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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
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[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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 0-30628
Alvarion Ltd.
(Exact name of Registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
21A HaBarzel Street, Tel Aviv 69710, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, NIS 0.01 par value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
57,953,229 Ordinary Shares, NIS 0.01 par value per share
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.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
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INTRODUCTION
We are a leading provider of wireless broadband connectivity solutions and
specialized cellular networks. Our products are used primarily to provide
wireless broadband data and voice services for subscribers in the "last mile" of
connectivity as well as for feeding cellular networks, for creating cellular
network extensions and compact specialized cellular networks. With our
comprehensive product offerings, we provide a broad range of integrated wireless
broadband solutions operating in licensed and license-free bands ranging from
450 MHz to 26 GHz and comply with industry standards. These solutions address
different markets and the various business models of carriers, service providers
and private network operators. We have played a prominent role in creating and
promoting industry standards, including our leading role in the WiMAX Forum(TM)
(Worldwide Interoperability for Microwave Access, Inc.), an organization focused
on increasing the widespread adoption of standards-based products in the
wireless broadband market and leading the industry to mobile WiMAX solutions.
We were incorporated in September 1992 under the laws of the State of
Israel. In August 2001, under the name of BreezeCOM, we merged with Floware
Wireless Systems Ltd., a company incorporated under the laws of the State of
Israel, or Floware. Following the merger, we continued as the surviving company
and we changed our name to Alvarion Ltd. In April 2003, we completed the
acquisition of InnoWave ECI Wireless Systems Ltd., a wholly-owned subsidiary of
ECI Telecom Ltd., or InnoWave. In December 2004, interWAVE Communications
International Ltd., or interWAVE, was acquired through a merger with and into
Alvarion.
Except for historical information contained herein, the statements
contained in this annual report are forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our business, financial condition and results of operations. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all or any of the risks
discussed in "Item 3 -- Key Information -- Risk Factors" and elsewhere in this
annual report.
We urge you to consider that statements which use the terms "believe,"
"expect," "plan," "intend," "estimate," "anticipate," "project" and similar
expressions in the affirmative and the negative are intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on current assumptions, expectations,
estimates and projections and are subject to risks and uncertainties. Except as
required by applicable law, including the securities laws of the United States,
we do not undertake any obligation nor intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
As used in this annual report, the terms "we," "us," "our," "our company,"
and "Alvarion" mean Alvarion Ltd., and its subsidiaries, unless otherwise
indicated. "Alvarion," "Alvarion & Design," "We're on your wavelength,"
"BreezeACCESS," "BreezeCOM," "BreezePHONE," "BreezeNET," "BreezEXCHANGE,"
"BreezeLINK," "WALKair," "WALKnet," "BreezeGATE," "BreezeIP," "BreezeLAN,"
"BreezeWEB," "BreezeCONFIG," "BreezeWIZARD," "BreezeSECURE," "BreezeVIEW,"
"BreezeMANAGE," "Alvari," "AlvariX," "AlvariSTAR," "AlvariBASE," "BreezeCARE,"
"BreezeACCESS II," "BreezeACCESS II CX," "BreezeACCESS XL," "BreezeACCESS MMDS,"
"BreezeACCESS OFDM," "BreezeACCESS LB," "BreezeACCESS TM," "BreezeACCESS VL,"
"BreezeACCESS V," "BreezeACCESS GO," "WALKair 1000," "WALKair 3000," "BreezeNET
PRO.11," "BreezeNET DS.11," "BreezeNET DS.11b", "BreezeNET DS.5800",
"EasyBridge", "BreezeMAX", "eMGW, "MGW", "Breeze2000", "complete spectrum",
"wavexpress", "wavexchange", "waveview" and "microexpress" are trademarks or
registered trademarks of Alvarion. All other trademarks and tradenames appearing
in this annual report are owned by their respective holders.
TABLE OF CONTENTS
Page
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PART I ..................................................................... 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ............ 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE .......................... 1
ITEM 3. KEY INFORMATION .................................................. 2
A. SELECTED FINANCIAL DATA .......................................... 2
B. CAPITALIZATION AND INDEBTEDNESS .................................. 3
C. REASONS FOR THE OFFER AND USE OF PROCEEDS ........................ 3
D. RISK FACTORS ..................................................... 3
ITEM 4. INFORMATION ON THE COMPANY ....................................... 18
A. HISTORY AND DEVELOPMENT OF THE COMPANY ........................... 18
B. BUSINESS OVERVIEW ................................................ 18
C. ORGANIZATIONAL STRUCTURE ......................................... 34
D. PROPERTY, PLANTS AND EQUIPMENT ................................... 35
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ..................... 35
A. OPERATING RESULTS ................................................ 35
B. LIQUIDITY AND CAPITAL RESOURCES .................................. 46
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ................... 52
D. TREND INFORMATION ................................................ 52
E. OFF-BALANCE SHEET ARRANGEMENTS ................................... 53
F. TABULAR DISCLOSURE OF CONTRACTURAL OBLIGATIONS ................... 53
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ....................... 53
A. DIRECTORS AND SENIOR MANAGEMENT .................................. 53
B. COMPENSATION ..................................................... 56
C. BOARD PRACTICES .................................................. 56
D. EMPLOYEES ........................................................ 60
E. SHARE OWNERSHIP .................................................. 61
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ................ 62
A. MAJOR SHAREHOLDERS ............................................... 62
B. RELATED PARTY TRANSACTIONS ....................................... 63
C. INTERESTS OF EXPERTS AND COUNSEL ................................. 63
ITEM 8. FINANCIAL INFORMATION ............................................ 63
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION .......... 63
B. SIGNIFICANT CHANGES .............................................. 64
ITEM 9. THE OFFER AND LISTING ............................................ 64
A. OFFER AND LISTING DETAILS ........................................ 64
B. PLAN OF DISTRIBUTION ............................................. 65
C. MARKETS .......................................................... 65
D. SELLING SHAREHOLDERS ............................................. 65
E. DILUTION ......................................................... 65
F. EXPENSES OF THE ISSUE ............................................ 65
i
TABLE OF CONTENTS
(continued)
Page
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ITEM 10. ADDITIONAL INFORMATION .............................................. 65
A. SHARE CAPITAL ....................................................... 65
B. MEMORANDUM AND ARTICLES OF ASSOCIATION .............................. 65
C. MATERIAL CONTRACTS .................................................. 67
D. EXCHANGE CONTROLS ................................................... 67
E. TAXATION ............................................................ 74
F. DIVIDENDS AND PAYING AGENTS ......................................... 74
G. STATEMENT BY EXPERTS ................................................ 74
H. DOCUMENTS ON DISPLAY ................................................ 74
I. SUBSIDIARY INFORMATION .............................................. 74
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......... 74
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES .............. 75
PART II ......................................................................... 76
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ..................... 76
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS ..................................................... 76
ITEM 15. CONTROLS AND PROCEDURES ............................................. 76
ITEM 16. RESERVED ............................................................ 76
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT .................................... 76
ITEM 16B. CODE OF ETHICS AND CODE OF CONDUCT .................................. 76
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES .............................. 77
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES .......... 77
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE INSURER AND
AFFILIATED PURCHASES ................................................ 77
PART III ........................................................................ 78
ITEM 17. FINANCIAL STATEMENTS ................................................ 78
ITEM 18. FINANCIAL STATEMENTS ................................................ 78
ITEM 19. EXHIBITS ............................................................ 78
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
1
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
We have derived the following selected consolidated financial data
presented below as of December 31, 2003 and 2004 and for each of the years ended
December 31, 2002, 2003 and 2004 from our audited consolidated financial
statements and related notes included in this annual report. The consolidated
financial data for the year ended December 31, 2001 and thereafter include the
results of operations of the former Floware business from August 1, 2001, the
effective date of the merger of Floware with and into us. The consolidated
financial data for the year ended December 31, 2003 include the results of
operations of the assets and assumed liabilities of InnoWave business from April
1, 2003. The consolidated financial data for the year ended December 31, 2004
include the results of operations of the former interWAVE Communications
International Ltd. business from December 9, 2004. We have derived the selected
consolidated financial data as of December 31, 2000, 2001 and 2002 and for each
of the years ended December 31, 2000 and 2001 from our audited consolidated
financial statements and related notes not included in this annual report. We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, or U.S. GAAP. You should
read the selected consolidated financial data together with the section of this
annual report entitled "Item 5 -- Operating and Financial Review and Prospects"
and our consolidated financial statements and related notes included elsewhere
in this annual report.
2000 2001 2002 2003 2004
---------- ----------- ---------- ---------- --------
(In thousands, except per share data)
Statement of Operations Data:
Sales ............................................. $ 101,460 $ 98,968 $ 88,849 $ 127,208 $201,507
Cost of sales ..................................... 55,608 59,484 55,120 68,535 102,329
Write-off of excess inventory and provision for
inventory purchase commitments ................... -- 53,881 250 6,562 11,412
---------- ----------- ---------- ---------- --------
Gross profit (loss) ............................... 45,852 (14,397) 33,479 52,111 87,766
========== =========== ========== ========== ========
Operating costs and expenses:
Research and development, gross ................... 16,818 27,078 27,597 27,351 31,713
Less grants ....................................... 4,345 5,982 3,520 3,846 3,897
---------- ----------- ---------- ---------- --------
Research and development, net ..................... 12,473 21,096 24,077 23,505 27,816
Selling and marketing ............................. 26,226 30,258 26,570 32,904 39,038
General and administrative ........................ 4,132 6,226 6,018 6,323 9,681
Merger and acquisition related expenses ........... -- 2,841 -- 2,201 369
Amortization of intangible assets ................. -- 1,200 2,400 2,606 2,779
Amortization of deferred stock compensation ....... 18 726 580 511 60
In-process research and development write-off ..... -- 26,300 -- -- 10,993
Restructuring ..................................... -- 5,437 1,102 -- --
One-time expense related to a settlement of an
OCS program ...................................... -- 6,535 -- -- --
---------- ----------- ---------- ---------- --------
Total operating expenses .......................... 42,849 100,619 60,747 68,050 90,736
---------- ----------- ---------- ---------- --------
Operating income (loss) ........................... 3,003 (115,016) (27,268) (15,939) (2,970)
Financial income, net ............................. 7,031 8,540 6,587 4,127 3,821
Other expenses .................................... -- (3,535) -- -- --
---------- ----------- ---------- ---------- --------
Net income (loss) ................................. $ 10,034 $ (110,011) $ (20,681) $ (11,812) $ 851
========== =========== ========== ========== ========
Basic net earnings (loss) per share ............... $ 0.40 $ (2.80) $ (0.38) $ (0.23) $ 0.02
========== =========== ========== ========== ========
Weighted average number of shares used in
computing basic net earnings (loss) per share .... 24,938 39,298 53,941 52,127 56,549
========== =========== ========== ========== ========
Diluted net earnings (loss) per share ............. $ 0.33 $ (2.80) $ (0.38) $ (0.23) $ 0.01
========== =========== ========== ========== ========
Weighted average number of shares used
in computing diluted net earnings (loss)
per share ........................................ 30,807 39,298 53,941 52,127 63,754
========== =========== ========== ========== ========
2
2000 2001 2002 2003 2004
-------- --------- -------- -------- --------
(In thousands)
Consolidated Balance Sheet Data:
Working capital ................ $159,793 $ 167,371 $ 74,237 $ 90,359 $ 53,341
Total assets ................... 252,837 307,595 272,075 284,957 328,535
Shareholders' equity ........... $212,495 $ 254,251 $227,830 $220,202 $232,812
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Our business, financial condition and results of operations could be
seriously harmed due to any of the following risks, among others. If we do not
successfully address the risks to which we are subject, we could experience a
material adverse effect on our business, results of operations and financial
condition and our share price may decline. We cannot assure you that we will
successfully address any of these risks.
Risks Related to Our Business and Our Industry
We have incurred losses in the past and may incur losses in the future.
While we had a net profit in 2004, we incurred operating losses and net
losses in 2003 and 2002. In 2004, our operating loss and net income were
approximately $(3.0) million and $0.9 million, respectively. In 2003, our
operating loss and net loss were approximately $(15.9) million and $(11.8)
million, respectively. In 2002, our operating loss and net loss were
approximately $(27.3) million and $(20.7) million, respectively. Although we
were profitable in 2004, we may incur operating and net losses again in the
future. Losses or a decrease in our net income could have a material adverse
effect on our business, financial condition and results of operations and the
value and market price of our ordinary shares.
Adverse conditions in the telecommunications industry and in the
telecommunications equipment market may decrease demand for our products and may
harm our business, financial condition and results of operations.
Our systems are used by telecom carriers and service providers. The
slowdown in the telecommunications industry from 2001 through the beginning of
2003 curtailed the ability of existing and prospective carriers and service
providers to finance purchases of products such as ours. In addition some
carriers and service providers using wireless broadband are emerging companies
with unproven business models. During 2003 and 2004, we perceived an improvement
in the general market for telecommunications equipment. However, due to the past
volatility of the market, we cannot predict the duration or extent of any
recovery in this market or the impact it may have on our revenues or results of
operations. Market conditions could continue to cause our customers and
potential customers to be conservative in their spending.
The markets that we participate in may not grow as we expect or at all.
While our goal is to increase our sales by expanding the number of carrier
customers that we address, there can be no assurance that we will succeed in
doing so. The number of carriers and service providers who are our potential
customers is relatively small and may not grow because of the limited number of
licenses granted in each country and the substantial comparative capital
requirements involved in establishing networks.
3
If we do not maintain or increase our share of the wireless broadband equipment
and specialized cellular network markets, our business will suffer. In addition
new markets we attempt to penetrate may not become substantial commercial
markets.
In order to maintain or increase our share of the markets we participate
in, we must:
o sustain our attained technology position in designing,
developing, and manufacturing wireless broadband and specialized
cellular network products;
o develop and cultivate additional sales channels, including
original equipment manufacturer, or OEM, agreements or other
strategic arrangements with leading manufacturers of access
equipment to market our wireless broadband products to
prospective customers, such as local exchange carriers, cellular
operators, Internet and application service providers and local
telephone companies; and
o effectively establish and support relationships with customers,
including local exchange carriers, Internet and application
service providers, public fixed or mobile telephone service
providers and private network operators sometimes offered on
special commercial terms.
Our efforts in these markets may not succeed. In addition the mobile market
and any future markets that we may attempt to penetrate may not become
substantial commercial markets or may not evolve in a manner that will enable
our products to achieve market acceptance.
If customers refrain from buying our current proprietary products in order to
wait for our standards-compliant, WiMAX certified products, our business will
suffer.
WiMAX certification relates to two industry standards, IEEE 802.16d and
802.16e. We may suffer temporarily from the market transition to WiMAX certified
products as customers may slow their purchases of our proprietary technology in
order to wait for WiMAX certified products. In addition, the introduction of
Wimax certified products may not increase the demand for wireless broadband
solutions and this may adversely affect our results of operations.
Our standards-compliant, WiMAX ready products, may not receive the certification
that we expect, which may affect our future business.
We rely on the recently developed WiMAX technology. Products based on this
technology may not receive certification in the time frame we expect, or at all,
and may therefore not achieve the wide acceptance that we are seeking. Market
changes could render this technology obsolete or subject to intense competition
by alternative technologies. This may harm the sales of our standards compliant
products, and consequently, our results of operations.
If we lose large customers we may not succeed in replacing them and our revenues
will be adversely affected.
In 2002, one of our customers was responsible for 11.4% of our 2002 sales
and another was responsible for 10.3% of our sales. In 2003, 13.9% of our sales
were to a Latin American operator, and in 2004, this operator accounted for
30.6% of our sales If revenues from these customers decline, or we lose these
large customers, we may not be successful in replacing them on a timely basis,
or at all, and our revenues may be adversely affected.
Our products have long and unpredictable sales cycles. This could adversely
impact our revenues and net income.
The sales cycle for our licensed band and cellular mobile products
encompasses significant technical evaluation and testing by each potential
purchaser and a commitment of significant cash and other resources. The sales
cycle can extend for as long as one year from initial contact with a carrier to
receipt of a purchase order. This time frame may be extended due to, among other
reasons, a carrier's need to obtain financing to purchase systems incorporating
our products, the regulatory authorization of competition in local services,
delays in the licensing of spectrum for these services and other regulatory
hurdles.
As a result of the length of this sales cycle, revenues from our products
may fluctuate from quarter to quarter and fail to correspond with associated
expenses, which are largely based on anticipated revenues. In addition, the
4
delays inherent in the sales cycle of our products raise additional risks of
customers canceling or changing their product plans. Our revenues will be
adversely affected if a significant customer, or significant potential customer,
reduces, delays or cancels orders during the sales cycle of the products or
chooses not to deploy networks incorporating our products. Any such fluctuation
in revenue or cancellation of orders could affect the market price of our
ordinary shares.
Our business is dependent upon the success of distributors who are under no
obligation to purchase our products.
A significant portion of our revenues is derived from sales to independent
distributors. These distributors then resell the products to others, who further
resell those products to end-users. The three largest distributors of our
products accounted for a total of approximately 20.9% of our sales in 2002,
13.1% of our sales in 2003, and less than 10% of our sales in 2004. If we
terminate or lose any of these distributors, we may not be successful in
replacing them on a timely basis, or at all. Any changes in the distribution and
sales channels of our products, particularly the loss of a major distributor or
our inability to establish effective distribution and sales channels for new
products will impact our ability to sell our products and result in a loss of
revenues. We are dependent upon the acceptance of our products by the market
through our distributors' efforts in marketing and sales. In some cases,
arrangements with our distributors do not prevent them from selling competitive
products and those arrangements do not contain minimum sales or marketing
performance requirements. These distributors may not give a high priority to
marketing and supporting our products. Changes in the financial condition,
business or marketing strategies of these distributors could have a material
adverse effect on our results of operations. Any of these changes could occur
suddenly and rapidly.
Our business depends in part on original equipment manufacturers and systems
integrators.
The success of the sales of our wireless broadband products currently
depends in part on existing relationships with OEMs or other system integrators.
A portion of our systems is sold to and through telecommunications systems
integrators for integration into their systems, rather than directly to
carriers. The sale of our wireless broadband products depends in part on the
OEMs' and systems integrators' active marketing and sales efforts as well as the
quality of their integration efforts and post-sales support. Sales through the
OEM and system integrator channels exposes this business to a number of risks,
each of which could result in a reduction in the sales of our wireless broadband
products.
We face the risk of termination of these relationships and the promotion of
competing products or emphasis on alternative technologies by these OEMs and
systems integrators. In addition, our efforts to increase sales may suffer from
the lack of brand visibility resulting from OEMs' and systems integrators'
integration of these products into more comprehensive systems. If any of these
risks materializes, we will need to develop alternative methods of marketing
these products. Until we do so, sales of our wireless broadband products may
decline.
We are also dependent upon the success of our direct sales efforts.
Direct sales accounted for a total of approximately 14.5% of our sales in
2002, 28.4% of our sales in 2003, and 52% of our sales in 2004. Direct sales
customers are not under any obligation to purchase our products. Some of these
customers do not have long business histories and have encountered, and may
continue to encounter, financial difficulty, including difficulty in obtaining
credit to purchase our products. These customers typically purchase our products
on a project-by-project basis, so that continuity of purchases by these
customers is not assured. We do not necessarily retain sales personnel with
carrier sales expertise, and may face difficulty locating and retaining carrier
customers who purchase directly. If we are unable to effectively continue our
direct sales efforts of our products, our results of operations could be
materially adversely affected. Any such change could occur suddenly and rapidly.
We may not successfully integrate the business operations of interWAVE. Our
failure to do so might harm our results of operations and share price.
In December 2004, we completed the acquisition of interWAVE. The challenges
of integrating the business operations of the companies include demonstrating to
our customers that the acquisition will not result in an adverse change in
business focus and persuading our personnel that the companies' respective
business cultures are compatible,
5
and that we can overcome the differences in culture and time zones. To
successfully integrate both companies' operations, we need to retain management,
key employees and business partners of both companies and to gain the benefit of
each company's strengths. If we are unable to effectively complete the
integration of the two companies' operations, technologies and personnel in a
timely and efficient manner, we will not realize the benefits we expect from the
acquisition and our business, financial conditions and results of operations may
be materially adversely affected.
Under the terms of our merger transaction with interWAVE Communications
International Ltd., we are liable for interWAVE's pre merger liabilities.
The merger of interWAVE with and into us in December 2004, resulted in our
assuming all of the liabilities of interWAVE existing at the time of the merger.
If such liabilities exceed the liabilities we are aware of and have provided for
in our financial statements or if there are liabilities that we were not aware
of at the time of the merger, this could have an adverse affect on us.
We may engage in future acquisitions that could harm our business, results of
operations and financial condition, and dilute our stockholders' equity.
We have pursued, and will continue to pursue, growth opportunities through
internal development and acquisition of complementary businesses, products and
technologies. We are unable to predict whether or when any other prospective
acquisition will be completed. The process of integrating an acquired business
may be prolonged due to unforeseen difficulties and may require a
disproportionate amount of our resources and management's attention. We cannot
assure you that we will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into our
operations, or expand into new markets. Further, once integrated, acquisitions
may not achieve comparable levels of revenues, profitability or productivity as
our existing business or otherwise perform as expected. The occurrence of any of
these events could harm our business, financial condition or results of
operations. Future acquisitions may require substantial capital resources, which
may require us to seek additional debt or equity financing.
Future acquisitions by us could result in the following, any of which could
seriously harm our results of operations or the price of our stock:
o issuance of equity securities that would dilute our current
stockholders' percentages of ownership;
o large one-time write-offs;
o the incurrence of debt and contingent liabilities;
o difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;
o diversion of management's attention from other business concerns;
o contractual disputes;
o risks of entering geographic and business markets in which we
have no or only limited prior experience; and
o potential loss of key employees of acquired organizations.
Our failure to manage growth effectively could impair our business, financial
condition and results of operations.
Our rapid growth, including our amalgamation with interWAVE, our
acquisition of most of the assets and assumed liabilities of InnoWave, and our
merger with Floware, has significantly strained our management, operational and
financial resources. Any future growth including mergers and acquisitions may
increase the strain on our management, operational and financial resources. If
we do not succeed in managing future growth effectively, we may not be able to
meet the demand, if any, for our products and we may lose sales or customers,
harming our business, financial condition and results of operations.
6
Rapid technological change may have an adverse affect on the market acceptance
for our products.
The markets for our products and the technologies utilized in the industry
in which we operate evolve rapidly. We rely on key technologies, including
wireless LAN, wireless packet data, orthogonal frequency division multiplexing,
or OFDM, time division multiplexing, modem and radio technologies and other
technologies, which we have been selling for several years, as well as the
recently developed WiMAX technology and CDMA (Code Division Multiple Access) or
other 3G products. These technologies may be replaced with alternative
technologies or may otherwise not achieve the wide acceptance that we are
seeking. In particular, there is a substantial risk that the wireless broadband
technologies underlying our products may not achieve market acceptance for use
in access applications.
Market changes could render our products and technologies obsolete or
subject them to intense competition by alternative products or technologies or
by improvements in existing products or technologies. For example, the wireless
broadband equipment market may stop growing as a result of the deployment of
alternative technologies, that are constantly improving, such as DSL, cable
modem, fiber optic, coaxial cable, satellite systems, third generation cellular
systems or otherwise. New or enhanced products developed by other companies may
be technologically superior to our products, and limit our addressable market,
or render our products obsolete.
The success of our technology depends on the following factors, among
others:
o acceptance of new and innovative technologies;
o acceptance of standards for wireless broadband products;
o timely availability and maturity of technology from technology
suppliers, such as Intel;
o capacity to handle growing demands for faster transmission of
increasing amounts of data and voice;
o its cost-effectiveness and performance compared to other
broadband technologies;
o its reliability and security;
o its suitability for a sufficient number of geographic regions;
o the availability of sufficient frequencies and site locations for
carriers to deploy and install products at commercially
reasonable rates; and
o safety and environmental concerns regarding wireless broadband
transmissions.
We may experience difficulties in the introduction of new or enhanced products,
which could result in reduced sales, unexpected expenses or delays in the launch
of new or enhanced products.
The development of new or enhanced products is a complex and uncertain
process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products or product enhancements. The difficulties could result
in reduced sales, unexpected expenses of delays in the launch of new or enhanced
products, which may adversely affect our results of operations.
Our products are complex and may have errors or defects that are detected only
after deployment in complex networks.
Some of our products are highly complex and are designed to be deployed in
complex networks like the cellular mobile products for example. Although our
products are tested during manufacturing and prior to deployment, our customers
may discover errors after the products have been fully deployed. If we are
unable to fix errors or other problems that may be identified in full
deployment, we could experience:
o costs associated with the remediation of any problems;
o loss of or delay in revenues;
o loss of customers;
o failure to achieve market acceptance and loss of market share;
7
o diversion of deployment resources;
o diversion of research and development resources to fix errors in
the field;
o increased service and warranty costs;
o legal actions or demands for compensation by our customers; and
o increased insurance costs.
In addition, our products often are integrated with other network
components. There may be incompatibilities between these components and our
products that could significantly harm the service provider or its subscribers.
Product problems in the field could require us to incur costs or divert
resources to remedy the problems and subject us to liability for damages caused
by the problems or delay in research and development projects because of the
diversion of resources. These problems could also harm our reputation and
competitive position in the industry.
Existing and potential industry standards may have a negative impact on our
business.
We have developed and continue to develop our products with a view to
compliance with existing standards and anticipated future standards. We
expended, and intend to continue to expend, substantial resources in developing
products and product features that are designed to conform to such standards. In
addition, although we developed our products with a view to compliance with
existing standards and anticipated compliance with future standards, we may not
be able to introduce on a timely basis products that comply with industry
standards.
Certain standards on which we base our products and technology (such as
IEEE 802.16e, GSM and CDM2000) may not continue to be or will not be broadly
adopted which could significantly limit our market opportunity and harm our
business. In addition, our focus on anticipated future standards, including the
IEEE 802.16e standard, may lead to delays in introducing products designed for
current standards.
Our strategy of seeking to anticipate and comply with industry standards is
subject to the following additional risks, among others:
o the standards ultimately adopted by the industry may vary from
those anticipated by us, causing our products (which were
designed to meet anticipated standards) to fail to comply with
established standards;
o even if our products do comply with established standards, these
standards are not mandatory and consumers may prefer to purchase
products that do not comply with them or that comply with new or
competing standards; and
o product standardization may have the effect of lowering barriers
to entry in the markets in which we seek to sell our products, by
diminishing product differentiation and causing competition to be
based upon criteria such as the relative size and marketing
skills of competitors. We may have greater disadvantages in
competing on the basis of these criteria than on the basis of
product differentiation.
These risks, among others, may harm our sales and, consequently, our
results of operations.
Standardization and increased competition may have an adverse effect on our
gross margins.
Standardization of product features may increase the number of competitive
product offerings. Furthermore, our competitors may also attempt to influence
the adoption of standards that are not compatible with our products.
Standardization also results in lower average selling prices. Increased
competition, direct and indirect, has resulted in, and is likely to continue to
result in, reductions of average selling prices, shorter product life cycles,
reduced gross margins, longer sales cycles and loss of market share and,
consequently, could adversely affect our sales and profitability.
Government regulation may increase our costs of doing business, limit our
potential markets or require changes to our products that may be difficult and
costly.
Our business is premised on the availability of certain radio frequencies
for two-way broadband communications. Radio frequencies are subject to extensive
regulation under the laws of each country and international treaties. Each
country has different regulation and regulatory processes for wireless
communications
8
equipment and uses of radio frequencies. In the United States, our products are
subject to the Federal Communications Commission, or FCC, rules and regulations.
In other countries, our products are subject to national or regional radio
authority rules and regulations. Current FCC regulations permit license-free
operation in FCC-certified bands in the radio spectrum in the United States. In
other countries the situation varies as to the spectrum, if any, that may be
used without a license and as to the permitted purposes of such use. Some of our
products operate in license-free bands, while others operate in licensed bands.
The regulatory environment in which we operate is subject to significant change,
the results and timing of which are uncertain.
In many countries the unavailability of radio frequencies for two-way
broadband communications has inhibited the growth of these networks. The process
of establishing new regulations for wireless broadband frequencies and
allocating these frequencies to operators is complex and lengthy. The regulation
of frequency licensing began during 1999 in many countries in Europe and South
America and continues in many countries in these and other regions. However,
this frequency licensing regulation process may suffer from delays that may
postpone the commercial deployment of products that operate in licensed bands in
any country that experiences this delay. Our current customers that commercially
deploy our licensed band products have already been granted appropriate
frequency licenses for their network operation. In some cases, the continued
validity of these licenses may be conditional on the licensee complying with
various conditions. In addition to regulation of available frequencies, our
products must conform to a variety of national and international regulations
that require compliance with administrative and technical requirements as a
condition to the operation of marketing or devices that emit radio frequency
energy. These requirements were established, among other things, to avoid
interference among users of radio frequencies and permit interconnection of
equipment.
The regulatory environment in which we sell our products subjects us to
several risks, including the following:
o Our customers may not be able to obtain sufficient frequencies
for their planned uses of our wireless broadband products.
o Failure by the regulatory authorities to allocate suitable and
sufficient radio frequencies in a timely manner could deter
potential customers from ordering our wireless broadband
products. Also, licenses to use certain frequencies and other
regulations may include terms which affect the desirability of
using our products and the ability of our customers to grow.
o If our products operate in the license-free bands, FCC rules and
similar rules in other countries require operators of radio
frequency devices, such as our products, to cease operation of a
device if its operation causes interference with authorized users
of the spectrum and to accept interference caused by other users.
o If the use of our products interferes with authorized users, or
if users of our products experience interference from other
users, market acceptance of our products could be adversely
affected.
o Regulatory changes, including changes in the allocation of
available frequency spectrum, may significantly impact our
operations by rendering our current products obsolete or
non-compliant, or by restricting the applications and markets
served by our products.
o Regulatory changes and restrictions imposed due to environmental
concerns, such as restrictions imposed on the location of outdoor
antennas.
o We may not be able to comply with all applicable regulations in
each of the countries where our products are sold and we may need
to modify our products to meet local regulations.
In addition, we are subject to export control laws and regulations with
respect to all of our products and technology. We are subject to the risk that
more stringent export control requirements could be imposed in the future on
product classes that include products exported by us.
We must be able to manage expenses and inventory risks associated with meeting
the demand of our customers.
To ensure that we are able to meet customer demand for our products, we
place orders with our subcontractors and suppliers based on our estimates of
future sales. If actual sales differ materially from these estimates, our
9
inventory levels and expenses may be adversely affected and our business and
results of operations could suffer. We wrote-off inventory in 2002, 2003 and
2004.
We depend on a number of manufacturing subcontractors with limited manufacturing
capacity, and these manufacturers may be unable to fill our orders on a timely
basis and at the quality specifications that we require. As a result, we may not
meet our customers' demands, harming our business and results of operations.
We currently depend on a number of contract manufacturers with limited
manufacturing capacity to manufacture our products. The assembly of certain of
our finished products, the manufacture of custom printed circuit boards utilized
in electronic subassemblies and related services are also performed by these
independent subcontractors. In addition, we rely on third-party "turn-key"
manufacturers to manufacture certain sub-systems for our products.
Reliance on third party manufacturers exposes us to significant risks,
including risks resulting from:
o potential lack of manufacturing capacity;
o limited control over delivery schedules;
o quality assurance and control;
o manufacturing yields and production costs;
o voluntary or involuntary termination of their relationship with
us;
o difficulty in, and timeliness of, substituting any of our
contract manufacturers, which could take as long as six months or
more;
o the economic and political conditions in their environment; and
o their financial strength.
If the operations of our contract manufacturers are halted, even
temporarily, or if they are unable to operate at full capacity for an extended
period of time, we may experience business interruption, increased costs, loss
of goodwill and loss of customers.
We are required to place manufacturing orders well in advance of the time
we expect to sell products, and this may result in us ordering greater or lesser
amount of these products than required. Because we outsource the manufacture of
several of our products, we are required to place manufacturing orders well in
advance of the time when we expect to sell these products. In the event that we
order the manufacture of a greater or lesser amount of these products than we
will ultimately require, we are generally obligated to purchase the surplus
products or to forego or delay the sale or delivery of the products that we did
not order in advance. In either case, our business and results of operations may
be adversely affected. Any of these risks could result in manufacturing delays
or increases in manufacturing costs and expenses. For example, in 2003 and 2004
we recorded in our balance sheet, an allowance for irrevocable inventory
purchase commitments in an aggregate amount of approximately $4.3 million and
$4.8 million, respectively, as a result of over-estimation of our sales. If we
experience manufacturing delays, we could lose orders for our products and, as a
result, lose customers. There may be an adverse affect on our profitability and
consequently on our results of operations, if we incur increased costs.
Our dependence on limited sources for key components of our products may lead to
disruptions in the delivery and cost of our products, harming our business and
results of operations.
We currently obtain key components for our products from a limited number
of suppliers, and in some instances from a single supplier. In addition, some of
the components that we purchase from single suppliers are custom-made. Although
we believe that we can replace any single supplier and obtain key components of
comparable quality and price from alternative suppliers, we cannot assure you
that we will not experience disruptions in the delivery and cost of our
products. We do not have long-term supply contracts with most of these
suppliers. In addition, there is global demand for some electrical components
that are used in our systems and that are supplied by relatively few suppliers.
This presents the following risks:
10
o delays in delivery or shortages of components, especially for
custom-made components or components with long delivery lead
times, could interrupt and delay manufacturing and result in
cancellations of orders for our products;
o suppliers could increase component prices significantly and with
immediate effect on the manufacturing costs for our products;
o we may not be able to develop alternative sources for product
components;
o suppliers could discontinue the manufacture or supply of
components used in our products. This may require us to modify
our products, which may cause delays in product shipments,
increased manufacturing costs and increased product prices;
o we may be required to hold more inventory for longer periods of
time than we otherwise might in order to avoid problems from
shortages or discontinuance; and
o due to the political situation in the Middle East, we may not be
able to import necessary components.
In the past, we experienced delays and shortages in the supply of
components on more than one occasion. We may experience such delays in the
future, harming our business and results of operations.
We could be subject to warranty claims and product recalls, which could be very
expensive and harm our financial condition.
Products like ours sometimes contain undetected errors. These errors can
cause delays in product introductions or require design modifications. In
addition, we are dependent on unaffiliated suppliers for key components
incorporated into our products. Defects in systems in which our products are
deployed, whether resulting from faults in our products or products supplied by
others, from faulty installation or from any other cause, may result in customer
dissatisfaction. We are continually marketing several new products. The risk of
errors in these new products, as in any new product, may be greater than the
risk of errors in established products. The warranties for our products permit
customers to return for repair, within a period ranging from 12 to 36 months of
purchase, any defective products. Any failure of a system in which our products
are deployed (whether or not these products are the cause), any product recall
and any associated negative publicity could result in the loss of, or delay in,
market acceptance of our products and harm our business, financial condition and
results of operations.
Intense competition in the markets for our products may have an adverse affect
on our sales and profitability.
Many companies compete with us in the wireless broadband equipment market
in which we sell our products. We expect that competition will increase in the
future including from current large as well as new market vendors, both with
respect to products that we currently offer and products that we intend to
introduce in the future. In addition, some, or all, of the systems integrators
and other strategic partners to which we sell our wireless broadband products
could develop the capability to manufacture systems similar to our wireless
broadband products independently. We expect our competitors to continue to
improve independently the performance of their current products and to introduce
new products or new technologies that may supplant or provide lower cost
alternatives to our products or products with better performance. As the market
grows, we expect to face competition from aggressive start-ups in different
markets. We expect that we will also face competition from alternative wireline
and wireless technologies including copper wires, fiber-optic cable, digital
subscriber lines, or DSL, cable modems, satellite and other broadband access
systems.
