in April 1995, several of
our shareholders were granted registration rights for their ordinary shares. We
granted registration rights to Yehuda Zisapel, Zohar Zisapel, RAD Data
Communications Ltd. and the employees' trust, as a group.
This shareholder group as well as other groups who purchased our
ordinary shares in the private placement, have the right to make a single demand
for the registration of their ordinary shares outstanding at the time of our
public offering in March 2000 provided that:
o the shareholder group owns at least 2% of our outstanding share
capital; and
o the demand covers shares representing a market value of at least $3
million and does not include shares which may be sold without
restriction within three months from the date of the demand.
The shareholders' rights will be exercisable at any time commencing on
March 13, 2001 and for a period of three years thereafter. In addition, each of
the investors in the April 1995 private placement has the right to have its
ordinary shares included in some of our registration statements, provided that
the shareholder owns at least 2% of our outstanding share capital at the time it
exercises this right.
In the private placement of our ordinary shares in September 1996, Intel
Corporation was granted registration rights for their ordinary shares. The
agreement provides for registration rights on the same terms and conditions as
contained in the private placement agreements of April 1995.
In the private placement of our preferred shares in May 1998, several of
our shareholders were granted registration rights for the ordinary shares
outstanding or to be issued upon conversion of their preferred shares, which
represent 2,957,165 ordinary shares in the aggregate.
The agreement provides that the purchasers of the preferred shares in
May 1998, as a group, will have the right to make a demand on two occasions for
the registration of their ordinary shares outstanding at the time of this
offering, provided that:
the demand covers shares representing a market value of at least $3
million; and
72
the demand does not include shares which may be sold without restriction
within three months from the date of the demand.
The shareholders' rights will be exercisable at any time commencing on
the first anniversary of the consummation of our public offering in March 2000
and for a period of three years thereafter or, in specified cases, for a period
of five years. In addition, each of the investors in the May 1998 private
placement has the right to have its ordinary shares included in some of our
registration statements. The agreement also provides that if subsequent
investors in RADVISION are granted more favorable terms concerning demand or
other registration rights, each of the investors will be granted identical
rights, for so long as they own at least 5% of our outstanding shares at that
time.
Voting Agreement
Upon the completion of the private placement which took place
contemporaneously with our March 2000 initial public offering, Siemens and some
of our existing shareholders, including our current chairman of the board, our
former chief executive officer, the Evergreen Group, Clal Venture Capital Fund
LP and Yehuda Zisapel, entered into a voting agreement. The voting agreement
provided that, in the election of our directors, the shareholders party to the
agreement will nominate and vote for a nominee of Siemens to serve as a director
and as many other nominees as the other shareholders party to the agreement
shall unanimously propose to serve as directors. However, the number of
directors that the other shareholders propose to serve as directors shall at a
minimum be equal to the number of directors which these shareholders have
appointed to the board prior to March 2000. If all directors, except for one
director, decide that the continuation of a director on our board may damage our
business prospects, then the director shall be removed from our board.
The voting agreement expires in March 2003, except that it will be
automatically extended for two additional one-year periods, unless any of the
parties to the agreement notifies each of the other parties 60 days before the
expiration date of the then current term that such party wishes to terminate the
agreement. 4,427,554 ordinary shares, representing approximately 24.21 % of the
outstanding shares, are currently subject to the voting agreement.
Item 14. Controls and Procedures
Within the 90 days prior to the date of the filing of this Form 10-K, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to our company required to be included in our company's periodic SEC
filings.
There have been no significant changes in the our internal controls or
other factors which could significantly affect internal controls subsequent to
the date we carried out the evaluation.
73
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) See Index to Financial Statements on Page F-1 for a list of the financial
statements being filed herein.
(a)(2) Index to Financial Statement Schedules
Schedule II--Valuation and qualifying accounts (years ended December 31, 2000,
1999 and 1998).
(a)(3) See Exhibits below for all Exhibits being filed or incorporated by
reference herein.
Exhibit Description
- ------- -----------
3.1* Memorandum of Association of the Registrant
3.2* Articles of Association of the Registrant
4.1* Form of Ordinary Share Certificate
4.2* Agreement, dated as of April 14, 1995, by and among Registrant, RAD
Data Communications Ltd. and Yehuda Zisapel and Zohar Zisapel
4.3* Agreement, dated as of April 18, 1995, by and among Registrant, Clal
Venture Capital Fund LP and Yehuda Zisapel and Zohar Zisapel
4.4* Agreement, dated as of April 18, 1995, by and among Registrant, Lannet
Data Communications Ltd. and Yehuda Zisapel and Zohar Zisapel
4.5* Agreement, dated as of April 19, 1995, by and among Registrant, ECI
Telecom Ltd. and Yehuda Zisapel and Zohar Zisapel
4.6* Agreement, dated as of April 24, 1995, by and among Registrant, Zohar
Gilon, Avraham Neuman, Yair Tauman and W.S.P. Capital Investment Ltd.,
and Yehuda Zisapel and Zohar Zisapel
4.7* Agreement, dated as of April 26, 1995, by and among Registrant, Lerosh
Investments Ltd., Gevahim Investments House Limited Ltd., Yoav
Chelouche, Permal Emerging Growth V Ltd., Maritime--Julex Investment
Ltd., Shraga Blazer and Eli Luz and Yehuda Zisapel and Zohar Zisapel
74
4.8* Agreement, dated as of April 27, 1995, by and among Registrant,
Finovelec, Factory Systemes, Houston Venture Partners, Ltd. and Yehuda
Zisapel and Zohar Zisapel
4.9* Agreement, dated September 12, 1996, by and among Registrant and Intel
Corporation, as amended
4.10* Agreement, dated May 12, 1998, by and among Registrant, Evergreen
Canada Israel Management Ltd., IJT Technologies Ltd., Periscope I Fund
Israeli Partnership, Dovrat Shrem Trust Company Ltd., Rubin Gruber,
C.E. Unterberg, Towbin LLC, C.E. Unterberg, Towbin Private Equity
Partners LP, C.E. Unterberg, Towbin Private Equity Partners CV, C.E.
Unterberg, Private Profit Sharing Plan FBO Alex Bernstein and
Steimatzsky Ltd.
10.1*** Form of 2000 Employee Stock Option Plan
10.2* Key Employee Share Incentive Plan, as amended
10.3* Consultant Option Plan, as amended
10.4* License Agreement, dated January 13, 1999, between Registrant and
RADCOM Ltd.
10.5* Lease Agreement, dated May 12, 1997, between RADVISION Inc. and RAD
Data Communications Inc., as amended
10.6** Lease Agreement, dated January 19, 2001, between Zohar Zisapel
Properties, Inc., Yehuda Zisapel Properties, Inc. and RADVISION Inc.
11 Statements re computation of per share earning.
21 Subsidiaries of RADVISION Ltd.
23 Consent of Kost Forer & Gabbay, a member of Ernst & Young
International, with respect to the Registration Statements on Form
S-8.
99.1 Certification by Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
99.3 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.4 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
75
-------------------
* Incorporated by reference to our registration statement on Form F-1,
registration number 333-30916, as amended, filed with the Securities and
Exchange Commission.
** Incorporated by reference to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2000, filed with the Securities and
Exchange Commission.
*** Incorporated by reference to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K.
1. On November 4, 2002 the Registrant filed with the Securities and
Exchange Commission a Form 8-K, announcing the INVISION product
line.
2. On November 18, 2002 the Registrant filed with the Securities and
Exchange Commission a Form 8-K, announcing the sale and
successful roll out of an integrated videoconferencing solution
to FastWeb, a Milan-based service provider that provides bundled
broadband voice, video, and data services to consumers and
businesses throughout Italy.
3. On November 26, 2002 the Registrant filed with the Securities and
Exchange Commission a Form 8-K, reporting the receipt from the
Israeli court to commence its second program to repurchase up to
$10 million or 2 million of its common shares under the share
repurchase program that was announced on August 28, 2002.
76
RADVISION Ltd. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
Description of period expenses accounts Deductions of period
- ----------- --------- -------- -------- ---------- ---------
Year ended December 31, 2002:
Allowance for doubtful accounts.... $1,126,000 $467,000 $1,593,000
========== ==========
Year ended December 31, 2001:
Allowance for doubtful accounts.... $577,000 $549,000 $1,126,000
======== ==========
Year ended December 31, 2000:
Allowance for doubtful accounts.... $225,000 $352,000 $577,000
======== ========
77
RADVISION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
Page
----
Reports of Independent Auditors F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8 - F-31
- - - - - - - - - - - - - - -
F-1
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Radvision Ltd.:
- ---------------
We have audited the accompanying consolidated balance sheets of Radvision
Ltd. (the "Company") and its subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2002, and the consolidated
results of their operations and cash flows for the year ended December 31, 2002,
in conformity with accounting principles generally accepted in the United
States.
/s/Kost Forer & Gabbay
Tel-Aviv, Israel KOST FORER & GABBAY
January 29, 2003 A Member of Ernst & Young Global
F-2
This is a copy of the previously issued Independent Public Accountants' report
of Arthur Andersen. The report has not been reissued by Arthur Andersen.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders of
RADVISION Ltd.:
- ---------------
We have audited the accompanying consolidated balance sheets of RADVISION Ltd.
(an Israeli corporation) and its subsidiaries as of December 31, 2000 and 2001,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RADVISION Ltd. and its subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Luboshitz Kasierer
Arthur Andersen
Tel-Aviv, Israel
January 30, 2002
F-3
RADVISION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
December 31,
------------------------
2001 2002
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,717 $ 13,825
Short-term bank deposits 27,701 14,879
Short-term marketable securities 25,084 14,712
Trade receivables (net of allowance for
doubtful accounts of $ 1,126 and $ 1,593
at December 31, 2001 and 2002, respectively) 5,078 9,505
Other receivables and prepaid expenses 1,259 2,836
Inventories 1,884 996
---------- ----------
Total current assets 67,723 56,753
---------- ----------
LONG-TERM ASSETS:
Long-term bank deposits 2,022 11,013
Long-term marketable securities 24,304 33,929
Severance pay fund 1,200 1,641
---------- ----------
Total long-term assets 27,526 46,583
---------- ----------
PROPERTY AND EQUIPMENT, NET 4,518 3,335
---------- ----------
Total assets $ 99,767 $106,671
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term bank loans $ 19 $ -
Trade payables 765 3,347
Deferred revenues 3,491 2,863
Other payables and accrued expenses 10,071 12,385
---------- -----------
Total current liabilities 14,346 18,595
---------- -----------
ACCRUED SEVERANCE PAY 1,872 3,061
---------- -----------
Total liabilities 16,218 21,656
---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 0.1 par value:
Authorized - 25,000,000 shares as of
December 31, 2001 and 2002; Issued -
19,889,690 and 20,152,045 shares as of
December 31, 2001 and 2002,
respectively; Outstanding - 18,304,244 and
18,285,930 shares as of December 31, 2001
and 2002, respectively 182 187
Additional paid-in capital 104,209 104,586
Deferred stock compensation (299) (117)
Treasury stock, at cost (1,585,446 and 1,866,115
Ordinary shares of NIS 0.1 par value as of
December 31, 2001 and 2002, respectively) (9,903) (11,757)
Accumulated deficit (10,640) (7,884)
----------- ---------
Total shareholders' equity 83,549 85,015
----------- ---------
Total liabilities and shareholders' equity $ 99,767 $106,671
============ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
RADVISION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
Year ended December 31,
---------------------------------------
2000 2001 2002
------------ ------------- ------------
Revenues $ 45,911 $ 46,227 $ 49,095
Cost of revenues 11,446 10,362 10,946
------------ ------------- ------------
Gross profit 34,465 35,865 38,149
------------ ------------- ------------
Operating expenses:
Research and development costs 14,263 17,933 15,338
Less - participation by the Chief Scientist of the
Government of Israel 353 - -
------------ ------------- ------------
Research and development expenses, net 13,910 17,933 15,338
Marketing and selling expenses, net 17,358 16,735 18,624
General and administrative expenses 3,458 4,438 4,098
Restructuring costs - 3,023 -
Repayment of future royalties 3,666 - -
------------ ------------- ------------
Total operating expenses 38,392 42,129 38,060
------------ ------------- ------------
Operating income (loss) (3,927) (6,264) 89
Financial income, net 4,176 4,652 2,667
------------ ------------- ------------
Net income (loss) $ 249 $ (1,612) $ 2,756
============ ============= ============
Basic net earnings (loss) per Ordinary share $0.014 $ (0.09) $ 0.15
============ ============= ============
Diluted net earnings (loss) per Ordinary share $0.013 $ (0.09) $ 0.15
============ ============= ============
The accompanying notes are an integral part of the consolidated financial
statements
F-5
RADVISION LTD. AND ITS SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Ordinary shares Preferred shares Additional Deferred Total
------------------ ------------------- paid-in stock Treasury Accumulated shareholder's
Number Amount Number Amount capital compensation stock deficit equity
--------- ------- ---------- -------- ----------- ------------ -------- ------------ ------------
Balance as of January 1,
2000 10,686,306 $ 17 2,957,165 $ 4 $ 13,789 $(1,052) $ - $ (9,277) $ 3,481
Ordinary shares issued 4,960,822 125 - - *)89,094 - - - 89,219
Conversion of Preferred
shares 2,957,165 4 (2,957,165) (4) - - - - -
Cancellation of Ordinary
shares (58,447) - - - - - - - -
Deferred compensation - - - - 218 (218) - - -
Options exercised 599,138 19 - - 780 - - - 799
Amortization of deferred
compensation - - - - (32) 629 - - 597
Net income - - - - - - - 249 249
---------- ------ ---------- ------- ---------- -------- -------- --------- ------------
Balance as of December 31,
2000 19,144,984 165 - - 103,849 (641) - (9,028) 94,345
Purchase of treasury
stock (1,585,446) - - - - - (9,903) - (9,903)
Options exercised 744,706 17 - - 924 - - - 941
Payment of issuance
expenses - - - - (550) - - - (550)
Amortization of deferred
compensation - - - - (14) 342 - - 328
Net loss - - - - - - - (1,612) (1,612)
---------- ------ ---------- ------- ----------- -------- -------- --------- ------------
Balance as of December 31,
2001 18,304,244 182 - - 104,209 (299) (9,903) (10,640) 83,549
Purchase of treasury
stock (280,669) - - - - - (1,854) - (1,854)
Exercise of options by
employees 262,355 5 - - 377 - - - 382
Amortization of deferred
stock compensation - - - - - 182 - - 182
Net income - - - - - - - 2,756 2,756
---------- ------ ---------- -------- ---------- -------- -------- -------- ------------
Balance as of December 31,
2002 18,285,930 $ 187 - $ - $ 104,586 $ (117) $(11,757) $ (7,884) $ 85,015
========== ====== ========== ========= =========== ======== ======== ========= ============
*) Net of issuance expenses of approximately $ 8,400.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
RADVISION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
------------------------------------------
2000 2001 2002
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 249 $ (1,612) $ 2,756
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,843 2,407 2,665
Gain on sale of property and equipment - - (2)
Accrued interest and amortization of premium on
held-to-maturity marketable securities - - (263)
Accrued severance pay, net 107 279 748
Amortization of deferred stock compensation 597 328 182
Decrease (increase) in trade receivables, net (3,810) 1,947 (4,427)
Decrease (increase) in other receivables and prepaid
expenses 465 (208) (1,577)
Decrease (increase) in inventories (2,522) 3,072 888
Increase (decrease) in trade payables 1,158 (2,951) 2,582
Increase (decrease) in deferred revenues 7,367 (6,807) (628)
Increase (decrease) in other payables and accrued
expenses 3,076 3,592 2,314
Other 34 174 -
----------- ----------- ------------
Net cash provided by operating activities 8,564 221 5,238
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (39,550) (13,235) -
Increase in long-term investments (15,897) (10,429) -
Proceeds from redemption of held-to-maturity
marketable securities - - 45,810
Purchase of held-to-maturity marketable securities - - (44,800)
Proceeds from withdrawal of bank deposits - - 36,998
Purchase of bank deposits - - (33,167)
Purchase of property and equipment (4,175) (2,045) (1,705)
Proceeds from sale of property and equipment 118 146 225
----------- ----------- ------------
Net cash provided by (used in) investing activities (59,504) (25,563) 3,361
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of share capital 90,018 941 -
Purchase of treasury stock - (9,903) (1,854)
Exercise of options by employees - - 382
Payment of issuance expenses - (550) -
Repayment of long-term bank loans (66) (46) (19)
----------- ----------- ------------
Net cash provided by (used in) financing activities 89,952 (9,558) (1,491)
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents 39,012 (34,900) 7,108
Cash and cash equivalents at the beginning of the year 2,605 41,617 6,717
----------- ----------- ------------
Cash and cash equivalents at the end of the year $ 41,617 $ 6,717 $ 13,825
=========== =========== ============
Supplemental disclosure of cash flow activities:
------------------------------------------------
Cash paid during the year for:
Interest $ 8 $ 4 $ -
=========== =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
Radvision Ltd. ("the Company"), an Israeli corporation, designs,
develops and supplies products and technology that enable real-time
voice, video and data communications over packet networks, including
the Internet and other networks based on the Internet protocol.