Many companies compete with us in the specialized cellular network market,
and we expect that competition will increase in the future, including
competition from new market vendors (such as vendors operating in China)
entering the cellular niche of rural cellular networks, in addition to the trend
of IP based cellular base stations and softswitches as an alternative technology
to this rural cellular niche.
Some of our existing and potential competitors have substantially greater
resources including financial, technological, manufacturing and marketing and
distribution capabilities, and enjoy greater market recognition than we do. We
may not be able to differentiate our products from those of our competitors,
successfully develop or introduce new products that are less costly or offer
better performance than those of our competitors or offer our
11
customers payment or other commercial terms as favorable as those offered by our
competitors. In addition, we may not be able to offer our products as part of
integrated systems or solutions to the same extent as our competitors. A failure
to accomplish one or more of these objectives could materially adversely affect
our sales and profitability, harming our financial condition and results of
operation.
While 2004 showed steady quarterly growth, we have experienced in the past, and
may experience in the future, quarterly and annual fluctuations in our results
of operations. This may cause volatility in the market price of our ordinary
shares.
We have experienced, and may continue to experience, significant
fluctuations in our quarterly and annual results of operations. Any fluctuations
may cause our results of operations to fall below the expectations of securities
analysts and investors. This would likely affect the market price of our
ordinary shares.
Our quarterly and annual results of operations may vary significantly in
the future for a variety of reasons, many of which are outside of our control,
including the following:
o our success in integrating the interWAVE business;
o the uneven pace of spectrum licensing to carriers and service
providers;
o adoption of new standards in our industry;
o the size and timing of orders and the timing of large scale
projects;
o customer deferral of orders in anticipation of new products,
product features or price reductions;
o the timing of our product introductions or enhancements or those
of our competitors or of providers of complementary products;
o the purchasing patterns of our customers and end-users, as well
as the budget cycles of customers for our products;
o seasonality, including the relatively low level of general
business activity at the beginning of each fiscal year and during
the summer months in Europe and the winter months in South
America and in the United States;
o disruption in, or changes in the quality of, our sources of
supply;
o changes in the mix of products sold by us;
o the extensive marketing and organizational efforts that carriers
are required to make to develop their subscriber base following
the deployment of the network infrastructure, creating a gap
between the time carriers purchase base stations for network
infrastructure deployment and the time they purchase terminal
stations for connection of subscribers to the network;
o mergers or acquisitions, by us, our competitors and exiting and
potential customers, if any;
o fluctuations in the exchange rate of the NIS against the dollar;
o adoption of new financial accounting standards; and
o general economic conditions, including the changing economic
conditions in the United States and worldwide.
Our customers ordinarily require the delivery of products promptly after
their orders are accepted. Our business usually does not have a significant
backlog of accepted orders. Consequently, revenues in any quarter depend on
orders received and accepted in that quarter. The deferral of the placing and
acceptance of any large order from one quarter to another could materially
adversely affect our results of operations for the previous quarter. If revenues
from our business in any quarter remain level or decline in comparison to any
previous quarter, our results of operations could be harmed.
In addition, our operating expenses may increase significantly. If revenues
in any quarter do not increase correspondingly or if we do not reduce our
expenses in a timely manner in response to lower level or declining
12
revenues, our results of operations for that quarter would be materially
adversely affected. Because of the variations that we have experienced in our
quarterly results of operations, we do not believe quarter-to-quarter
comparisons of our results of operations are necessarily meaningful and you
should not rely on results of operations in any particular quarter as an
indication of future performance.
We depend on key personnel.
Our future success depends, in part, on the continued service of key
personnel. If one or more of our key technical, sales or management personnel
terminates his or her employment, our business and results of operations could
be harmed. Our employees are employed "at will." This means that our employees
are not obligated to remain employed by us for any specific period.
We may be classified as a passive foreign investment company.
As a result of the combination of our substantial holdings of cash, cash
equivalents and securities and the decline in the market price of our ordinary
shares from its historical highs, there is a risk that we could be classified as
a passive foreign investment company, or PFIC, for United States federal income
tax purposes. Based upon our market capitalization during 2004 and each year
prior to 2001, we do not believe that we were a PFIC for any such year and,
based upon our valuation of our assets as of the end of each quarter of 2002 and
2003 an independent valuation of our assets as of the end of each quarter of
2001, we do not believe that we were a PFIC for 2001, 2002 or 2003 despite the
relatively low market price of our ordinary shares during some of those years.
We cannot assure you, however, that the Internal Revenue Service or the courts
would agree with our conclusion if they were to consider our situation. There is
no assurance that we will not become a PFIC in 2005 or in subsequent years. If
we were classified as a PFIC, U.S. taxpayers that own our ordinary shares at any
time during a taxable year for which we were a PFIC would be subject to
additional taxes upon certain distributions by us or upon gains recognized after
a sale or disposition of our ordinary shares unless they appropriately elect to
treat us as a "qualified electing fund" under the U.S. Internal Revenue Code.
This could also adversely affect the market price of our ordinary shares.
Compliance with changing laws and regulations relating to corporate governance
and public disclosure has resulted, and will continue to result, in the
incurrence of additional expenses associated with being a public company.
New and changing laws and regulations, including the Sarbanes-Oxley Act of
2002, new SEC regulations impose stricter corporate governance requirements and
greater disclosure obligations. They have had the effect of increasing the
complexity and cost of our company's corporate governance compliance, diverting
the time and attention of our management from revenue-generating activities to
compliance activities, and increasing the risk of personal liability for our
board members and executive officers involved in our company's corporate
governance process. Our efforts to comply with evolving laws and regulations may
result, in increased general and administrative expenses, and increased
professional fees. In addition, it may become more difficult and expensive for
us to obtain director and officer liability insurance. Furthermore, in order to
meet the new corporate governance and disclosure obligations, we have been
taking, and will continue to take, steps to improve our controls and procedures
and related corporate governance policies and procedures to address compliance
issues and correct any deficiencies that we may discover. While we believe that
the procedures and policies that we have in place are effective to address the
New Sarbanes and other regulatory requirements, the expansion of our operations
and the growth of our business may require us to modify and expand our
disclosure controls and procedures and related corporate governance policies. In
addition, these new and changed laws and regulations are subject to varying
interpretations in many cases due to their lack of specificity, and as a result,
their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies. If our efforts to comply with new or changed
laws and regulations differ from the conduct intended by regulatory or governing
bodies due to ambiguities or varying interpretations of the law, we could be
subject to regulatory sanctions, our reputation may be harmed and our stock
price may be adversely affected.
The Implementation of SFAS No. 123(R) would negatively affect the Company's
profitability.
The Financial Accounting Standards Board ("FASB") has recently adopted an
accounting standard ("SFAS No. 123(R)") that requires the fair value of all
equity-based awards granted to employees be recognized in the statement
13
of operations as compensation expense, beginning in the first quarter of 2006.
The various methods for determining the fair value of stock options are based
on, among other things, the volatility of the underlying stock. Our stock price
has historically been volatile. The adoption of this new accounting regulation
will have a significant impact on our results of operations, as our reported
earnings will decrease significantly. Had we adopted Statement 123(R) in 2002,
2003 and 2004, the impact of that standard have been approximately $7.0 million,
$7.6 million and $6.5 million, respectively, as described in the disclosure of
pro forma net income and earnings per share in Note 2m to our consolidated
financial statements. Our stock price could decline in response to the decline
in our reported earnings.
Such adoption may also affect the Company's management discretion to
continue to use stock options as an incentive and retention tool, which could,
in turn, hurt the Company's ability to recruit employees and retain existing
employees.
The trading price of our ordinary shares is subject to volatility.
The trading price of our ordinary shares has experienced significant
volatility in the past and may continue to do so in the future. Since our
initial public offering in March 2000, the sales prices of our ordinary shares
on the Nasdaq National Market have ranged from a high of $53.125 to a low of
$1.55. On June 6, 2005, the last sales price of our ordinary shares on the
Nasdaq National Market was $9.37. We may continue to experience significant
volatility in the future, based on the following factors, among others:
o our prospects;
o actual or anticipated fluctuations in our sales and results of
operations;
o variations between our actual or anticipated results of
operations and the published expectations of analysts;
o general conditions in the wireless broadband products industry
and general conditions in the telecommunications equipment
industry;
o announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures
and capital commitments;
o introduction of technologies or product enhancements or new
industry substitute standards that reduce the need for our
products;
o general economic and political conditions, particularly in the
United States and in South America on our operations and results;
and
o departures of key personnel.
Our proprietary technology is difficult to protect and unauthorized use of it by
third parties may impair our ability to compete effectively.
Our success and ability to compete will depend, to a large extent, on
maintaining our proprietary rights and the rights that we currently license or
will license in the future from third parties. We rely primarily on a
combination of trademark, trade secret and copyright law and on confidentiality,
non-disclosure and assignment-of-inventions agreements to protect our
proprietary technology. We have obtained several patents and have several patent
applications pending that are associated with our products. We also have several
trademark registrations associated with our name and some of our products.
These measures may not be adequate to protect our technology from
third-party infringement. Our competitors may independently develop technologies
that are substantially equivalent or superior to our technology. Third party
patent applications filed earlier may block our patent applications or receive
broader claim coverage. In addition, any patents issued to us, if issued at all,
may not provide us with significant commercial protection. Third parties may
also invalidate, circumvent, challenge or design around our patents or trade
secrets, and our proprietary technology may otherwise become known or similar
technology may be independently developed by competitors. Additionally, our
products may be sold in foreign countries that provide less protection to
intellectual property than that provided under U.S. or Israeli laws. Failure to
successfully protect our intellectual property from infringement may damage our
ability to compete effectively and harm our results of operations.
14
We could become subject to litigation regarding intellectual property rights,
which could seriously harm our business.
Third parties have in the past asserted against us, and may in the future
assert against us, infringement claims or claims that we have violated a patent
or infringed a copyright, trademark or other proprietary right belonging to
them. In addition, based on the size and sophistication of our competitors and
the history of rapid technological change in our industry, we anticipate that
several competitors may have intellectual property rights that could relate to
our products. Therefore, we may need to litigate to defend against claims of
infringement or to determine the validity or scope of the proprietary rights of
others. Similarly, we may need to litigate to enforce or uphold the validity of
our patent, trademarks and other intellectual property rights. Other actions may
involve ownership disputes over our intellectual property or the
misappropriation of our trade secrets or proprietary technology. As a result of
these actions, we may have to seek licenses to a third party's intellectual
property rights, which may not be able to be successfully integrated into our
products. These licenses may not be available to us on reasonable terms or at
all. In addition, if we decide to litigate these claims, the litigation could be
expensive and time consuming and could result in court orders preventing us from
selling our then-current products or from operating our business. Any
infringement claim, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and harm our business, financial
condition and results of operations.
If we are unable to maintain licenses to use certain technologies, we may not be
able to develop and sell our products.
We license certain technologies from others for use in connection with some
of our technologies. The loss of these licenses could impair our ability to
develop and market our products. If we are unable to obtain or maintain the
licenses that we need, we may be unable to develop and market our products or
processes, or we may need to obtain substitute technologies of lower quality or
performance characteristics or at greater cost. We cannot assure you that we can
maintain these licenses or obtain additional licenses, if we need them in the
future, on commercially reasonable terms or at all.
Operating in international markets exposes us to risks which could cause our
sales to decline and our operations to suffer.
While we are headquartered in Israel, at least 99% of our sales in 2002,
2003 and 2004 were generated elsewhere around the world. Our products are
marketed internationally and we are therefore subject to certain risks
associated with international sales, including, but not limited to:
o trade restrictions, tariffs and export license requirements,
which may restrict our ability to export our products or make
them less price-competitive;
o currency fluctuations;
o greater difficulty in safeguarding intellectual property; and
o difficulties in managing overseas subsidiaries and international
operations.
We may encounter significant difficulties with the sale of our products in
international markets as a result of one or more of these factors.
There may be health and safety risks relating to wireless products.
In recent years, there has been publicity regarding the potentially
negative direct and indirect health and safety effects of electromagnetic
emissions from cellular telephones and other wireless equipment sources,
including allegations that these emissions may cause cancer. Our wireless
communications products emit electromagnetic radiation. Health and safety issues
related to our products may arise that could lead to litigation or other actions
against us or to additional regulation of our products. We may be required to
modify our technology and may not be able to do so. We may also be required to
pay damages that may reduce our profitability and adversely affect our financial
condition. Even if these concerns prove to be baseless, the resulting negative
publicity could affect our ability to market these products and, in turn, could
harm our business and results of operations.
15
Terrorist attacks, or the threat of such attacks, may negatively impact the
global economy which may materially adversely affect our business, financial
condition and results of operation and may cause our share price to decline.
The financial, political, economic and other uncertainties following
terrorist attacks throughout the world have led to a worsening of the global
economy. As a result, many of our customers and potential customers have become
much more cautious in setting their capital expenditure budgets, thereby
restricting their telecommunications procurement. Uncertainties related to the
threat of terrorism have had a negative effect on global economy, causing
businesses to continue slowing spending on telecommunications products and
services and further lengthen already long sales cycles. Any escalation of these
threats or similar future events may disrupt our operations or those of our
customers, distributors and suppliers, which could adversely affect our
business, financial condition and results of operations.
Risks Relating to Our Location in Israel
Conducting business in Israel entails special risks.
We are incorporated under Israeli law and our principal offices and the
majority of our manufacturing and research and development facilities are
located in the State of Israel. Political, economic and military conditions in
Israel directly affect our operations. We could be harmed by any major
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners or a significant downturn in the economic or
financial condition of Israel. Due to the volatile security situation in Israel,
our insurance carrier no longer insures our facilities and assets for damage or
loss resulting from terrorist incidents. Additionally, several countries still
restrict business with Israel and with Israeli companies. We could be adversely
affected by the continuation or deterioration of Israel's conflict with the
Palestinians or from restrictive laws or policies directed towards Israel or
Israeli businesses.
We could be adversely affected if the rate of inflation in Israel exceeds the
rate of devaluation of the New Israeli Shekel against the dollar.
Substantially the majority of our revenues are generated in U.S. dollars. A
significant portion of our expenses, primarily labor and subcontractor expenses,
is incurred 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, that the timing of this devaluation lags
behind inflation in Israel, or the NIS may increase in value relative to the
dollar. If the dollar costs of our operations in Israel increase, our
dollar-measured results of operations will be adversely affected. In 2004, the
value of the dollar decreased in relation to the NIS by 1.62%, and the inflation
rate in Israel was 1.21%.
We currently benefit from government programs and tax benefits that may be
discontinued or reduced.
We currently receive grants and tax benefits under Government of Israel
programs. Pursuant to our current arrangement with the Office of the Chief
Scientist, or OCS, the OCS will finance up to 20% of our research and
development expenses by reimbursing us for up to 50% of the approved expenses
related to our generic research and development projects. In addition, we obtain
other grants from the OCS to fund certain other research and development
projects. These programs currently restrict our ability to manufacture
particular products or transfer particular technology outside of Israel. Under
the programs we need to comply with certain conditions. If we fail to comply
with these conditions, the benefits received could be canceled and we could be
required to refund any payments previously received under these programs or pay
additional amounts with respect to the grants received under these programs. The
Government of Israel has reduced the benefits available under these programs in
recent years and these programs may be discontinued or curtailed in the future.
If the Government of Israel discontinues or modifies these programs and tax
benefits, our business, financial condition and results of operations could be
materially adversely affected.
Recently, an amendment to the R&D Law was approved by Israel's Parliament
which is intended to make the R&D Law more compatible with the global business
environment. Currently, the law permits the Office of the Chief Scientist to
approve the transfer of manufacturing rights outside Israel subject to an
approval of the research committee and in exchange for payment of higher
royalties, for royalties bearing programs.
16
Following our acquisition of interWAVE and its subsidiaries, the Irish
subsidiary participates in programs sponsored by the Irish Government and the
European Union , operated by the Industrial Development Agency (IDA) and
previously by Shannon Development. These programs are designed to promote
research and development and overall regional development. No royalties are
payable on these grants but the IDA may at any time within five years from the
date of payment of the last installment from any particular grant stop payment
of the grants and/or revoke and cancel or reduce the grants under certain
circumstances. If we fail to comply with these conditions in the future, the
grants received could be canceled and we could be required to repay them.
In addition, we have been granted status of an approved enterprise under
the Law for the Encouragement of Capital Investments, 1959 for our production
facilities in Israel. Such status enables us to obtain certain tax relief for a
definitive period upon compliance with the investment law regulations. A recent
amendment to the Investment Law, which we refer to as the Amendment and has been
officially published and effected since April 1, 2005, has significantly changed
the provisions of the Investment Law. The Amendment limits the scope of
enterprises, which may be approved by the Investment Center by setting criteria
for the approval of a facility as an Approved Enterprise. Additionally, the
Amendment enacted major changes in the manner in which tax benefits are awarded
under the Investment Law so that companies no longer require Investment Center
approval in order to qualify for tax benefits. However, the Amendment provides
that terms and benefits included in any certificate of approval already granted
will remain subject to the provisions of the law as they were on the date of
such approval. If we fail to comply with these conditions in the future, the tax
benefits received could be canceled and we could be required to pay increased
taxes in the future.
We currently contemplate that a portion of our products will be
manufactured outside of Israel. This could materially reduce the tax benefits to
which we would otherwise be entitled. In addition, because the Israeli tax
authorities customarily review and reassess existing tax benefits granted to
merging companies and because we have yet to finalize the status of our tax
benefits with the Israeli tax authorities following our merger with Floware and
our acquisition of most of the assets and assumption of related liabilities of
InnoWave, we cannot assure you that the Israeli tax authorities will not modify
adversely to us the tax benefits that we could have enjoyed prior to these
events.
We may be exposed to tax liabilities in the USA and in other local and
international jurisdictions following the acquisition of interWAVE
Communications.
Provisions of Israeli law may delay, prevent or make difficult a merger or an
acquisition of us, which could prevent a change of control and therefore depress
the market price of our ordinary shares.
Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
us. The Israeli Companies Law, 5759-1999, referred to as the Israeli Companies
Law, generally requires that a merger be approved by the board of directors and
by a shareholder vote at a shareholders' meeting that has been called on at
least 21 days' advance notice. Any creditor of a merger party may seek a court
order to delay or enjoin the merger, if there is a reasonable concern that the
surviving corporation will not be able to satisfy all of the obligations of any
party to the merger. Moreover, a merger may not be completed until at least 70
days have passed from the time that the merger proposal has been filed with the
Israeli Registrar of Companies. Other potential means of acquiring a public
Israeli company such as us might involve significant obstacles, including a
requirement for court approval for the acquisition. In addition, a body of case
law has not yet developed with respect to the new Companies Law. Until this
happens, uncertainties will exist regarding its interpretation. These
uncertainties could have the effect of inhibiting attempts to acquire us and
other transactions and decisions by or involving us.
It may be difficult to effect service of process and enforce judgments against
directors, officers and experts in Israel.
We are incorporated in Israel. Our executive officers and directors and
some of the experts named in this annual report are expected to be nonresidents
of the United States, and a substantial portion of our assets and the assets of
these persons may be located outside the United States. Therefore, it may be
difficult to enforce a judgment obtained in the United States against us or any
of those persons. It may also be difficult to enforce civil liabilities under
U.S. federal securities laws in original actions instituted in Israel.
17
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated in September 1992 under the laws of the State of
Israel. Since our inception, we have devoted substantially all of our resources
to the design, development, manufacturing and marketing of wireless products.
On August 1, 2001, Floware merged with and into us. As a result of the
merger we continued as the surviving company and Floware's separate existence
ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd.
to Alvarion Ltd. On April 1, 2003, we completed an acquisition of most of the
assets and the assumption of related liabilities of InnoWave Wireless
Communication Ltd. In December 2004, we completed our transaction with interWAVE
Communications International Ltd.
Our principal executive offices are located at 21A HaBarzel Street, Tel
Aviv 69710, Israel and our telephone number is 972 645-6262. In 1995, we
established a wholly-owned subsidiary in the United States, Alvarion, Inc., a
Delaware corporation. Alvarion, Inc. is located at 2495 Leghorn Street,,
Mountain View, CA, 94043 and its telephone number is 650-314-2500.
We also have several wholly owned subsidiaries worldwide handling local
support, promotion, manufacturing and developing activities. For a discussion of
our capital expenditures and divestitures, see "Item 5B -- Operating and
Financial Review and Prospects -- Liquidity and Capital Resources".
B. BUSINESS OVERVIEW
General
We are a leading provider of wireless broadband connectivity solutions and
specialized cellular networks. Our solutions are used by telecom carriers and
service providers worldwide and for private networks. Our products are used to
provide broadband data and voice services for subscribers in the "last mile" of
connectivity, for feeding cellular networks, cellular network extensions and
compact specialty networks. With our comprehensive product offerings, we provide
a broad range of integrated wireless broadband solutions, addressing different
markets and frequency bands, designed to address the various business models of
carriers, service providers and private network operators.
We have played a prominent role in creating and promoting industry
standards, including our leading role in the WiMAX Forum(TM), an organization
focused on increasing the widespread adoption of standards-based products in the
wireless broadband market and leading the industry to mobile WiMAX solutions.
The WiMAX Forum works to promote the interoperability of multiple vendors'
products in the wireless broadband market. Since its establishment, the WiMAX
Forum members, working together with the IEEE, have established the first of the
standards on which fixed wireless broadband systems will operate (the IEEE
802.16-2004 standard). This standard fully supports all fixed and nomadic
broadband wireless applications.
Our products are usually used in a point-to-multipoint architecture and
address a wide scope of end-user profiles, from the residential and small
office, home office, or SOHO, markets, through small and medium enterprises, or
SMEs, and multi-tenant units/multi-dwelling units, or MTU/MDU's. Our compact
specialty cellular networks serve a variety of end-users and applications
including residential cellular users, governmental, homeland security, and
disaster relief agencies, as well as travel/leisure companies.
Our products operate in licensed and license-free bands, ranging from 450
MHz to 28 GHz and comply with various industry standards. Our core technologies
include spread spectrum radio, linear radio, digital signal processing, modems,
MAC (media access control), IP-based mobile switches, compact mobile networks,
networking protocols and very large systems integration, or VLSI. We have
intellectual property in these technologies.
Our transaction with interWAVE, a provider of compact mobile network
equipment and services, complements our existing product set and expands our
served market to include a rapidly growing segment of the mobile
18
equipment market. interWAVE's technical expertise in cellular systems design and
experience in providing complete mobile networks will accelerate the development
of our next generation offering.
We are currently placing an increased emphasis on the development of the
next-generation technology based on the IEEE 802.16e standard, for the
development of broadband mobility solutions. We intend to leverage our expertise
and our position in the fixed wireless broadband market and the cellular
know-how acquired by the interWAVE acquisition, in order to introduce broadband
mobile standards-compliant solutions to the market.
Wireless Access Overview
Growth of the wireless broadband market is currently driven by demand for
broadband connectivity. We expect that this growth will be affected by:
o Demand for fundamental data and voice telecom services in
un-served areas where wired infrastructure cannot fill the
demand;
o Demand for cellular voice and data services;
o Demand for mobile communications;
o Deregulation: international regulatory changes enabling increased
competition and resulting in increased allocation of spectrum;
o Competition to offer multiple services using a single network;
o Standardization: wide adoption of wireless broadband standards as
key access technology for infrastructure;
o Introduction of low cost wireless technology based on
international standards; and
o Growing demand of public access providers to build
municipalities' own infrastructures.
Demand for Connectivity
Demand for Broadband in Unserved Areas
Demand for user bandwidth and availability of competitively priced
solutions has increased. DSL and cable modem rollout continues in many areas
throughout the world and telecom operators are upgrading central offices and
deploying broadband solutions. However, in areas where DSL and cable modems
cannot fulfill the demand for broadband, the wireless broadband solution is an
effective alternative to meet this demand. In developed countries, government
programs for complete broadband coverage increase the demand in rural and
suburban areas. In developing countries, government programs for fundamental
telephony services increase demand in urban areas, where infrastructure is poor
or does not exist.
Demand for Cellular Voice and Data Services
Cellular mobile networks deliver both voice and limited broadband data
connectivity, enabling operators to provide competitive solutions, with limited
data rates at low cost. In developed countries, cellular end-users are
accustomed to 100% coverage, and expect the same even in areas that require
specialized networks (e.g., cruise ships). In developing countries, the demand
is driven by the extensive need for cellular network extensions to areas which
are not connected to a backbone via any type of wireline connection.
Demand for Personal Broadband Mobility
The demand for mobile communications is the natural convergence of fixed
broadband networks (DSL and cable) and mobile voice networks towards mobile
broadband. Technology and networks are evolving to networks that support mobile
broadband communications. The introduction of WiMAX-compliant products, based on
the IEEE 802.16e standard will create additional opportunities in mobile
broadband communications. Future mobile networks will be IP based, with a focus
on open standards, end-users and consumer devices, as opposed to the current
focus on closed standards, carriers and network equipment.
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Deregulation
Global telecom deregulation is opening up the telecommunications/Internet
access industries to competition by new players. As more and more countries
enable carriers and service providers to operate in a variety of frequencies,
new broadband access markets are opening. Unlike the built-in delivery systems
of wireline infrastructure, wireless technology requires the use of frequencies
contained within a given spectrum to transfer voice and data. Usually,
governments allocate a specific range of that spectrum, either licensed or
unlicensed bands, to incumbent and competitive carriers, as well as to cellular
operators, internet service providers, or ISPs, and other service providers,
enabling them to launch a variety of broadband initiatives based exclusively on
wireless networking solutions. During 2004, additional licensed and unlicensed
spectrums were added in many regions around the world. Increased availability of
licensed and unlicensed spectrums may increase the demand for wireless
broadband.
Standardization
The wireless broadband market is in a continuing process of
standardization. The WiFi Alliance, a non-profit international association, has
succeeded in promoting the IEEE 802.11 -- the Wireless LAN standard. Similarly,
we helped produce the IEEE 802.16 2004 specification for fixed applications, led
its harmonization with ETSI (European Telecommunications Standards Institute),
and became a principal founder of the WiMAX Forum. WiMAX stands for the
Worldwide Interoperability for Microwave Access, Inc. and the WiMAX Forum is a
group promoting the IEEE 802.16 wireless broadband standard).
The WiMAX Forum is a non-profit industry organization chartered to ensure
interoperable IEEE 802.16 systems from multiple vendors. We are also helping to
develop the IEEE 802.16e specification for mobile applications. The scope of the
IEEE 802.16-based standard is the Wireless MAN (Metropolitan Area Network),
supporting larger range outdoor access networks with more performance and
dedicated high-end services.
For cellular technology, our products are based on standard GSM and CDMA
technologies. The most prevalent emerging third generation, or 3G, standards of
wireless communications are forms of CDMA and the Universal Mobile Telephony
Services, or UMTS, which is built upon a GSM base. We believe that many carriers
may deploy GSM prior to deploying 3G because some elements of GSM are utilized
in this form of 3G.
Once standards are accepted, product costs generally decrease and product
interoperability is possible, factors aiding in market growth.
Next Generation Technology
Fixed wireless broadband solutions are based on OFDM (Orthogonal Frequency
Division Multiplexing) technology with Non-Line-of-Sight, or NLOS, capabilities,
creating more possibilities to cover a Wireless Access network. In addition, the
availability of lower-cost, volume-produced standard chips to replace
internally-produced proprietary chips will enable vendors to lower the cost of
the solution to operators. Low cost solutions can create a larger demand for
wireless broadband applications. In July 2003, Intel Corporation announced its
intention to develop IEEE 802.16d-compliant silicon chip. At the same time, we
signed a strategic agreement with Intel to work together to incorporate Intel's
IEEE 802.16 chips into our line of standard-based technology. The cost of our
system is expected to decrease significantly as a result of our cooperation with
Intel and the availability of standard chip sets, expected in mid 2005.
CDMA 2000-1x technology enables last mile wireless telephony and always-on
data access over wide coverage for residential users who are fixed or mobile.
CDMA 2000's design minimizes the initial network cost for servicing the last
mile. Using CDMA 2000 operators can profitably address the challenge of
servicing the low ARPU (Average Revenue Per User) markets; leveraging the low
price CDMA 2000-1x CPEs (Customer Premise Equipment) and economic benefits. CDMA
2000 is a Point-to-multipoint solution, which offers operators a cost efficient
alternative to traditional wireless local loop technologies. Carriers will be
able to provide voice and always-on data services for both fixed and limited
mobility connections. CDMA 2000 1xRTT offers always-on 153 Kbps peak with and
upgrade path to 1xEVDO which offers 2.4Mbps user peak rate. CDMA 2000 operates
in the 450MHz, 850MHz, 1900MHz, and 2100 MHz frequencies.
We are currently working on an IEEE 802.16e compliant solution which will
provide WiMAX broadband mobility, and plan to introduce this to the market in
2006. IEEE 802.16e compliant technology enables mobile
20
networks to be IP based, with a focus on open standards, end-users and consumer
devices. The demand for this technology is a result of the convergence of fixed
broadband networks and mobile voice networks towards mobile broadband
communications.
Our Target Customers
Our existing and target customers are principally comprised of network
operators. Deregulation in the global telecommunications industry has increased
the number of carriers providing data and voice access to the global
telecommunications network. Following is a more detailed description of our
target markets.
Telecom Carriers
Incumbent local exchange carriers (ILECs) and competitive local exchange
carriers (CLECs) seek to compete effectively in various markets, resulting in
wireless broadband emerging as an attractive last-mile alternative to wired
access solutions. Telecom carriers are deploying our products to provide voice
and broadband services in rural and suburban areas where wireline infrastructure
does not exist or does not support the demand. Unlike the limited reach of
landline infrastructure, wireless broadband systems offer carriers the ability
to reach otherwise inaccessible customers, while providing increased bandwidth
flexibility and service differentiation.
Wireless broadband technology offers opportunity and growth potential to
carriers targeting emerging market sectors, such as SOHO, SME, and many parts of
the residential market because of its bandwidth, low capital and operating costs
and the ability to use the technology to deliver sophisticated data and voice
services. The modular architecture of our wireless broadband products enables
carriers to deploy our products gradually as customer demand grows, limiting the
initial capital expenditure in equipment and enabling rapid roll out. With high
network capacity and coverage, classes of service options, carrier-class
equipment and network management software, our wireless broadband products
provide attractive solutions for carriers seeking to compete in a deregulated
market environment.
Cellular Operators
Cellular operators are able to leverage their infrastructure, radio
base-station sites and customer base, together with their marketing, billing
systems and customer support investments, to offer competitive broadband
Internet access services to their customer base or to attract new customers for
broadband who can eventually become cellular customers.
In the past, wireless networks have been deployed primarily in urban
centers and other heavy usage areas. Increasing demand for improved service over
wider geographic areas has prompted cellular service providers to accelerate the
expansion of their networks. In addition, cellular service providers are
deploying networks in locations where service has previously been inadequate or
prohibitively expensive to provide. Alvarion's cellular solutions provide a very
cost effective extension of coverage. Alvarion offers various remote-cell
packages with local switching capabilities, which reduces both operating and
capital expenditures. These packages can serve as an extension to a larger
infrastructure deployed in an urban location so that operators maintain all
network service and management transparency.
Service Providers and Regional Carriers
In today's competitive telecommunications markets, Internet service
providers and regional carriers seek to offer their customers comprehensive
solution packages as the demand increases for service providers and regional
carriers to deliver enhanced data and voice services with fast and reliable
connectivity.
Leveraging the potential of these customers requires the delivery of
dependable last mile broadband connectivity, which, in turn, requires deployment
of the necessary infrastructure. Many SME, SOHO and residential customers are
located on the periphery of urban centers, beyond the reach of fiber-optic
systems, cable modems or other landline connections. Even when these connections
are available, bottlenecks between the operator's final point-of-presence and
the customer often lead to inconsistent service and unpredictable network
performance.
The reduced installation costs, rapid roll-out potential and modular
architecture of our wireless broadband solutions, coupled with their high
network capacity and coverage and enhanced service options, present an
attractive
21
alternative to service providers and regional carriers seeking to supply their
customers with reliable comprehensive data and voice solutions.
Private Network Operators
Private and government sectors that operate private, closed loop networks,
are in constant need of deploying COTS (Commercial Off The Shelf) technologies
to support their operational requirements. Examples of such requirements are
enterprises that require leased line replacement for cost effective connectivity
to provide VoIP and data services; metropolitan area networks for broadband
connectivity; and cost-effective access within communities, municipalities and
educational institutions.
The low cost installation, low entry level (pay-as-you-grow) and rapid roll
out of our wireless broadband solutions enables private network operators to
take advantage of the improved economics with future ready capacity and
features.
Geographic Markets
Alvarion installations include two types of applications for different
geographic markets:
Developed countries -- In countries with high levels of economic development
there are developing regions with low density population
areas that have limited telecommunications
infrastructures and do not yet have high penetration for
access technologies for broadband services, such as
cable and DSL, or complementary to cables and DSL where
they do not have full coverage. In addition in developed
countries we provide cellular applications for
specialized networks.
Developing countries -- Countries lacking coverage of telecommunications
infrastructures seeking mass deployment of technologies
for voice and broadband services.
Our strategy is to provide a generic, integrated system solution, enabling
our products to be used by a diverse group of end users in a wide variety of
applications in each of these geographic markets. Our products are used
primarily by telecom carriers, by service providers, by regional carriers and by
cellular operators. Telecom carriers and service providers using our products
include, among others:
o Altitude;
o AMA Wireless;
o AT&T Wireless;
o Axtel;
o British Telecom;
o China Mobile;
o China Netcom;
o China Telecom;
o China Unicom;
o EDN Sovintel;
o Entel PCS Telecommunications SA;
o Equant Russia Limited; and
o Iberbanda SA;
o Irish Broadband;
o Megafon;
o Millicom Argentina
22
o Mobifon Titan Broadband;
o MultiTel S.A.;
o Neo Sky 2003 S.A;
o Onatel;
o Reliance
o Telecom Serbia
o Telkom South Africa;
o Telmex;
o TelstraClear
o TPSA;
o Verizon Avenue;
o Vivendi Telecom Hungary;
Our OEM partners are Alcatel, Lucent, Nera and Siemens.
Our Solutions
Our product offerings include several different types of wireless
applications: fixed access; compact cellular networks and network extensions;
specialized networks; bridging and backhauling; and broadband mobility.
Fixed Access
We offer applications in which access to the end-user is provided by
wireless broadband systems. These access applications can be utilized by telecom
operators, service providers and regional carriers based on the needs of their
regions of operation. The applications are either broadband data, voice,
telecommunication multiservices, bridging or backhauling.
Wireless broadband solutions are implemented in a modular infrastructure,
enabling swift, cost-effective roll-out as needed. Sectorized base stations are
deployed to provide radio coverage to the targeted area, and frequency channels
are reused in non-adjacent base station sectors, making the most efficient use
of the available spectrum. Base stations are connected to the operator's central
office, or Point of Presence, using wired or wireless point-to-point solutions.
End users are provided with customer premises equipment, or CPE, typically
consisting of an outdoor unit with a radio and an antenna connected to an indoor
unit or indoor self-installed unit, which present voice and data interfaces to
the customer network. The entire wireless broadband network is connected to the
carrier backbone.
Our BreezeMAX, BreezeACCESS, BreezeNet, MGW/eMGW and WALKair wireless
broadband products provide carriers with comprehensive wireless broadband
solutions ranging from toll-quality telephony, to high-speed access to voice and
data in the licensed and license-free bands. Our solutions provide these
operators with services that are comparable to leased line and fiber
connectivity, with heightened bandwidth flexibility and service differentiation.
Our wireless broadband products offer carriers comprehensive, scalable and
rapidly deployable solutions to their last mile connectivity needs independent
of landline infrastructure, and enable cost effective IP-based bridging and
backhauling.
Compact Cellular Network Infrastructure
We offer a complete line of compact cellular solutions. We have pioneered
what we believe is the only commercially available system that provides all of
the infrastructure equipment and software necessary to support an entire
wireless network within a single, compact enclosure. Our networks may be
deployed in communities with a few thousand subscribers and may be scaled to
grow to over a hundred thousand subscribers.
23
Our cellular solutions are targeted primarily for emerging markets in
developing or under-developed countries, and our products provide wireless
network operators a simple, easy to support and maintain network that is
software configurable to various network architectures. We have designed our
systems to serve the following applications:
o Small to mid size stand-alone cellular networks: e.g., islands,
remote communities
o Rural extensions to already established cellular infrastructure:
e.g., to add capacity and coverage in remote or rural areas and
to provide telephone service in previously under-served
communities
o Specialty cellular configurations: e.g., disaster relief,
emergency, military/tactical, containerized platforms, as well as
applications on cruise ships, or network on wheels for rapid
deployments
o WLL (Wireless Local Loop) connecting subscribers to the PSTN
switch using radio signals as a substitute for copper
Our solutions are targeted to telecom carriers, offering cellular services and
wireless service providers looking to better serve their existing user base and
to gain market share, with the objective of extending capacity, coverage, and
providing better quality of service
Our Products
We manufacture and sell the following products:
Fixed Access Products
o BreezeMAX
o BreezeACCESS access products (BreezeACCESS II,, XL, VL, OFDM).
o WALKair (WALKair 1000 and 3000);
o BreezeNet (BreezeNET DS.11 and PRO.11)
o BreezeACCESS connectivity products (BreezeNET B)
o MGW and eMGW
o Breeze2000
Compact Cellular Infrastructure Products
o WAVExpress
o WAVExchange (switch)
o UltraWAVE (BTS, BSC, MSC)
These products are being offered as a result of our transaction with
interWAVE.
Network Management Products:
o BreezeMANAGE, WALKnet, BreezeVIEW, IMS, AlvariSTAR and UltraVIEW
network management products.
Fixed Access Products
The BreezeMAX is our third generation OFDM platform based on the IEEE
802.16/ETSI HIPERMAN standards, following the WiMAX standard. The BreezeMAX is a
carrier-class platform that addresses multiple applications from residential to
business, MDU/MTU, hotspot backhauling and home networking, and is the first
release of the extensive BreezeMAX product line.
The system is designed specifically to solve the unique problem of the
wireless metropolitan area network (MAN) environment and to deliver broadband
access services to a wide range of customers, including residential,
24
SOHO, SME and multi-tenant customers. Its Media Access Control (MAC) protocol
was designed for point-to-multipoint wireless broadband access applications,
providing a very efficient use of the wireless spectrum and supporting difficult
user environments. The access and bandwidth allocation mechanisms accommodate
hundreds of subscriber units per channel, with subscriber units that may support
different services to multiple end users.
The system uses OFDM radio technology, which is robust in adverse channel
conditions and enables NLOS operation that allows easy installation and improves
coverage, while maintaining a high level of spectral efficiency. Modulation and
coding can be adapted per burst, ever striving to achieve a balance between
robustness and efficiency in accordance with prevailing link conditions.
Our BreezeMAX 3500 product, our first product to be introduced under this
platform, operates in the 3.5 GHz licensed frequency band. It is a modular,
scalable system that offers macro and micro base stations, and various types of
CPEs, for business and residential users, which combine to enable carriers to
deploy the optimal cost/ performance for each of their operating environments.
Enabling the offering of IP-based voice, data, and even triple play services in
dense urban to rural areas, BreezeMAX is a wireless broadband solution for
providers wanting to boost their revenue potential. We expect to submit this
product for WiMAX certification in the second half of 2005.
BreezeACCESS enables high-speed, data and voice, point-to-multipoint
wireless broadband applications. BreezeACCESS access products operate in several
frequency bands to meet the needs of service providers and telecom operators
worldwide. The BreezeACCESS wireless DSL product family consists of base
stations, including access units and controllers, and subscriber units, which
operate optimally when connected to computers or computer networks utilizing the
Internet Protocol. The subscriber units include subscriber units for data
applications and subscriber units for data and telephony applications.
BreezeACCESS is modular in design, allowing for a low initial investment, and is
scalable for future growth.
BreezeACCESS OFDM, or orthogonal frequency division multiplexing-based,
products, support higher speed wireless broadband access products currently in
the licensed 3.5 GHz band, and provide gross data rates of up to 12 Mbps.
BreezeACCESS VL, OFDM-based products operate in the 4.9, 5.2, 5.3, 5.4, 5.7
bands, which are mostly unlicensed, and provide gross data rates of up to 54
Mbps.
OFDM technology, on which BreezeMAX, BreezeACCESS OFDM and BreezeACCESS VL
are based, enable higher data rates, up to 12 Mbps in the case of BreezeACCESS
OFDM, up to 18 Mbps in the case of BreezeMAX, and up to 54 Mbps in the case of
BreezeACCESS VL, by utilizing the available radio spectrum in an efficient
manner. In addition, OFDM technology enables NLOS operation with robust
resistance to interference. OFDM based products enable carriers to use the
technology in applications where a high data rate is required, including serving
medium to large enterprises and high-speed backbone applications. The
BreezeACCESS VL OFDM-based system, which utilizes our proprietary air protocol
and broad set of features along with a high power radio, uses our "open
platform" architecture and may be used with other BreezeACCESS band versions
(BreezeACCESS II, XL, V or OFDM), giving operators the flexibility to use one
band for service provisioning to residential, SOHO and SME customers, while
reserving high bandwidth for large enterprises and MTUs. It is intended to
become our service provider solution in all the 5 GHz bands (5.15-5.35,
5.47-5.7, 5.7-5.8).
BreezeACCESS wireless DSL products include BreezeACCESS II, BreezeACCESS
XL, BreezeACCESS VL and BreezeACCESS OFDM.
BreezeACCESS II products operate in the unlicensed, 2.4 GHz ISM band, and
provide gross data rates of up to 3 Mbps.
WALKair Products
The WALKair system is a Wireless Broadband system that enables carriers to
provide high-speed Internet access, other data services and voice services
primarily to SMEs. WALKair's high spectral efficiency, dynamic bandwidth
allocation, effective frequency reuse plan and high coverage capacity enable
carriers to connect last-mile business subscribers to their network in an
efficient and cost-effective manner.
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Our WALKair products consist of WALKair 1000 that operates in the 3.5, 10.5
and 26 GHz licensed bands, and WALKair 3000 that operates in the 26 and 28 GHz
band.
WALKair products are based on time division multiplexing, or TDM,
technology. WALKair systems support a complement of value-added classes of
services including VPN, Virtual LAN, or VLAN, and QoS, based on per-user
allocation of committed data rate and maximum data rate.
WALKair 3000 accommodates carriers' requirements for broader bandwidth,
primarily driven by the growing use of data-intensive Internet applications. It
also enables carriers to efficiently connect multiple subscribers in
multi-tenant buildings by a single terminal station. WALKair 3000 supports
significantly broader bandwidth for each customer and increased capacity for
each cell, increasing the peak speed of transmission of each terminal station to
up to 36 Mbps. WALKair 3000 integrates smoothly with WALKair 1000. This enables
carriers to deploy both systems on the same base station, serving a variety of
subscribers with different needs for communication services, within the same
cell.
Integrating our WALKair 1000 and WALKair 3000 technologies in the same base
station, Alvarix allows operators to benefit from low deployment costs without
limiting the ability to upgrade each customer when appropriate. For a low-cost
entry solution, operators can deploy WALKair 1000 along with differentiated data
service. When higher speed and capacity is required, WALKair 3000 can be
deployed on the same base station to deliver high-end data services with premium
QoS capabilities. This pay-as-you-grow approach allows operators to improve
their infrastructure price-performance.
BreezeNET Products
Our BreezeNET products are designed to provide high reliability
building-to-building bridging solutions, to support mobile connectivity, and to
provide individuals or small groups of users with wireless access to a LAN.
BreezeNET products consist of three product families: BreezeNET DS.11 and
BreezeNET PRO.11.
BreezeNET DS.11 products utilize direct sequence spread spectrum, or DSSS,
radio technology and are compliant with the IEEE 802.11b Wireless LAN standard.
DSSS products provide data rates of up to 11 Mbps and are most suitable for low
user density applications where high data rates are of prime importance.
BreezeNET DS.11 outdoor bridging products, operating in the unlicensed 2.4 GHz
band, feature an indoor/outdoor architecture with an indoor interface unit and
an outdoor radio unit. The indoor/outdoor architecture enables lower cost
installations while supporting reliable building-to-building high data rate
bridging over long distances.
BreezeNET PRO.11 products utilize frequency hopping spread spectrum, or
FHSS, radio technology and are compliant with the IEEE 802.11 Wireless LAN
standard. FHSS products provide data rates of up to 3 Mbps and allow
point-to-multipoint installations with a large number of wireless users.
BreezeNET PRO.11 products, operating in the unlicensed 2.4 GHz band, include
indoor solutions and outdoor wireless connectivity solutions most suitable for
building-to-building bridging and applications characterized by high user
density, and high-speed mobility in harsh radio environments.
BreezeNet B products function as a wireless bridge system that provide
high-capacity, high-speed point-to-point connectivity. The BreezeNET B system
operates in the unlicensed 5GHz band and enables operation in near and
non-line-of-sight environments such as buildings, foliage or ridgelines. The
system also features adaptive modulation for automatic selection of modulation
schemes to maximize data rate and improve spectral efficiency. BreezeNET B
supports security sensitive applications through optional use of authentication
and/or data encryption. The system supports VLANs, enabling secure operation,
and VPN services, allowing tele-workers or remote offices to conveniently access
their enterprise network.
MGW and eMGW Products
The MultiGain Wireless, MGW, and enhanced MultiGain, eMGW, solutions are
cost effective, rapidly deployable, point-to-multipoint fixed wireless access
systems that provide data and voice services for both residential and small
business users, mainly in suburban and rural environments. Utilizing radio links
instead of copper lines to bridge the last mile, the MGW and eMGW products
enable rapid deployment of quality services
26
to residential or SOHO customers. The products ensure the optimal utilization of
the available spectrum and minimum interference, regardless of topography.
eMGW is a point-to-multipoint Fixed Wireless Access system that provides
fast Internet access, corporate access and carrier-class telephony in a single
system. It also enables LAN-to-LAN connectivity over IP-VPN tunnels for
businesses, fax (G3) and dial-up modem (v.92/56Kbps) services for residential
subscribers and leased line services. It operates in a broad range of licensed
and unlicensed (ISM) bands, from 1.5 to 5.7 GHz. eMGW provides coverage of up to
25 kilometers in very challenging environments and operates in NLOS installation
scenarios. The eMGW is the optimal price / performance fixed wireless access
system for operators who need to: provide coverage to subscribers in green
fields; upgrade existing networks with advanced data services; and provide
wireless DSL services in low and medium subscriber density areas.
eMGW, which has a scalable and modular architecture, is comprised of an
indoor base station controller, an outdoor base station radio, an indoor
subscriber interface and an outdoor subscriber terminal. It also includes a
network planning tool and a network management system featuring fault,
configuration, performance and security management.
eMGW is based on our frequency hopping CDMA technology and utilizes our
innovative "hybrid switching" transmission technology, combining circuit
switching for toll quality voice and packet switching for fast data services,
optimizing the utilization of spectrum resources. This "hybrid switching"
concept provides a solution for the economic and technological challenges facing
network operators today.
MGW is a point-to-multipoint fixed wireless access system that supports a
variety of services, including toll quality voice, high-speed voice band data
and ISDN-BRI, primarily for urban, suburban and rural environments. MGW's
scalable architecture enables low initial investment, with incremental growth
based on subscriber demand. It is well suited for both new operators entering
the market and incumbent operators in areas where copper infrastructure is
already saturated or is difficult to install, such as new housing areas,
historical sites or temporary installations. Based on our frequency hopping CDMA
technology, MGW supports a broad range of frequency bands, from 800MHz to 3.8
GHz, and provides coverage of over 25 kilometers in line of sight, or LOS,
conditions. Hundreds of thousands of MGW lines have already been successfully
installed in over 60 countries.
MGW is comprised of a radio port control unit, a radio port coupler, a
fixed access unit, a power supply and charger unit and a coverage extender used
to extend the geographical coverage of the network. It also includes a network
planning tool and a network management system featuring fault, configuration,
traffic and performance management.
Breeze2000
Breeze2000 is being designed to provide last mile wireless telephony and
always-on data access over wide coverage for residential users with fixed or
limited mobility. Breeze2000 is designed to be a point to multipoint, NGN
solution, IP based CDMA 2000. The IP based architecture combined with
distributed structural design minimizes the initial network cost for servicing
the last mile. For use in small to medium scale networks in urban to rural, the
distributed IP architecture minimizes operator's initial investment and
expedites its time to market. We believe operators will be able to profitably
address the challenge of servicing the low ARPU markets.
Moving to an IP-based CDMA network will result in a number of key advantages for
service providers, particularly in terms of savings on both infrastructure and
backhaul. Carriers enjoy a low initial investment in large deployments and an
ongoing cost-efficiency in small and medium networks enabled by the distributed
IP architecture. Breeze2000 will provide transparent telephony services over
V5.2 interface including supplementary services, fax G3, payphone and data
services of circuit switched and always-on 153 Kbps peak. In addition, it will
offer a self-contained network connected to PSTN over SS7, thereby reducing the
costs of satellite backhaul in rural networks. The system is to operate in the
450MHz, 850MHz, 1900MHz, and 2100MHz frequencies.
27
Compact Cellular Infrastructure Products
GSM solutions
The WAVEXpress and ultraWAVE product families provide a comprehensive set
of GSM network capabilities that supports an entire GSM network within a single
enclosure. WAVEXpress and ultraWAVE systems can serve as a base station, base
station controller, switch or any combination of these functions depending on
the system's hardware and software configuration. The WAVEXpress and ultraWAVE
products are modular, which enable the system to be updated and enhanced by
exchanging specific hardware modules and upgrading software. The compact and
modular system enables wireless service providers to fill in coverage blind
spots, to increase capacity in heavy usage areas and to provide service to
previously unserved areas.
WAVExchange switching family is a cost effective Mobile Switching System
scalable from 100 to 200,000 subscribers. WAVExchange offers full mobility
functions and allows operators to expand their switching capacity and service
offerings to remote or isolated areas. WAVExchange also provides international
roaming for visiting subscribers. WAVExchange can be deployed as a stand-alone
solution or integrated with WAVEXpress and ultraWAVE as part of an end-to-end
cellular deployment.
Network Management Products
We provide advanced management applications for our wireless broadband
solutions. Our network management applications are equipped with graphics-based
user interfaces and provide a set of tools for configuring, monitoring and
effectively managing our wireless broadband networks. Our network management
products are:
o AlvariSTAR, which configures, monitors and manages our BreezeMAX,
BreezeACCESS and WALKair products.
o BreezeMANAGE, which configures, monitors and manages our
BreezeACCESS products;
o WALKnet, which configures, monitors and manages our WALKair
products;
o BreezeVIEW, which configures, monitors and manages our BreezeNET
products;
o UltraWAVE OMC which configures, monitors and manages our mobile
products (UltraWave and Breeze2000)
o IMS, which configures, monitors and manages our eMGW product
BreezeMANAGE, WALKnet, BreezeVIEW, AlvariSTAR, UltraVIEW and IMS are
multi-platform simple network management protocol, or SNMP, applications. Using
standard and private SNMP agents incorporated in the products, these
applications, operating under the HP Open View network management platform,
enable configuring, managing faults and monitoring performance of all system
components from a central management station.
Accessories Offered by Us
In order to support our products and provide comprehensive solutions to our
customers, we provide a family of accessories designed to extend the range of
our BreezeMAX, BreezeACCESS, WALKair and BreezeNET solutions. These accessories
include antennas, cables, surge arrestors, amplifiers and other components. We
also offer various configuration and monitoring tools in addition to the
BreezeMANAGE, WALKnet and BreezeVIEW network management applications for our
BreezeACCESS, WALKair and BreezeACCESS products.
Technologies Underlying Our Products
We use internally developed core technologies and continue to invest
heavily in augmenting our expertise in networking, radio and digital signal
processing, or DSP, modem technologies. We also participate as active members in
international standards committees.
28
Networking Technology
To support the BreezeMAX products, we have developed or otherwise acquired,
and continue to invest in, networking expertise in the areas of IP Access, PPPoE
(Point-to-Point Protocol Over Ethernet) tunneling, Virtual Private Networks
(VPN) and Voice over IP (VoIP), based on industry standards such as H.323, SIP
and MGCP, and other Internet standards and protocols. We have also developed,
and are continuing to develop, know-how to satisfy market requirements with
respect to quality of service, classes of services, committed information rate,
maximum information rate, virtual LAN management and prioritization. We are
developing access technology based on the IEEE 802.16-2004 standard for further
improved support of these needs. We have also developed a network management
system that provides network surveillance, monitoring and configuration
capabilities for all the family products.
To support our BreezeACCESS products, we have developed or otherwise
acquired, and continue to invest in, networking expertise in the areas of VoIP,
based on industry standards such as H.323 and media gateway control protocol, or
MGCP, and other Internet standards and protocols. We have also developed, and
are continuing to develop, know-how to satisfy market requirements with respect
to quality of service, classes of services, committed information rate, maximum
information rate, virtual LAN management and interfacing with billing systems
for data and voice. We are developing medium access technology based on the IEEE
802.16a standard for further improved support of these needs.
To support our WALKair products, we have developed time division multiple
access, or TDMA, based air protocol whereby all terminal stations are
synchronized with the base station. Each terminal station transmits a burst
according to the base station upon demand.
Radio Technology
We have in-house radio development capabilities to address the diversified
frequency bands and modulation methods of our products. The frequency bands
include, among others, 900 MHz, 2.4 GHz, 2.3, 2.5-2.7 GHz, or MMDS, 3.4-3.6 GHz,
5.7 GHz, 10.5 GHz and 26 and 28 GHz. The modulation methods include Frequency
Hopping Spread Spectrum, or FHSS, Gaussian Frequency Shift Keying, or GFSK,
Direct Sequence Spread Spectrum, or DSSS, Single Carrier QAM and OFDM, OFDMA,
GSM and CDMA. Our products include both Time Division Duplex, or TDD, radios and
Frequency Division Duplex, or FDD, radios.
Our radio teams specialize in low cost, mass-production oriented radio
design. The system level capability is software assisted radio auto-calibration,
which allows for reduced manufacturing costs and compensates for instability,
temperature changes and aging of components.
Our internal radio expertise enables us to attract customers by addressing
promptly new needs such as new frequency bands.
Digital Signal Processing (DSP) Modem Technology
We maintain strong expertise in DSP and in modem design. Our capabilities
include hardware oriented design, as well as programmable DSP oriented design.
The extensive configurability of our modems, through FPGA (Field Programmable
Gate-Array) and DSP reprogramming, allow us to introduce advanced features to
our products and to follow amendments to emerging standards.
We have developed the BreezeMAX base station platform, which is designed to
support the WiMAX (IEEE 802.16d and HIPERMAN) air interface specification. The
platform supports the multiple antenna elements per sector in order to exploit
the smart-antenna signal processing techniques for improved coverage and network
capacity. The programmable DSP-based architecture of the BreezeMAX platform will
enable us to support the emerging IEEE 802.16 2004 standard, which will also be
used as the foundation for our broadband mobile IEEE 802.16e solution, while
enjoying the benefits of OFDMA and smart-antenna processing. The base station
architecture and capabilities is closely aligned and synchronized with the CPE
ASICs and reference design developed by Intel resulting from our collaboration,
which began in 2003, in order to assure optimum performance in future WiMAX
deployments.
We have developed mixed signal ASICs containing DSP cores. Inclusion
on-chip of analog-digital converters is instrumental to both cost reduction and
power consumption reduction. First generation ASIC supports our IEEE
29
802.11-based FH-GFSK products, with the above-standard capability of delivering
3 Mbps, with automatic fall back to 2 Mbps and 1 Mbps as necessary. Our second
generation ASIC is optimized for OFDM modulation, as used by the IEEE 802.11a/g
standards and the recently approved IEEE 802.16a standard. This ASIC is based on
a proprietary programmable "very long instruction word" DSP architecture. The
programmable architecture allows us to implement numerous beyond-standard
capabilities, such as OFDMA extensions to the baseline OFDM mode. This
system-on-a-chip ASIC will serve as a key component of our BreezeACCESS-OFDM
products. Additional ASIC developed in-house supports our WALKair products, with
a full duplex point-to-multipoint single carrier trellis-coded 64QAM modem. The
PSTN FWA MGW system was extended to provide additional data services to wireless
subscribers. The eMGW system was especially designed to support the modern
wholesale network model for carriers. PPPoE, remote and local DHCP network tools
give to the network access provider ability for fast and inexpensive IP network
configuration and interfacing to the billing systems.
The FWA eMGW system was designed to provide data services to wireless
subscribers on top of voice services. The subscriber unit is based on our ASIC
implementing functions of the PHY and MAC layers of the air interface. The eMGW
base station design includes Voice echo canceling and Fax/modem detection
algorithm to support high spectrum efficiency while ensuring toll quality voice.
We have expertise in radio modem design for GSM and TDMA, including design
of DSP, equalizer, AGC, and power control for CDMA products. Currently the IWF
(Inter Working Function) is designed for fax and data services.
GSM switching and IP-based mobile switch
Our cellular products include two distinctive switching technologies for
GSM and CDMA networks. WAVExchange is a family of low and high capacity MSC
platforms for GSM and is capable of supporting from 100 up to 100,000
subscribers on a single platform. WAVExchange enables operators to cost
effectively render service in areas with no switching capabilities or with poor
transmission to central switching locations.
Our recently developed CDMA switch (MSC) is based on a VoIP paradigm where
all calls are trunked over an IP based network infrastructure. This
architectural concept is often referred to as NGN (Next Generation Network) and
enables virtual positioning of the IP-based MSC anywhere on the public or
private IP network. Using off-the-shelf IP gear enables a very cost effective
and easy to maintain backbone network.
Participation in International Standards Committees
As part of our strategy to become a technological leader and influence the
industry in specific areas, we have, since our inception, been an active member
in standardization committees.
We are a principal founder of the WiMAX Forum, a non-profit organization
whose members work to promote adoption of the IEEE 802.16 OFDM/OFDMA standard,
and to certify interoperability of compliant equipment. Alvarion is represented
on the board of directors the WiMAX Forum, by Mohammad Shakouri, Vice President
of Business Development at Alvarion, who holds the position of Vice Chair of the
WiMAX Forum, and chairs the Marketing Working Group.
The scope of the IEEE 802.16-based standard is the Wireless MAN
(Metropolitan Area Network), supporting larger range fixed/nomadic/mobile
broadband access networks with more performance and dedicated high-end services.
Alvarion's engineers actively participate in the technical group for defining
inter-operability profiles and tests. We actively participate in IEEE 802.16,
Broadband Wireless Access work group, to define and improve the OFDM/OFDMA mode,
selected by WiMAX, for both fixed and mobile broadband applications and to
improve the IEEE 802.16 standard ability to increase its market print in
Licence-Exempt applications.
Mariana Goldhammer, Director for Strategic Technologies at Alvarion, is
Chair of IEEE 802.16h, targeting Improved Coexistence in License-Exempt
deployment. She is also ETSI BRAN (Broadband Radio Access Networks) Vice-Chair
and HiperMAN Chair. ETSI HiperMAN has adopted the IEEE 802.16 OFDM mode and is
currently considering the OFDMA mode. Ms. Goldhammer is acting to align the IEEE
and ETSI standards in order to create a worldwide broadband standard for
converged Fixed-Mobile applications.
30
We have participated in the IEEE 802.11 wireless LAN work group, being the
driving force behind increasing the data rate of the frequency hopping modem.
Naftali Chayat, our Chief Scientist, chaired a task group of the IEEE 802.11a, a
wireless LAN work group involved with high-data rate standardization.
We are very active in the international arena, including ITU-R, to promote
the WiMAX policy in the Regulatory domain and secure the spectrum for broadband
fixed/mobile deployment.
Sales, Marketing and Support of Our Products
We market our products through an extensive network of more than 220 active
partners. These include original equipment manufacturers, national and local
distributors, systems integrators and resellers. Our distributor partners in
turn sell to resellers, including value-added resellers and systems integrators,
and to end-users. We also market our products directly to large-end customers.
We currently sell and distribute our products in more than 150 countries
worldwide. The use of different types of marketing channels through our
partnership network enables us to market our products to many different markets
and to meet the differing needs of our customers.
Our products are aimed at the wireless broadband, wireless voice, wideband
and cellular markets. We sell in these markets through OEM agreements or other
strategic arrangements with leading telecommunications suppliers, direct sales
to large customers, such as public access providers (e.g. municipalities), as
well as indirectly through our distribution channels, which market primarily to
smaller Internet service providers and operators. Additionally, in order to
achieve broad and rapid market penetration, we maintain direct relationships
with carriers. By doing so, we believe that we are better able to understand the
needs of carriers, Tier 1 and global operators, and are better able to identify
and anticipate trends in the wireless broadband market.
We have strategic relationships with major telecommunications equipment
manufacturers, such as Siemens, Alcatel, Nera and Lucent. Pursuant to
arrangements entered into with these partners, they are permitted to distribute
our products on either a regional or worldwide basis under private labels. We
are seeking additional strategic relationships with international partners and
other key companies to increase our exposure and establish ourselves as a
supplier to markets and end-user segments that are not reached by our present
distribution channels.
We have strong relationships with leading incumbents to whom we sell our
solutions directly.
A distributor of our products is typically a data communications or a
telecommunications marketing organization, or both, with the capability to add
value with training and first-tier support to resellers and systems integrators.
One of our customers, a Latin American operator, accounted for about 14%
and 30% of our sales in 2003 and 2004, respectively.
We operate in various regions. Our subsidiaries and representative offices,
located throughout North America, South America, Europe and Asia, support our
international marketing network.
We derive our revenues from different geographical regions. For a more
detailed discussion regarding the allocation of our revenues by geographical
regions based on the location of our customers, see "Item 5A -- Operating and
Financial Review and Prospects -- Operating Results."
We conduct a wide range of marketing activities aimed at generating name
recognition and awareness of our brands throughout the telecommunications
community, as well as identifying leads for distributors and other resellers.
These activities include public relations, participation in trade shows and
exhibitions, advertising programs, public speaking at industry forums and
maintaining a website.
We maintain a highly trained global technical support team that
participates in providing customer support to customers who have purchased our
products. This includes local support by distributors' and systems integrators'
personnel trained by our support team, support through help desks and the
provision of detailed technical information on our website, expert technical
support for resolution of more difficult problems, as well as participation in
pre- and post-sales activities conducted by our distribution channels with large
accounts and key end-users.
31
We organize technical seminars covering general technologies, as well as
specific products and applications. We also have qualification programs to
advance the technical knowledge of our distributors and their ability to sell
and support our products. The seminars are held in various countries and in
different languages according to need.
Manufacturing Operations and Suppliers
We currently subcontract most of the manufacturing of our products. We have
a pre-qualification process for our contract manufacturers, which includes the
examination of the technological skills, production capacity and quality
assurance ability of each contract manufacturer. Our manufacturing capacity
planning is based on rolling marketing forecasts done on a monthly basis. The
forecasts provided to the sub-contractors are based on internal company
forecasts, and are up to six months.
Our products are currently manufactured primarily by several contract
manufacturers located in Israel, the Philippines, Japan and the United States.
These contract manufacturers purchase, on our behalf, many of the components for
our products.
Part of our production is conducted in our facility in Tel Aviv. For other
parts of this production, we have arrangements with several subcontractors, who
manufacture components for our products, or conduct either electronic assembly
or mechanical assembly.
The quality assurance, final assembly and testing operations of our
products are performed by us at our facilities in Tel Aviv, Omer, Mountain View,
Schenzen and in our leased premises at some of our subcontractors' facilities in
Israel. We have processes on place for the ongoing performance of quality
assurance at our own facilities and at our subcontractors' facilities. Equipment
owned by us and used for final assembly and testing is located at our facilities
in Omer and in our leased premises at the facilities of some of our
subcontractors in Israel as part of our Approved Enterprise programs.
We monitor quality with respect to each stage of the production process,
including the selection of components and subassembly suppliers, warehouse
procedures, assembly of goods, final testing and packaging and shipping. Our
packaging and shipping activities are conducted primarily at our Tel Aviv, Omer
and Mountain View facilities.
All our manufacturing locations in Israel are ISO 9001 certified, which
verifies that our manufacturing processes adhere to established standards. We
require that our Israel based contract manufacturers be ISO 9002 certified. Our
US manufacturing location and contract manufacturers are undergoing ISO 9002
certification, and we expect this during the course of 2005. Our Tel Aviv and
Omer locations are ISO 14000 certified.
Proprietary Rights
In order to protect our proprietary rights in our products and
technologies, we rely primarily upon a combination of patents trademark, trade
secret, and copyright law as well as confidentiality, non-disclosure and
assignment of inventions agreements. We have over 82 patents issued by patent
offices in several countries, with additional 59 patents pending. We have
trademark registrations in Israel, United States, the European Union and many
other countries. In addition, we have typically entered into nondisclosure,
confidentiality and assignment of inventions agreements with our employees,
consultants and with some of our suppliers and customers who have access to
sensitive information. We cannot assure you that the steps taken by us to
protect our proprietary rights will be adequate to prevent misappropriation of
our technology or independent development and/or the sale by others of products
with features based upon, or otherwise similar to, those of our products.
Given the rapid pace of technological development in the communications
industry, we also cannot assure you that our products do not or will not
infringe on existing or future proprietary rights of others. Although we believe
that our technology has been independently developed and that none of our
intellectual property infringes on the rights of others, we cannot assure you
that third parties will not assert infringement claims against us or seek an
injunction on the sale of any of our products in the future. If an infringement
were found to exist, we may attempt to acquire the requisite licenses or rights
to use such technology or intellectual property. However, we cannot assure you
that such licenses or rights could be obtained on terms that would not have a
material adverse effect on us, if at all.
We license certain technologies from others for use in connection with some
of our technologies. The loss of these licenses could impair our ability to
develop and market our products. If we are unable to obtain or maintain
32
the licenses that we need, we may be unable to develop and market our products
or processes, or we may need to obtain substitute technologies of lower quality
or performance characteristics or at greater cost.
The Competitive Environment in which We Operate
The markets for our products are very competitive and we expect that
competition will increase in the future, both with respect to products that we
are currently offering, and with respect to products that we are developing. The
principal competitive factors in these markets include:
o price and price/performance ratio;
o technology;
o regulation and product certifications;
o ability to support new industry standards;
o product time to market, and
o brand strength and sales channels.
Companies that are engaged in the manufacture and sale, or the development,
of products that compete with our wireless broadband products include Marconi
plc, SR Telecom, Wi-Lan Inc., Airspan Inc., Proxim, Inc., Motorola, Aperto
Networks, Navini, IP Wireless, Vyyo, Harris, ZTE, Nexnet, Wave rider, Axxcelera,
Cambridge, Redline, Trango, Arraycom and Flarion. Other vendor members of the
WiMAX Forum may become our competitors. Our products also compete with
alternative telecommunications transmission media, including leased lines,
copper wire, fiber-optic cable, cable modems, television modems and satellite.
Companies that are engaged in the manufacture and sale, or the development, of
products that can compete with our compact cellular network products are GSM
communications equipment providers such as Ericson, Lucent, Motorola, Nokia,
Siemens, ZTE and Huawei. We also compete with the TDMA and CDMA product
offerings from the same communications equipment providers and expect that a
number of them will develop competing data communications products and
technologies in the near future. We also compete with CDMA product offerings of
Ericsson, Motorola, ZTE, Huawei, UT-Starcom, Samsung and LG Electronics. In the
past, the products of the leading GSM equipment communications providers were
capable of handling large subscriber bases. Equipment providers are beginning
however to focus on equipment similar to our products that address smaller
subscriber bases and distributed architecture based on IP Base Stations (GSM or
CDMA). Each of the major GSM communications equipment providers has at least a
partial GSM solution that addresses this target market.
Increased competition in our market is likely to result in price
reductions, shorter product life cycles, reduced gross margins, longer sales
cycles and loss of market shares, of which could harm the results of our
operations. We have designed and engineered our products to minimize costs,
maximize margins and improve competitiveness. However we cannot assure you that
we will be able to compete successfully against current or future competitors.
Government Regulation
Our business is premised on the availability of certain radio frequencies
for two-way broadband communications. Radio frequencies are subject to extensive
regulation under the laws of each country and international treaties. Each
country has different regulation and regulatory processes for wireless
communications equipment and uses of radio frequencies. In the United States,
our products are subject to FCC rules and regulations. In other countries, our
products are subject to national or regional radio authority rules and
regulations. Current FCC regulations permit license-free operation in
FCC-certified bands in the radio spectrum in the United States. In other
countries the situation varies as to the spectrum, if any, that may be used
without a license and as to the permitted purposes of such use. Some of our
products operate in license-free bands, while others operate in licensed bands.
The regulatory environment in which we operate is subject to significant change,
the results and timing of which are uncertain.
In many countries, the unavailability of radio frequencies for two-way
broadband communications has inhibited the growth of these networks. The process
of establishing new regulations for Wireless Broadband frequencies and
allocating these frequencies to operators is complex and lengthy. The regulation
of frequency
33
licensing began during 1999 in many countries in Europe and South America and
continues in many countries in these and other regions. Licensed blocks in
3.5GHz were released in some countries. However, this frequency licensing
regulation process may suffer from delays that may postpone commercial
deployment of products that operate in licensed bands in any country that
experiences this delay. Our current customers that commercially deploy our
licensed band products have already been granted appropriate frequency licenses
for their network operation. In some cases, the continued validity of these
licenses may be conditional on the licensee complying with various conditions.
There is a trend to release more license-exempt bands. For example, in the
United States, FCC rules were modified to include an additional 255MHz of
spectrum, though actual use of this allocation is not permitted until a
technical issue is resolved between the NTIA (which manages government-used
spectrum) and the FCC (which manages commercial and public spectrum). Also, in
the U.S. a Report and Order by the FCC was released in March to allow unlicensed
devices, on a registration basis and with some limitations, to operate in 50MHz
from 3650MHz-3700MHz. Alvarion is currently studying the rules and examining the
market opportunity that may exist with the new allocation. Also, the FCC
evaluating possible unlicensed allocations in the sub-1GHz "TV bands," which are
being vacated as broadcasters transition from analogue to digital.
In Europe, the process is slower. We see potential for new markets in rural
areas and developing countries, created by the availability of licensed-exempt
spectrum in 5MHz.
In addition to regulation of available frequencies, our products must
conform to a variety of national and international regulations that require
compliance with administrative and technical requirements as a condition to
marketing devices that emit radio frequency energy. These requirements were
established, among other things, to avoid interference among users of radio
frequencies and to permit the interconnection of equipment.