The Company's products and technology are used by its customers to
develop systems that enable enterprises and service providers to use
packet networks for real-time IP ("Internet Protocol") communications.
Commencing in 2001, the Company operates under two reportable
segments, based on its restructured internal organization, management
of operations and performance evaluation. These segments are: 1) the
"networking" business unit or NBU, which focuses on a networking
product and is responsible for developing networking products for
IP-centric voice, video and data conferencing services; and 2) the
"technology" business unit or TBU, which focuses on creating developer
toolkits for the underlying IP communication protocols and testing
tools needed for real-time voice and video over IP.
The Company has four wholly-owned subsidiaries: Radvision Inc., in the
United States, Radvision B.V., in the Netherlands, Radvision HK in
Hong Kong, and Radvision U.K. in the United Kingdom. The subsidiaries
are primarily engaged in the sale and marketing of the Company's
products and technology.
Revenues derived from the Company's two largest customers in 2002
represented 25% and 11% of total sales (see Note 11c).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared according to
generally accepted accounting principles in the United States or U.S.
GAAP. The significant accounting policies followed in the preparation
of the financial statements, applied on a consistent basis, are as
follows:
a. Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated upon
consolidation.
F-8
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
c. Financial statements in U.S. dollars:
The Company and its subsidiaries' revenues are generated in U.S.
dollars ("dollar"). In addition, a portion of the Company and its
subsidiaries' costs is incurred in dollars. The Company's
management believes that the dollar is the primary currency of
the economic environment in which the Company and its
subsidiaries operate. Thus, the functional and reporting currency
of the Company and its subsidiaries is the dollar.
Accordingly, the Company and its subsidiaries' transactions and
balances, denominated in dollars, are presented at their original
amounts. Non-dollar transactions and balances have been
remeasured into U.S. dollars, in accordance with Statement of the
Financial Accounting Standard No. 52 "Foreign Currency
Translation" ("SFAS No.52"). All transaction gains and losses
from remeasurement of monetary balance sheet items denominated in
non-dollar currencies, are reflected in the statements of
operations as financial income or expenses, as appropriate, and
have not been material for all periods presented.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with maturities of three months
or less at the date aquired.
e. Marketable securities:
The Company accounts for investments in debt securities in
accordance with Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). Management determines the
appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. The amortized cost of held-to-maturity
securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization any decline in value
judged to be other than temporary and interest are included in
financial income, net.
f. Short-term bank deposits:
Short-term bank deposits are deposits with maturities of more
than three months but less than one year. The deposits are in
U.S. dollars and bear interest at an average rate of 2.95%. The
short-term deposits are presented at their cost, including
accrued interest.
g. Long-term bank deposits:
Bank deposits with maturities of more than one year are included
in long-term investments, and presented at their cost plus
accrued interest. The deposits are in U.S. dollars and bear
interest at an average rate of 3.76%.
F-9
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs and write-down provisions are provided to
cover risks arising from slow-moving items or technological
obsolescence. The Company and its subsidiaries periodically
evaluate the quantities on hand, relative to current and
historical selling prices, and historical and projected sales
volume and aging inventory. Based on this evaluation, provisions
are made when required to write inventory down to its market
prices. As a result of adjusted forecast of revenues for the
years 2002 and 2003, and the decision to discontinue selling
certain products, the Company and its subsidiaries wrote off
excess inventories in order to adjust the inventory level to the
new revenue expectations, in the amount of approximately $ 864 in
2001 and $ 396 and in 2002, which have been included in the cost
of revenues.
Cost is determined as follows:
Raw materials - using the average cost method. Work-in-progress -
represents the cost of subcontractors.
Finished products - on the basis of subcontractors' costs, with
the addition of raw materials.
i. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, at the
following annual rates:
%
----------------------
Computers and peripheral equipment 15-33
Office furniture and equipment 7-15
Motor vehicles 15
Over the term of the
Leasehold improvements lease
The Company and the subsidiaries' long-lived assets are reviewed
for impairment in accordance with Statement of Financial
Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144") whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be
generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of by sale are
reported at the lower of the carrying amount or fair value less
selling costs. As of December 31, 2002, no impairment losses have
been identified.
F-10
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Severance pay:
The Company's liability for severance pay 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. Employees are entitled to one month's
salary for each year of employment or a portion thereof. The
Company's liability for all of its employees is fully provided by
monthly deposits for insurance policies and by an accrual. The
value of these policies is recorded as an asset in the Company's
balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay
law or labor agreements. The value of the deposited funds is
based on the cash surrendered value of the policies and includes
immaterial profits.
Severance expenses for the years ended December 31, 2000, 2001
and 2002, amounted to approximately $ 107, $ 279 and $ 748,
respectively.
k. Revenue recognition:
The Company and its subsidiaries generate revenues mainly from:
1) licensing the rights to use its software products and sales of
systems; 2) royalty income; and 3) maintenance, support and
training. The Company and its subsidiaries sell their products to
end-users principally through indirect channel by OEMs, system
integrators and value added resellers, all of which are
considered end-users.
Software licensing, royalties and other revenues:
The Company accounts for software sales in accordance with
Statement of Position 97-2,"Software Revenue Recognition," ("SOP
97-2") as amended by Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions", ("SOP 98-9"). SOP 98-9 requires that revenue be
recognized under the "residual method" when vendor specific
objective evidence (VSOE) of fair value exists for all
undelivered elements and VSOE does not exist for all of the
delivered elements and all other SOP 97-2 revenue recognition
criteria are met. Under the residual method any discount in the
arrangement is allocated to the delivered element.
Revenue from license fees is recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, no
significant obligations with regard to implementation remain, the
fee is fixed or determinable, and collectibility is probable.
Revenues from short-term time-based licenses are recognized
ratably over the terms of software agreement.
F-11
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Certain royalty agreements provide for per unit royalties to be
paid to the Company based on the shipments by customers of units
containing the Company's products. Revenues under such agreements
are recognized at the time of shipments by the customers as they
are paid to the Company by these customers. Non-refundable
payments on account of future royalties from similar agreements
are recognized upon payment, provided that no future obligation
exists.