We are subject to export control laws and regulations with respect to all
of our products and technology. In addition, Israeli law requires us to obtain a
government license to engage in research and development, and export, of the
encryption technology incorporated in some of our products. We currently have
the required licenses to utilize the encryption technology in our products.
C. ORGANIZATIONAL STRUCTURE
The following is a list of our active subsidiaries, each of which is
wholly-owned:
o Alvarion, Inc., incorporated under the laws of Delaware, United
States;
o Alvarion Mobile, Inc., incorporated under the laws of Delaware,
United States, is a wholly owned subsidiary of Alvarion Inc.;
o interWAVE Communications Inc., incorporated under the laws of
Delaware, United States, is a wholly owned subsidiary of Alvarion
Mobile, Inc.;
o Alvarion UK LTD., incorporated under the laws of England;
o Alvarion SARL*, incorporated under the laws of France;
o Alvarion SRL, incorporated under the laws of Romania;
o Alvarion Asia Pacific Ltd., incorporated under the laws of Hong
Kong;
o Alvarion do Brasil LTDA, incorporated under the laws of Brazil;
o Alvarion Uruguay SA, incorporated under the laws of Uruguay;
o Alvarion Japan KK, incorporated under the laws of Japan;
o Alvarion Israel (2003) Ltd., incorporated under the laws the
State of Israel;
o Tadipol-ECI Sp.z o.o.,** incorporated under the laws of Poland;
o Alvarion Telsiz Sistemleri Ticaret A.S.**, incorporated under the
laws of Turkey;
o Alvarion de Mexico S.A de C.V, incorporated under the laws of
Mexico;
34
o interWAVE Communications Ireland Limited, incorporated under the
laws of Ireland;
o interWAVE Communications UK Ltd., incorporated under the laws of
England;
o interWAVE Communications International SA, incorporated under the
laws of France;
o interWAVE Communications (Shenzen) Co., Ltd., incorporated under
the laws of China;
o interWAVE Communication International Ltd., incorporated under
the laws of Hong Kong; and
o International Wave Communications Networks, Inc., incorporated
under the laws of the Philippines.
-----------------
* Alvarion SARL is a wholly-owned subsidiary of Alvarion UK LTD. In addition,
we have representative offices in China, Italy, Russia, the Philippines,
Japan, South Africa, Spain, Czech Republic and Singapore.
** Alvarion Telsiz Sistemleri Ticaret A. S. and Alvarion -- Tadipol -- ECI
Sp.zoo are wholly owned subsidiaries of Kermadec Telecom B.V.
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real estate property. On December 31, 2004, we leased an
aggregate of approximately 244,000 square feet in Israel for annual lease
payments (including management fees) of approximately $3.5 million and incur
annual parking expenses in connection with this lease of approximately $0.6
million. These premises consist mainly of our corporate headquarters and two
separate warehouses located in Israel. We have been occupying our main premises
since April 2001, which serves as our corporate headquarters, as well as the
site at which we conduct our main research and development activities and some
quality assurance, final assembly and testing operations. Our main lease expires
in April through May 2006, we intend to extend it for an additional period. We
also lease approximately 34,500 square feet of office facilities in Mountain
View California, at an annual rent of approximately $0.4 million. These premises
serve as the corporate headquarters of our U.S. subsidiary, Alvarion Inc, and as
our principal sales and marketing office in North America. In addition, we lease
office space for the operation of our facilities in Miami, Florida, San Diego,
California, U.K., France, Germany, Romania, China, Hong Kong, Uruguay, Japan,
Brazil, Mexico, Philippines, Ireland and Poland.
We believe that the facilities we currently lease are adequate for our
current requirements
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes included elsewhere in this annual report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth in "Item 3 -- Key Information -- Risk Factors."
A. OPERATING RESULTS
Overview
We are a leading provider of wireless broadband connectivity solutions and
specialized cellular networks. Our solutions are used by telecom carriers and
service providers worldwide and for private networks. Our products are used to
provide broadband data and voice services, for subscribers in the "last mile" of
connectivity, for feeding cellular networks, cellular network extensions and
compact specialty networks. With our comprehensive product offerings, we provide
a broad range of integrated wireless broadband solutions, addressing different
markets and frequency bands, designed to address the various business models of
carriers, service providers and private network operators.
We have played a prominent role in creating and promoting industry
standards, including our leading role in the WiMAX Forum(TM), an organization
focused on increasing the widespread adoption of standards-based products in the
wireless broadband market and leading the industry to mobile WiMAX solutions.
The WiMAX Forum works to promote the interoperability of multiple vendors'
products in the wireless broadband market. Since its
35
establishment, the WiMAX Forum members, working together with the IEEE, have
established the first of the standards on which fixed wireless broadband systems
will operate (the IEEE 802.16-2004 standard). This standard fully supports all
fixed and nomadic broadband wireless applications.
Our products are usually used in a point-to-multipoint architecture and
address a wide scope of end-user profiles, from the residential and small
office, home office, or SOHO, markets, through small and medium enterprises, or
SMEs, and multi-tenant units/multi-dwelling units. Our compact specialty
cellular networks serve a variety of end-users and applications including
residential cellular users, governmental, homeland security, disaster relief
agencies, as well as travel/leisure companies.
Our products operate in licensed and license-free bands, ranging from 450
MHz to 28 GHz and comply with various industry standards. Our core technologies
include spread spectrum radio, linear radio, digital signal processing, modems,
MAC, IP-based mobile switches, compact mobile networks, networking protocols and
very large systems integration, or VLSI. We have intellectual property in these
technologies.
On December 9, 2004, we acquired through merger interWAVE, a provider of
compact mobile network equipment and services, which complements our existing
product set and expands our served market to include a rapidly growing segment
of the mobile equipment market. interWAVE's technical expertise in cellular
systems design and experience in providing complete mobile networks will
accelerate the development of our next generation offering.
On August 1, 2001 we acquired Floware Wireless Communication Ltd. Upon the
closing of the acquisition, we changed our name from BreezeCOM Ltd. to Alvarion
Ltd. We have consolidated the results of Floware's business in our financial
statements from August 1, 2001. On April 1, 2003 we acquired certain assets and
assumed liabilities of InnoWave Ltd. We have consolidated the results of
InnoWave's business in our financial statements from April 1, 2003. On December
9, 2004 we acquired interWAVE Communications Ltd. We have consolidated the
results of operations of interWAVE's business in our financial statements from
December 9, 2004.
Our results for 2004 reflect the increased demand for broadband access
around the world, resulting in growth in our sales and net profit.
2004 Highlights
The following describes major developments to our business in 2004:
o interWAVE Acquisition -- On December 9, 2004 we acquired
interWAVE for a purchase price of approximately $47.7 million, as
well as fair value of approximately $1.7 million related to
320,826 options granted to interWAVE's employees in exchange for
their previously held vested options, and $1.4 million
acquisition related costs. The acquisition of interWAVE provides
a complementary voice and data solution for both fixed and mobile
operators in developing regions of the world, enlarges and
strengthens our diversified customer base and sales channels, and
increases our technical expertise in design and deployment of
mobile systems.
o Expanded our relationships with OEM partners -- We announced two
OEM agreements, one with Lucent and one with Alcatel. The OEM
agreement with Lucent covers our WiMAX-ready IEEE 802.16 fixed
solution and may be extended to include future IEEE 802.16e
mobile WiMAX products. Our OEM agreement with Alcatel is an
extension of an existing OEM relationship with them and helps us
to address DSL extension opportunities with their extensive
customer base. We also expanded our existing OEM relationships
with Siemens to include our BreezeMAX product.
o WiMAX -- During 2004, we deployed the first WiMAX-ready networks
in Latin America, Eastern and Western Europe. We experienced
interest from incumbent and alternative carriers, both fixed and
mobile operators. At the end of 2004, we had several deployments
and different opportunities in various stages of trial activity
all over the world. By the end of 2004, the WiMAX Forum,
announced that the certification lab has been chosen and that the
certification program is expected to be launched in July 2005.
o Agreement with Intel -- In 2003, we signed a strategic agreement
with Intel Corporation to work together to incorporate Intel's
IEEE 802.16a chips into our line of WiMAX standard-based
technology. During
36
2004, we received sample chips from Intel and are on track for
delivery of Intel-based CPEs by mid-2005, which will enable us to
pursue WiMAX conformance and interoperability certification.
o Large customer -- During 2004, one of our customers, a large
operator in Latin America, accounted for about 30% of our annual
revenues. This customer accounted for about 14% of our annual
revenues in 2003. The Latin American operator has made the eMGW
product a basis for its 3.5 GHz wireless access network, to
provide high-speed Internet, and voice services to its rural and
suburban regions. If revenues from this customer decline, or we
lose this customer, we may not be successful in replacing it on a
timely basis, or at all, and our revenues would be adversely
affected.
Critical Accounting Principles
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, and audited in accordance with
standards of the Public Company Accounting Oversight Board (United States). A
discussion of the significant accounting policies which we follow in preparing
our financial statements is set forth in Note 2 to our consolidated financial
statements included in Part III of this annual report. In preparing our
financial statements, we must make estimates and assumptions as to certain
matters, including, for example, the amount of new materials and components that
we will require to satisfy the demand for our products based on our sales
estimates and the period of time that will elapse before our products become
obsolete. While we endeavor diligently to assure that our estimates and
assumptions have a reasonable basis and reflect our best assessment as to the
future circumstances which they anticipate, actual results may differ from the
results estimated or assumed and the differences may be substantial as to
require subsequent write-offs, write-downs or other adjustments to past results
or current valuations.
The following is a summary of certain critical principles, which have a
substantial impact upon our financial statements and which we believe are most
important to keep in mind in assessing our financial condition and operating
results:
Revenue Recognition. We generate revenues from selling our products
indirectly through distributors and OEMs as well as directly to end-users.
Revenues are recognized in accordance with Staff Accounting Bulletin No.
104 "Revenue Recognition in Financial Statements" and Emerging Issues Task Force
No. 00-21, "Revenue Arrangements with Multiple Deliverables", when the following
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or determinable, no further
obligation exists and collection is reasonably assured.
We generally do not grant a right of return. However, we have granted to
certain distributors limited rights of return on unsold products. Product
revenues on shipments to these distributors are deferred until the distributors
resell our products to their customers, provided that all other revenue
recognition criteria are met.
In cases in which we are obligated to perform post delivery installation
services, revenues are recognized upon completion of the installation.
In transactions, where a customer's contractual terms include a provision
for customer acceptance, revenues are recognized either when such acceptance has
been obtained or the acceptance provision has lapsed.
Accounts Receivable. We are required to assess the collectability of our
accounts receivable balances. Generally we do not require collaterals, however
under certain circumstances we require letters of credit, other collateral,
additional guarantees or advance payments. A considerable amount of judgment is
required in assessing the ultimate realization of these receivables including,
but not limited to, the current credit-worthiness of each customer. For certain
accounts receivable balances, we are also covered by foreign trade risk
insurance. To date, we have not experienced material losses on the ongoing
credit evaluations of our customers. Should we consider it necessary to increase
the level of provision for doubtful accounts, required for a particular
customer, then additional charges will be recorded in the future.
Inventory Valuation. Our policy for valuation of inventory and commitments
to purchase inventory, including the determination of obsolete or excess
inventory, requires us to perform a detailed assessment of inventory at each
37
balance sheet date which includes a review of, among other factors, an estimate
of future demand for products within specific time frames, valuation of existing
inventory, as well as product lifecycle and product development plans. The
business environment in which we operate, the wide range of products that we
offer and the relatively short sales-cycles we experience all contribute to the
exercise of judgment relating to maintaining and writing-off of inventory
levels. The estimates of future demand that we use in the valuation of inventory
are the basis for our revenue forecast, which is also consistent with our
short-term manufacturing plan. Inventory reserves are also provided to cover
risks arising from non-moving items. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. We may be required to record additional inventory
write-down if actual market conditions are less favorable than those projected
by our management. Similarly, Note 2g to our financial statements describes the
write-offs and provisions which we made and recorded in 2004, 2003 and 2002 to
reflect the decline from our expectations in the value of inventory which had
become excessive, unmarketable or otherwise obsolete or the inventory of new
materials and components which we had purchased or committed to purchase in
anticipation of forecasted sales which we did not consummate. If there were to
be a sudden and significant decrease in demand for our products, or if there
were a higher incidence of inventory obsolescence because of rapidly changing
technology and customer requirements, we could be required to increase our
inventory allowances and our gross margin could be adversely affected. Inventory
management remains an area of management focus as we balance the need to
maintain strategic inventory levels to ensure competitive lead times against the
risk of inventory obsolescence because of rapidly changing technology and
customer requirements.
Intangible assets. As a result of the acquisition of interWAVE in 2004 and
the acquisition of InnoWave in 2003, our balance sheet as of December 31, 2004
and 2003 includes acquired intangible assets, such as goodwill, current
technology, customer relations and tradenames, which totaled approximately
$100.5 million and $50.4 million, as of these dates respectively. In the course
of the analysis and valuation of intangible assets, we use financial and other
information, including financial projections and valuations provided by third
parties. Although we evaluate our intangible assets annually or when there is an
indication of an impairment, our projections following an acquisition are based
on the information available at the respective acquisition dates, and may differ
from actual results.
Goodwill. In accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible assets", ("SFAS No.142"), goodwill
acquired in a business combination that closes on or after July 1, 2001 is
deemed to have indefinite life and will not be amortized. SFAS 142 requires
goodwill to be tested for impairment on adoption and at least annually
thereafter or between annual tests in certain circumstances, and written down
when impaired, rather than being amortized as previous accounting standards
required. As of December 31, 2004 we had total goodwill of $85.3 million on our
balance sheet. Goodwill is tested for impairment by comparing the fair value of
the reporting unit with its carrying value. In accordance with the guidelines of
FAS141, during 2004, we carried forward the determination of fair value of 2003.
The fair value was determined based on our management's future operations
projections, using discounted cash flows and market approach and market
multiples valuation methods. No indication of impairment was identified. In
assessing the recoverability of our goodwill and other intangible assets, we
must make assumptions regarding the estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.
In-process research and development write-off. At the time of our
acquisition of interWAVE, interWAVE was in the process of developing new
technologies that we valued at $11.0 million. The technologies under development
were CDMA and a part of the GSM technology. As of the date of the acquisition,
none of these technologies had demonstrated their technological or commercial
feasibility. Significant risk existed because we were unsure of the obstacles we
would encounter in the form of time and cost necessary to produce
technologically feasible products. Were these proposed products to fail to
become viable, it was unlikely that we would be able to realize any value
from the sale of the technology to another party.
As the in-process technologies had no alternative since the proposed
products did not prove to be feasible, these development efforts are within the
definition of In-Process Research and Development (IPR&D) contained in Statement
of Financial Accounting Standards (SFAS) No. 2. Accordingly, this amount was
expensed in the consolidated statement of operations, upon consummation of the
acquisition.
38
We used an income approach in valuing the acquired IPR&D. Under this
approach, the fair value reflects the present value of the projected free cash
flows that will be generated by the IPR&D projects and that is attributable to
the acquired technology, if successfully completed. The projected revenues used
in the income approach were based upon our estimate of the revenues to be
generated upon completion of the projects and the beginning of commercial sales.
The projections assumed that the products would be successful and that the
product's development and commercialization would meet our management's current
time schedule.
Current Technology. Current technology represents proprietary "know how",
patents, or any other relevant intellectual property that is technologically
feasible as of the valuation date. Usually, current technology can be easily
identified as existing products generating revenues on a current basis. As of
December 31, 2004, the amounts allocated to current technology from the
interWAVE acquisition, the InnoWave acquisition and the Floware merger totaled
$3.5 million, $0.8 million and $8.4 million, respectively. In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment of Long-Lived Assets", ("SFAS No. 144"), the value of the current
technology as of December 31, 2004 and 2003, has also been reviewed and it was
determined that no indicators for impairment existed. The acquired current
technology is amortized using the straight line method, over 7 years, 4.75 years
and 7.75 depending on the respective product's amortization schedules.
Customer relations. When an operating entity is acquired, the target
company is often a party to ongoing relationships with its customers that are of
material value to the acquirer. To the extent that future cash flow of a
business would be negatively affected in the absence of these relationships,
they are deemed to have economic value. The amount allocated to customer
relations acquired from the interWAVE and Innowave acquisitions totaled
approximately $1.2 million and $0.5 million, respectively. These values are
estimated by performing discounted cash flows analysis which is based upon
customer backlog at the date of acquisition and historical recurring revenues by
customer, reflecting customer renewal rates, and entails forecasting cash flows
to be generated by customer relations. In accordance with SFAS No. 144 we
reviewed the value of our customer relations as of December 31, 2004 and 2003
and determined that there was no indicators for impairment existed. The amount
of intangible assets represented by customer relations related to the interWAVE
and Innowave acquisitions is amortized using the straight line method over a
period of two years and 3.75 years, respectively reflecting the expected
attrition of the respective customer relationships.
Tradename -- The amount allocated to the acquired tradename related to the
interWAVE acquisition of $1.1 million was based upon the estimated cost to
recreate tradenames. This estimated cost was based upon the historical
advertising and promotion spending over the last two years for our GSM products.
The amount allocated to tradename is being amortized on a straight-line basis
over two years based upon the expected transition time from the legacy hardware
to the next generation hardware.
Should any of these intangibles have been impaired and therefore
written-down or written-off, the charge would result in a corresponding
reduction in our shareholders' equity and a corresponding charge to our
statement of operations. Should the estimates and tests that we conducted in
making these assessments be incorrect, we will have to record impairment on
these intangibles.
Warranties. We provide for the estimated cost of product warranties at the
time revenue is recognized. Our products sold are covered by a warranty for
periods ranging from one year to three years. We accrue a warranty reserve for
estimated costs to provide warranty services. Our estimate of costs to service
the warranty obligations is based on historical experience and expectation of
future conditions. We accrue for warranty costs as part of our cost of sales
based on associated material costs and technical support labor costs. Material
cost is primarily estimated based upon historical trends in the volume of
product returns within the warranty period and the cost to repair or replace the
equipment. Technical support labor cost is primarily estimated based upon
historical trends in the rate of customer calls and the cost to support the
customer calls within the warranty period. To the extent we experience increased
warranty claim activity or increased costs associated with servicing those
claims, our warranty accrual will increase, resulting in decreased gross profit.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the deferred
39
tax asset would increase income in the period such determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. Our
estimates for estimated future tax rates could be adversely affected by earnings
being lower than anticipated in countries where we have different statutory
rates, changes in the valuation of our deferred tax assets or liabilities, or
changes in tax laws or interpretations thereof. In addition, we are subject to
the continuous examination of our tax returns by the local tax authorities in
each country that we have established corporations. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for deferred taxes.
Results of Operations
The following table presents our total revenues attributed to the
geographical regions based on the location of our customers for the years ended
December 31, 2002, 2003 and 2004.
2002 2003 2004
------------------------ ------------------------ ------------------------
Total Total Total
revenues revenues revenues
--------- --------- ---------
In Percentage In Percentage In Percentage
thousands Of sales thousands Of sales thousands Of sales
--------- ---------- --------- ---------- --------- ----------
Israel .......................... $ 655 0.7% $ 1,294 1.0% $ 2,268 1.1%
United States
(including Canada) ............. 28,434 32.0% 31,710 24.9% 34,772 17.3%
Europe (without Russia) ......... 23,907 26.9% 26,836 21.1% 45,491 22.6%
Russia .......................... 4,087 4.6% 9,802 7.7% 13,794 6.8%
Chile ........................... 8,440 9.5% 4,180 3.3% 203 0.1%
Mexico .......................... 873 1.0% 18,655 14.7% 64,005 31.8%
Japan ........................... 6,754 7.6% 217 0.2% 48 0.0%
Africa (without Angola) ......... 4,036 4.5% 6,704 5.3% 17,911 8.9%
Angola .......................... 401 0.5% 6,519 5.1% 374 0.2%
Asia (without Japan) ............ 7,628 8.6% 13,198 10.4% 9,102 4.5%
Latin America (without
Mexico & Chile) ................ 3,634 4.1% 8,093 6.3% 13,539 6.7%
------- ----- -------- ----- -------- -----
$88,849 100.0% $127,208 100.0% $201,507 100.0%
======= ===== ======== ===== ======== =====
40
The following table sets forth, for the periods indicated, selected items
from our consolidated statement of operations in U.S. dollars in thousands and
as a percentage of total sales:
Year ended December 31,
---------------------------------
2002 2003 2004
-------- -------- --------
(in thousands)
Sales .................................................... $ 88,849 $127,208 $201,507
Cost of sales ............................................ 55,120 68,535 102,329
Write-off of excess inventory and provision for inventory
purchase commitments .................................. 250 6,562 11,412
-------- -------- --------
Gross profit ............................................. 33,479 52,111 87,766
-------- -------- --------
Operating costs and expenses:
Research and development, gross .......................... 27,597 27,351 31,713
Less -- grants ........................................... 3,520 3,846 3,897
-------- -------- --------
Research and development, net ............................ 24,077 23,505 27,816
Selling and marketing .................................... 26,570 32,904 39,038
General and administrative ............................... 6,018 6,323 9,681
Merger and acquisition related expenses .................. -- 2,201 369
Amortization of intangible assets ........................ 2,400 2,606 2,779
Amortization of deferred stock compensation .............. 580 511 60
In-process research and development write-off ............ -- -- 10,993
Restructuring ............................................ 1,102 -- --
-------- -------- --------
Total operating expenses ................................. 60,747 68,050 90,736
-------- -------- --------
Operating loss ........................................... (27,268) (15,939) (2,970)
Financial income, net .................................... 6,587 4,127 3,821
-------- -------- --------
Net income (loss) ........................................ $(20,681) $(11,812) $ 851
======== ======== ========
41
Year Ended December 31,
---------------------------------------
2002 2003 2004
----------- ----------- -----------
(as a percentage of sales)
Statement of Operations Data:
Sales ................................................... 100.0% 100.0% 100.0%
Cost of sales ........................................... 62.0 53.9 50.8
Write-off of excess inventory and provision for inventory
purchase commitments ................................... 0.3 5.1 5.7
----- ----- -----
Gross profit ............................................ 37.7 41.0 43.5
Operating costs and expenses:
Research and development, gross ......................... 31.1 21.5 15.8
Less -- grants .......................................... 4.0 3.0 2.0
----- ----- -----
Research and development, net ........................... 27.1 18.5 13.8
Selling and marketing ................................... 29.9 25.9 19.4
General and administrative .............................. 6.8 5.0 4.8
Merger and acquisition related expenses ................. -- 1.7 0.2
Amortization of intangible assets ....................... 2.7 2.0 1.4
Amortization of deferred stock compensation ............. 0.7 0.4 0.0
In-process research and development write-off ........... -- -- 5.4
Restructuring ........................................... 1.2 -- --
----- ----- -----
Total operating expenses ................................ 68.4 53.5 45.0
----- ----- -----
Operating loss .......................................... (30.7) (12.5) (1.5)
Financial income, net ................................... 7.4 3.2 1.9
----- ----- -----
Net income (loss) ....................................... (23.3)% (9.3)% 0.4%
===== ===== =====
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
The results for the period December 9, 2004 through December 31, 2004
reflect the combined activities of Alvarion with former interWAVE operations
whereas the results of 2003 for the period between April 1, 2003 and December
31, 2003 reflect the combined activities of Alvarion with former InnoWave
operations. The results of former interWAVE operations during this period did
not have a material effect on our consolidated statement of operations.
Sales. Sales in 2004 were approximately $201.5 million, an increase of
approximately 58.4% compared with sales of approximately $127.2 million in 2003.
interWAVE accounted for $1.6 million of revenues in 2004.The continuous
worldwide demand for broadband solutions, including broadband wireless
solutions, is the primary reason for the increase of our sales in 2004 compared
to 2003. This increased demand was derived from several sources such as, the
developing regions in Central and Eastern Europe where wireline infrastructure
is inadequate, Western Europe where well-capitalized independent operators who
own spectrums are deploying our solutions on a national basis, and an on-going
project which was initiated in 2003 by one of our customers which accounted for
about 30% and 14% of our revenues in 2004 and 2003, respectively. These
increases are reflected in our sales by countries. For example, Europe,
Middle-East and Africa accounted for 40% of our sales in 2004 reflecting an
increase of 55% over 2003 sales in this region. Latin America accounted for 39%
of our 2004 sales reflecting a year-over-year growth of approximately 150%.
Cost of sales. Cost of sales was approximately $102.3 million in 2004, an
increase of approximately 49.3% compared with cost of sales of approximately
$68.5 million in 2003. interWAVE accounted for $1.3 million of our cost of sales
in 2004. Cost of sales consists primarily of cost of components, cost of product
manufacturing and assembly, labor, overhead and other costs associated with
production. This increase is primarily attributable to the increase in sales
compared to 2003 partially offset by cost reduction processes. Cost of sales as
a percentage of sales decreased to approximately 50.8% in 2004 from
approximately 53.9% in 2003, primarily attributable to the continued
implementation of operational efficiency measures and cost reduction programs,
which we implemented during 2004.
42
Write-off of excess inventory and provision for inventory purchase
commitments. We periodically assess our inventories valuation in accordance with
obsolete and slow moving items based on revenues forecasts and technological
obsolescence. Should inventories on-hand exceed our estimates or become obsolete
it would be written-down or written-off. This would result in a charge to our
statement of operations and a corresponding reduction in our inventory and
shareholders' equity. Changes in demand for our products and in our estimates
for demand create changes in provisions for obsolete inventory. As part of our
ordinary course of business we evaluate on a quarterly basis our actual
inventory needs versus our sales projections and write-off excess inventory and
un-cancelable purchase commitments from our suppliers and subcontractors. In
2004, we recorded charges related to the write-off of excess inventory and
accrued a provision for inventory purchase commitments of new materials and
components which we had purchased or committed to purchase in anticipation of
forecasted sales which we did not consummate in the aggregate amount of
approximately $10.9 million and $504,000, respectively compared to approximately
$5.3 million and $1.3 million, respectively in 2003. Such utilization
contributed to our gross margins.
Research and development expenses, net. Gross Research and development
expenses consist primarily of employee salaries, development-related raw
materials and subcontractors, and other related costs. Gross research and
development expenses were approximately $31.7 million in 2004, an increase of
approximately 15.7% compared with gross research and development expenses of
approximately $27.4 million in 2003. interWAVE accounted for $0.5 million of
research and development expenses in 2004. The increase is primarily
attributable to the increase in employee-related expenses. Research and
development, gross, as a percentage of sales decreased to 15.8% in 2004 from
21.5% in 2003, primarily as a result of the increase in our revenues. Grants
from the OCS, totaled approximately $3.9 million in 2004 and $3.8 million in
2003. Research and development expenses, net, were approximately $27.8 million
in 2004, compared with approximately $23.5 million in 2003.
Selling and marketing expenses. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
selling and marketing activities, promotion, advertising, trade shows and
exhibitions, travel and related expenses. Selling and marketing expenses were
approximately $39.0 million in 2004, an increase of approximately 18.5% compared
with selling and marketing expenses of approximately $32.9 million in 2003.
interWAVE accounted for $0.3 million of selling and marketing expenses in 2004.
The increase is primarily attributable to the increase in sales reflected in
increased employee-related expenses and expanded sales and marketing efforts.
Selling and marketing expenses as a percentage of sales decreased to 19.4% in
2004 from 25.9% in 2003. This decrease is primarily attributable to the increase
in sales in 2004.
General and administrative expenses. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, office maintenance, insurance costs, professional fee
costs and other administrative costs. General and administrative expenses were
approximately $9.7 million in 2004, an increase of approximately 54% compared
with general and administrative expenses of approximately $6.3 million in 2003.
interWAVE accounted for $0.3 million of general and administrative expenses in
2004. The increase is primarily attributable to the growth of our activities and
to professional fees related to the growth of our activities. General and
administrative expenses as a percentage of sales decreased to 4.8% in 2004 from
5% in 2003. This decrease is primarily attributable to the increase in sales in
2004.
Acquisition related expenses. Acquisition related expenses of approximately
$369,000 consist primarily of compensation and related expenses to synergy of
employees from the merger transaction with interWAVE and human resources,
marketing, administrative and other expenses related to the transaction.
Amortization of intangibles assets. As a result of the merger with Floware,
we acquired an identifiable intangible asset, which was defined as current
technology with an aggregate value of $16.8 million. This amount is being
amortized over the useful life of the asset, which is 7 years. As a result of
the acquisition of InnoWave, we acquired other acquisition-related intangibles
such as current technology and customer relations with an aggregate value of
$5.8 million, which is amortized over the useful life of these assets, which
range between 3.75 to 7.75 years. In addition, as a result of the acquisition of
interWAVE, we acquired other acquisition-related intangibles such as current
technology, customer relations and tradenames with an aggregate value of $5.8
million, which is amortized over the useful life of these assets, and range
between 2 to 7 years. Amortization charges of
43
$2.8 million for all of these acquisition-related intangibles were recorded in
2004 and $2.6 million were recorded in 2003.
Amortization of deferred stock compensation. Deferred stock compensation
charges of $60,000 were recorded in 2004 and $511,000 were recorded in 2003.
Deferred stock compensation charges in 2004 are related to the issuance of
options to purchase ordinary shares to one of our directors in 2003 and to
interWAVE's former CEO as part of the acquisition of interWAVE in 2004. Deferred
stock compensation charges in 2003 relate primarily to the issuance of our stock
options into which Floware stock options were converted pursuant to the terms of
our merger agreement with Floware. The 2003 amortization is due primarily to the
remaining balance of the deferred compensation of approximately $2.1 million
related to stock options granted to employees of Floware through July 31, 2001
based on the intrinsic value related to such options on the consummation date.
The deferred stock compensation is being amortized to expense over the vesting
periods of the applicable options.
In-Process research and development write-off. As a result of the
acquisition of interWAVE, we acquired an identifiable intangible asset of $11.0
million allocated to the CDMA and a certain GSM technology. The in-process
research and development was determined by an independent appraisal using the
Income approach. These technologies were considered to have no alternative
future use other than the technological indications for which they were in
development and thus, no technological feasibility had been established.
Accordingly, this amount, was expensed in the consolidated statement of
operations, upon consummation of the acquisition in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method" ("FIN 4").
Financial income, net. Financial income, net, was approximately $3.8
million in 2004, a decrease of approximately 7.3%, compared with financial
income, net, of approximately $4.1 million in 2003. The decrease in financial
income is primarily attributable to the worldwide decrease in interest rates on
investments and the decrease in our cash reserves due to the acquisition of
interWAVE.
Net income. In 2004, net income was approximately $851,000, compared with a
net loss of approximately $(11.8) million in 2003.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
The results of 2003 for the period between April 1, 2003 and December 31,
2003 reflect the combined activities of Alvarion with former InnoWave operations
whereas results in 2002 and the first three months of 2003 reflect sales derived
only by Alvarion.
Sales. Sales in 2003 were approximately $127.2 million, an increase of
approximately 43.2% compared with sales of approximately $88.8 million in 2002.
The inclusion of former InnoWave's results and the worldwide increased demand
for broadband solutions, including wireless broadband solutions, are the primary
reasons for the increase of our sales in 2003 compared to 2002. During 2003
there was a growing demand for BWA solutions, primarily in developing regions
with little existing telecom infrastructure such as Central and Eastern Europe,
Latin America and South East Asia. For example, in the second-half of 2003 we
received a large order of about $40 million for a major infrastructure
initiative in South America, most of which will be delivered in 2004.
Cost of sales. Cost of sales was approximately $68.5 million in 2003, an
increase of approximately 24.3% compared with cost of sales of approximately
$55.1 million in 2002. This increase is primarily attributable to the increase
in sales compared to 2002. Cost of sales as a percentage of sales decreased to
approximately 53.9% in 2003 from approximately 62.0% in 2002, primarily
attributable to the continued implementation of operational efficiency measures
and cost reduction programs, which we implemented during 2003.
Write-off of excess inventory and provision for inventory purchase
commitments. In 2003, we recorded charges related to the write-off of excess
inventory and accrued a provision for inventory purchase commitments in the
aggregate amount of approximately $6.6 million compared to approximately
$250,000 in 2002. Adverse economic conditions along with reduced capital
spending worldwide, particularly in the telecommunications equipment markets,
resulted in our determination that it is unlikely for us to utilize or market
our entire inventory or purchase commitments in the next few quarters and were
the main reasons for this charge. During this period we utilized about $6.1
million of inventory that was written off in previous years and this improved
our margins.
44
Research and development expenses, net. Gross research and development
expenses were approximately $27.4 million in 2003, a decrease of approximately
1.0% compared with gross research and development expenses of approximately
$27.6 million in 2002. The decrease in gross research and development expenses
in 2003 was a result of our restructuring initiatives carried out toward the end
of 2002, partially offset by the consolidation of InnoWave's research and
development operations. Research and development, gross, as a percentage of
sales decreased to 21.5% in 2003 from 31.1% in 2002, primarily as a result of
the increase in our revenues. Grants from the OCS, totaled approximately $3.8
million in 2003 and $3.5 million in 2002. This increase is primarily
attributable to our grants received and accrued for our generic projects and for
the projects acquired in the InnoWave acquisition that are entitled to OCS
grants. Research and development expenses, net, were approximately $23.5 million
in 2003, compared with approximately $24.1 million in 2002.
Selling and marketing expenses. Selling and marketing expenses were
approximately $32.9 million in 2003, an increase of approximately 23.8% compared
with selling and marketing expenses of approximately $26.6 million in 2002. This
increase is primarily attributable to the increase in sales reflected in
increased employee-related expenses and intense sales and marketing efforts.
Selling and marketing expenses as a percentage of sales decreased to 25.9% in
2003 from 29.9% in 2002. This decrease is primarily attributable to the increase
in sales in 2003.
General and administrative expenses. General and administrative expenses
were approximately $6.3 million in 2003, an increase of approximately 5.0%
compared with general and administrative expenses of approximately $6.0 million
in 2002. This increase is primarily attributable to the growth of our activities
due to the InnoWave acquisition. General and administrative expenses as a
percentage of sales decreased to 5.0% in 2003 from 6.8% in 2002, mainly due to
the increase in sales and efficiencies and cost savings which reflect the
economies of scale achieved in the acquisition of InnoWave.
Acquisition-related expenses. The acquisition-related expenses of
approximately $ 2.2 million are comprised of charges related to information
technology systems integration expenses, bonuses, compensation and related
expenses to synergy of employees from the acquisition of InnoWave and human
resources, marketing, administrative and other expenses related to the
acquisition.
Amortization of intangibles assets. As a result of the merger with Floware,
we acquired an identifiable intangible asset, which was defined as current
technology, with an aggregate value of $16.8 million. This amount is being
amortized over the useful life of the asset, which is 7 years. In addition, as a
result of the acquisition of InnoWave, we acquired other acquisition related
intangibles such as current technology and customer relations with an aggregate
value of $1.6 million, which is amortized over the useful life of these assets,
which ranges between 3.75 and 7.75 years. Amortization charges of $2.6 million
were recorded in 2003 and $2.4 million were recorded in 2002.
Amortization of deferred stock compensation. Deferred stock compensation
charges of $511,000 were recorded in 2003 and $580,000 were recorded in 2002,
relating primarily to our the issuance of stock options into which Floware stock
options were converted pursuant to the terms of our merger agreement with
Floware.
Financial income, net. Financial income, net, was approximately $4.1
million in 2003, a decrease of approximately 37.3%, compared with financial
income, net, of approximately $6.6 million in 2002. The decrease in financial
income is primarily attributable to the worldwide decrease in interest rates on
investments and partially as a result of the decrease in our cash reserves,
mostly due to the acquisition of InnoWave.
Net loss. In 2003, net loss was approximately $(11.8) million, compared
with a net loss of approximately $(20.7) million in 2002.
Impact of Inflation and Currency Fluctuations
The dollar cost of our operations is influenced by the extent to which
inflation in Israel is offset by a devaluation of the NIS in relation to the
dollar. Substantially all of our sales, and most of our expenses, are
denominated in dollars. However, a portion of our expenses, primarily labor
expenses is denominated in NIS unlinked to the dollar. Inflation in Israel will
have the effect of increasing the cost in dollars of these expenses unless
offset on a timely basis by a devaluation of the NIS in relation to the dollar.
Yet the devaluation of the NIS against the dollar will have the effect of
decreased dollar cost of our operations in Israel. Because exchange rates
between the NIS and
45
the dollar fluctuate continuously, albeit with a historically declining trend in
the value of the NIS, exchange rate fluctuations will have an impact on our
profitability and period-to-period comparisons of our results of operations. In
2004, the valuation of the NIS against the dollar exceeded the rate of inflation
in Israel and we have experienced an increase in the dollar cost of our
operations in Israel.
To protect against exchange rate fluctuations, we have instituted several
foreign currency hedging programs. These hedging activities consist of cash flow
hedges of anticipated NIS payroll and forward exchange contracts to hedge
certain trade payables payments in NIS. These activities are all effective as
hedges of these expenses. Please see "Item 11 -- Qualitative and Quantitative
Market Risks"
For a discussion of certain policies or factors relating to our being an
Israeli company and our location in Israel, please see "Item 3 -- Key
Information -- Risk Factors -- Risks Relating to our Location in Israel."
B. LIQUIDITY AND CAPITAL RESOURCES
The following sections discuss the effects of changes in our balance
sheets, cash flows, and commitments on our liquidity and capital resources.
Balance Sheet and Cash Flows
Total cash, cash equivalents, short term and long term marketable
securities and deposits were $132.7 million as of December 31, 2004, a decrease
of approximately $20.9 million or 13.6% from $153.6 million at December 31,
2003. The change in cash reserves was a result of cash used mainly for the
acquisition of interWAVE of $47.9 million and the repayment of maturities of
long term loan of $1.7 million, partially offset by cash provided from the
issuance of ordinary shares of $9.8 million related to the exercise of warrants
and employees' stock options and cash provided from all other operating,
investing, and financing activities of $18.9 million.
Our operating activities provided cash of approximately $23.0 million in
2004 and $1.6 million in 2003 and used cash of approximately $9.5 million in
2002 . The cash flows provided in 2004 include our net income in this period
together with the write-off of In-process research and development relating to
the interWAVE acquisition and the increase in other accounts payables partially
offset by the increase of trade receivables and trade payables. The cash flows
provided in 2003 include our net loss in this period together with increase in
trade receivables partially offset by increase in trade payables and other
accounts payables. The negative cash flows in 2002 include our net loss in this
period together with increase in trade and other accounts payables partially
offset by decrease in trade receivables, other accounts receivables and
inventories, reflecting our reduced cash burn during this year.
Our investing activities used cash of approximately $34.7 million in 2004
used cash of approximately $3.6 million in 2003 and provided cash of
approximately $6.4 million in 2002.
Capital expenditures were approximately $3.4 million in 2004, $3.1 million
in 2003 and$4.3 million in 2002. These expenditures principally financed the
purchase of research and development equipment and manufacturing equipment.
Net cash provided by financing activities totaled approximately $8.1
million in 2004 and $2.0 million in 2003 and used in financing activities of
$6.3 million in 2002 . In 2004, the amount of cash provided was attributable
primarily to proceeds from the issuance of shares in connection with the
exercise of warrants and employees' options at the amount of approximately $9.8
million partially offset by repayment of maturities of long term loan of $1.7
million. In 2003, the amount of cash provided was attributable primarily to
proceeds from the issuance of shares in connection with the exercise of
employees' options in the amount of approximately $4.9 million and from the
proceeds from long-term debt in the amount of $6.9 million, partially offset by
the repurchase of shares in the amount of approximately $1.3 million and the
settlement of our debt to the OCS in the amount of $8.5 million. In 2002, we
received an Israeli court approval for the purchase of up to $9 million of our
ordinary shares. Following the court approval, our board of directors approved
the purchase of our ordinary shares, subject to certain conditions. These
purchases are conducted as either open market purchases or private transactions.
In 2002, we began repurchasing our shares. As of June 14, 2005, we had
repurchased approximately 3.8 million of our ordinary shares at an aggregate
cost of approximately $7.9 million. Our board of directors may increase the
amount of ordinary shares that we may repurchase in the future. The amount of
cash provided in 2002 was attributable primarily to proceeds from the issuance
of shares in connection with the exercise of options.
46
We expect that cash provided by operations may fluctuate in future periods
as a result of a number of factors, including fluctuations in our operating
results, shipment timing, accounts receivable collections, inventory management,
and the timing of other payments and investments.
We have historically met our financial requirements primarily through the
sale of equity securities, including our initial public offering and follow-on
public offering, and through research and development and marketing grants from
the government of Israel, bank borrowings and cash generated from operations and
from the exercise of warrants and options. We raised approximately $107 million
from the sale of 5,750,000 ordinary shares in our initial public offering in
March 2000 and approximately $73 million from the sale of 2,150,000 ordinary
shares in our July 2000 follow-on offering. We also obtained approximately $55.5
million in cash and cash equivalents, marketable securities and deposits as a
result of our merger with Floware in 2001 and approximately $30.1 million was
received and accrued as financial income from 2000 through 2004.
Accounts Receivable, Net. Accounts receivable, net was $28.1 million and
$21.2 million as of December 31, 2004 and December 31, 2003, respectively. Days
sales outstanding ("DSO") in receivables as of December 31, 2004 and December
31, 2003 were 51 days and 61 days, respectively. Decrease in DSO's in 2004 is
primarily a result of the change in the mix of credit terms and intense
collections in 2004.
Inventories. Inventories were $41.3 million as of December 31, 2004, an
increase of $4.3 million or 11.6% from $37 million at December 31, 2003.
Inventories consist of raw materials, work in process and finished goods and
inventories at customers which are not recognized as revenues yet. This increase
in inventory level is mainly attributed to the increase of our sales and to the
increased number of products we offer, including interWAVE products. Inventory
turns were approximately two and a half times in fiscal 2004 and two times in
2003. Inventory levels and the associated inventory turns reflect our ongoing
inventory management efforts. Inventory management remains an area of focus as
we balance the need to maintain strategic inventory levels to ensure competitive
lead times against the risk of inventory obsolescence because of rapidly
changing technology and customer requirements. We are focusing our operational
efforts to increase inventory turns to enhance our responsiveness to future
customers' needs and market changes.
WORKING CAPITAL
Our working capital was approximately $53.3 million as of December 31,
2004, compared to $90.4 million as of December 31, 2003 and to $74.2 million as
of December 31, 2002. The decrease in working capital from December 31, 2003 to
December 31, 2004 is primarily attributable to the cash used for the acquisition
of interWAVE and the increase of other accounts payable and accrued expenses
partially offset by the increase in trade receivables. The increase in working
capital from December 31, 2002 to December 31, 2003 is primarily attributable to
investment of our cash reserves in short-term bank deposits, an increase in
trade receivables and inventories level, partially offset by an increase in
accounts and trade payables.
Commitments
Long term debt. During 2003, we entered into a long-term loan agreement for
approximately $7.0 million with a bank designated for the settlement of a
portion of our OCS royalty payment obligations. The loan is linked to the US
dollar and is payable in four equal annual installments carrying variable
interest. As of December 31, 2004 the balance of the long-term loan was $5.2
million. The loan is secured by a back-to-back lien of a bank deposit.
Leases. We lease office space in several worldwide locations. Rent expense
totaled $4.5 million in 2004, $4.0 million in 2003 and $3.6 million in 2002,
respectively. We also lease various motor vehicles under operating lease
agreements, which expire in 2007. Motor vehicles leasing expenses for the year
ended December 31, 2004 were $2.1 million, for the year ended December 31, 2003
were $2.2 million and for the year ended December 31, 2002 were $2.0 million.
47
Future annual minimum lease payments under all non-cancelable operating
leases as of December 31, 2004 were as follows (in thousands):
Lease of
Rental of motor
Premises vehicles
--------- --------
2005 ................................................ $4,241 2,112
2006 ................................................ $1,293 1,698
2007 ................................................ $ 53 719
------- ------
$5,587 $4,529
======= ======
Royalties. During 2004, we recorded royalty-bearing grants from the OCS for
the support of research and development activities aggregating to $480,000 for
certain of our research and development projects. We are obligated to pay
royalties to the OCS, amounting to 3%-5% of the sales of the products and other
related revenues generated from such projects, up to 100%-150% of the grants
received, linked to the U.S. dollar. The obligation to pay these royalties is
contingent upon actual sales of the products, and in the absence of such sales,
no payment is required.
During 2004, we paid or accrued royalties to the OCS in the amount of $2.9
million. As of December 31, 2004, the aggregate contingent liability to the OCS
amounted to $7.2 million.
The following table of our material contractual obligations as of December
31, 2004, summarizes the aggregate effect that these obligations are expected to
have on our cash flows in the periods indicated:
Payments due by period (in thousands)
--------------------------------------------------
During the second
Contractual Obligations Total Less than 1 year and third years
----------------------- ----------- ---------------- -----------------
Long-Term Debt ................... $ 5,248 $ 1,742 $ 3,506
Rental Lease Obligations ......... $ 5,587 $ 4,241 $ 1,346
Motor vehicle Leases ............. $ 4,529 $ 2,112 $ 2,417
------- ------- -------
Total ............................ $15,364 $ 8,095 $ 7,269
======= ======= =======
FUTURE NEEDS
Based on past performance and current expectations we believe that cash
generated from operations, our cash balances and investments, governmental
research and development grants, the net proceeds from our public offerings and
from our merger with Floware will satisfy our working capital needs, capital
expenditures, investment requirements, stock repurchases, commitments, future
customer financings, and other liquidity requirements associated with our
existing operations through at least the next twelve months. We believe that the
most strategic uses of our cash resources include working capital, strategic
investments to gain access to new technologies, acquisitions, financing
activities, and repurchase of shares. There are no transactions, arrangements,
and other relationships with unconsolidated entities or other persons that are
reasonably likely to materially affect liquidity or the availability of our
requirements for capital resources. However, if our operations do not generate
cash to the extent currently anticipated by us, or if we grow more rapidly than
currently anticipated, it is possible that we will require more funds than
anticipated. We expect that these sources will continue to finance our
operations in the long term, and will be complemented, if required, by private
or public financing.
Effective Corporate Tax Rate
Income derived by Alvarion Ltd. is generally subject to the regular Israeli
corporate tax rate, which is progressively being reduced from 36% to 35% in 2004
and to a rate of 30% in 2007. However, as detailed below, income derived in
Israel from certain "Approved Enterprises" will enjoy certain tax benefits for a
specific definitive period. The allocation of income derived from approved
enterprises is dependent upon compliance of certain requirements with the
Investment Law.
Our manufacturing facilities in Tel Aviv and Nazareth have been granted
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, 1959, as amended, or the Investment Law, and,
48
consequently, are eligible, subject to compliance with specified requirements,
for tax benefits beginning when such facilities first generate taxable income.
According to the provision of the law, we have elected the "alternative
benefits" track provisions of the investment law, pursuant to which we have
waived our right to grants and instead receive a tax benefit on undistributed
income derived from the "Approved Enterprise" program. The tax benefits under
the Investment Law may not be available with respect to income derived from
products manufactured outside of Israel or manufactured in Israel but outside of
the Approved Enterprises mentioned above and may be affected by the current
location of our facilities in Israel. The relative portion of taxable income
that should be allocated to each Approved Enterprise and expansion is subject to
the fulfillment of covenants with the tax authorities.
On September 6, 1995, our production facilities in Tel Aviv were granted
Approved Enterprise status. Subject to compliance with applicable requirements,
the income derived from the Tel Aviv Approved Enterprise will be tax-exempt for
a period of four years and will enjoy a reduced tax rate of 10% to 25% for the
following six years. The actual number of years and tax rate depends upon the
percentage of the non-Israeli holders of our share capital. On December 31,
1997, our production facilities in Nazareth were granted Approved Enterprise
status. Subject to compliance with applicable requirements, the income derived
from the Nazareth Approved Enterprise is tax exempt for a period of ten years.
The periods of tax benefits with respect to each of the Tel Aviv and
Nazareth Approved Enterprises will commence with the first year in which we earn
our taxable income and exhaust our accumulated tax loss carry forwards. The
period of tax benefits for the Approved Enterprises are subject to limits of the
earlier of 12 years from the commencement of production or 14 years from
receiving the approval. The period of benefits for the Tel Aviv Approved
Enterprise has not yet commenced, and will expire in the year 2007. The period
of benefits for the Nazareth plan has not yet commenced, and will expire in
2009.
In 1998, Floware submitted a request for Approved Enterprise status of its
production facility in Or Yehuda. This request was approved. After the merger,
Floware's enterprise was relocated into our facilities in Tel-Aviv. The income
derived from this Approved Enterprise will be tax-exempt for a period of two
years and will thereafter enjoy a reduced tax rate between 10% and 25% for an
additional period of five to eight years. The actual number of years and tax
rate depends upon the percentage of the non-Israeli holders of our share
capital. The period of benefits will commence with the first year that we earn
taxable income, and will expire in 2011.
In 2000, we received approval of our application for an expansion of our
Approved Enterprise status with respect to our Nazareth facility. This expansion
will include, among other things, our Carmiel facility, which during 2004 was
relocated to Migdal Ha-emek. The income derived from this Approved Enterprise
will be tax-exempt for a period of ten years. The relative portion of taxable
income that should be exempt for a ten year period is subject to final covenants
with the tax authorities. The ten-year period of benefits will commence with the
first year in which we earn taxable income, and will expire in 2013.
InnoWave was granted an "Approved Enterprise" status for its 1997 plan
regarding the production facility in Omer. During 1999, InnoWave's request for
an expansion was approved.
During 2003, we applied for the assignment of former InnoWave's "Approved
Enterprise" status to Alvarion. Such approval was obtained. The income derived
from this Approved Enterprise will be tax-exempt for a period of ten years. The
relative portion of taxable income that should be exempt for a ten year period
is subject to final covenants with the tax authorities. The ten-year period of
benefits will commence with the first year in which we earn taxable income, and
will expire in 2014.
In order to maintain eligibility for the above programs and benefits
following the Floware merger and InnoWave acquisition, we must meet specified
conditions stipulated by the Investment Law, regulations published there under
and the letters of approval for the specific investments in "Approved
Enterprises". In the event of failure to comply with these conditions, any
benefits which were previously granted may be canceled and we may be required to
refund the amount of the benefits, in whole or in part, including interest.
If these retained tax-exempt profits are distributed they would be taxed at
the corporate tax rate applicable to such profits as if we had not elected the
alternative system of benefits, currently between 15%-20% for an
49
"Approved Enterprise". As of December 31, 2004, our accumulated deficit does not
include tax-exempt profits earned by our "Approved Enterprise."
A recent amendment to the Investment Law (the "Amendment"), which has been
officially published and effected since of April 1, 2005, has significantly
changed the provisions of the Investment Law. The Amendment limits the scope of
enterprises, which may be approved by the Investment Center by setting criteria
for the approval of a facility as an Approved Enterprise. Additionally, the
Amendment enacted major changes in the manner in which tax benefits are awarded
under the Investment Law so that companies no longer require Investment Center
approval in order to qualify for tax benefits. However, the Amendment provides
that terms and benefits included in any certificate of approval already granted
will remain subject to the provisions of the law as they were on the date of
such approval.
As of December 31, 2004, in the Israeli company we had available tax loss
carryforwards amounting to approximately $89 million, which may be carried
forward, in order to offset taxable income in the future, for an indefinite
period. In addition, the incurred net tax operating loss carryforwards in a
total amount of $69 million of BreezeCOM and Floware at the effective time of
the merger can be carried forward to subsequent years and may be set off against
our taxable income beginning with the tax year immediately following the merger.
This set off is limited per each calendar year to the lesser of:
o 20% of the aggregate net tax operating losses of the merging
companies prior to the effective time of the merger; and
o 50% of the combined company's taxable income in the relevant tax
year before the set off of losses from preceding years.
These restrictions, with several modifications, also apply to the set off
of capital losses of the merging companies against capital gains of the combined
company. Our available tax losses carryforwards in Alvarion Ltd. are nominated
in NIS and therefore subject to the effect of currency fluctuations of the NIS
in relation to the dollar.
As a result, we do not anticipate being subject to income tax in Israel
until at least 2007.
As of December 31, 2004, the state and the U.S. federal tax losses
carryforward of our U.S. subsidiary, excluding former interWAVE tax losses
carryforward, amounted to approximately $6.6 million and $17.5 million,
respectively. These losses are available to offset against any future U.S.
taxable income of our U.S. subsidiary and will expire in the years 2009 and
2024, respectively.
Utilization of U.S. net operating losses may be subject to substantial
annual limitations due to the "change in ownership" provisions ("annual
limitations") of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses
before utilization.
Following the acquisition of interWAVE, we have analyzed the annual
limitations on its net operating losses as of the acquisition date and our
alternatives to benefits from such losses. As of December 31, 2004, we have yet
to finalize the estimated amount of net operating loss carryforward resulted by
interWAVE acquisition.
Reduction in corporate tax rate
On June 2004, the Israeli Parliament approved an amendment to the Income
Tax Ordinance (No. 140 and Temporary Provision), which progressively reduces the
corporate tax rate from 36% to 35% in 2004 and to a rate of 30% in 2007. Because
we have more than one "Approved Enterprise," our effective tax rate in Israel
will be a weighted combination of the various applicable tax rates. We are
likely to be unable to take advantage of all tax benefits in Israel for an
Approved Enterprise, which would otherwise be available to us because a portion
of our operations may be considered by the Israeli tax authorities as generated
in areas that are defined as non-Approved Enterprise areas. In addition, because
the tax authorities customarily review and reassess existing tax benefits
granted to merging companies, and we have yet to finalize the status of our tax
benefits following the Floware merger, the InnoWave acquisition and the
interWAVE acquisition, we cannot assure you that the tax authorities will not
modify the tax benefits that we enjoyed prior to these transactions.
Our effective corporate tax rate may substantially exceed the Israeli tax
rate. Our Brazilian, French, German, Hong Kong, Japanese, Romanian, U.K.,
Uruguayan, Polish, Dutch, Turkish, Mexican, Ireland, China, Philippines
50
and U.S. subsidiaries will generally each be subject to applicable federal,
state, local and foreign taxation, and we may also be subject to taxation in
other jurisdictions where we own assets, have employees or conduct activities.
Because of the complexity of these local tax provisions, it is not possible to
anticipate the actual combined effective corporate tax rate that will apply to
us.
Government Grants
Under an arrangement previously entered with the Office of the Chief
Scientist in Israel's Ministry of Industry and Trade ("the OCS"), the company
settled its liability for the amount due of $8,534. The repayment to the OCS
could be made over a period of five years from the date of settlement. The
liability is linked to Israel's Consumer Price Index ("CPI") and bears annual
interest of 4%. (For additional information please refer to Note 10 of our
financial statements).
This Arrangement enables the Company to participate in new OCS programs
under which it will be eligible to receive grants for research and development
projects without any royalty repayment obligations excluding OCS programs grants
resulting from InnoWave's former operations which were not included in the
Arrangement.
In addition to these grants, we obtain grants from the OCS to fund certain
other research and development projects as part of our participation in the
Magnet Consortium These grants do not bear any royalty repayment obligations.
In addition, during 2004, we participated in a consortium in the frame of
the European 6th program. As of December 31, 2004 we accrued grants from this
project totaling $530,000. These grants do not bear any royalty repayment
obligations.
Following our acquisition of interWAVE and its subsidiaries, the Irish
subsidiary participates in programs sponsored by the Irish Government and the
European Union, operated by the Industrial Development Agency (IDA) and
previously by Shannon Development. These programs are designed to promote
research and development and overall regional development. No royalties are
payable on these grants but the IDA may at any time within five years from the
date of payment of the last installment from any particular grant stop payment
of the grants and/or revoke and cancel or reduce the grants under certain
circumstances.
Recently issued accounting standards
In November 2004, the FASB issued Statement of Financial Accounting
Standard No. 151, "Inventory Costs, An amendment of ARB No. 43, Chapter 4.".
SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight handling costs
and wasted materials (spoilage) should be recognized as current-period charges.
In addition, SFAS 151 requires that the allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. SAFS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We do not expect that the adoption of SFAS
No. 151 will have a material effect on our financial position or results of
operations.
In March 2004, the Financial Accounting Standards Board approved the
consensus reached on Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB issued FASB Staff Position ("FSP") FSP EITF 03 1, "Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1," which defers the effective date for
the measurement and recognition guidance contained in paragraphs 10-20 of EITF
03-1 pending the development of further guidance. We will continue to monitor
these developments concerning this Issue and are currently unable to determine
the impact of EITF 03-1 on our financial position or results of operations.
On December 16, 2004, the Financial Accounting Standards Board issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure
51
is no longer an alternative. Early adoption will be permitted in periods in
which financial statements have not yet been issued. The new standard will be
effective for us in the first interim period beginning after January 1, 2006.
As permitted by Statement 123, we currently account for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognize no compensation cost for employee stock options. In
addition, non-compensatory plans under APB 25 will be considered compensatory
for Statement 123(R) purposes. Accordingly, the adoption of Statement 123(R)'s
fair value method will have a significant impact on our result of operations,
although it will have no impact on our overall financial position. Had we
adopted Statement 123(R) in prior periods, the impact of that standard would
have approximated the impact of Statement 123 as described in the disclosure of
pro forma net income and earnings per share in Note 2m to our consolidated
financial statements. We are currently evaluating the impact of this standard on
our results of operations and financial position.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our product development plans are market-driven and address the major,
fast-moving trends that influence the wireless industry. We believe that our
future success will depend upon our ability to maintain technological
competitiveness, to enhance our existing products and to introduce on a timely
basis new commercially viable products addressing the demands of the broadband
wireless access market. Accordingly, we devote, and intend to continue to
devote, a significant portion of our personnel and financial resources to
research and development. As part of the product development process, we seek to
maintain close relationships with current and potential distributors, other
resellers and end-users, strategic partners and leaders in industry segments in
which we operate to identify market needs and define appropriate product
specifications.
As of December 31, 2004, our research and development staff consisted of
379 full time employees. Our research and development is conducted at our
facilities in Israel, the U.S., Romania, Ireland and China. We occasionally use
independent subcontractors for portions of our development projects.
Our gross research and development expenses were approximately $27.6
million or 31.1% of sales in 2002, $27.4 million or 21.5% of sales in 2003 and
$31.7 million or 15.7% of sales in 2004. The OCS reimbursed us for approximately
$3.5 million in 2002, $3.8 million in 2003 and $3.9 million in 2004.
D. TREND INFORMATION
Growth in Demand for Broadband
Three years ago, only five million DSL lines had been installed. Now there
are over 80 million DSL lines deployed around the world. Yet there are millions
of additional customers who want broadband connectivity but cannot get it
because in developed regions there are areas that DSL or other broadband
solutions cannot reach. In the U.S., for example, as overall demand for
broadband increases, so does the demand in areas lacking coverage from DSL or
cable, which is prompting the incumbent operators to consider broadband wireless
technology.
Strong demand is coming from the developing regions of the world where the
existing infrastructure is of poor quality or missing entirely. The authorities
in areas such as Latin America, China, India, Africa and Eastern Europe are
choosing to leap over the limitations of wireline technology and deploy wireless
networks to support universal voice and broadband data services. Our largest
deployment so far, which began in late 2003, is a major infrastructure
initiative in Latin America that calls for tens of thousands of lines to be
rolled out over several quarters.
Regulatory Factors
Regulation is a key factor in the adoption of wireless broadband solutions;
allocation of licenses by governments may increase the demand for our solutions
in the allocated bands.
In Western Europe, many governments and municipalities are now mandating
100% broadband availability, requiring the incumbent operators to fill their DSL
coverage gaps. In many European countries, this represents a significant number
of households. Wireless Broadband solutions provide a fast and cost effective
way to meet this requirement. Currently, we are working with telecommunication
companies in the UK, France, and Sweden on the trial-phase of universal access
projects.
52
We are also active in additional developing areas, such as Russia, Africa,
Chain and we see future potential in other deregulating low tele-density
regions, such as India.
Role of Standards
We believe that the ability of standards adoption to act as a catalyst for
growth is evident in the growth patterns of the fax, cellular and wireless LAN
markets. Our belief in the power of standards has caused us to be active in this
area for several years. We have been one of the most active proponents of the
IEEE 802.16 standard and we helped found the WiMAX Forum in 2003 to promote its
adoption.
Intel Corporation made a very strong commitment to the standard and pledged
to develop IEEE 802.16-compliant silicon, the IEEE 802.16-2004 which is
currently available to equipment vendors and the IEEE 802.16e complaint silicon,
to enable broadband mobility which is expected to be available in future. With
the availability of mass produced chips, the cost of customer premise equipment
is expected to decline significantly. Lower cost, coupled with better throughput
and greater ease of installation resulting from next generation technology, plus
interoperability to facilitate multi-vendor networks, are some of the advantages
that are expected to fuel growth in demand for WiMAX compliant solutions.
E. OFF-BALANCE SHEET ARRANGEMENTS
Not applicable.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Included under Section B of this Item 5.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table lists the name, age, and position of Alvarion Ltd.'s
current directors and executive officers:
Name Age Position
---- --- --------
Anthony Maher ................... 58 Chairman of the board of directors (2)
Dr. Meir Barel .................. 53 Vice Chairman of the board of directors (2)
Oded Eran ....................... 48 Director (2)
Benny Hanigal ................... 54 Director (1)
Professor Raphael Amit .......... 57 External Director (4)
Robin Hacke ..................... 44 External Director (5)
Amnon Yacoby .................... 55 Director (3)
Dr. David Kettler ............... 62 Director (3)
Zvi Slonimsky ................... 55 Chief Executive Officer and Director (3)
Tzvi Friedman ................... 44 President and Chief Operating Officer
Amir Rosenzweig ................. 44 President, Alvarion, Inc.
Dafna Gruber .................... 40 Chief Financial Officer
Zvi Harnik ...................... 46 President, Broadband Mobile Unit
Benny Glazer .................... 55 Senior Vice President -- Corporate Sales
------------
(1) Term expiring at our 2005 Annual General Meeting
(2) Term expiring at our 2006 Annual General Meeting
(3) Term expiring at our 2007 Annual General Meeting
(4) Term expiring September 2006
(5) Term expiring April 2007
53
Mr. Anthony Maher has served as the chairman of our board of directors
since March 2004. He was a member of Floware's board of directors from 1997 and
until its merger with us and has, since the merger, served as a member of our
board of directors. In March 2002, Mr. Maher joined Star Venture Management, a
venture capital company, as a partner. Until January 2002, Mr. Maher was a
member of the board of directors of the Information and Communication Networks
Group of Siemens AG. Since 1978, Mr. Maher has held various engineering,
marketing and managerial positions at Siemens. Prior to that, he was employed by
Bell Telephone Laboratories in Naperville, Illinois, contributing to hardware
and software design, as well as System engineering. Mr. Maher also serves as
director of Adva Optical Networks, Inc. and Cube Optics Inc. Mr. Maher holds
M.Sc. and B.Sc. degrees in Electrical Engineering and Physics from the
University of Illinois.
Dr. Meir Barel served as the chairman of the board of directors of Floware
from its inception until its merger with us in August 2001, and has, since the
merger, served as vice chairman of our board of directors. Dr. Barel also served
as a director of BreezeCOM between 1994 and 2000. Dr. Barel is the founder and
managing partner of Star Venture Management, a venture capital company, which
was founded in 1992, and SVM Star Venture Capital Management Ltd. From 1988 to
1992, Dr. Barel was a managing director of TVM Techno Venture Management,
Munich. Prior to 1986, Dr. Barel served in various German and Israeli companies
involved in factory automation, computer design and data communication. Dr.
Barel received a doctorate in Electrical Engineering from the Data Communication
Department of the Technical University of Aachen, Germany.
Mr. Oded Eran has served as a member of our board of directors since
September 2003. Mr. Eran is a corporate lawyer, who has been a member of the
Israeli law firm of Goldfarb, Levy, Eran & Co. since 1986. From 1983 to 1986 Mr.
Eran was an associate lawyer at the New York law firm of Kronish, Lieb, Weiner &
Hellman. Mr. Eran is a member of the Israeli Bar (1981) and the New York Bar
(1984). He holds LLB and LLM degrees from the Tel Aviv University Faculty of
Law.
Mr. Benny Hanigal has served as a member of our board of directors since
our inception and served as chairman of our board of directors until February
1999. Since August 2001, Mr. Hanigal has been a partner in Sequoia Capital
Venture Fund. In 1985, Mr. Hanigal founded Lannet Ltd., of which Mr. Hanigal
served as President and Chief Executive Officer until 1995. In 1995, Lannet was
acquired by Madge Networks N.V., which thereafter employed Mr. Hanigal until he
left in June 1997. From January 1998 until 2001, Mr. Hanigal served as a
managing director of a company that manages one of the Star funds. Mr. Hanigal
has a B.Sc. degree in Electrical Engineering from the Technion.
Professor Raphael Amit has served as one of our external directors since
September 2003. Professor Amit has been the Robert B. Goergen Professor of
Entrepreneurship and a Professor of Management at the Wharton School of the
University of Pennsylvania since July 1999. Professor Amit also serves as the
Academic Director of Wharton's Goergen Entrepreneurial Management Programs.
Prior thereto, Professor Amit was the Peter Wall Distinguished Professor at the
Faculty of Commerce and Business Administration, University of British Columbia
(UBC), where he was the founding director of the W. Maurice Young
Entrepreneurship and Venture Capital Research Center. From 1983 to 1990,
Professor Amit served on the faculty of the J.L. Kellogg Graduate School of
Management at Northwestern University, where he received the J.L. Kellogg
Research Professorship and the Richard M. Paget Research Chair in Business
Policy. Professor Amit holds B.A. and M.A. degrees in Economics from the Hebrew
University and a Ph.D. in Management from the Northwestern University's J.L.
Kellogg Graduate School of Management. Professor Amit serves on the editorial
boards of the Strategic Management Journal and the Journal of Business
Venturing. From January 1996 to February 2001, Professor Amit served as chair of
the board of directors of Creo Products Inc. Professor Amit has served as a
consultant to a broad range of organizations in North America and Europe on
strategic, entrepreneurial management and new venture formation issues.
Ms. Robin Hacke was appointed as one of our external directors upon our
merger with Floware in August 2001. Ms. Hacke served as a member of Floware's
board of directors from its initial public offering in August 2000 and was
appointed as an external director of Floware in December 2000. Since August
2003, Ms. Hacke has been the Managing Director of Pentaport Venture Advisors
Inc., a company that advises investment companies, including Portview
Communications Partners LP. From January 2003 to July 2003, Ms. Hacke served as
Managing Director of Triport Advisors Ltd., a company founded by Ms. Hacke that
provides advisory services to investment companies including Portview
Communications Partners. From 1990 to 2002, Ms. Hacke served as the Chief
Executive Officer of HK Catalyst Strategy and Finance Ltd., a company that Ms.
Hacke founded that provided advisory services to
54
investment companies and high-tech enterprises. From 1986 to 1990, Ms. Hacke
held various management positions at Aitech Ltd., an Israeli start-up company.
Prior to that, Ms. Hacke was an investment banker at Shearson Lehman Brothers in
New York. Ms. Hacke is a member of the board of directors of several privately
held companies, including Aternity Inc. Ms. Hacke holds an A.B. magna cum laude
degree from Harvard-Radcliffe College and an MBA degree from Harvard Business
School.
Mr. Amnon Yacoby has served as a member of our board of directors since our
merger with Floware in August 2001. Mr. Yacoby founded Floware and served as its
Chief Executive Officer and as a member of its board of directors until its
merger with us. Following our merger with Floware until the end of 2001, Mr.
Yacoby served as our co-Chief Executive Officer. In 2004, Mr. Yacoby founded
Aternity, Inc. and serves as its Chairman and CEO. In 1987, Mr. Yacoby founded
RAD Network Devices Ltd., a developer of data networking devices, and served as
its president and Chief Executive Officer until 1995. From 1972 to 1986, he
served in the Israel Defense Forces' Electronic Research Department in various
positions, most recently as head of the department. He twice received the Israel
Security Award. Mr. Yacoby holds B.Sc. and M.Sc. degrees in Electrical
Engineering from the Technion.
Dr. David Kettler has joined as a member of our board of directors in May
2004. He provides consulting on telecom and information technology through DAK
Solutions, LLC in Atlanta. Previously, Dr. Kettler served as the BellSouth Vice
President in charge of the Science & Technology organization and Chief Architect
for the BellSouth Network until his retirement at the end of 2000. Prior to
BellSouth, Dr. Kettler spent over 15 years at AT&T Bell Laboratories and in
Strategic Planning at AT&T Corporate Headquarters. After his retirement from
BellSouth he served a few years as Managing Director and General Partner of
H.I.G. Capital Management. He has actively contributed to Computer Science &
Telecommunications Board Committee Reports on the Internet and Broadband. Dr.
Kettler also serves on the Computing Advisory Board of Georgia Tech College and
numerous research and economic development steering committees. He has
proactively engaged university/industry activities, led numerous consortia
projects and facilitated the technology transfer from research laboratories
toward commercialization. Dr. Kettler is an IEEE Fellow. He earned his BEE,
MSEE, and Ph.D.EE from the University of Virginia and is a member of the ECE
Industrial Advisory Board and the School of Engineering and Applied Sciences
Academic Board.
Mr. Zvi Slonimsky has been Alvarion's Chief Executive Officer since June
2002, and is expected to remain in this position until September 2005. Prior
thereto he served as our President and Chief Operating Officer since May 1999.
Following our merger with Floware in August 2001, Mr. Slonimsky became a member
of our board of directors and served as our co-Chief Executive Officer, and
since the beginning of 2002 has been our sole Chief Executive Officer. Mr.
Slonimsky had been President and Chief Executive Officer of MTS Ltd., a company
supplying add-on software to PBXs, since its inception in December 1995 as a
spin off from C. Mer Industries until 1999. Mr. Slonimsky joined C. Mer in
November 1992 as Vice President of its products division. Before joining C. Mer,
he was the General Manager of Sorek Technology Center from September 1991 to
November 1992. From 1989 to 1991, Mr. Slonimsky was the General Manager of DSPG
Ltd., the Israeli-based subsidiary of DSPG, Inc. Prior to DSPG, he held various
management positions in Tadiran Ltd., an Israeli communication equipment
manufacturer. Mr. Slonimsky holds B.Sc. and M.Sc. degrees in Electrical
Engineering from the Technion and a M.B.A. degree from Tel-Aviv University.
Mr. Tzvi Friedman is expected to be appointed Alvarion's Chief Executive
Officer in October 2005. He joined Floware in October 2000 as its President and
Chief Operating Officer and has served in this capacity in Alvarion since our
merger with Floware. From 1998 to 2000, Mr. Friedman served as Corporate Vice
President and General Manager of the DCME division at ECI Telecom. From 1992 to
1996, Mr. Friedman served as vice president Marketing and Sales of ECI Telecom's
SDH division. Mr. Friedman holds a B.Sc.E.E. summa cum laude in Electrical
Engineering , a M.Sc.E.E. cum laude in Electrical Engineering from Tel Aviv
University and a Sloan Program M.Sc.M. in Management from the London Business
School.