Maintenance and support revenue included in multiple element
arrangements is deferred and recognized on a straight-line basis
over the term of the maintenance and support agreement. The VSOE
of fair value of the undelivered elements (maintenance and
support fees) is determined based on the price charged for the
undelivered elements when sold separately.
In agreements for which the customer requires a 30-day acceptance
provision, the Company and its subsidiaries defer revenues until
the receipt of the acceptance confirmation.
Deferred revenue includes unearned amounts received under
maintenance and support contracts, and amounts received from
customers but not recognized as revenues.
Sales of systems:
Revenues from systems sales are recognized in accordance with
Staff Accounting Bulletin No.101, "Revenue Recognition in
Financial Statements" ("SAB No.101"), when delivery has occurred,
persuasive evidence of an agreement exists, the vendor's fee is
fixed or determinable, no further obligation exists and
collectability is probable.
The Company and its subsidiaries generally do not grant a right
of return to its customers. When returns are expected and
estimated, the Company defers revenue until the probability for
such returns expires, at which time revenue is recognized
provided that all other revenue recognition criteria are met. The
Company maintains provision for product returns; based on its
experience in accordance with Statement of Financial Accounting
Standard No. 48, "Revenue Recognition When Right of Return
Exists". The provision has been immaterial for the years ended
December 31, 2000, 2001 and 2002.
l. Research and development costs:
Research and development costs, net of grants received, are
charged to the statement of operations, as incurred. Statement of
Financial Accounting Standard No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed",
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
F-12
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Based on the Company's product development process, technological
feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working
models and the point at which the products are ready for general
release have been insignificant. Therefore, all research and
development costs have been expensed.
The Company received grants from the Israel U.S Binational
Industrial Research and Development Foundation (see Note 8b) and
the Chief Scientist Office. These grants are recognized at the
time the Company is entitled to such grants on the basis of the
costs incurred and included as a deduction of research and
development expenses.
m. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). This
Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiaries provide a
valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
n. Fair value of financial instruments:
The Company and its subsidiaries, in estimating the fair value of
its financial instruments used the following methods and
assumptions for disclosures of financial instruments:
The carrying amount reported in the balance sheet for cash and
cash equivalents, short-term bank deposits, trade receivables,
trade payables and current maturities of long-term bank loans
approximate their fair values due to the short-term maturities of
such instruments.
The fair value for held to maturity marketable securities is
based on amortized cost, which does not differ significantly from
the quoted market value (see Note 3).
o. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
No. 25") and FASB No. Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44")
in accounting for its employee stock option plans. Under APB No.
25, when the exercise price of the Company's stock options is
less than the market price of the underlying shares on the date
of grant, compensation expense is recognized.
F-13
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Under Statement of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation ("SFAS No. 123"), pro
forma information regarding net income and net earnings per share
is required, and has been determined as if the Company had
accounted for its employee stock options under the fair value
method of SFAS No. 123. The fair value for these options is
amortized over their vesting period and estimated at the date of
grant using a Black - Scholes Option Valuation Model with the
following weighted-average assumptions for 2000, 2001 and 2002:
risk-free interest rates of 5.0% for 2000, 2.5% for 2001 and 3.0%
for 2002; dividend yields of 0% for 2000, 2001 and 2002;
volatility factors of the expected market price of the Company's
Ordinary shares of 0.8 for 2000, 0.98 for 2001 and 0.48 for 2002;
and an expected life of the option of 2.5 years after the option
is vested for 2000, 2.63 years for 2001 and 4 years for 2002.
Pro forma information under SFAS No. 123:
Year ended December 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
Net income (loss) as reported $ 249 $ (1,612) $ 2,756
=========== =========== ===========
Add: stock based compensation expense
determined under APB 25 $ 596 $ 328 $ 193
=========== =========== ===========
Deduct: stock-based compensation expense
determined under fair value method for
all awards $ (4,042) $ (6,687) $ (5,440)
=========== =========== ===========
Pro forma net loss $ (3,197) $ (7,971) ($ 2,491)
=========== =========== ===========
Basic and diluted earnings (loss) per
share, as reported $ 0.013 $ (0.09) $ 0.15
=========== =========== ===========
Pro forma basic and diluted net loss per
share $ (0.19) $ (0.42) $ (0.14)
=========== =========== ===========
p. Concentration of credit risk:
Financial instruments that potentially subject the Company and it
subsidiaries to concentrations of credit risk consist principally
of cash and cash equivalents, marketable securities, short-term
bank deposits, trade payables, trade receivables and long-term
bank deposits.
The majority of the Company's cash and cash equivalents and
short-term and long-term bank deposits are invested in dollar
investments with major banks in Israel and the U.S. Such cash and
cash equivalents, short-term and long-term bank deposits in the
United States may be in excess of insured limits and are not
insured in other jurisdictions. However, management believes that
the financial investments that hold the Company's investments are
financially sound and accordingly, minimal credit risk exists
with respect to these investments.
F-14
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company and its subsidiaries' marketable securities include
investments in debentures of U.S corporations, and state and
political subdivisions. Management believes that the portfolio is
well diversified, and accordingly, minimal credit risk exists
with respect to these marketable securities.
The Company and its subsidiaries' trade receivables related to
NBU business are derived from sales to large and solid
organizations located mainly in North America, Europe, the Far
East and Israel. The Company and its subsidiaries perform ongoing
credit evaluations of its customers and to date have not
experienced any material losses. An allowance for doubtful
accounts is determined with respect to those amounts that the
Company and its subsidiaries have determined to be doubtful of
collection and by a general reserve. In certain circumstances,
the Company and its subsidiaries may require letters of credit,
other collateral or additional guarantees.
The Company and its subsidiaries' trade receivables related to
TBU business are derived from sales to emerging companies located
mainly in North America, Europe, the Far East and Israel. The
Company and its subsidiaries perform ongoing credit evaluations
of its customers and when uncertainty of collectability exists,
the Company defers revenues until such uncertainty expires.
As of December 31, 2002, current balances of two customers
accounted for 41.6% and 9.1% of the Company's trade receivables,
or a total of approximately $ 4,819.
The Company has no significant off-balance-sheet concentration of
credit risk, such as foreign exchange contracts, options
contracts or other foreign hedging arrangements.
q. Basic net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of shares of Common Stock outstanding
during the year. For the same periods, diluted net earnings
(loss) per share further includes the effect of dilutive stock
options outstanding during the year, all in accordance with SFAS
No. 128, "Earnings per Share".
r. Recently issued accounting pronouncements:
FASB recently also issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 136"). SFAS
146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 improves financial reporting by
requiring that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The provisions of SFAS
146 are effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 is not
expected to have a material effect on the Company and its
subsidiaries' financial position or operating results.
F-15
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of held-to-maturity securities at December
31, 2002:
Amortized Unrealized Estimated
cost gains (losses) fair value
------------- -------------- --------------
Obligations of state and political
subdivisions $ 21,501 $ 821 $ 22,322
Corporate obligations 27,140 (876) 26,264
------------- -------------- --------------
$ 48,641 $ (55) $ 48,586
============= ============== ==============
At December 31, 2001, the carrying amount of securities approximated
the fair value and the amount of unrealized gain or loss was not
significant. Gross realized gains or losses for 2002, 2001, and 2000
were not significant.