Mr. Amir Rosenzweig was appointed President of Alvarion, Inc. in July 2001.
Prior to joining Alvarion, Mr. Rosenzweig served as President, Chief Executive
Officer and a Director of MTS Ltd. from 1998 to 2001. Between 1996 and 1998, Mr.
Rosenzweig served as Vice President Marketing and Sales of GMA Communications
Ltd., prior to which Mr. Rosenzweig was President and Chief Executive Officer of
Sogo Electronics Ltd., from 1989 until 1996. Mr. Rosenzweig holds both a B.Sc.
degree in Electronics Engineering and an M.B.A. degree from Tel Aviv University.
Ms. Dafna Gruber has been our Chief Financial Officer since 1997 and was
our controller from 1996 to 1997. From 1993 to 1996, Ms. Gruber was a controller
at Lannet, a worldwide leading data communications company
55
subsequently acquired by Lucent. Ms. Gruber has a B.A. degree in Accounting and
Economics from Tel Aviv University and has been a certified public accountant
since 1991.
Mr. Zvi Harnik was appointed President, Broadband Mobile Unit in January
2005 and served as Executive Vice President -- Research and development from
April 2000 to January 2005. From September 1999 to April 2000, Mr. Harnik served
as Vice President of Research and Development at Midbartech Ltd. Prior to
joining Midbartech, Mr. Harnik served as our Vice President of Research and
Development from 1997 to 1999. From 1987 to 1997, Mr. Harnik served as
Engineering and Research Director of Lannet. Mr. Harnik managed the design of an
Ethernet switching system that received the Rothschild prize for innovation in
1995. Mr. Harnik has a B.Sc.E.E. degree from the Technion.
Mr. Benny Glazer joined us as Vice President of Corporate Sales in August
1999. From 1998 to 1999, Mr. Glazer served as Director of Business Development
for ESC Medical Systems Ltd., a manufacturer of medical lasers. From 1996 to
1997, Mr. Glazer served as President and Chief Executive Officer of NuLAN
Technologies, a manufacturer of videoconferencing systems. In 1995, he was the
President and Chief Executive Officer of ACE North Hills Ltd., a data
communications company, until its acquisition by Nbase Ltd. From 1985 to 1994,
he served as Vice President of International Sales of Fibronics, a LAN and fiber
optic networking equipment manufacturer. Mr. Glazer has a B.Sc. degree in
Electronic Engineering from Ben Gurion University and a M.B.A. degree from Tel
Aviv University.
[space]
B. COMPENSATION
The aggregate direct labor costs associated with all of our directors and
executive officers as a group (15 persons) for the year ended December 31, 2004
(including persons who served as directors or executive officers for only a
portion of 2004, and whether or not serving as such as of December 31, 2004) was
approximately $1,827,669. This amount includes approximately $282,296 which was
set aside or accrued to provide pension, retirement, social security or similar
benefits. The amount does not include amounts expended by us for vehicles made
available to our officers, expenses, including business travel, professional and
business association dues and expenses, reimbursements to directors and officers
and other fringe benefits commonly reimbursed or paid by companies in Israel.
Our directors who are not officers received an aggregate of $241,660 in
compensation in 2004. As of December 31, 2004 , our directors and executive
officers held outstanding options to purchase an aggregate of 4, 214,147
ordinary shares, at exercise prices ranging from $1.27 to $15.4 , with
expiration dates ranging from January 2009 to December 2014.
C. BOARD PRACTICES
Appointment of Directors and Terms of Officers
Our directors are elected by our shareholders at an annual general
shareholders' meeting. Our directors generally commence the terms of their
office at the close of the annual general shareholders' meeting at which they
are elected and, other than our external directors, serve in office until the
close of the third annual general shareholders' meeting following the meeting at
which they are elected, and may be re-elected by the shareholders. Annual
general shareholders' meetings are required to be held at least once every
calendar year, but not more than fifteen months after the last preceding annual
general shareholders' meeting. Until the next annual general shareholders'
meeting, shareholders may elect new directors to fill vacancies in, or increase
the number of the members of the board of directors in a special meeting of the
shareholders. Our board of directors may appoint any person as a director
temporarily to fill any vacancy created in the board of directors, except for
vacancies of an external director. The terms of office of the directors,
including compensation, must be approved, under the Israeli Companies Law, by
the audit committee, the board of directors and the shareholders. The
appointment and terms of office of all our executive officers are determined by
our board of directors.
56
Service Contracts of Directors
None of our directors has the right to receive any benefit upon termination
of his or her office or any service contract he or she may have with us.
External Directors
We are subject to the provisions of the Israeli Companies Law. Under the
Israeli Companies Law, companies incorporated under the laws of Israel whose
shares have been offered to the public in or outside of Israel are required to
appoint a minimum of two directors who qualify as external directors under the
Israeli Companies Law. A person may not be appointed as an external director if
the person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment as external
director, or had, during the preceding two years, any affiliation with the
company, any entity controlling the company or any entity controlled by the
company or by this controlling entity. 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 office holder.
A person may not serve as an external director if that person's position or
other business creates, or may create, a conflict of interest with the person's
responsibilities as an external director or may adversely impact such person's
ability to serve as an external director. Under the Israeli Companies Law, each
committee of a company's board of directors is required to include at least one
external director. The term of office of an external director is three years and
may be extended for one additional three year term. The external directors must
be elected by the majority of the shareholders in a general meeting, provided
that either the shares voting in favor of the external director's election
includes at least one-third of the shares of non-controlling shareholders or the
total shares of non-controlling shareholders voted against the election does not
represent more than one percent of the voting rights in the company. Until the
lapse of two years from his or her termination of office, a company may not
engage a former external director to serve as an office holder and may not
employ or receive professional services from that person, either directly or
indirectly, including through an entity controlled by that person.
Currently Ms. Robin Hacke and Professor Raphael Amit qualify as our
external directors under the Israeli Companies Law. Ms. Hacke was elected as an
external director for an initial three year term on August 1, 2001, and was
re-elected for an additional term on April 28, 2004. On September 30, 2003,
Professor Amit was elected as an external director for an initial three year
term, effective as of October 1, 2003. We have appointed the external directors
to the committees of our board of directors as required by law.
Audit Committee
Pursuant to the Israeli Companies Law, the board of directors of a public
company must appoint an audit committee. The responsibilities of the audit
committee include monitoring the management of the company's business and
suggesting appropriate courses of action, as well as approving related party
transactions, reviewing and recommending on board members compensation and other
matters as required by law. The audit committee must be comprised of at least
three directors, including all of the external directors. The audit committee
may not include the chairman of the board, any director employed by the company
or providing to the company services on a regular basis, or a controlling
shareholder or his relative. Our audit committee assists the board of directors
in fulfilling its responsibilities to ensure the integrity of our financial
reports, serves as an independent and objective monitor of our financial
reporting process and internal controls systems, including the activities of our
independent auditor and internal audit function, and provides an open avenue of
communication between the board of directors and the independent auditors,
internal auditor and financial and executive management. The members of our
audit committee are Professor Amit, Ms. Hacke and Mr. Eran, each of whom are
independent directors in accordance with the Nasdaq listing requirements.
Professor Amit qualifies as a financial expert for purposes of the rules of the
Securities and Exchange Commission. As stated above, Ms. Hacke and Professor
Amit qualify as external directors under the Israeli Companies Law.
57
Compensation, Nominating and Corporate Governance Committee
The compensation, nominating and corporate governance committee of our
board of directors, which consists of Mr. Maher, Dr. Barel, Professor Amit, and
Dr. Kettler, assists the board of directors in carrying out its responsibilities
relating to compensation of our top executive officers, including our President,
Chief Operating Officer, Chief Financial Officer and Chief Executive Officer,
and the setting of their respective goals, and in administering our share option
plans and other issues relating to employee compensation. Our compensation,
nominating and corporate governance committee is also responsible for
recommending to the board of directors nominees for board membership and for
reviewing and advising the board of directors on corporate governance issues.
Internal Auditor
The Israeli Companies Law also requires the board of directors of a public
company to appoint an internal auditor recommended by the audit committee. The
role of the internal auditor is to examine, among other things, whether the
company's acts comply with applicable law and orderly business procedure. The
internal auditor may be an employee of the company but may not be an interested
party or office holder, or a relative of any interested party or office holder,
and may not be a member of the company's independent accounting firm or its
representative. Mr. Yossi Ginnosar, CPA, serves as our internal auditor.
Fiduciary Duties of Office Holders; Approval of Specified Related Party
Transactions Under Israeli Law
The Israeli Companies Law codifies the fiduciary duties that office
holders, including directors and executive officers, owe to a company. 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 with the level of skill with which
a reasonable office holder in the same position would have acted under the same
circumstances. The office holder's duty of care includes a duty to use
reasonable means to obtain information on the advisability of a given action
brought for his approval or performed by him by virtue of his position, and all
other significant information pertaining to those actions. The duty of loyalty
requires an office holder to act in good faith and for the company's benefit,
and includes avoiding any conflict of interest between the office holder's
position in the company and any other position held by him or his personal
affairs, avoiding any competition with the company, avoiding exploiting any
business opportunity of the company in order to receive personal advantage for
himself or others, and disclosing to the company any information or documents
relating to the company's affairs that the office holder has received as a
result of his position as an office holder. Each person listed in the table
under "Directors and Senior Management" above is deemed to be an office holder
under the Israeli Companies Law. Under the Israeli Companies Law, all
arrangements as to compensation of office holders who are not directors require
approval of the board of directors and, with respect to indemnification and
insurance of these office holders, also require audit committee approval.
Arrangements regarding the compensation of directors, as well as indemnification
and/or insurance for directors, require each of the audit committee, board of
directors and shareholder approvals.
Disclosure of Personal Interest
The Israeli Companies Law requires that an office holder of a company
promptly disclose any personal interest that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. This would include disclosure of a personal
interest of the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants, and their spouses, as well as of any
corporation in which the office holder or his or her relative is a 5% or greater
shareholder, director or general manager or in which he or she or his or her
relative has the right to appoint at least one director or the general manager,
but does not include a personal interest arising solely from the holding itself
of shares of the company. Disclosure is not required if the transaction is not
an extraordinary transaction, that is, a transaction other than in the ordinary
course of business, otherwise than on market terms, or likely to have a material
impact on the company's profitability, assets or liabilities, and in which the
office holder's personal interest results solely from the personal interest of
his or her relative. Once the office holder complies with his or her disclosure
requirement, if the transaction is not an extraordinary transaction, the Israeli
Companies Law provides that only the approval of the board of directors is
required unless the articles of association provide otherwise. Approval of these
types of transactions is conditioned on the transaction not being adverse to the
company's interest. If the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the
58
articles of association, it also must be approved by the company's audit
committee and then by the board of directors. A director, who has a personal
interest in a matter that is considered at a meeting of the board of directors
or the audit committee, may generally not be present at this meeting or vote on
this matter. However, a director may be present at a meeting of the board of
directors or audit committee and participate in the vote despite having a
personal interest in the transaction under consideration, if most of the
directors or most of the members of the audit committee, as the case may be,
have a personal interest in the transaction. If most of the directors have a
personal interest in a transaction, the transaction also requires shareholders'
approval.
Disclosure of Personal Interests of a Controlling Shareholder
The Israeli Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company. A controlling shareholder is a
shareholder who has the ability to direct the activities of a company, and may
include a shareholder that holds 25% or more of the voting rights if no other
shareholder owns more than 50% of the voting rights in the company. Subject to
exceptions specified in regulations promulgated under the Israeli Companies Law,
extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder or employee, require the
approval of the audit committee, the board of directors and a majority of the
shareholders of the company in a general meeting, provided that either such
majority include at least one-third of the shareholders who have no personal
interest in the transaction and are present at the meeting, or the total
shareholdings of those who have no personal interest in the transaction that
vote against the transaction does not represent more than one percent of the
total voting rights in the company. For information concerning the direct and
indirect personal interests of certain of our office holders and principal
shareholders in certain transactions with us, see "Item 7 -- Major Shareholders
and Related Party Transactions -- Related Party Transactions."
Duties of Shareholders
In addition, under the Israeli Companies Law each shareholder has a duty to
act in good faith in exercising his or her rights and fulfilling his or her
obligations toward the company and other shareholders and to refrain from
abusing any power he or she has in the company, such as in shareholder votes. In
addition, certain shareholders have a duty of fairness toward the company,
although such duty is not defined in the Israeli Companies Law. These
shareholders include any controlling shareholder, any shareholder who knows that
it possesses the power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of the articles of association, has
the power to appoint or to prevent the appointment of an office holder or any
other power in regard to the company.
Exculpation, Insurance and Indemnification of Directors and Officers
Our articles of association provide that, to the extent permitted by the
Israeli Companies Law, we may indemnify our office holders for liabilities or
expenses incurred by an office holder as a result of an act done by him in his
capacity as an office holder, such as:
o financial liability imposed on him in favor of another person by
a court judgment, including a settlement judgment or an
arbitrator's award approved by a court; and
o reasonable litigation expenses, including attorney's fees,
expended by an office holder or charged to him by a court in
proceedings filed against him by us or on our behalf or by
another person, or in a criminal charge from which he was
acquitted, or in a criminal charge of which he was convicted of a
crime that does not require a finding of criminal intent.
The Israeli Companies Law and our articles of association provide that,
subject to certain limitations, we may undertake in advance to indemnify our
office holders.
Our articles of association provide that, to the extent permitted by the
Israeli Companies Law, we may obtain insurance to cover any liabilities imposed
on our office holders as a result of an act done by him in his capacity as an
office holder, in any of the following:
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 he acted in
good faith and had reasonable grounds to assume that his act
would not harm us; or
59
o financial liability imposed upon him in favour of another person.
These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify or procure
insurance for an office holder for:
o a breach of the duty of loyalty, unless the office holder acted
in good faith and had reasonable grounds to assume that the
action would not harm the company;
o an intentional or reckless breach of the duty of care;
o an act done with the intent to unlawfully realize personal gain;
or
o a criminal fine or penalty imposed on the office holder.
In addition, our articles of association provide that, to the extent
permitted by the Israeli Companies Law, we may exculpate an office holder in
advance from liability, in whole or in part, for damages resulting from a breach
of his duty of care to us.
We have obtained directors and officers liability insurance for the benefit
of our office holders.
Following approval by our audit committee, board of directors and
shareholders, in 2001 and 2004, we entered into agreements with our office
holders under which we undertook to indemnify and exculpate our office holders.
In connection with our merger with Floware, we have also assumed similar
agreements entered into between Floware and its officer holders. The
indemnification agreements provide that we will indemnify an office holder for
any expenses incurred by the office holder in connection with any claims (as
these terms are defined in the agreements) that fall within one or more
categories of indemnifiable events listed in the agreements, related to any act
or omission of the office holder while serving as an office holder of our
company (or serving or having served, at our request, as an employee,
consultant, office holder or agent of any subsidiary of our company, or any
other corporation or partnership). In addition, under these agreements, we
exempt and release our office holders from any and all liability to us related
to any breach by them of their duty of care to us, to the maximum extent
permitted by law. At present, we are not aware of any pending litigation or
proceeding involving an office holder where indemnification would be required or
permitted under the indemnification agreements.
D. EMPLOYEES
As of December 31, 2004, we had 942 employees (including persons who became
our employees as a result of the interWAVE acquisition), of which 379 were
engaged in research and development, 253 in operations, 230 in sales and
marketing and 80 in administration and management. Of our full-time employees,
as of December 31, 2004, 574 were located in Israel, 167 in the United States
and 182 at our other branch offices, listed in Item 4C -- Information on the
Company -- 'Organizational Structure'.
We consider our relations with our employees to be good and have never
experienced any strikes or work stoppages. Substantially all of our employees
have employment agreements and none are represented by a labor union.
We are subject to labor laws and regulations in Israel and in other
countries where our employees are located. Although our Israeli employees are
not parties to any collective bargaining agreement, we are subject to certain
provisions of collective bargaining agreements among the Government of Israel,
the General Federation of Labor in Israel and the Coordinating Bureau of
Economic Organizations, including the Industrialists' Association, that are
applicable to our Israeli employees by virtue of expansion orders of the Israeli
Ministry of Labor and Welfare. Israeli labor laws are applicable to all of our
employees in Israel. Those provisions and laws principally concern the length of
the work day, minimum daily wages for workers, procedures for dismissing
employees, determination of severance pay and other conditions of employment.
We contribute funds on behalf of our employees to an individual insurance
policy known as Managers' Insurance. This policy provides a combination of
savings plan, insurance and severance pay benefits to the insured employee. It
provides for payments to the employee upon retirement or death and secures a
substantial portion of the severance pay, if any, to which the employee is
legally entitled upon termination of employment. Each participating employee
contributes an amount equal to 5% of such employee's base salary, and we
contribute
60
between 13.3% and 15.8% of the employee's base salary. Full-time employees who
are not insured in this way are entitled to a pension fund to which the employee
contributes an amount ranging from 5% to 5.5% of such employee's base salary,
and we contribute an amount ranging from 5% to 14.33% of the employee's base
salary, or alternatively, to a savings account, to which the employee and the
employer each make a monthly contribution of 5% of the employee's base salary.
We also provide our employees with an Education Fund, to which each
participating employee contributes an amount equal to 2.5% of the employee's
base salary, and we contribute an amount of up to 7.5% of the employee's base
salary. We also provide our employees with additional health insurance coverage
for instances of severe illnesses.
Like all Israeli employers we are required to provide salary increases as
partial compensation for increases in the Israeli consumer price index. The
specific formula for such increases varies according to agreements reached among
the Government of Israel, the Manufacturers' Association and the General
Federation of Labor in Israel. Employees and employers also are required to pay
predetermined sums, which include a contribution to provide a range of social
security benefits.
Management Employment Agreements
We maintain written employment agreements with substantially all of our key
employees. These agreements provide, among other matters, for monthly salaries,
our contributions to Managers' Insurance and an Education Fund and severance
benefits. Most of our agreements with our key employees are subject to
termination by either party upon the delivery of notice of termination as
provided therein.
E. SHARE OWNERSHIP
The following table sets forth certain information regarding the ownership
of our ordinary shares by our directors and executive officers as of June 6,
2005. The percentage of outstanding ordinary shares is based on 58,439,640
ordinary shares outstanding as of June 6, 2005
Number of Percentage of Outstanding
Name Ordinary Shares Ordinary Shares
---- --------------- -------------------------
Amnon Yacoby ......... 861,372* 1.47%
------- ----
------------
* Includes 166,972 options for ordinary shares which are exercisable within
60 days of date stated above.
As of June 6, 3005, the directors and executive officers listed above, as a
group, held 4,039,297 options to purchase of our ordinary shares at a weighted
average exercise price of $6.31 with expiration dates ranging from January 2009
to December 2014. The voting rights of our directors and executive officers do
not differ from the voting rights of other holders of our ordinary shares.
Share Option Plans
As of December 31, 2004 a total of 24,998,651 ordinary shares have been
reserved for issue upon exercise of options granted to our employees, officers,
directors and consultants pursuant to our share option plans. These ordinary
shares have been reserved pursuant to our 2002 Global Share Option Plan, or the
2002 Plan, Key Employee Share Incentive Plan (1994), as amended, Key Employee
Share Incentive Plan (1996), Key Employee Share Incentive Plan (1997), 1999 U.S.
Stock Option Plan, interWAVE's 1994 Stock Option Plan, interWAVE 1999 Stock
Option Plan and Floware's Key Employee Share Incentive Plan (1996).
Options granted under the share option plans usually vest over a period of
four years. Of the options reserved under the share option plans, options to
purchase 10,484,759 ordinary shares have been exercised, options to purchase
1,757,766 ordinary shares are available for future grant and options to purchase
12,756,127 ordinary shares, including options issued pursuant to the terms of
the Floware merger and interWAVE acquisition, were outstanding as of December
31, 2004, at a weighted average exercise price of $7.57 per share. Unless a
shorter period is specified in the notice of grant or unless the applicable
share option plan has an earlier termination date, each of the 12,756,127
options outstanding expire between eight and ten years from the date of grant.
In connection with our acquisition of interWAVE, we assumed interWAVE's
1994 Stock Option Plan and 1999 Stock Option Plan (the options under which are
referred to as the assumed options). Each assumed option to purchase
61
interWAVE ordinary shares outstanding pursuant to interWAVE's Employee Stock
Option Plan was converted into an option to purchase, on the same terms and
conditions as applied to the interWAVE option, to a number of our ordinary
shares equal to the number of interWAVE ordinary shares that the holder of such
interWAVE option was entitled to acquire, multiplied by 0.2978056 ("the ratio"),
at an exercise price per share equal to the former exercise price per share
under the interWAVE option, divided by 0.2978. This ratio reflects the quotient
obtained by dividing the per share consideration of interWAVE by our share
price. For these purposes, our share price means the average closing price of
our ordinary shares on the NASDAQ over the five trading days up to and including
the second trading day preceding the closing. Effective upon the closing of the
acquisition of interWAVE, 25% of the unvested portion of any assumed interWAVE
options accelerated and the remaining unvested options continued to vest
according to the original vesting schedule. In connection with this, outstanding
assumed options to purchase interWAVE ordinary shares were converted into
options to purchase approximately 423,156 of our ordinary shares.
In addition, in connection with our merger with Floware, each option to
purchase Floware ordinary shares outstanding pursuant to Floware's Employee
Stock Option Plan was converted into an option to purchase, on the same terms
and conditions as applied to the Floware option (subject to any applicable
accelerated vesting or other provisions as were triggered in connection with the
merger), a number of Alvarion ordinary shares equal to the number of Floware
ordinary shares that the holder of such Floware option was entitled to acquire,
multiplied by 0.767 (the exchange ratio in the merger), at an exercise price per
share equal to the former exercise price per share under the Floware option,
divided by 0.767. In connection with the merger, outstanding options to purchase
Floware ordinary shares were converted into options to purchase approximately
5,230,469 of our ordinary shares.
The share option plans are administered by the board of directors which
designates the optionees, dates of grant, vesting period and the exercise price
of options. Each grantee is responsible for all personal tax consequences of the
grant and exercise the options. Unless otherwise approved by our board of
directors, employees usually may exercise vested options granted under the share
option plans for a period of three months following the date of termination of
their employment with us or any of our subsidiaries and options that have not
vested on the date of termination expire. Under Israeli law, the issuance of
options must be approved by our board of directors and issuance of options to
directors must be approved by the shareholders.
In September 2002, the board of directors approved an option exchange
program. Under the program, holders of options with exercise prices in excess of
$4.60 were given the opportunity to voluntarily tender unexercised vested and
non-vested stock options previously granted to them, in exchange for replacement
options to be granted at a later date. The exchange offer expired on September
20, 2002. Depending upon the exercise price of the options tendered, those
participants who elected to tender options under the terms of the program
received new options in an amount ranging from 2% to 85% of the number of the
options tendered. As a result of the option exchange program, the amount of
options outstanding was reduced by approximately 3 million. The exercise price
of the new options is $2.02 per share, which was the closing price of our
ordinary shares as reported by the Nasdaq National Market on March 21, 2003, the
last trading day prior to the date of the grant, March 23, 2003.
The new options were granted under our 2002 Plan, pursuant to which we
reserved an aggregate of 12.5 million ordinary shares issuable upon exercise of
options. We reduced the number of ordinary shares reserved for issuance upon
exercise of options under our other existing option plans by approximately 8.3
million ordinary shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June 6, 2005, by each person or entity we
know to own beneficially more than 5% of our outstanding ordinary shares based
on information provided to us by the holders or disclosed in public filings with
the Securities and Exchange Commission. The voting rights of the shareholders
listed below are not different from the voting rights of our other shareholders.
The percentage of outstanding ordinary shares is based on 58,439,640 ordinary
shares outstanding as of June 6, 2005. Ordinary shares deemed beneficially owned
by virtue of the right of any person or group to acquire such shares within 60
days of the date of this annual report are treated as outstanding only for the
purpose of determining the percent owned by such person or group.
62
Ordinary Shares
Beneficially Owned
--------------------
Name Number Percent
---- --------- -------
Fidelity Investments (1) ................................ 4,268,400 7.3%
------------
(1) Aggregate holdings of certain institutional accounts and/or open-end
investment companies managed by FMR Corp and Fidelity International
Limited. FMR Corp and Fidelity International Limited are the parent
companies of various investment advisors that manage institutional accounts
and/or open-end investment companies.
As of June 6, 2005, there were 57 holders of our ordinary shares of record
registered with a United States mailing address, including banks, brokers and
nominees. As of June 6, 2005, these holders of record held approximately
55,299,877 ordinary shares representing approximately 95% of our then
outstanding share capital. Because these holders of record include banks,
brokers and nominees, the beneficial owners of these ordinary shares may include
persons who reside outside the United States.
To the best of our knowledge, we are not directly or indirectly owned or
controlled by another corporation, by any foreign government or by any other
natural or legal person or persons severally or jointly and currently there are
no arrangements that may, at a subsequent date, result in a change in our
control.
B. RELATED PARTY TRANSACTIONS
Not applicable.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The Financial Statements required by this item are found at the end of this
annual report, beginning on page F-1.
Legal Proceedings
A lawsuit was filed by a former customer of interWAVE on December 8, 2004,
for compensatory damages with respect to certain alleged damages caused by
interWAVE actions in the amount of approximately $4 million. As this claim is
yet in its preliminary stage, it is impractical to predict its outcome. We do
not believe it will have a material effect on our financial results nor could
our legal advisors estimate the likelihood of an unfavourable outcome of this
matter.
During 2001 a purported Class Action (the "Action") lawsuit was filed
against interWAVE asserting failure to disclose certain alleged improper actions
by various underwriters and interWAVE's officers and directors under the
Securities Act of 1933 and the Securities Exchange Act of 1934 followed by
interWAVE's initial public offering. A stipulation of Settlement (the
"Settlement") has been submitted to the Court for preliminary approval. Under
the Settlement interWAVE will be dismissed of all claims in exchange for a
contingent payment guarantee by the insurance companies responsible for insuring
interWAVE as an issuer. There is no guarantee that the settlement will become
effective as it is subject to certain terms. In that case under which settlement
will not occur, we are of the opinion that it has a good defense against the
action however, the litigation results can not be predicted at this point.
Except as otherwise disclosed in this annual report, we are not a party to
any material litigation or arbitration, either in Israel or any other
jurisdiction, and we are not aware of any pending or threatened litigation or
arbitration that would have a material adverse effect on our business, financial
condition or results of operations.
63
Export Sales
Export sales constitute a significant portion of our sales. In 2004, export
sales were approximately $199.2 million constituting approximately 99.0% of our
total sales. For a more detailed discussion regarding the allocation of our
revenues by geographic regions based on the location of our customers, see "Item
5 -- Operating and Financial Review and Prospects -- Operating Results."
Dividend Policy
We have never declared or paid any cash dividend on our ordinary shares. We
do not anticipate paying any cash dividend on our ordinary shares in the
foreseeable future. We currently intend to retain all future earnings to finance
operations and expand our business
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, no significant change
has occurred since December 31, 2004.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The following table sets forth the high and low sales prices for our
ordinary shares as reported by the Nasdaq National Market for each full
financial year since our initial public offering in March 2000 and as reported
by the Tel Aviv Stock Exchange, in NIS, since our ordinary shares commenced
trading on the Tel Aviv Stock Exchange in August 2001:
Nasdaq National Market Tel Aviv Stock Exchange
---------------------- -----------------------
Year High Low High Low
---- -------- ------- --------- ---------
2000 ...................... $53.13 $9.69 N.A. N.A.
2001 ...................... $17.50 $1.55 NIS 21.99 NIS 7.98
2002 ...................... $ 4.05 $1.64 NIS 18.04 NIS 8.54
2003 ...................... $11.55 $1.84 NIS 51.10 NIS 8.69
2004 ...................... $17.15 $8.50 NIS 74.30 NIS 41.47
The following table sets forth the high and low sales price for our
ordinary shares as reported by the Nasdaq National Market for each full
financial quarter in 2003 and 2004 and as reported by the Tel Aviv Stock
Exchange, in NIS:
Nasdaq National Market Tel Aviv Stock Exchange
---------------------- -----------------------
2003 High Low High Low
---- -------- ------- --------- ---------
First Quarter ............. $ 2.24 $1.84 NIS 9.59 NIS 8.69
Second Quarter ............ $ 4.04 $2.17 NIS 17.14 NIS 10.15
Third Quarter ............. $ 7.30 $4.00 NIS 32.81 NIS 17.05
Fourth Quarter ............ $11.55 $6.60 NIS 51.10 NIS 28.72
2004 High Low High Low
---- -------- ------- --------- ---------
First Quarter ............. $17.15 $11.40 NIS 74.30 NIS 51.70
Second Quarter ............ $14.44 $ 8.50 NIS 64.04 NIS 41.47
Third Quarter ............. $13.47 $ 9.99 NIS 59.96 NIS 46.36
Fourth Quarter ............ $16.01 $12.20 NIS 67.89 NIS 55.73
64
The following table sets forth the high and low sales price for our
ordinary shares as reported by the Nasdaq National Market and the Tel Aviv Stock
Exchange for the most recent six months:
Nasdaq National Market Tel Aviv Stock Exchange
---------------------- -----------------------
Month High Low High Low
----- -------- ------- --------- ---------
December 2004 ............. $14.98 $12.20 NIS 64.66 NIS 55.73
January 2005 .............. $14.23 $ 9.90 NIS 60.79 NIS 44.12
February 2005 ............. $11.45 $ 9.90 NIS 49.39 NIS 42.87
March 2005 ................ $10.40 $ 8.90 NIS 44.43 NIS 39.67
April 2005 ................ $ 9.78 $ 7.87 NIS 42.13 NIS 36.26
May 2005 .................. $10.00 $ 8.24 NIS 41.56 NIS 36.62
June 2005 (through June 6) $ 9.50 $ 8.93 NIS 41.09 NIS 39.61
As of June 6, 2005, the exchange rate of the NIS to the US$ was $1 to NIS
4.412.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares began trading on the Nasdaq National Market on March
23, 2000 under the symbol "BRZE." Prior to that date, there was no market for
our ordinary shares. On August 1, 2001, upon the completion of our merger with
Floware and the change of our name to Alvarion Ltd., our symbol was changed to
"ALVR." On August 1, 2001, our ordinary shares also began to trade on the Tel
Aviv Stock Exchange.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following is a summary description of certain provisions of our
memorandum of association and articles of association:
Our articles of association permits us to engage in any lawful business.
Our purpose is to operate in accordance with business considerations to generate
profits (provided, however, that we may donate reasonable amounts to worthy
causes, as our board of directors may determine in its discretion, even if such
donations are not within the framework of business considerations).
Our articles of association permit us to enter into a business transaction
with any of the directors of our company or enter into a business transaction
with a third party in which a director has a personal interest, subject to
compliance with the Israeli Companies Law. See "Item 6 -- Directors, Senior
Management and Employees -- Board Practices."
Directors who do not hold other positions in our company and who are not
external directors may not receive any compensation from our company, unless
such compensation is approved by our shareholders, subject to applicable law.
65
Our board of directors may, from time to time, in its discretion, cause us
to borrow or secure the payment of any sum or sums of money for our purposes, on
such terms and conditions as it deems appropriate.
Shareholders are entitled to receive dividends or bonus shares, upon the
recommendation of our board of directors and resolution of our shareholders. The
shareholders entitled to receive dividends or bonus shares are those who are
registered in the shareholders register on the date of the resolution approving
the distribution or allotment, or on such later date, as may be determined in
such resolution. Any right to a declared dividend by us to our shareholders
terminates after seven years from our declaration of the dividend if such
dividend has not been claimed by the shareholder within such time. After seven
years the unclaimed dividend will revert back to us.
Every shareholder has one vote for each share held by such shareholder of
record. With certain exceptions, no shareholder is entitled to vote at any
general meeting (or be counted as a part of the lawful quorum thereat), unless
all calls and other sums then payable in respect of his shares have been paid.
A shareholder seeking to vote with respect to a resolution that requires
that the majority of such resolution's adoption include at least a certain
percentage of all those not having a personal interest (as defined in the
Israeli Companies Law) in it, must notify us at least two business days prior to
the date of the general meeting, whether or not he has a personal interest in
the resolution, as a condition for his right to vote and be counted with respect
to such resolution.
Upon our liquidation, the liquidator, with the approval of a general
meeting of the shareholders, may distribute all or part of the property to our
shareholders, and may deposit any part of such property with trustees in favour
of the shareholders, as deemed appropriate by the liquidator.
Rights attached to our ordinary shares, may be modified or abrogated by a
resolution adopted at a general meeting of the shareholders by more than 50% of
the shareholders who are entitled to vote at the meeting, or an "ordinary
majority," other than certain rights relating to the election of directors that
may be modified or abrogated only with the approval of more than 75% of the
shareholders who are entitled to vote at the meeting.
An annual general meeting of our shareholders, or "annual meeting," must be
held once in every calendar year, within a period of not more than 15 months
from the preceding annual meeting, either within or outside of Israel. All
general meetings of our shareholders other than annual meetings are called
"extraordinary meetings." Our board of directors has discretion over when to
convene an extraordinary meeting. However, our board of directors must convene
an extraordinary meeting upon demand by the lesser number of: (i) any two
directors of our company; ora quarter of the directors of our company, whichever
is lower; or (ii) upon the demand of one or more shareholders holding alone or
together at least five percent of the issued share capital of our company. Our
board of directors, upon demand to convene an extraordinary meeting, is required
to announce the convening of the general meeting within 21 days from the receipt
of the demand, provided, however, that the date fixed for the extraordinary
meeting may not be more than 35 days from the publication date of the
announcement of the extraordinary meeting, or such other period as may be
permitted by the Israeli Companies Law or the regulations thereunder.
Directors, other than external directors, are elected, unless specifically
determined otherwise, until the third annual general shareholders' meeting
following the meeting at which such directors were elected. Any director may be
removed from his office by way of a resolution adopted by the vote of the
holders of 75% of the voting power represented at a meeting.
The shareholders who are entitled to participate and vote at a general
meeting are those shareholders who are registered in our shareholders register
on the date determined by our board of directors, provided that such date not be
more than 40 days, nor less than 21 days, prior to the date of the general
meeting, except as otherwise permitted by the regulations under the Israeli
Companies Law. Shareholders entitled to attend a general meeting are entitled to
receive notice of such meeting at least 21 days prior to the date fixed for such
meeting, unless a shorter period is permitted by law.
There are no limitations imposed by our Articles of Association or the
Israeli Companies Law on the right to own our shares including the rights of
non-resident or foreign shareholders to hold or exercise voting rights of our
shares, except with respect to subjects of countries which are in a state of war
with Israel.
Certain provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
our company, as detailed in "Item 3 -- Key Information -- Risk Factors
66
-- Risks Relating to Our Location in Israel". Provisions of Israeli law may
delay, prevent or make difficult a merger with or an acquisition of us, which
could prevent a change of control and therefore depress the market price of our
ordinary shares.
The information contained under the heading "Description of Ordinary
Shares" in our Registration Statement on Form F-1 (Registration Number
333-11572) is incorporated herein by reference.
Our transfer agent and registrar is the American Stock Transfer & Trust Co.
at address 59 Maiden Lane, New York, NY 10038.
C. MATERIAL CONTRACTS
In December 9th, 2004 Alvarion Mobile, Inc., a wholly-owned subsidiary of
Alvarion Ltd. amalgamated with interWAVE Communications, Ltd. As a result of the
amalgamation, Alvarion Mobile, Inc. continued as the surviving company and
interWAVE Communications Ltd.'s separate existence ceased. Upon the closing,
Alvarion paid interWAVE's shareholders $4.18 for each interWAVE share, and a
total consideration of $47.9 million.
Except as otherwise disclosed in this annual report, we have no other
material contracts.
D. EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to our shareholders, 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, may be paid in
non-Israeli currency or, if paid in Israeli currency, may be converted into
freely repatriable U.S. dollars at the rate of exchange prevailing at the time
of conversion.
However legislation remains in effect pursuant to which currency controls
can be imposed by administrative action at any time.
E. TAXATION
General
The following is a discussion of Israeli and United States tax consequences
material to our shareholders. To the extent that the discussion is based on new
tax legislation that has not been subject to judicial or administrative
interpretation, the views expressed in the discussion might not be accepted by
the tax authorities in question. The discussion is not intended, and should not
be construed, as legal or professional tax advice and does not exhaust all
possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to
the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.
Israeli Taxation of Our Shareholders
Capital Gains Tax
Israeli law imposes a capital gains tax on the sale of capital assets. The
law distinguishes between inflationary surplus and real gain. The inflationary
surplus is a portion of the total capital gain that is equivalent to the
increase of the relevant asset's purchase price that is attributable to the
increase in the Israeli consumer price index between the date of purchase and
the date of sale. The real gain is the excess of the total capital gain over the
inflationary surplus. The inflationary surplus accumulated from and after
December 31, 1993 is exempt from any capital gains tax in Israel. Real gain
accrued before January 1, 2003 is added to ordinary income, which generally is
taxed at ordinary rates of up to 49% for individuals and 35% for corporations,
while real gain accrued on or after January 1, 2003, in accordance with the
provisions of the recent tax reform discussed below, generally is taxed at a
capital
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gains rate of 25% for both individuals and corporations. The allocation of the
real gain accruals between the periods before and after January 1, 2003 is
calculated on a linear basis proportionately to the lengths of such periods.
Real gain accrued before January 1, 2003 on sales of our ordinary shares
purchased in our initial public offering or thereafter, other than sales by
entities that are subject to the Inflationary Adjustments Law, as discussed
below, generally is exempt from Israeli capital gains tax. On January 1, 2003,
the Law for Amendment of the Income Tax Ordinance (Amendment No. 132),
5762-2002, known as the "tax reform," came into effect. The tax reform and the
regulations promulgated thereunder include, among other things, the imposition
of capital gains tax at a rate of 15% on gains derived from and after January 1,
2003 by Israeli residents, from the sale of shares in Israeli companies publicly
traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside
of Israel. This tax rate does not apply to: (1) dealers in securities, (2)
shareholders that report in accordance with the Inflationary Adjustment Law, (3)
shareholders who acquired their shares prior to an initial public offering, (4)
the sale of shares to a relative; or (5) shareholders claiming a deduction for
financing expenses in connection with the sold securities. The tax basis of
shares acquired prior to January 1, 2003 will be determined in accordance with
the average closing share price in the three trading days preceding January 1,
2003. However, a request may be made to the tax authorities to consider the
actual adjusted cost of the shares as the tax basis if it is higher than such
average price. Non-Israeli residents are generally exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on a
recognized stock exchange or regulated market outside of Israel, provided such
shareholders did not acquire their shares prior to an initial public offering
and provided such gains did not derive from a permanent establishment of such
shareholders in Israel. The provisions of the tax reform do not affect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described in the previous paragraph.
Furthermore, pursuant to the Convention Between the Government of the
United States of America and the Government of the State of Israel with Respect
to Taxes on Income, as amended (the U.S.-Israel tax treaty), the sale, exchange
or disposition of ordinary shares that are held as a capital asset by a person
who qualifies as a resident of the United States within the meaning of the
U.S.-Israel tax treaty and who is entitled to claim the benefits afforded to
such resident by the U.S.-Israel tax treaty (Treaty U.S. Resident), generally
will not be subject to Israeli capital gains tax unless such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale,
exchange or disposition. A sale, exchange or disposition of ordinary shares by a
Treaty U.S. Resident who holds, directly or indirectly, shares representing 10%
or more of our voting power at any time during such preceding 12-month period
would be subject to such Israeli tax, to the extent applicable.
Special Provisions Relating to Taxation Under Inflationary Conditions
The Israeli Income Tax Ordinance and regulations promulgated there under
allow "Foreign-Invested Companies," which maintain their accounts in U.S.
dollars in compliance with the regulations published by the Israeli Minister of
Finance, to base their tax returns on their operating results as reflected in
the dollar financials statements or to adjust their tax returns based on
exchange rate changes rather than changes in the Israeli CPI, in lieu of the
principles set forth by the Inflationary Adjustments Law. For these purposes, a
Foreign-Invested Company is a company, more than 25% of whose share capital, in
terms of rights to profits, voting and appointment of directors, and of whose
combined share and loan capital is held by persons who are not residents of
Israel. A company that elects to measure its results for tax purposes based on
the dollar exchange rate cannot change that election for a period of three years
following the election. We believe that we qualify as a Foreign Investment
Company within the meaning of the Inflationary Adjustments Law. We have elected
to measure our results for tax purposes based on the U.S. dollar exchange rate
from 2003 and forth.
Prior to 2003 we measured our results for tax purposes based on the changes
in the Israeli CPI as set forth by the Inflationary Adjustments Law. The Income
Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law,
represents an attempt to overcome the problems presented to a traditional tax
system by an economy undergoing rapid inflation. The Inflationary Adjustments
Law is highly complex. The features that are material to us may be described as
follows:
A special tax adjustment for the preservation of equity whereby certain
corporate assets are classified broadly into fixed (inflation resistant) assets
and non-fixed (soft) assets. Where a company's equity, as defined in such law,
exceeds the depreciated cost of its fixed assets, the company may take a
deduction from taxable income that reflects
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the effect of the annual rate of inflation on such excess, up to a ceiling of
70% of taxable income in any single tax year, with the unused portion carried
forward on a linked basis. If the depreciated cost of fixed assets exceeds a
company's equity, then such excess multiplied by the annual rate of inflation is
added to taxable income.
Subject to limitations set forth in the Inflationary Adjustments Law,
depreciation deductions on fixed assets and losses carried forward are adjusted
for inflation based on the increase in the Israeli consumer price index.
Gains on sales of traded securities are taxable under the Inflationary
Adjustments Law.
Taxation of Non-Resident Holders of Our Shares
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel or received in Israel. Such sources of income
include passive income such as dividends, royalties, interest and capital gain,
as well as non-passive income from business conducted in Israel. Unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence, dividends, other than bonus shares or stock dividends, not
generated by an Approved Enterprise are subject to income tax at the rate of
25%, which is withheld at source. Under the U.S.-Israel tax treaty, these
distributions to a Treaty U.S. Resident are subject to income tax at a maximum
rate of 25%, or 12.5% if the Treaty U.S. resident is a U.S. corporation and
holds at least 10% of our voting power, in general, in the current and preceding
tax years. Dividends distributed from income generated by an Approved Enterprise
are subject to 15% tax, which is withheld at source.
For information with respect to the applicability of Israeli capital gains
taxes to the sale of our ordinary shares by United States residents, see "--
Israeli Taxation of our Shareholders -- Capital Gains Tax," above.
United States Federal Income Tax Considerations with Respect to the
Ownership and Disposition of Our Ordinary Shares
The following is a discussion of the material United States federal income
tax consequences applicable to "U.S. Holders" (as defined below) who
beneficially own our ordinary shares. The discussion is based on the Internal
Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury
regulations promulgated thereunder, and existing administrative rulings and
court decisions in effect as of the date of this annual report, all of which are
subject to change at any time, possibly with retroactive effect. For purposes of
this discussion, it is assumed that U.S. Holders of our ordinary shares hold
such stock as a capital asset within the meaning of Section 1221 of the Code,
that is, generally for investment. This discussion does not address all aspects
of United States federal income taxation that may be relevant to a particular
U.S. Holder of our ordinary shares in light of his or her circumstances or to a
U.S. Holder of our ordinary shares subject to special treatment under United
States federal income tax law, including, without limitation:
o banks, other financial institutions, "financial services
entities," insurance companies or mutual funds;
o broker-dealers, including dealers in securities or currencies, or
taxpayers that elect to apply a mark-to-market method of
accounting;
o shareholders who hold our ordinary shares as part of a hedge,
straddle, or other risk reduction, constructive sale or
conversion transaction;
o tax-exempt entities;
o persons who have a functional currency other than the U.S.
dollar;
o taxpayers that are subject to the alternative minimum tax
provisions of the Code;
o persons who have owned at any time or who own, directly,
indirectly, constructively or by attribution, ten percent or more
of the total voting power of our share capital;
o partnerships, other passthrough entities, or persons who hold our
ordinary shares in a partnership or other passthrough entity;
o certain expatriates or former long-term residents of the United
States; and
o shareholders who acquired our ordinary shares pursuant to the
exercise of an employee stock option or right or otherwise as
compensation.
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In addition, not discussed is the application of either: (i) foreign, state
or local tax laws on the ownership or disposition of our ordinary shares; or
(ii) United States federal and state estate and/or gift taxation.
As used in this section, the term "U.S. Holder" refers to any beneficial
owner of our ordinary shares that is any of the following:
o a citizen or resident of the United States for United States
federal income tax purposes;
o a corporation or partnership (or other entity treated as a
corporation or partnership under United States federal income tax
purposes) created or organized in the United States or under the
laws of the United States or of any State or the District of
Columbia;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its
source;
o a trust (i) if a court within the United States is able to
exercise primary supervision over the administration of the trust
and one or more United States persons have the authority to
control all of such trust's substantial decisions; or (ii) that
has in effect a valid election under applicable U.S. Treasury
regulations to be treated as a U.S. person.
Material aspects of U.S. federal income tax relevant to a holder of our
ordinary shares that is not a U.S. Holder (a "Non-U.S. Holder") are also
discussed below.
Each holder of our ordinary shares is advised to consult his or her own tax
advisor with respect to the specific tax consequences to him or her of
purchasing, holding or disposing of our ordinary shares, including the
applicability and effect of federal, state, local and foreign income and other
tax laws in his or her particular circumstances.
Dividend Distributions
Subject to the discussion below under the heading "Passive Foreign
Investment Company Status," to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax
principles, a distribution made with respect to our ordinary shares (including
the amount of any Israeli withholding tax thereon) will be includible for United
States federal income tax purposes in the income of a U.S. Holder as a taxable
dividend. Dividends that are received by U.S. Holders that are individuals,
estates or trusts will be taxed at the rate applicable to long-term capital
gains (a maximum rate of 15%), provided that such dividends meet the requirement
of "qualified dividend income" as defined by the Code. Dividends that fail to
meet such requirements, and dividends received by corporate U.S. Holders, are
taxed at ordinary income rates. No dividend received by a U.S. Holder will be a
qualified dividend (1) if the U.S. Holder held the ordinary share with respect
to which the dividend was paid for less than 61 days during the 121-day period
beginning on the date that is 60 days before the ex-dividend date with respect
to such dividend, excluding for this purpose, under the rules of Code section
246(c), any period during which the U.S. Holder has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such ordinary share (or substantially identical securities); or (2)
to the extent that the U.S. Holder is under an obligation (pursuant to a short
sale or otherwise) to make related payments with respect to positions in
property substantially similar or related to the ordinary share with respect to
which the dividend is paid. If we were to be a "passive foreign investment
company" (as such term is defined in the Code) for any year, dividends paid on
our ordinary shares in such year or in the following year would not be qualified
dividends. In addition, a non-corporate U.S. Holder will be able to take a
qualified dividend into account in determining its deductible investment
interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income
rates.
To the extent that such distribution exceeds our earnings and profits and
provided that we were not a passive foreign investment company, or PFIC, such
distribution will be treated as a non-taxable return of capital to the extent of
the U.S. Holder's adjusted basis in our ordinary shares and thereafter as
taxable capital gain. Dividends paid by us generally will not be eligible for
the dividends received deduction allowed to corporations under the Code.
Dividends paid in a currency other than the U.S. dollar will be includible in
income of a U.S. Holder in a U.S. dollar amount based on the spot rate of
exchange on the date the distribution is included in income, without reduction
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for any Israeli taxes withheld at source, regardless of whether the payment is
in fact converted into U.S. dollars on such date. A U.S. Holder who receives a
foreign currency distribution and converts the foreign currency into U.S.
dollars subsequent to receipt will have foreign exchange gain or loss, based on
any appreciation or depreciation in the value of the foreign currency against
the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Subject to certain conditions and limitations set forth in the Code, U.S.
Holders generally will be able to elect to claim a credit against their United
States federal income tax liability for any Israeli withholding tax deducted
from dividends received in respect of our ordinary shares. For purposes of
calculating the foreign tax credit, dividends paid on our ordinary shares will
be treated as income from sources outside the United States and generally will
constitute foreign source "passive income" for U.S. foreign tax purposes or, in
the case of a financial services entity, "financial services income" (and for
tax years beginning after December 31, 2006, as "general category income"). In
lieu of claiming a tax credit, U.S. Holders may instead claim a deduction for
foreign taxes withheld, subject to certain limitations.
The rules relating to the determination of the amount of foreign income
taxes that may be claimed as foreign tax credits are complex and U.S. Holders
should consult their tax advisors to determine whether and to what extent a
credit would be available.
Sale or Exchange
Subject to the discussion below under the heading "Passive Foreign
Investment Company Status," upon the sale, exchange or other disposition of our
ordinary shares, a U.S. Holder generally will recognize gain or loss for United
States federal income tax purposes in an amount equal to the difference between
the U.S. dollar value of the amount realized on the disposition of our ordinary
shares and the U.S. Holder's adjusted tax basis in our ordinary shares, which is
usually the U.S. dollar cost of the ordinary shares. Such gain or loss generally
will be long-term capital gain or loss if our ordinary shares have been held for
more than one year on the date of the disposition. The deductibility of a
capital loss recognized on the sale or exchange of ordinary shares is subject to
limitations. Any gain or loss generally will be treated as United States source
income or loss for United States foreign tax credit purposes. In addition, a
U.S. Holder who receives foreign currency upon the sale or exchange of our
ordinary shares and converts the foreign currency into U.S. dollars subsequent
to receipt will have foreign exchange gain or loss, based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be United States source ordinary income or loss.
Passive Foreign Investment Company Status
Generally a foreign corporation is treated as a PFIC for United States
federal income tax purposes if either:
o 75% or more of its gross income (including the pro rata gross
income of any company (U.S. or foreign) of which such corporation
is considered to own 25% or more of the ordinary shares by value)
for the taxable year is passive income; or
o 50% or more of the average value of its gross assets (including
the pro rata fair market value of the assets of any company in
which such corporation is considered to own 25% or more of the
ordinary shares by value) during the taxable year produce or are
held for the production of passive income.
As a result of the combination of our substantial holdings of cash, cash
equivalents and securities and the decline in the market price of our ordinary
shares from its historical highs, there is a risk that we could be classified as
a PFIC, for United States federal income tax purposes. Based upon our market
capitalization during 2004 and each year prior to 2001, we do not believe that
we were a PFIC for any such year and an independent valuation of our assets as
of the end of each quarter of 2001 and based upon our valuation of our assets
for 2002 and 2003, we do not believe that we were a PFIC for 2001, 2002 or 2003
despite the relatively low market price of our ordinary shares during much of
those years. We cannot assure you, however, that the Internal Revenue Service or
the courts would agree with our conclusion if they were to consider our
situation. There is no assurance that we will not become a PFIC in a subsequent
year.
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If we were deemed to be a PFIC for any taxable year during which a U.S.
Holder held our shares and such holder failed to make either a "QEF election" or
a "mark-to-market election" (as described below) for the first taxable year
during which we were a PFIC and the U.S. Holder held our shares:
o gain recognized (including gain deemed recognized if our ordinary
shares are used as security for a loan) by the U.S. Holder upon
the disposition of, as well as income recognized upon receiving
certain distributions in respect of, our ordinary shares would be
taxable as ordinary income;
o the U.S. Holder would be required to allocate such dividend
income and/or disposition gain ratably over such holder's entire
holding period for our ordinary shares; the U.S. Holder's income
for the current taxable year would include (as ordinary income)
amounts allocated to the current year, i.e., the year of the
dividend payment or disposition, and to any period prior to the
first day of the first taxable year for which we were a PFIC;
o the amount allocated to each year other than (i) the year of the
dividend payment or disposition and (ii) any year prior to our
becoming a PFIC, would be subject to tax at the highest
individual or corporate marginal tax rate, as applicable, in
effect for that year, and an interest charge would be imposed
with respect to the resulting tax liability;
o the U.S. Holder would be required to file an annual return on IRS
Form 8621 regarding distributions received in respect of, and
gain recognized on dispositions of, our ordinary shares; and
o any U.S. Holder who acquired our ordinary shares upon the death
of a U.S. Holder would not receive a step-up of the income tax
basis to fair market value for such shares. Instead, such U.S.
Holder would have a tax basis equal to the decedent's basis, if
lower than the fair market value.
Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable
year generally will cause the above-described consequences to apply for all
future years to U.S. Holders who held shares in the corporation at any time
during a year when the corporation was a PFIC and who made neither a QEF
election nor a mark-to-market election (as discussed below) with respect to such
shares with their tax return for the year that included the last day of the
corporation's first taxable year as a PFIC. This will be true even if the
corporation ceases to be a PFIC in later years. However, with respect to a PFIC
during the U.S. Holder's holding period that does not make any distributions or
deemed distributions, the above tax treatment would apply only to U.S. Holders
who realize gain on their disposition of shares in the PFIC.
Generally, if a U.S. Holder makes a valid QEF election with respect to our
ordinary shares:
o the U.S. Holder would be required for each taxable year for which
we are a PFIC to include in income such holder's pro-rata share
of our: (i) net ordinary earnings as ordinary income; and (ii)
net capital gain as long-term capital gain, in each case computed
under U.S. federal income tax principles, even if such earnings
or gains have not been distributed, unless the shareholder makes
an election to defer this tax liability and pays an interest
charge;
o the U.S. Holder would not be required under these rules to
include any amount in income for any taxable year during which we
do not have ordinary earnings or net capital gain; and
o the U.S. Holder would not be required under these rules to
include any amount in income for any taxable year for which we
are not a PFIC.
The QEF election is made on a shareholder-by-shareholder basis. Thus, any
U.S. Holder of our ordinary shares can make its own decision whether to make a
QEF election. A QEF election applies to all of our ordinary shares held or
subsequently acquired by an electing U.S. Holder and can be revoked only with
the consent of the IRS. A shareholder makes a QEF election by attaching a
completed IRS Form 8621, using the information provided in the PFIC annual
information statement, to a timely filed U.S. federal income tax return. In
order to permit our shareholders to make a QEF election, we must supply them
with certain information. We will supply U.S. Holders with the information
needed to report income and gain pursuant to the QEF election in the event that
we are classified as a PFIC for any taxable year and will supply such additional
information as the IRS may require in order to enable U.S. Holders to make the
QEF election. It should be noted that U.S. Holders may not make a QEF election
with
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respect to warrants or rights to acquire our ordinary shares, and that certain
classes of investors (for example, consolidated groups and grantor trusts) are
subject to special rules regarding the QEF election.
Under certain circumstances, a U.S. Holder may also obtain treatment
similar to that afforded a shareholder who has made a timely QEF election by
making an election in a year subsequent to the first year during the U.S.
Holder's holding period that we are classified as a PFIC to treat such holder's
interest in our company as subject to a deemed sale on the first day of the
first QEF year for an amount equal to its fair market value and recognizing
gain, but not loss, on such deemed sale in accordance with the general PFIC
rules, including the interest charge provisions, described above and thereafter
treating such interest in our company as an interest in a QEF. In addition,
under certain circumstances U.S. Holders may make a retroactive QEF election,
but may be required to file a protective statement currently to preserve their
ability to make a retroactive QEF election. U.S. Holders should consult their
tax advisors regarding the advisability of filing a protective statement.
Alternatively, a U.S. Holder of shares in a PFIC can elect to mark the
shares to market annually, recognizing as ordinary income or loss each year the
shares are held, as well as on the disposition of the shares, an amount equal to
the difference between the shareholder's adjusted tax basis in the PFIC stock
and its fair market value. Ordinary loss is recognized only to the extent of net
mark-to-market gains previously included in income by the U.S. Holder under the
election in prior taxable years. As with the QEF election, a U.S. Holder who
makes a mark-to-market election would not be subject to the deemed ratable
allocations of gain, the interest charge, and the denial of basis step-up at
death (described above). A mark-to-market election applies for so long as our
ordinary shares are "marketable," and is irrevocable without obtaining the
consent of the IRS and would continue to apply even in years that we were no
longer a PFIC. However, under Treasury regulations, a U.S. Holder who makes a
mark-to-market election would not include mark-to-market gain or loss for any
taxable year in which we are not a PFIC.
U.S. Holders of our ordinary shares are urged to consult their tax advisors
about the PFIC rules, including the advisability, procedure and timing of making
a QEF election, in connection with their holding of our ordinary shares,
including warrants or rights to acquire our ordinary shares.
Tax Consequences for Non-U.S. Holders of Our Ordinary Shares
Except as described in "Information Reporting and Backup Withholding"
below, a Non-U.S. Holder of our ordinary shares will not be subject to U.S.
federal income or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, our ordinary shares, unless:
o such item is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States and,
in the case of a resident of a country which has a treaty with
the United States, such item is attributable to a permanent
establishment or, in the case of an individual, a fixed place of
business, in the United States,
o the Non-U.S. Holder is an individual who holds our ordinary
shares as a capital asset and is present in the United States for
183 days or more in the taxable year of the disposition and does
not qualify for an exemption, or
o the Non-U.S. Holder is subject to tax pursuant to the provisions
of United States tax law applicable to U.S. expatriates.
Information Reporting and Backup Withholding
U.S. Holders generally are subject to information reporting requirements
with respect to dividends paid in the United States on our ordinary shares. In
addition, U.S. holders of our ordinary shares are subject to backup withholding
(currently at a rate of 28%) upon any dividends paid in the United States on our
ordinary shares, unless they:
o furnish a correct taxpayer identification number and certify that
they are not subject to backup withholding on an IRS Form W-9; or
o provide proof that they are otherwise exempt from backup
withholding.
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U.S. Holders are subject to information reporting on proceeds paid from the
sale, exchange, redemption or other disposition of our ordinary shares and also
to backup withholding (currently at a rate of 28%) on such proceeds unless the
U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or
back-up withholding with respect to dividends paid on, or upon the disposition
of, our ordinary shares, provided that such Non-U.S. Holder provides a taxpayer
identification number, certifies to its foreign status, or otherwise establishes
an exemption.
Backup withholding is not an additional tax. The amount of any backup
withholding is allowable as a credit against the U.S. or Non-U.S. Holder's
United States federal income tax liability, provided that such holder provides
the requisite information to the Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, applicable to foreign private issuers and fulfil the
obligation with respect to such requirements by filing reports with the
Securities and Exchange Commission. As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and "short-swing" profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements with the
Securities and Exchange Commission as frequently or as promptly as United States
companies whose securities are registered under the Exchange Act. You may read
and copy any document we file with the Securities and Exchange Commission
without charge at the Securities and Exchange Commission's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may
be obtained by mail from the Public Reference Branch of the Securities and
Exchange Commission at such address, at prescribed rates. Please call the
Securities and Exchange Commission at l-800-SEC-0330 for further information on
the public reference room. A copy of each report submitted in accordance with
applicable United States law is also available for public review at our
principal executive offices.
In addition, the Securities and Exchange Commission maintains an Internet
website at http://www.sec.gov that contains reports, proxy statements,
information statements and other material that are filed through the Securities
and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval, or
EDGAR, system. We began filing our reports through the EDGAR system in November
2002.
The Israeli Securities Authority maintains an Internet website at
http://www.isa.gov.il that contains reports proxy statements, information
statements and other material that are filed through the electronic disclosure
system (MAGNA). We began filing our reports through the MAGNA system in August
2003.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risk associated with changes in foreign
currency exchange rates. To mitigate these risks, we use derivative financial
instruments. The majority of our revenues and expenses are generated in U.S.
dollars. A portion of our expenses, however, are denominated in NIS. During
2004, in order to protect ourselves against the volatility of future cash flows
caused by changes in foreign exchange rates, we used currency forward contracts
and put and call options. We hedge the majority of our forecasted expenses
denominated in NIS. During
74
the year ended December 31, 2004 we recognized gains of $407,000 as a result of
these derivatives. All amounts have been included in salary expenses in the
statement of operations. Our hedging program reduces, but does not eliminate,
the impact of foreign currency rate movements. We have, based on our past
experience, concluded that there is no material foreign exchange rate exposure.
Our investment portfolio includes held to maturity marketable securities.
The contractual cash flows of these investments are either guaranteed by the
U.S. government or an agency of the U.S. government or were issued by highly
rated corporations. Since we generally do not intend to sell these securities
before their maturity date, we do not attempt to reduce our exposure to changes
in interest rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
75
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A. to D. Not applicable.
E. USE OF PROCEEDS
The effective date of the registration statement (No. 333-11572) for our
initial public offering of our ordinary shares, par value NIS 0.01 per share,
was March 22, 2000. The offering commenced on March 23, 2000, and terminated
after the sale of all the securities registered. The managing underwriter of the
offering was CIBC World Markets. We registered 5,750,000 ordinary shares in the
offering, including shares issued pursuant to the exercise of the underwriter's
over-allotment option. We sold all of the 5,750,000 ordinary shares at an
aggregate offering price of $115 million ($20.00 per share). Under the terms of
the offering, we incurred underwriting discounts of approximately $8 million. We
also incurred other expenses of approximately $3.2 million in connection with
the offering. None of the expenses consisted of amounts paid directly or
indirectly to any of our directors, officers, general partners or their
associates, any persons owning 10% or more of any class of our equity
securities, or any of our affiliates. The net proceeds that we received as a
result of the offering were approximately $104 million. None of the net proceeds
was paid, directly or indirectly, to any of our directors or officers, or their
associates, any persons owning 10% or more of any class of our equity
securities, or any of our affiliates. From March 23, 2000 to December 31, 2004
the net offering proceeds were used to finance the continued growth including
acquisitions of our business and for general corporate purposes.
ITEM 15. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31,
2004, have concluded that, as of such date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure and
is recorded, processed, summarized and reported within the periods specified by
the SEC's rules and forms.
There were no changes in our internal controls over financial reporting
identified with the evaluation thereof that occurred during the period covered
by this annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Professor Amit, a member of our
audit committee, is qualified as an "audit committee financial expert" as
defined in the applicable regulations.
ITEM 16B. CODE OF ETHICS
In 2004 we adopted a Code of Conduct that applies to all of our employees
including executives, senior officers and members of the board of directors. A
copy of the Code of Conduct is filed as an exhibit to this annual report. In
2003 we also adopted a Code of Ethics that applies to our CEO, CFO and all other
senior officers. This Code of Ethics was filed as an exhibit to our 2003 Annual
Report.
76
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to us for audit, audit
related and non-audit services provided by Kost, Forer, Gabbay & Kasierer to us
for the years ended December 31, 2003 and December 31, 2004:
Fee Category 2004 Fees 2003 Fees
------------ --------- ---------
Audit Fees ............................................. $172,500 $ 97,537
Audit-Related Fees ..................................... $ 71,500 $ 55,850
Tax Fees ............................................... $105,200 $ 24,424
-------- --------
Total Fees ............................................. $349,200 $177,811
Audit Fees: Consists of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements and services that are
normally provided by Kost, Forer, Gabbay & Kasierer in connection with statutory
and regulatory filings or engagements.
Audit Related Fees: Consists of the aggregate fees billed for assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under "Audit Fees." For
2004, these services primarily consist of due diligence services related to the
interWAVE acquisition. For 2003 these services primarily consist of advice and
consultation for relocation related issues and due diligence services related to
the InnoWave acquisition.
Tax Fees: Consists of the aggregate fees billed for professional services
rendered for tax compliance, tax advice and tax planning. These services include
assistance regarding international and Israeli tax services.
All Other Fees: Consists of the aggregate fees billed for products and
services other than the services reported above. We did not have such services
in 2004 and 2003.
Our Audit Committee has adopted a policy for pre-approval of audit and
non-audit services. Under the policy, the Audit Committee Proposed services
either may be pre-approved without consideration of specific case-by-case
services by the Audit Committee ("general pre-approval") or they may require the
specific pre-approval of the Audit Committee ("specific pre-approval"). The
Audit Committee employs a combination of these two approaches. Unless a type of
service has received general pre-approval, it will require specific pre-approval
by the Audit Committee if it is to be provided by the independent auditor. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers a different period and states otherwise.
The Audit Committee reviews annually and pre-approves the services that may be
provided by the independent auditor without obtaining specific pre-approval from
the Audit Committee. The Audit Committee adds to or subtracts from the list of
general pre-approved services from time to time, based on subsequent
determinations. Pre-approval fee levels or budgeted amounts for all services to
be provided by the independent auditor are to be established annually by the
Audit Committee. Any proposed services exceeding these levels or amounts require
specific pre-approval by the Audit Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASES
Not applicable.
77
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
The financial statements required by this item are found at the end of this
annual report, beginning on page F-1.
ITEM 19. EXHIBITS
The exhibits filed with or incorporated into this annual report are listed
on the index of exhibits below.
Exhibit No. Description
----------- -----------
1.1 Memorandum of Association (English translation accompanied by Hebrew original) (1)
1.2 Articles of Association (1)
1.3 Certificate of Name Change (English translation accompanied by Hebrew original) (2)
2.1 Form of Ordinary Share Certificate (3)
2.2 Form of Warrant (1)
4.1 Lease Agreement, dated April 16, 2000, between the Registrant and Bet Dror Ltd. And
Ziviel Investments Ltd. (English summary accompanied by Hebrew original) (1)
4.2 Form of Indemnity Agreement for Directors and Executive Officers
4.3 Addendum, dated September 2000, to Lease Agreement between the Registrant and Bet Dror
Ltd. and Ziviel Investments Ltd. (English summary accompanied by Hebrew original) (4)
4.4 Sublease Agreement, dated July 5, 2001, between Floware Wireless Systems Ltd. and
Ceragon Networks Ltd. (English summary accompanied by Hebrew original) (4)
4.5 Amalgamation Agreement, by and among interWAVE Communications, Ltd, Alvarion
Mobile, Inc. and Alvarion Ltd., dated as of 27 July, 2004 (1)*
8 Subsidiaries of Alvarion Ltd.*
10.1 Consent of Kost, Forer, Gabay & Kasierer *
11 Code of Conduct*
12.1 Certification of Chief Executive Officer required by Rules 13a-14(a) and Rule 15d-14(a)
under the Securities Exchange Act of 1934, as amended *
12.2 Certification of Chief Financial Officer required by Rules 13a-14(a) and Rule 15d-14(a)
under the Securities Exchange Act of 1934, as amended *
13.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
13.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
------------
* Filed herewith
(1) Incorporated herein by reference to the Registration Statement on Form F-1
(File No. 333-11572).
(2) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-13786)
(3) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-14142)
(4) Incorporated by reference to the Annual Report on Form 20-F for the fiscal
period ending December 31, 2001
78
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
ALVARION LTD.
/s/ Zvi Slonimsky
-------------------------
By: Zvi Slonimsky
Chief Executive Officer
Date: 20 June, 2005
79
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 Memorandum of Association (English translation accompanied by Hebrew original) (1)
1.2 Articles of Association (1)
1.3 Certificate of Name Change (English translation accompanied by Hebrew original) (2)
2.1 Form of Ordinary Share Certificate (3)
2.2 Form of Warrant (1)
4.1 Lease Agreement, dated April 16, 2000, between the Registrant and Bet Dror Ltd. And
Ziviel Investments Ltd. (English summary accompanied by Hebrew original) (1)
4.2 Form of Indemnity Agreement for Directors and Executive Officers
4.3 Addendum, dated September 2000, to Lease Agreement between the Registrant and Bet Dror
Ltd. and Ziviel Investments Ltd. (English summary accompanied by Hebrew original) (4)
4.4 Sublease Agreement, dated July 5, 2001, between Floware Wireless Systems Ltd. and
Ceragon Networks Ltd. (English summary accompanied by Hebrew original) (4)
4.5 Amalgamation Agreement, by and among interWAVE Communications, Ltd, Alvarion
Mobile, Inc. and Alvarion Ltd., dated as of 27 July, 2004 (1)*
8 Subsidiaries of Alvarion Ltd.*
10.1 Consent of Kost, Forer, Gabay & Kasierer *
11 Code of Conduct*
12.1 Certification of Chief Executive Officer required by Rules 13a-14(a) and Rule 15d-14(a)
under the Securities Exchange Act of 1934, as amended *
12.2 Certification of Chief Financial Officer required by Rules 13a-14(a) and Rule 15d-14(a)
under the Securities Exchange Act of 1934, as amended *
13.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
13.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
------------
* Filed herewith
(1) Incorporated herein by reference to the Registration Statement on Form F-1
(File No. 333-11572).
(2) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-13786)
(3) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-14142)
(4) Incorporated by reference to the Annual Report on Form 20-F for the fiscal
period ending December 31, 2001
80
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
IN U.S. DOLLARS
INDEX
Page
--------
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3-F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7-F-8
Notes to Consolidated Financial Statements F-9-F-37
- - - - - - -
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ALVARION LTD.