The amortized cost of held-to-maturity debt and securities at December
31, 2002, by contractual maturities, are shown below:
Amortized Estimated
cost fair value
------------- -------------
Due in one year or less $ 14,712 $ 15,526
Due after one year through five years 33,929 31,060
------------- -------------
$ 48,641 $ 48,586
============= =============
NOTE 4:- INVENTORIES
Inventories are composed of the following:
December 31,
-----------------------------
2001 2002
------------- -------------
Raw materials $ 991 $ 194
Work-in-progress 391 720
Finished products 502 82
------------- -------------
$1,884 $ 996
============= =============
F-16
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 5:- PROPERTY AND EQUIPMENT
Composition of assets, grouped by major classifications, is as
follows:
December 31,
-------------------------
2001 2002
------------- ----------
Computers and peripheral equipment $ 3,651 $ 5,780
Office furniture and equipment 3,781 3,272
Motor vehicles 1,001 591
Leasehold improvements 1,487 1,536
------------- -----------
9,920 11,179
Less - accumulated depreciation 5,402 7,844
------------- -----------
Depreciated cost $ 4,518 $ 3,335
============= ===========
Depreciation expense amounted to $ 1,843, $ 2,407 and $ 2,665, for the
years ended December 31, 2000, 2001 and 2002, respectively.
NOTE 6:- OTHER PAYABLES AND ACCRUED EXPENSES
December 31,
----------------------------
2001 2002
------------- --------------
Employees and employee accruals $ 2,369 $ 1,617
Tax withholding payable 284 -
Accrued expenses 7,418 10,768
------------ ------------
$ 10,071 $ 12,385
============ ============
NOTE 7:- LONG-TERM BANK LOANS
December 31,
----------------------------
2001 2002
------------- -------------
Loans linked to the U.S. dollar $ 19 $ -
Less - current maturities 19 -
------------- ------------
$ - $ -
============= ============
The loans bore an annual interest rate of LIBOR plus 1%.
As of December 31, 2002, the Company had an unused line of credit in
the amount of $2,500.
F-17
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:- COMMITMENTS AND CONTINGENCIES
a. In connection with its marketing activities, the Company received
in prior years participation payments from the Government of
Israel - Fund for the Encouragement of Marketing Activities in
the total amount of approximately $ 686. In return for the
participation payments, the Company is committed to pay royalties
at a rate of 3% of the Company's total increase in export sales,
from the end of the second year of implementation of the
marketing plan until the date at which the participation has been
fully repaid. The Company's total commitment for royalties
payable with respect to future sales, based on Government of
Israel participations received or accrued, net of royalties paid
or accrued, totaled approximately $ 0 as of December 31, 2002.
b. In connection with its research and development, the Company
received and accrued participation payments from the Israel U.S.
Binational Industrial Research and Development Foundation
(BIRD-F), in the total amount of approximately $ 188. In return
for the participation, the Company is committed to pay royalties
at a rate of 2.5% of proceeds from the first year's sales and 5%
of the proceeds from the succeeding years' sales, up to the
amount of the grant. Once the amount of the grant has been
repaid, royalties will be payable at the rate of 2.5% of
proceeds, until additional royalties equal to one half of the
grant amount have been repaid. The Company's total commitment for
royalties payable with respect to future sales, based on BIRD-F
participations received or accrued, net of royalties paid or
accrued, totaled approximately $ 276 as of December 31, 2002.
Royalties paid or accrued to the BIRD-F amounted to $ 0.
c. The Company and its subsidiaries operate from leased premises in
Israel, United States, China, United Kingdom and Hong Kong. Lease
agreements expire till June 2005 (some with renewal options). The
Company rents vehicles under operating lease agreements that
expire on various dates, the latest of which is in 2006.
Annual minimum future rental payments due under the above
agreements, at the exchange rate in effect on December 31, 2002,
are approximately as follows:
2003 $2,162
2004 1,841
2005 788
2006 33
------
$4,824
======
For the years ended December 31, 2000, 2001 and 2002, rental
expense was $ 1,015, $ 1,424 and $ 1,556, respectively.
F-18
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:-COMMITMENTS AND CONTINGENCIES (Cont.)
d. The Company is committed to pay royalties to two third parties
for the integration of these third parties' technologies into the
Company's products. Royalties are payable based on the sales
volume of these products, as long as the Company uses these
technologies.
The rates of royalties to one of the third parties are based on a
fixed amount per product sold by the Company ranging from $ 1.00
to $ 5.00 per unit sold.
The rates of royalties to the other third party are comprised of
(in U.S. dollars):
(i) Royalties based on a fixed amount per certain product sold
by the Company ranging from $ 20 to $ 48 per unit sold, and;
(ii) a minimum aggregate royalty payment in the amount of $ 85 to
be paid until the earlier of May, 2005, or the completion of
an aggregate sales volume of 600 units of another product.
The agreements pursuant to which the royalties are payable have
no expiration date. Annual minimum future royalty payments are
approximately as follows as of December 31, 2002:
2003 $25
2004 25
---
$50
===
The Company paid royalties in the amount of $ 25 in 2002.
e. In 1998, a third party sent correspondence to the Company's
affiliate alleging that some products manufactured by the Company
infringe upon patents held by the third party and offered to
license these patents to the Company. In subsequent
correspondence, the Company's affiliate requested that the third
party specifically substantiate each allegation of infringement
before the Company's affiliate would be prepared to enter into
any licensing arrangements. The Company does not believe that
these allegations will have a material adverse effect upon its
business, financial position, results of operations or liquidity.
The Company's affiliate has received further correspondence from
the third party, in which the third party has, among other
things, reiterated its claims. The Company's affiliate does not
believe the third party has substantiated its claims and has
communicated this belief to the third party. The Company's
affiliate has advised the Company that the alleged infringement
claims are unresolved. The Company's management is unable to
determine with any certainty the ultimate outcome of the
allegations, and its effect on the Company's business, results of
operations and financial condition.
F-19
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:-COMMITMENTS AND CONTINGENCIES (Cont.)
f. In January 2001, the Company entered into an agreement with
related parties, to lease approximately 24,000 square feet of
office space in Paramus, New Jersey for a period of 5 years,
which space the Company subsequently surrendered. The parties
have a dispute in respect to damages caused by this action, if
any. The Company cannot predict the final outcome of this
dispute. The Company's management is unable to determine with any
certainty the ultimate outcome of the dispute, however it had
accrued what it believes to be sufficient funds.
NOTE 9:- SHAREHOLDERS' EQUITY
The Ordinary shares of the Company are traded on the Nasdaq National
Market.
Since October 20, 2002, the Ordinary shares of the Company have also
traded on the Tel Aviv Stock Exchange.
The Ordinary shares confer upon their holders the right to receive
notice to participate and vote in general meetings of the Company, and
the right to receive dividends, if declared.
a. In January 2000, the Company increased its authorized Ordinary
share capital to 24,984,470 Ordinary shares and 15,530 deferred
shares of NIS 0.1 par value per share and all outstanding
Preferred shares were converted into an identical number of
Ordinary shares. In January 2000, the Company effected a 211 to 1
share split in the form of a share dividend. All references to
per share amounts and the number of shares in these financial
statements have been restated to reflect the abovementioned
changes.
b. The Company had an authorized share capital of 15,530 deferred
shares of par value NIS 0.1 each. The deferred shares conferred
no rights or privileges on their holders, except for the right to
receive, upon dissolution or liquidation, the par value of the
deferred shares. In October 2002, special shareholders meeting
approved a conversion of the deferred shares to Ordinary shares.
c. In March 2000, the Company issued 590,822 Ordinary shares in a
private placement to Siemens Aktiengesellschaft, Samsung
Electro-Mechanics Co. Ltd. and Samsung Venture Investment
Corporation for an aggregate consideration of approximately $10
million.
d. In March 2000, the Company issued 4,370,000 Ordinary shares in an
initial public offering for $ 87,000, or $ 20 per share.
e. In February 2001, the Company announced that its Board of
Directors authorized the purchase of up to 10% of its outstanding
Ordinary shares in the open market, from time to time, at
prevailing market prices. No time limit was given with respect to
the duration of the share purchase program.
F-20
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 9:- SHAREHOLDERS' EQUITY (Cont.)
As of December 31, 2002, the Company had purchased 1,866,115
Ordinary shares at a cost of $ 11,757.
On August 28, 2002, the Board of Directors authorized an
additional purchase of up to $ 10,000 or 2,000,000 of the
Company's outstanding Ordinary shares in the open market.
f. The Company adopted a key employee share incentive plan which
provides for the grant by the Company of option awards to
purchase up to an aggregate of 6,485,075 Ordinary shares to
officers, employees, directors and consultants of the Company and
its subsidiaries and affiliates. The options vest ratably over
vesting periods ranging from three to five years. The options
expire 5 to 10 years from the date of issuance. The incentive
plan provides for the grant of options equal in the amount of up
to 4% of the Company's share capital on a diluted basis.
As of December 31, 2002, 467,940 shares qualify for future grant.
Options that are cancelled or forfeited before expiration become
available for future grant.
Transactions related to the share incentive plan during the years
ended December 31, 2000, 2001 and 2002, and the weighted average
exercise prices per share at the date of grant, are summarized as
follows:
Year ended December 31,
---------------------------------------------------------------
2000 2001 2002
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Amount price Amount price Amount price
--------- ---------- ---------- --------- ---------- ----------
$ $ $
---------- --------- ----------
Options outstanding
at the beginning
of the year 2,667,251 1.23 3,228,656 7.48 3,885,872 7.29
Granted 1,390,795 16.68 2,284,095 5.65 1,167,000 5.19
Exercised (599,138) 1.46 (744,706) 1.31 (262,355) 1.61
Forfeited (230,252) 7.30 (882,173) 8.74 (379,581) 7.88
--------- ---------- ----------
Options outstanding
at the end of the
year 3,228,656 7.48 3,885,872 7.29 4,410,936 6.99
========= ========== ========== ========= ========== ==========
Options exercisable
at the end of the
year 749,225 1.69 698,842 8.01 1,485,885 7.53
========= ========== ========== ========= ========== ==========
F-21
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 9:- SHAREHOLDERS' EQUITY (Cont.)
A summary of the options outstanding and exercisable at December 31, 2002,
is as follows:
Options outstanding Options exercisable
------------------------------------------ ----------------------------
Weighted-
average Weighted- Outstanding Weighted-
Outstanding remaining average at average
Exercise at December contractual exercise December exercise
price 31, 2002 life prices 31, 2002 prices
------------- ------------ ----------- ----------- ------------- -----------
$ Years $ $
------------- ----------- ----------- -----------
0.68-1.02 186,046 6.58 0.95 98,480 0.95
1.02-1.53 247,913 6.58 1.18 178,283 1.18
1.53-2.3 188,441 7.50 1.58 112,486 1.58
3.45-5.18 1,278,892 8.96 4.86 295,229 4.94
5.18-7.77 1,675,425 8.93 5.62 365,412 6.06
7.77-11.66 110,564 7.33 10.20 82,922 10.20
11.66-17.49 553,155 7.50 14.64 276,573 14.65
26.24-28 170,500 7.75 28.00 76,500 28.00
------------ ----------- ------------- -----------
4,410,936 6.99 1,485,885 7.53
============ =========== ============= ===========
A summary of the options granted whose exercise prices differ from the
market price of the date of the stock on the date of grant as follows:
Year ended December 31,
---------------------------------------------------------------
2000 2001 2002
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
--------- ---------- ---------- --------- ---------- ----------
$ $ $
---------- --------- ----------
Weighted average
exercise prices less
than fair value at
date of grant 121,114 10.20 - - - -
========= ========== ========== ========= ========== ==========
Weighted average
exercise prices equal
to fair value at date
of grant 1,269,681 17.52 2,284,095 5.65 1,167,000 5.19
========= ========== ========== ========= ========== ==========
The amounts of deferred compensation recognized arising from the
difference between the exercise price and the fair market value on the
date of the grant of $ 218, $ 0 and $ 0 for options granted in the
years ended December 31, 2000, 2001 and 2002, are included in
shareholders' equity and are amortized over the vesting periods of the
options according to APB No. 25. Under APB No. 25, the amortization of
deferred compensation expense for the years ended December 31, 2000,
2001 and 2002 amounted to $ 597, $ 328 and $ 182, respectively. The
weighted average fair values, on the grant date, for the years ended
December 31, 2000, 2001 and 2002, amounted to $ 7.72, $ 3.29 and $
2.03, respectively.
F-22
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 9:- SHAREHOLDERS' EQUITY (Cont.)
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS or in foreign currency subject to any
statutory limitations. The Company does not intend to pay cash
dividends in the foreseeable future. The Company has decided not to
declare dividends out of tax exempt earnings.
NOTE 10:- NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net earnings (loss) per share:
Year ended December 31,
--------------------------------------------
2000 2001 2002
-------------- ------------- -------------
Numerator:
Net income (loss) $ 249 $ (1,612) $ 2,756
============== ============= =============
Denominator:
Weighted average number of Ordinary shares
outstanding during the
year used to compute basic net earnings
(loss) per share 17,174,453 18,943,014 18,353,052
Incremental shares attributable to
exercise of outstanding options
(assuming proceeds would be used to
purchase treasury stock) 2,698,769 *) - 630,278
-------------- ------------- -------------
Weighted average number of Ordinary
shares used to compute diluted net
earnings (loss) per share 19,873,222 18,943,014 18,983,330
============== ============= =============
Basic net earnings (loss) per share $ 0.01 $ (0.09) $ 0.15
============== ============= =============
Diluted net earnings (loss) per share $ 0.01 $ (0.09) $ 0.15
============== ============= =============
*) Anti-dilutive.
The total weighted average number of shares related to the outstanding
options excluded from the calculation of diluted net earnings (loss)
per shares, since they had an anti-dilutive effect, were 2,226,906 for
the year ended December 31, 2002.
F-23
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
a. Beginning in the year 2001, the Company operates under two
reportable segments based on its revised internal
organization structure, management of operations and
performance evaluation. These segments are: the technology
business unit and the networking business unit. Discrete
segment financial information was not available or reviewed
by senior management during the year 2000. Therefore
corresponding information for this year is not available.
The technology business unit is responsible for the
development of enabling technologies for real-time voice and
video over IP. The networking business unit is responsible
for developing networking products for IP-centric voice,
video and data conferencing services. There are no
significant transactions between the two segments.
The Company evaluates segment performance based on revenues
and operating income (loss) of each segment. As such, there
are no separately identifiable segment assets, nor are there
any separately identifiable statements of operations data
below operating loss.
Business segment revenues are as follows:
Year ended December 31,
----------------------------
2001 2002
------------ --------------
Technology business unit $ 16,545 $ 12,759
Networking business unit 29,682 36,336
------------ --------------
Total revenues $ 46,227 $ 49,095
============ ==============
Business segment operating income (loss)
is as follows:
Technology business unit $ (3,122) $ 552
Networking business unit (3,142) (463)
------------ --------------
Total operating income (loss) $ (6,264) $ 89
============ ==============
F-24
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION (Cont.)
b. The Company's sales by geographic area of end-customers are as
follows:
Year ended December 31,
------------------------------------------
2000 2001 2002
----------- ------------ ------------
North America, principally
the United States $ 28,830 $ 29,245 $ 24,599
Europe 7,328 8,096 12,029
Far East 5,287 6,940 10,200
Israel 4,466 1,946 2,267
----------- ----------- ------------
$ 45,911 $ 46,227 $ 49,095
=========== =========== ============
Long-lived assets by
geographical region:
Israel $ 4,852 $ 3,916 $ 2,576
United States 281 445 591
Other 67 157 168
--------- ----------- ------------
$ 5,200 $ 4,518 $ 3,335
========= =========== ============
c. For the years ended December 31, 2000, 2001 and 2002, one
customer accounted for approximately 22%, 35% and 25%,
respectively, of sales for that period. For the year ended
December 31, 2002, another customer accounted for approximately
11% of sales for that period.
NOTE 12:- MARKETING AND SELLING EXPENSES, NET
Year ended December 31,
------------------------------------------
2000 2001 2002
----------- ------------ ------------
Marketing and selling expenses $ 17,492 $ 16,735 $ 18,624
Participation by the Government of Israel 134 - -
----------- ----------- ------------
Marketing and selling expenses, net $ 17,358 $ 16,735 $ 18,624
=========== =========== ============
Marketing and selling expenses include:
Royalties to the Government of Israel $ 750 $ 80 $ -
=========== =========== ============
NOTE 13:- RESTRUCTURING COSTS
In the second quarter of 2001, the Company recorded a charge of
approximately $ 3,000, primarily relating to severance costs
associated with a 13% workforce reduction and onerous lease
commitments arising from a reduction in the facility as part of its
plan to reduce operating expenses. As of December 31, 2002, the
remaining reserve balance of approximately $ 1,600 is included in
other payables and accrued expenses in the balance sheet.
F-25
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- RELATED PARTY BALANCES AND TRANSACTIONS
a. Balances with related parties:
December 31,
-----------------------------
2001 2002
------------- -------------
Receivables $ 2 $ 4
Trade payables $ 148 $ 200
b. Transactions with related parties:
Year ended December 31,
------------------------------
2000 2001 2002
------- ------- -------
Revenues (1) $ 251 $ 108 $ 199
Cost of revenues (3) $ 842 $ 188 $ 244
Research and development expenses (2) $ 622 $ 184 $ 44
Marketing, selling, general and
administrative expenses (2) $1,210 $ 116 $ 157
Purchase of property and equipment (4) $ 722 $ 263 $ 576
(1) Includes revenues from the Company's products and
maintenance sold to affiliated companies.
(2) Includes administrative services provided to the Company by
affiliated companies that the Company reimburses for the
costs incurred in providing these services.
(3) Includes the purchase of components from affiliated
companies.
(4) Includes property and equipment that were purchased from
affiliated companies.
c. As for the dispute with related parties, see Note 8f.
F-26
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
d. The Company's Chairman and its former director and Chairman, are
principal shareholders of the Company. Individually or together,
they are also directors and principal shareholders of several
other companies, which, together with the Company and other
subsidiaries and affiliates, are known as the RAD-BYNET group and
which are related parties to the Company. These corporations
include:
AB-NET Ltd.
BYNET Data Communications Ltd.
BYNET Electronics Ltd.
BYNET Properties Ltd.
BYNET SEMECH Outsourcing Ltd.
BYNET Systems Applications Ltd.
BYNET Personal Computers Ltd.
Ceragon Networks Ltd. Modules INC.
Axerra Networks Inc.
RADCOM Ltd.
RAD Data Communications Ltd.
RADLAN Computer Communications Ltd.
RADView Software Ltd.
RADWARE Ltd.
RADWIN Ltd.
RIT Technologies Ltd.
RND Operation Services Ltd.
Sanrad Inc.
SILICOM Ltd.
WISAIR Inc.
NOTE 15:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investment, 1959 ("the Law"):
The Company's investment program totaling $ 122 has been granted
Approved Enterprise status under the Law for Encouragement of
Capital Investments, 1959. In addition, the Company was granted
Approved Enterprise status for an expansion of a previous program
totaling $ 459. The Company is entitled to a tax benefit period
of seven years, on income derived from these programs, as
follows: a full income tax exemption for the first two years and
a reduced income tax rate of 25% (instead of the regular rate of
36%) for the remaining five year period. If foreign shareholdings
in the Company exceed 25%, the period for which the Company is
entitled to a reduced income tax is extended to eight years, and
subject to corporate taxes at the reduced rate of 10%-25%
(depending on the level of non-Israeli investments in the
Company).
The period of tax benefits detailed above is subject to limits of
12 years from the year of commencement of production, or 14 years
from the date of granting the approval, whichever is earlier.
Given the aforementioned conditions, under the first expansion
program, the period of benefits for the production facilities,
which has not yet commenced, will terminate in the year 2010, and
under the second expansion program the period of benefits for the
production, which has yet commenced, will terminate in the year
2012.
F-27
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
As the Company currently has no taxable income, the benefits have
not yet commenced for all programs since inception.
In addition, the Company filed a request for an "Approved
Enterprise" status for a second expansion of the previous program
totaling $ 160. The request is not yet approved.
The tax-exempt income attributable to the "Approved Enterprise"
can be distributed to shareholders without subjecting the Company
to taxes only upon the complete liquidation of the Company. If
these retained tax-exempt profits are distributed in a manner
other than in the complete liquidation of the Company they would
be taxed at the corporate tax rate applicable to such profits as
if the Company had not elected the alternative system of
benefits, currently between 25% for an "Approved Enterprise". As
of December 31, 2002, the accumulated deficit of the Company does
not include tax-exempt profits earned by the Company's "Approved
Enterprise".
The benefits from the Company's approved enterprise programs are
dependent upon the Company fulfilling the conditions stipulated
by the Law for Encouragement of Capital Investments, 1959 and the
regulations published under this law, as well as the criteria in
the approval for the specific investment in the Company's
"Approved Enterprise" programs. If the Company does not comply
with these conditions, the tax benefits may be canceled, and the
Company may be required to refund the amount of the canceled
benefits, with the addition of linkage differences and interest.
As of the date of these financial statements, the Company's
management believes that it has complied with these conditions.
By virtue of this law, the Company is entitled to claim
accelerated depreciation on equipment used by the "Approved
Enterprise" during five tax years.
Income from sources other than the "Approved Enterprise" during
the benefit period will be subject to tax at the regular
corporate tax rate of 36%.
b. Tax reform:
On July 24, 2002, Amendment 132 to the Israeli Income Tax
Ordinance ("the Amendment") was approved by the Israeli
parliament and came into effect on January 1, 2003. The principal
objectives of the Amendment were to broaden the categories of
taxable income and to reduce the tax rates imposed on employees
income.
The material consequences of the Amendment applicable to the
Company include, among other things, imposing a tax upon all
income of Israeli residents, individuals and corporations,
regardless of the territorial source of income and certain
modifications in the qualified taxation tracks of employee stock
options.
F-28
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
c. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured and reflected in real terms
in accordance with the change in the Israeli Consumer Price Index
("CPI"). As explained in Note 2c the consolidated financial
statements are presented in U.S. dollars. The differences between
the change in the Israeli CPI and in the NIS/U.S. dollar exchange
rate causes a difference between taxable income or loss and the
income or loss before taxes reflected in the consolidated
financial statements. In accordance with paragraph 9(f) of SFAS
No. 109, the Company has not provided deferred income taxes on
this difference between the reporting currency and the tax bases
of assets and liabilities.
d. Tax benefits under Israel's Law for the Encouragement of Industry
(Taxation), 1969:
The Company is an "industrial company", as defined by the law for
the Encouragement of Industry (Taxes), 1969, and as such, is
entitled to claim public issuance expenses, and accelerated
depreciation on equipment used by the "Approved Enterprise",
during the five tax years.
e. As of December 31, 2002, the Company's net operating loss
carryforwards for tax purposes amounted to approximately $
18,000. These net operating losses may be carried forward
indefinitely and offset against future taxable income.
f. The U.S. subsidiary's carryforward tax losses through December
31, 2002 amounted to approximately $ 8,500. These losses are
available to offset any future U.S. taxable income of the U.S.
subsidiary and will expire in the years 2010-2015. In light of
the subsidiary's recent history of operating losses, the Company
has recorded a valuation allowance for all its deferred tax
assets.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitations may result in the expiration
of net operating losses before utilization.
F-29
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
g. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets resulting from tax loss carryforward are as
follows:
December 31,
2002
---------------
Operating loss carryforward $ 9,540
Valuation allowance (9,540)
---------------
$ -
===============
The Company and its subsidiaries provided valuation allowances in
respect of deferred tax assets resulting from tax loss
carryforward. Deferred taxes in respect of other temporary
differences are immaterial. Management currently believes that it
is more likely than not that the deferred tax regarding the loss
carryforwards and other temporary differences will not be
realized. The change in the valuation allowance as of December
31, 2002 was $519.
h. The Company's total income (loss) before provision for income
taxes is as follows:
Year ended December 31,
------------------------------------------
2000 2001 2002
----------- ------------ ------------
Domestic (Israel) $ 72 $ (965) $ 7,880
Foreign 177 (647) (5,124)
----------- ------------ ------------
$ 249 $(1,612) $ 2,756
=========== ============ ============
A reconciliation between the theoretical tax benefit, assuming
all income is taxed at the statutory tax rate applicable to the
income of the Company and the actual tax expense as reported in
the statements of operations, is as follows:
Year ended December 31,
--------------------------------
2000 2001 2002
--------- ----------- ---------
Income (loss) before taxes on income $ 249 $(1,612) $ 2,756
Theoretical tax expense (benefit)
computed at the statutory rate (36%) 90 (580) 992
Loss and other items for which
deferred taxes were not provided,
net (182) 418 (1,235)
Non-deductible expenses 92 162 243
--------- ----------- ---------
Taxes on income $ - $ - $ -
========= =========== =========
F-30
RADVISION LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 16:- QUARTERLY INFORMATION (UNAUDITED)
The Company's quarterly consolidated financial position and statements of
operations as of and for each of the quarterly periods in the years ended
December 31, 2001, and 2002 are as follows:
Three months ended,
------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Revenues $ 14,895 $ 10,430 $ 10,208 $ 10,694 $ 11,557 $ 11,707 $ 12,158 $ 13,673
Cost of revenues 3,725 2,240 2,099 2,298 2,558 2,571 2,615 3,202
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Gross profit 11,170 8,190 8,109 8,396 8,999 9,136 9,543 10,471
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Operating expenses
Research and development
expenses 4,757 4,563 4,319 4,294 4,041 3,870 3,815 3,612
Marketing and selling
expenses, net 4,840 4,365 3,690 3,840 4,469 4,587 4,642 4,926
General and administrative
expenses 1,169 1,308 1,057 904 969 1,073 1,071 985
Restructuring costs - 3,023 - - - - - -
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Total operating expenses 10,766 13,259 9,066 9,038 9,479 9,530 9,528 9,523
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Operating income (loss) 404 (5,069) (957) (642) (480) (394) 15 948
Financial income, net 1,404 1,264 1,118 866 752 686 634 595
---------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
Net income (loss) 1,808 (3,805) 161 224 272 292 649 1,543
========== ============ =========== ============ =========== ============ =========== ===========
Basic earnings (loss) per
Ordinary share $ 0.09 $ (0.2) $ 0.01 0.01 $ 0.01 $ 0.02 $ 0.04 $ 0.08
========== =========== =========== ============ =========== ============ =========== ===========
Weighted average number of
Ordinary shares outstanding 19,196,316 19,199,771 18,995,041 18,431,559 18,168,617 18,063,334 18,137,900 18,218,850
========== ========== =========== ============ =========== ============ =========== ===========
Diluted earnings (loss) per
Ordinary share $ 0.09 $ (0.20) $ 0.01 $ 0.01 $ 0.01 $ 0.02 $ 0.03 $ 0.08
========== ============ =========== ============ =========== ============ =========== ===========
Weighted average number of
shares 20,750,146 19,199,771 20,226,819 19,601,742 19,400,949 18,864,264 18,792,868 18,875,238
========== ========== =========== ============ =========== ============ =========== ===========
- - - - - - - - - - - - - - -
F-30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2003
RADVISION LTD.
/S/GAD TAMARI
By: -------------------------------------
Gad Tamari
President and Chief Executive Officer
(Principal Executive Officer)
/S/DAVID SELIGMAN
By: -------------------------------------
David Seligman
Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title
---- -----
/s/Zohar Zisapel
- -----------------------
Zohar Zisapel Chairman of the Board of Directors
/s/Gad Tamari
- -----------------------
Gad Tamari Chief Executive Officer, President and Director
/s/Dan Goldstein
- -----------------------
Dan Goldstein Director
/s/Efraim Wachtel
- ----------------------- Director
Efraim Wachtel
/s/Andreas Mattes
- ----------------------- Director
Andreas Mattes
/s/Liora Katzenstein
- ----------------------- Director
Liora Katzenstein
Dated: March 30, 2003
78
RADVISION LTD.
Exhibit Index
Exhibit Description
------- -----------
3.1* Memorandum of Association of the Registrant
3.2* Articles of Association of the Registrant
4.1* Form of Ordinary Share Certificate
4.2* Agreement, dated as of April 14, 1995, by and among Registrant, RAD
Data Communications Ltd. and Yehuda Zisapel and Zohar Zisapel
4.3* Agreement, dated as of April 18, 1995, by and among Registrant, Clal
Venture Capital Fund LP and Yehuda Zisapel and Zohar Zisapel
4.4* Agreement, dated as of April 18, 1995, by and among Registrant, Lannet
Data Communications Ltd. and Yehuda Zisapel and Zohar Zisapel
4.5* Agreement, dated as of April 19, 1995, by and among Registrant, ECI
Telecom Ltd. and Yehuda Zisapel and Zohar Zisapel
4.6* Agreement, dated as of April 24, 1995, by and among Registrant, Zohar
Gilon, Avraham Neuman, Yair Tauman and W.S.P. Capital Investment Ltd.,
and Yehuda Zisapel and Zohar Zisapel
4.7* Agreement, dated as of April 26, 1995, by and among Registrant, Lerosh
Investments Ltd., Gevahim Investments House Limited Ltd., Yoav
Chelouche, Permal Emerging Growth V Ltd., Maritime--Julex Investment
Ltd., Shraga Blazer and Eli Luz and Yehuda Zisapel and Zohar Zisapel
4.8* Agreement, dated as of April 27, 1995, by and among Registrant,
Finovelec, Factory Systemes, Houston Venture Partners, Ltd. and Yehuda
Zisapel and Zohar Zisapel
4.9* Agreement, dated September 12, 1996, by and among Registrant and Intel
Corporation, as amended
4.10*Agreement, dated May 12, 1998, by and among Registrant, Evergreen
Canada Israel Management Ltd., IJT Technologies Ltd., Periscope I Fund
Israeli Partnership, Dovrat Shrem Trust Company Ltd., Rubin Gruber,
C.E. Unterberg, Towbin LLC, C.E. Unterberg, Towbin Private Equity
Partners LP, C.E. Unterberg, Towbin Private Equity Partners CV, C.E.
Unterberg, Private Profit Sharing Plan FBO Alex Bernstein and
Steimatzsky Ltd.
10.1*** Form of 2000 Employee Stock Option Plan
10.2* Key Employee Share Incentive Plan, as amended
10.3* Consultant Option Plan, as amended
10.4*License Agreement, dated January 13, 1999, between Registrant and
RADCOM Ltd.
10.5*Lease Agreement, dated May 12, 1997, between RADVISION Inc. and RAD
Data Communications Inc., as amended
10.6** Lease Agreement, dated January 19, 2001, between Zohar Zisapel
Properties, Inc., Yehuda Zisapel Properties, Inc. and RADVISION Inc.
11 Statements re computation of per share earnings.
21 Subsidiaries of RADVISION Ltd.
23 Consent of Kost Forer & Gabbay, a member of Ernst & Young Global, with
respect to the Registration Statements on Form S-8.
99.1 Certification by Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
99.3 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.4 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
-------------------
* Incorporated by reference to our registration statement on Form F-1,
registration number 333-30916, as amended, filed with the Securities and
Exchange Commission.
** Incorporated by reference to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2000, filed with the Securities and
Exchange Commission.
*** Incorporated by reference to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, filed with the Securities and
Exchange Commission.