We have audited the accompanying consolidated balance sheets of Alvarion
Ltd. ("the Company") and its subsidiaries as of December 31, 2003 and 2004, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2004. 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 audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purposes of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and
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 at December 31, 2003 and 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S
generally accepted accounting principles.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
February 7, 2005 A Member of Ernst & Young Global
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
---------------------
2003 2004
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,323 $ 18,710
Short-term bank deposits 30,036 9,325
Marketable securities (Note 3) 27,060 31,430
Trade receivables (net of allowance for doubtful accounts
of $712 and $960 as of December 31, 2003 and 2004,
respectively) (Note 15) 21,199 28,148
Other accounts receivable and prepaid expenses (Note 4) 4,499 6,492
Inventories (Note 5) 36,981 41,328
-------- --------
Total current assets 142,098 135,433
-------- --------
LONG-TERM INVESTMENTS:
Long-term bank deposits 20,687 17,167
Marketable securities (Note 3) 53,510 56,050
Long-term receivables 834 456
Severance pay fund 5,493 7,025
-------- --------
Total long-term investments 80,524 80,698
-------- --------
PROPERTY AND EQUIPMENT, NET (Note 6) 11,939 11,925
-------- --------
INTANGIBLE ASSETS, NET (Note 7) 12,165 15,229
-------- --------
GOODWILL 38,231 85,250
-------- --------
Total assets $284,957 $328,535
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands except share data
December 31,
-----------------------
2003 2004
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 9) $ 1,749 $ 1,742
Trade payables 23,780 26,481
Other accounts payable and accrued expenses (Note 8) 26,210 53,869
---------- ----------
Total current liabilities 51,739 82,092
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt (Note 8) 5,248 3,505
Accrued severance pay 7,768 10,126
---------- ----------
Total long-term liabilities 13,016 13,631
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY (Note 12):
Share capital -
Ordinary shares of NIS 0.01 par value:
Authorized: 85,080,000 and 85,080,000 shares as of
December 31, 2003 and 2004; Issued: 57,618,340 and
61,750,002 shares as of December 31, 2003 and 2004,
respectively; Outstanding: 53,821,567 and 57,953,229 shares
as of December 31, 2003 and 2004, respectively 148 157
Additional paid-in capital 376,161 388,261
Treasury shares at cost 3,796,773 shares as of December 31, 2003
and 2004 (7,876) (7,876)
Deferred stock compensation (160) (736)
Accumulated other comprehensive income -- 226
Accumulated deficit (148,071) (147,220)
---------- ----------
Total shareholders' equity 220,202 232,812
---------- ----------
Total liabilities and shareholders' equity $ 284,957 $ 328,535
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Year ended December 31,
----------------------------------
2002 2003 2004
--------- --------- --------
Sales (Notes 14 and 15) $ 88,849 $ 127,208 $201,507
Cost of sales 55,120 68,535 102,329
Write-off of excess inventory and provision for inventory
purchase commitments (Note 2g) 250 6,562 11,412
--------- --------- --------
Gross profit 33,479 52,111 87,766
--------- --------- --------
Operating costs and expenses:
Research and development, net (Note 16a) 24,077 23,505 27,816
Selling and marketing 26,570 32,904 39,038
General and administrative 6,018 6,323 9,681
Merger and acquisition related expenses -- 2,201 369
Amortization of intangible assets 2,400 2,606 2,779
Amortization of deferred stock compensation (Note 16b) 580 511 60
In-process research and development write-off -- -- 10,993
Restructuring 1,102 -- --
--------- --------- --------
Total operating expenses 60,747 68,050 90,736
--------- --------- --------
Operating loss (27,268) (15,939) (2,970)
Financial income, net (Note 16c) 6,587 4,127 3,821
--------- --------- --------
Net income (loss) $ (20,681) $ (11,812) $ 851
========= ========= ========
Net earnings (loss) per share (Note 16d)
Basic $ (0.38) $ (0.23) $ 0.02
========= ========= ========
Diluted $ (0.38) $ (0.23) $ 0.01
========= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ALVARION LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Other
Deferred accumulated Total Total
Ordinary shares Additional stock compre- compre- share-
------------------- paid-in Treasury compen- hensive Accumulated hensive holders'
Number Amount capital shares sation income deficit income equity
---------- ------ ---------- -------- -------- ----------- ----------- ------- ----------
Balance at January 1, 2002 54,649,268 $141 $370,853 $ -- $ (1,165) $ -- $ (115,578) $ 254,251
Exercise of employee stock options 361,934 1 222 -- -- -- -- 223
Purchase of Treasury shares (3,095,573) -- -- (6,543) -- -- -- (6,543)
Cancellation of deferred stock
compensation due to termination
of employment -- -- (97) -- 97 -- -- --
Amortization of deferred stock
compensation -- -- -- -- 580 -- -- 580
Net loss -- -- -- -- -- -- (20,681) (20,681)
---------- ---- -------- -------- -------- ---- ---------- ---------
Balance at December 31, 2002 51,915,629 142 370,978 (6,543) (488) -- (136,259) 227,830
Exercise of employee stock options 2,607,138 6 4,922 -- -- -- -- 4,928
Purchase of Treasury shares (701,200) -- -- (1,333) -- -- -- (1,333)
Deferred stock compensation
related to options granted
to a director -- -- 183 -- (183) -- -- --
Amortization of deferred stock
compensation related to options
granted to a director -- -- -- -- 23 -- -- 23
Issuance of warrant pursuant to
acquisition of InnoWave -- -- 78 -- -- -- -- 78
Amortization of deferred stock
compensation -- -- -- -- 488 -- -- 488
Net loss -- -- -- -- -- -- (11,812) (11,812)
---------- ---- -------- -------- -------- ---- ---------- ---------
Balance at December 31, 2003 53,821,567 148 376,161 (7,876) (160) -- (148,071) 220,202
Exercise of warrants and employee
stock options 4,131,662 9 9,813 -- -- -- -- 9,822
Deferred stock compensation
related to options granted
to employee -- -- 293 -- (293) -- -- --
Assumption of options granted to
former interWAVE employees -- -- 1,994 -- (343) -- -- 1,651
Amortization of deferred stock
compensation related to options
granted to a director -- -- -- -- 60 -- -- 60
Comprehensive income:
Unrealized gains on foreign
currency cash flow hedges -- -- -- -- -- 226 -- 226 226
Comprehensive income:
Net income -- -- -- -- -- -- $ 851 $ 851 851
---------- ---- -------- -------- -------- ---- ---------- ------ ---------
$1,077
Total comprehensive income ======
Balance at December 31, 2004 57,953,229 $157 $388,261 $ (7,876) $ (736) $226 $ (147,220) $ 232,812
========== ==== ======== ======== ======== ==== ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
----------------------------------
2002 2003 2004
--------- -------- ---------
Cash flows from operating activities:
Net income (loss) $ (20,681) $(11,812) $ 851
Adjustments required to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 3,575 4,128 4,762
Amortization of deferred stock compensation 580 511 60
Interest, amortization of premium and accretion of discounts on
held-to-maturity marketable securities, bank deposits and other
long-term liabilities 261 148 633
In-process research and development write-off -- -- 10,993
Amortization of other intangible assets 2,400 2,606 2,779
Decrease (increase) in trade receivables 5,329 (5,033) (3,697)
Decrease in long term receivables and discount accretion related
to long term receivables -- 590 1,131
Decrease (increase) in other accounts receivable and prepaid expenses 4,401 915 (486)
Decrease (increase) in inventories 3,562 (934) 24
Increase (decrease) in trade payables (6,976) 6,524 (5,952)
Increase (decrease) in other accounts payable and accrued expenses (1,962) 3,280 11,066
Accrued severance pay, net (14) 561 826
Others 14 95 --
--------- -------- ---------
Net cash provided by (used in) operating activities (9,511) 1,579 22,990
--------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment (4,226) (3,105) (3,442)
Proceeds from maturity of bank deposits 74,568 8,025 132,767
Investment in bank deposits (52,821) (14,925) (109,097)
Investment in held-to-maturity marketable securities (135,350) (55,232) (63,398)
Proceeds from maturity of held-to-maturity marketable securities 114,854 69,861 56,416
Proceeds from sale of held-to-maturity marketable securities 9,478 1,137 --
Cash and cash equivalents used in the merger of Floware,
the acquisition of interWAVE (c) and InnoWave (d) (118) (9,334) (47,907)
--------- -------- ---------
Net cash provided by (used in) investing activities 6,385 (3,573) (34,661)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from exercise of warrants and employee stock options 223 4,928 9,822
Repayment of current maturities of long-term debt -- -- (1,764)
Purchase of Treasury shares (6,543) (1,333) --
Proceeds from long-term debt -- 6,900 --
Settlement of an OCS long-term liability -- (8,534) --
--------- -------- ---------
Net cash provided by (used in) financing activities (6,320) 1,961 8,058
--------- -------- ---------
Decrease in cash and cash equivalents (9,446) (33) (3,613)
Cash and cash equivalents at the beginning of the year 31,802 22,356 22,323
--------- -------- ---------
Cash and cash equivalents at the end of the year $ 22,356 $ 22,323 $ 18,710
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
-------------------------------------
2002 2003 2004
--------- ------ ---------
(a) Supplemental disclosure of cash flows activities:
Cash paid during the year for interest $ 41 $ 334 $ 120
========= ====== =========
(b) Non-cash transactions:
Purchase of property and equipment against trade payables $ 481 $ 128 $ --
========= ====== =========
(c) Cash and cash equivalents from the merger with
interWAVE (see also Note 1d):
Net fair value of the assets acquired and liabilities assumed
at the merger date was as follows:
Working capital, net (excluding cash and cash equivalents) $ (15,236)
Property and equipment 1,434
Long term receivables 199
In-process research and development 10,993
Current technology 3,450
Customer relationships 1,233
Tradename and trademark 1,160
Goodwill 47,019
---------
50,252
Deferred stock compensation (1,651)
Accrued expenses related to the acquisition (694)
---------
$ 47,907
=========
(d) Cash and cash equivalents from the acquisition of
InnoWave (see also Note 1c):
Net fair value of the assets acquired and liabilities assumed at the
acquisition date was as follows:
Working capital, net $3,137
Long-term receivables 1,512
Property and equipment 2,200
Technology and customer relations 1,572
Goodwill 991
------
9,412
Issuance of warrant (78)
------
$9,334
======
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
NOTE 1: - GENERAL
a. Alvarion Ltd. together with its worldwide subsidiaries ("the Company")
is a provider of wireless broadband connectivity solutions and
specialized cellular networks. The Company's solutions are used by
telecom carriers and service providers worldwide and for private
networks. The Company's products provide broadband data and voice
services for subscribers in the "last mile" of connectivity, for
feeding cellular networks, cellular network extensions and compact
specialty networks. The Company's product offerings provide a range of
integrated wireless broadband solutions, addressing different markets
and frequency bands designed to address the various business models of
carriers, service providers and private network operators. The
Company's products are usually used in a point-to-multipoint
architecture and address a wide scope of end-user profiles, from
residential and small office, home office markets, through small and
medium enterprises and multi-tenant units/multi-dwelling units. The
Company's products also serve a variety of end-users and applications
including residential cellular users, governmental agencies, homeland
security, disaster relief agencies and travel/leisure companies. The
Company's products operate in licensed and license-free bands ranging
from 450 MHz to 28 GHz frequency bands and comply with various
industry standards.
As for geographic markets and major customers, see Note 14.
b. Alvarion Ltd. has wholly-owned active subsidiaries: in the United
States, United Kingdom, France, Romania, Brazil, Hong-Kong, Japan,
Mexico, Turkey, Poland, Israel, Uruguay, China, Ireland and
Philippines primarily engaged in marketing, pre-sales, sales,
manufacturing and development activities.
c. Acquisition of InnoWave Wireless Systems:
On April 1, 2003, the Company entered into an asset purchase agreement
pursuant to the terms of which the Company acquired certain assets and
assumed certain liabilities of InnoWave Wireless Systems Ltd.
("InnoWave") for an aggregate purchase price of $9,428. The purchase
price consists of a cash payment of $9,100, fair value of $78 related
to a warrant issued to the selling company ("ECI") to purchase 200,000
Ordinary shares of the Company and $250 acquisition related costs.
InnoWave was a provider of fixed wireless wideband voice and data
point-to-multipoint solutions.
The acquisition of InnoWave strengthens and enlarges the Company's
diversified customer base and distributions channels and enables the
Company to offer its customers a comprehensive range of integrated
wireless broadband access products and platforms.
The acquisition has been accounted for using the purchase method of
accounting as determined in SFAS 141: Business combination ("SFAS
No.141") and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on their estimated
fair values at the date of acquisition.
F-9
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1: - GENERAL (Continued)
Based upon a valuation of tangible and intangible assets acquired, the
Company has allocated the total cost of the acquisition, as follows:
As of April 1,
2003
--------------
Current assets $ 13,411
Property and equipment 2,200
Long-term receivables 1,512
Intangible assets:
Technology 1,072
Customer relations 500
Goodwill 991
---------
Total assets acquired 19,686
---------
Liabilities assumed:
Current liabilities (10,258)
---------
Total liabilities assumed (10,258)
---------
Net assets acquired $ 9,428
=========
The amount of the excess cost attributable to current technology of two
products -- the MGW and eMGW is $1,072 and was determined using the Income
Approach on the basis of the present value of cash flows attributable to
the current technology over expected future life.
The value assigned to the customer relations amounted to $500. The
Company's customer relations have been valued using the Income Approach.
The valuation of the customer relations derives mostly from long standing
relationships with customers with no contracts.
The excess of the cost of $991 over the net amounts assigned to assets
acquired and liabilities assumed is recognized as goodwill. An acquired
workforce that does not meet the separability criteria has been included in
the amount recognized as goodwill.
The amounts allocated to intangible assets other than goodwill are
amortized on a straight-line basis over a weighted average amortization
period of 6.8 years, ranging between three and a half to eight years (see
also Note 2k).
The operations of InnoWave are included in the consolidated statements
since April 1, 2003.
The unaudited pro forma information below assumes that the acquisition had
been consummated on January 1, 2002 and January 1, 2003 and includes the
effect of amortization of intangible assets from that date. This data is
presented for information purposes only and is not necessarily
F-10
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
NOTE 1: - GENERAL (Continued)
indicative of the results of future operations or the results that would
have been achieved had the acquisition taken place on those dates. The pro
forma information is as follows:
Year ended December 31,
-----------------------
2002 2003
--------- ---------
Unaudited
-----------------------
Net revenues $ 134,633 $ 130,675
========= =========
Net loss $ (99,682) $ (13,734)
========= =========
Basic and diluted net loss per share $ (1.85) $ (0.26)
========= =========
d. Acquisition of interWAVE Communications International, Ltd.:
On December 9, 2004, the Company entered into an amalgamation agreement
with interWAVE Communications International, Ltd. ("interWAVE") a publicly
traded company pursuant to the terms of which the Company acquired
interWave for an aggregate purchase price of $50,783. The purchase price
consists of a cash payment of $47,688, fair value of $1,651 related to
320,826 options granted to InterWAVE's employees in exchange for their
previously held vested options and $1,444 acquisition related costs.
interWAVE was a provider of compact mobile network equipment and services,
primarily aimed at low density markets in developing regions, as well as
specialty vertical applications.
The acquisition of interWAVE provides a complementary voice and data
solution for both fixed and mobile operators in developing regions of the
world, enlarges and strengthens the Company's diversified customer base and
sales channels, and increases the Company's technical expertise in design
and deployment of mobile systems.
The acquisition has been accounted for using the purchase method of
accounting as determined in SFAS No.141. Accordingly, the purchase price
has been allocated to the assets acquired and the liabilities assumed based
on the estimated fair value at the date of acquisition.
The results of operations have been included in the consolidated financial
statements since December 9, 2004.
The allocation period was closed in March 2005, when the Company determined
that it is no longer waiting for information, which is known to be
available or obtainable in order to properly identify and measure the fair
value of the assets acquired and the liabilities assumed.
F-11
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1: - GENERAL (Continued)
Based upon a valuation of the tangible and intangible assets acquired and
assumed liabilities, the Company has allocated the total cost of the
acquisition, as follows:
As of
December 9,
2004
------------
Current assets $ 9,924
Property and equipment 1,434
Other non current assets 264
Intangible assets:
Goodwill 47,019
In-process research and development 10,993
Current technology 3,450
Customer relations 1,233
Tradename and trademark 1,160
---------
Total assets acquired 75,477
---------
Liabilities assumed:
Current liabilities (24,694)
---------
Net assets acquired $ 50,783
=========
The allocation of the intangibles assets was determined based on appraisals
performed by an independent third party using several valuation approaches.
The amount allocated to in-process research and development ("IPR&D") of
the CDMA (Code Division Multiple Access) and a certain GSM technology was
determined using the Income Approach. These technologies were considered to
have no alternative future use other than the technological indications for
which they were in development and no technological feasibility had been
established. Accordingly, this amount was expensed in the consolidated
statement of operations, upon consummation of the acquisition in accordance
with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method" ("FIN 4").
The amount of the excess cost attributable to current technology relates to
GSM technology, other than the technology that was identified as IPR&D, was
determined using the Income Approach on the basis of the present value of
cash flows attributable to the current GSM technology and is amortized on a
straight-line basis over expected future life of seven years. A seven year
period was estimated based upon duration of the cash flow associated with
the existing technology and managements estimates of its useful life.
F-12
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1: - GENERAL (Continued)
The value assigned to the customer relations was determined using the
Income Approach. This valuation is based upon backlog at the date of
acquisition, historical revenues by customer and customer renewal rates,
and is amortized on a straight-line basis over two years. A two-year period
was estimated based upon a 50% customer survival factor.
The value of tradenames and trademarks was based upon cost to generate.
This cost was estimated based upon the historical advertising and promotion
spending over the last two years, pertaining to the GSM product line and is
amortized on a straight-line basis over two years based upon the expected
transition time from the legacy hardware to the next generation hardware.
The excess of the cost of $47,019 over the net of the amounts assigned to
assets acquired and liabilities assumed is recognized as goodwill. An
acquired workforce of $3,249, which did not meet the separability criteria
has been included in the amount assigned to goodwill.
The unaudited pro forma information below assumes that the acquisition had
been consummated on January 1, 2003 and January 1, 2004, includes the
effect of amortization of intangible assets and does not include the IPR&D
write off from that date. This data is presented for information purposes
only and is not necessarily indicative of the results of future operations
or the results that would have been achieved had the acquisition taken
place on those dates. The pro forma information is as follows:
Year ended December 31,
----------------------
2003 2004
--------- --------
Unaudited
---------------------
Net revenues $ 163,435 $233,921
========= ========
Net loss $ (26,495) $ (4,108)
========= ========
Net loss per share $ (0.51) $ (0.07)
========= ========
e. Concentration of other risks
During the years ended December 31, 2003 and 2004 one of the Company's
customers, a large operator in Latin America (the "Operator") accounted for
approximately 14% and 31% of the Company's annual revenues (see Note 14b).
A loss of the Operator as the Company's customer or a significant reduction
of the amount of products ordered by the Operator and the Company's
inability to obtain a satisfactory replacement in a timely manner may
adversely affect the Company's sales and the results of operations.
F-13
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with 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. Financial statements in U.S. dollars ("dollars"):
A majority of the Company's revenues are generated in dollars. In
addition, a substantial portion of the Company's costs are denominated
and determined in dollars. The Company's management believes that the
dollar is the primary currency in the economic environment in which
the Company operates. Thus, the functional and reporting currency of
the Company is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into dollars in accordance with Statement of the
Financial Accounting Standard No. 52 "Foreign Currency Translation".
All transaction gains and losses from the remeasurement of monetary
balance sheet items are reflected in the statement of operations as
appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of Alvarion
Ltd. and its wholly-owned subsidiaries. Intercompany transactions and
balances, including profits from intercompany sales not yet realized
outside the Company, have been eliminated in consolidation.
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 acquired.
e. Short-term and long-term bank deposits:
Bank deposits with maturities of more than three months and up to one
year are included in short-term bank deposits. Bank deposits with
maturities of one year or more are included in long-term bank
deposits. As of December 31, 2003 and 2004, most of the bank deposits
are in U.S. dollars and bear interest at a weighted average interest
rate of 4.06% and 4.13% respectively. The deposits are presented at
their cost, including accrued interest.
f. Marketable securities:
The Company accounts for its investments in marketable securities
using Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of its
investments in debt securities at the time of purchase and reevaluates
such determinations at each balance sheet date. Marketable 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.
F-14
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the years ended December 31, 2003 and 2004, all securities covered by
SFAS No. 115 were designated by the Company's management as
held-to-maturity.
The amortized cost of held-to-maturity securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and interest are included in the statements of operations as
financial income or expenses, as appropriate. Realized gains and losses on
sales of investments, as determined on a specific identification basis, are
included in the statements of operations.
g. Inventories:
Inventories are stated at the lower of cost or market value. Cost is
determined as follows:
Raw materials and components -- using the "weighted moving average cost"
method.
Work in progress and finished products is based on the cost of raw
materials and components used and the cost of production as follows:
Labor and overhead calculated on a periodic average basis, which
approximates actual cost including direct and indirect manufacturing costs
and related overhead.
Inventory write offs have been provided to cover risks arising from dead
and slow moving items, technological obsolescence and excess inventories
according to revenue forecasts.
During 2002, 2003 and 2004, the Company recorded inventories write-offs and
provisions for inventory purchase commitments in a total amount of $250,
$5,255 and $10,908, respectively and an additional $0, $1,307 and $504,
respectively, related to the Company's commitments to purchase inventories
no longer required.
The purchase commitment liability is related to on-order inventory that is
in excess of the Company's future demand forecasts, amounted to
approximately $4,390 and $4,894 as of December 31, 2003 and 2004,
respectively.
During 2003 and 2004, approximately $6,133 and $5,595, respectively of
inventory previously written-off had been utilized.
h. Long-term trade receivables
Long-term receivables from InnoWave's acquisition carrying extended payment
terms, were recorded at estimated present values determined based on
appropriate interest rates and reported at their net amount in the
accompanying financial statements. Imputed interest is recognized, using
the effective interest method as a component of interest income in the
accompanying statements of operations.
F-15
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Property and equipment, net:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets, at the following annual rates:
%
-------------------------------------
Office furniture and equipment 7 - 15
Computers and manufacturing equipment 15 - 33
Motor vehicles 15
Leasehold improvements Over the shorter of the related
lease period or the life of the asset
j. Impairment of long-lived assets:
The Company's long-lived assets and certain identifiable intangible 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", whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 2002,
2003 and 2004, no impairment losses have been identified.
k. Other intangible assets, net:
Intangible assets acquired in a business combination are amortized over
their estimated useful life using a method of amortization that reflects
the pattern in which the economic benefits of the intangible assets are
consumed or otherwise used up, in accordance with Statement of Accounting
Standard No. 142, "Goodwill and Other Intangible Assets":
Current technology -- (i) the acquired Floware and interWAVE current
technologies are being amortized over a period of seven years on the
straight-line method and, (ii) the amount allocated to the InnoWave current
technology is being amortized on a straight-line basis over 4.75 years and
7.75 years reflecting different product amortization schedules.
Customer relations -- (i) The amount allocated to the customer relations of
InnoWave is being amortized on a straight-line basis over 3.75 years
reflecting the expected attrition in customer relationships. (ii) The
amount allocated to the customer relations of interWAVE is being amortized
on a straight-line basis over 2 years based upon a 50% customer survival
factor.
Tradename and trademark -- The amount allocated to the acquired Tradename
and trademark of interWAVE was based upon cost to generate the Tradename
and trademark. This cost was estimated based upon the historical
advertising and promotion spending over the last two years, due to the fact
that the Company will not use interWAVE's name but will use the GSM product
names. The amount allocated to the tradename and trademark is being
amortized on a straight-line basis over two years based upon the expected
transition time from the legacy hardware to the next generation hardware.
Goodwill -- Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net assets acquired in the acquisition.
F-16
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 142: Goodwill and Other Intangible Assets ("SFAS 142") prescribes a
two phase process for impairment testing of goodwill. The first phase
screens for impairment, while the second phase (if necessary) measures
impairment.
In the first phase of impairment testing, goodwill attributable to each of
the reporting units is tested for impairment by comparing the fair value of
each reporting unit with its carrying amount. If the carrying amount of the
reporting unit exceeds its fair value, the second phase is then performed.
The second phase of the goodwill impairment test compares the implied fair
value of the reporting unit's goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit's goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized
in an amount equal to that excess.
Goodwill attributable to the Company's single reporting unit as defined
under SFAS No. 142, was tested for impairment by comparing its fair value
with its carrying amount. Fair value is determined using an income approach
and a market approach. Estimates used in the methodologies include
estimated future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market multiples.
The Company performed the required annual impairment tests of goodwill's
fair value in 2003. Based on management projections, expected future
discounted operating cash flows and market multiples, no indication of
goodwill impairment was identified in 2003.
In accordance with the guidelines of SFAS No.141, during 2004 no indicators
existed of assets and liabilities that comprise the reporting unit have
changed significantly since the most recent fair value determination.
Consequently, the company carried forward the determination of fair value
analysis from 2003.
l. Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). This Statement prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined
based on differences between the financial reporting and tax bases of
assets and liabilities and for carryforward losses deferred taxes are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.
m. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Statement No.
25, "Accounting for Stock Options Issued to Employees" and FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" in accounting for its employee stock option plans. Under APB
No. 25, when the exercise price of an employee stock option is equivalent
to or above the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company adopted the disclosure provisions of Financial Accounting
Standards Board Statement No. 148, "Accounting for Stock-Based Compensation
-- Transition and Disclosure", which amended certain provisions of SFAS
123. The Company continues to apply the provisions of APB No. 25, in
accounting for stock-based compensation.
F-17
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pro forma information regarding the Company's net loss and net loss per
share is required by SFAS No. 123 and has been determined as if the Company
had accounted for its employee stock options under the fair value method
prescribed by SFAS No. 123.
The fair value of options granted in 2002, 2003 and 2004 is amortized over
their vesting period, generally over four years period and estimated at the
date of grant using a Black-Scholes options pricing model with the
following weighted average assumptions:
2002 2003 2004
------- ------- -------
Dividend yield 0% 0% 0%
Expected volatility 53% 94% 61%
Risk-free interest 1.5% 3% 3.32%
Expected life of up to 4 years 4 years 3 years
Pro forma information under SFAS No. 123, is as follows:
Year ended December 31,
--------------------------------
2002 2003 2004
-------- -------- -------
Net income (loss) available to Ordinary
shares -- as reported $(20,681) $(11,812) $ 851
Add -- stock-based employee
compensation -- intrinsic value 580 511 60
Deduct -- stock-based employee
compensation-fair value (7,618) (8,064) (6,541)
-------- -------- -------
Pro forma:
Net loss $(27,719) $(19,365) $(5,630)
======== ======== =======
Net earnings (loss) per share
Basic as reported $ (0.38) $ (0.23) $ 0.02
======== ======== =======
Diluted as reported $ (0.38) $ (0.23) $ 0.01
======== ======== =======
Pro forma basic and diluted net loss $ (0.51) $ (0.37) $ (0.10)
======== ======== =======
n. Revenue recognition:
The Company generates revenues from selling its products indirectly through
distributors and OEMs and directly to end-users.
Revenues are recognized in accordance with Staff Accounting Bulletin No.
104 "Revenue Recognition in Financial Statements" and Emerging Issues Task
Force No. 00-21, "Revenue Arrangements with Multiple Deliverables", when
the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the seller's price to the buyer is fixed or
determinable, no further obligation exists and collection is reasonably
assured.
The Company generally does not grant a right of return. However, the
Company has granted to certain distributors limited rights of return on
unsold products. Product revenues on shipments to these distributors are
deferred until the distributors resell the Company's products to their
customers provided that all other revenue recognition criteria are met.
F-18
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
In cases under which the Company is obligated to perform post delivery
installation services, revenues are recognized upon completion of the
installation.
In transactions, where a customer's contractual terms include a provision
for customer acceptance, revenues are recognized either when such
acceptance has been obtained or the acceptance provision has lapsed.
o. Warranty costs:
The Company provides a 12 to 36 month warranty period for all of its
products. The specific terms and conditions of a warranty vary depending
upon the product sold and customer it is sold to. The Company estimates the
costs that may be incurred under its warranty and records a liability in
the amount of such costs at the time product revenue is recognized. Factors
that affect the Company's warranty liability include the number of units,
historical rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
Changes in the Company's warranty allowance during the period are as
follows:
Year ended December 31,
-----------------------
2003 2004
----------- -----------
Balance at the beginning of the year $ 1,202 $ 4,070
Warranties issued during the year 4,529 6,327
Settlements made during the year (1,213) (3,376)
Changes in liability for pre-existing warranties during the
year, including expirations (448) (247)
-------- --------
Balance at the end of the year $ 4,070 $ 6,774
======== ========
p. Research and development:
Research and development costs, net of grants received, are charged to the
statement of operations as incurred.
q. Grants and participations:
Royalty and non-royalty bearing grants from the Government of Israel for
funding approved research and development projects 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 costs.
r. Severance pay:
The liability for severance pay for the Israeli companies is calculated
pursuant to Israel's Severance Pay Law, based on the most recent salary of
the employees multiplied by the number of years of employment as of the
balance sheet date. Employees are entitled to one month's salary for each
year of employment or a portion thereof. The Company's liability is fully
provided by monthly deposits with severance pay funds, insurance policies
and by an accrual.
F-19
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israel's Severance Pay Law or labor agreements. The
value of these policies is recorded as an asset in the consolidated balance
sheet. Severance pay expenses for the years ended December 31, 2002, 2003
and 2004, were $2,787, $2,410 and $3,016, respectively.
s. Advertising expenses:
Advertising expenses are carried to the statement of operations as
incurred. Advertising expenses for the years ended December 31, 2002, 2003
and 2004, were $351, $250 and $466, respectively.
t. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the weighted
average number of Ordinary shares outstanding during each year. Diluted net
earnings (loss) per share is computed based on the weighted average number
of Ordinary shares outstanding during each year, plus dilutive potential
Ordinary shares considered outstanding during the year, in accordance with
Statement of Financial Standard No. 128, "Earnings Per Share".
The total weighted average number of shares related to the outstanding
options and warrants excluded from the calculations of diluted net earning
(loss) per share due to their anti-dilutive effect was 14,730, 15,548 and
555 for the years ended December 31, 2002, 2003 and 2004, respectively.
u. Concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term bank deposits, long-term bank deposits, marketable
debt securities, trade receivables and long-term receivables.
The majority of the Company's cash and cash equivalents, short-term bank
deposits and long-term bank deposits are invested in U.S. dollar deposits
with major U.S., European and Israeli banks. Deposits in the U.S. may be in
excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Company's
investments are financially sound and accordingly, minimal credit risk
exists with respect to these investments.
The Company's marketable securities include investments in debentures of
U.S. corporations. Management believes that those corporations are
financially sound, the portfolio is well diversified and, accordingly,
minimal credit risk exists with respect to these marketable securities.
The trade receivables and the long-term receivables of the Company and its
subsidiaries are derived from sales to customers located primarily in North
America and Latin America, the Far East and Europe. The Company and its
subsidiaries generally do not require collateral; however, under certain
circumstances, the Company and its subsidiaries may require letters of
credit, other collateral, additional guarantees or advance payments.
Regarding certain account receivables balances, the Company is covered by
foreign trade risk insurance. The Company and its subsidiaries perform
ongoing credit evaluations of their customers and, to date, have not
F-20
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
experienced material losses. An allowance for doubtful accounts is
determined with respect to those amounts that the Company has determined to
be doubtful of collection.
The change in the allowance for doubtful accounts expenses (income) for the
years ended December 31, 2002, 2003 and 2004, was $88, $(582), and $727,
respectively.
v. Fair value of financial instruments:
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly,
the estimates may not be indicative of the amounts the Company could
realize in a current market exchange.
The carrying amounts of cash and cash equivalents, short-term bank
deposits, trade receivables and trade payables approximate their fair
values, due to the short-term maturities of these instruments.
The fair value of marketable debt securities are based on quoted market
prices and do not significantly differ from carrying amount (see Note 3).
The fair value of long-term bank deposits, long-term receivables, and
long-term liabilities were estimated by discounting the future cash flows,
using the rate currently available for deposits and for the long-term
receivables and liabilities of similar terms and maturity. The carrying
amount of the Company's long-term bank deposits, long-term receivables, and
long-term liabilities approximate their fair value.
The fair value of derivative instruments is determined by obtaining current
quotes from banks.
w. Derivative instruments:
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), requires
companies to recognize all of its derivative instruments as either assets
or liabilities in the statement of financial position at fair value.
For those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon
the exposure being hedged, as a fair value hedge, cash flow hedge or a
hedge of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as
the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in current earnings during the period of the change in
fair values. For derivative instruments that are designated and qualify as
a cash flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess
of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For derivative instruments not
F-21
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
designated as hedging instruments, the gain or loss is recognized in
current earnings during the period of change.
Cash flow Hedging Strategy:
To hedge against the risk of overall changes in cash flows resulting from
forecasted foreign currency salary payments during the year, the Company
has instituted a foreign currency cash flow hedging program. The Company
hedges portions of its forecasted expenses denominated in NIS with forwards
and put and call options (zero-cost collar). These option contracts are
designated as cash flow hedges, as defined by SFAS No. 133 and Derivative
Implementation Group Issue G20 and are all effective.
The Company recognized gains of $407 during the year ended December 31,
2004. All amounts have been included in salary expenses in the statement of
operations.
As of December 31, 2004 the Company recorded accumulated other
comprehensive income in the amount of $226 from its zero cost collar with
respect to anticipated payroll expenses expected to be incurred during
2005. Such amount will be recorded into earnings during 2005.
Fair Value Hedging Strategy:
The Company enters into forward exchange contracts to hedge a portion of
its NIS trade payables for a period of one to three months. The purpose of
the Company's foreign currency hedging activities is to protect the fair
value due to foreign exchange rates.
x. Reclassification
Certain amounts from prior years' cash flow presentation of long-term
receivables have been reclassified to conform to current period
presentation.
y. Impact of recently issued accounting standards:
In November 2004, the FASB issued Statement of Financial Accounting
Standard No. 151, "Inventory Costs, An amendment of ARB No. 43, Chapter
4.". SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43,
Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight handling costs and wasted materials (spoilage) should be recognized
as current-period charges. In addition, SFAS 151 requires that the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SAFS No. 151 is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not expect that the adoption of SFAS No.
151 will have a material effect on its financial position or results of
operations.
In March 2004, the Financial Accounting Standards Board approved the
consensus reached on Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". The objective of this Issue is to provide guidance for
identifying impaired investments. EITF 03-1 also provides new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB issued FASB Staff Position ("FSP") FSP EITF
03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1," which
defers the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1 pending the development of
F-22
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Continued)
further guidance. The Company will continue to monitor these developments
concerning this Issue and are currently unable to determine the impact of
EITF 03-1 on its financial position or results of operations.
On December 16, 2004, the Financial Accounting Standards Board issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. Early adoption
will be permitted in periods in which financial statements have not yet
been issued. The new standard will be effective for the Company in the
first interim period beginning after January 1, 2006.
As permitted by Statement 123, the company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method
and, as such, generally recognizes no compensation cost for employee stock
options. In addition, non-compensatory plans under APB 25 will be
considered compensatory for Statement 123(R) purposes. Accordingly, the
adoption of Statement 123(R)'s fair value method will have a significant
impact on the Company result of operations, although it will have no impact
on the Company overall financial position. Had the Company adopted
Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of
pro forma net income and earnings per share in Note 2m to the consolidated
financial statements. The Company is currently evaluating the impact of
this standard on its results of operations and financial position.
NOTE 3: - MARKETABLE SECURITIES
The following is a summary of held-to-maturity marketable securities:
Gross Gross Estimated
Amortized unrealized unrealized fair market
cost gains losses value
--------- ---------- ---------- -----------
December 31, 2003:
Corporate and bank debentures:
Maturing within one year $27,060 $ 79 $ (224) $26,915
Maturing within one to two years 53,510 138 (353) 53,295
------- ---- -------- -------
$80,570 $217 $ (577) $80,210
======= ==== ======== =======
December 31, 2004:
Corporate and bank debentures:
Maturing within one year $31,430 $ -- $ (441) $30,989
Maturing within one to two years 56,050 -- (730) 55,320
------- ---- -------- -------
$87,480 $ -- $ (1,171) $86,309
======= ==== ======== =======
F-23
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3: - MARKETABLE SECURITIES (Continued)
The unrealized losses of the Company's investments in held to maturity
marketable securities were mainly caused by interest rate increases. The
contractual cash flows of these investments are either guaranteed by the
U.S. government or an agency of the U.S. government or were issued by
highly rated corporations. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost of the
Company's investment. Based on the immaterial severity of the impairments
and the ability and intent of the Company to hold these investments until
maturity, the bonds were not considered to be other than temporarily
impaired at December 31, 2004.
The Company sold held-to-maturity marketable securities only during the
years ended December 31, 2002 and 2003 amounting to $9,478 and $1,137,
respectively. The marketable securities were sold before their maturity,
due to a deterioration in their credit rating. As a result of the sale, the
Company recorded immaterial gains during 2002 and 2003.
As of December 31, 2004, the aggregate amount of gross unrealized losses,
which have been in a continuous loss position for 12 months or longer was
immaterial.
NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
------------------
2003 2004
------ ------
Government authorities $1,552 $2,877
Prepaid expenses 1,231 1,358
Other 1,716 2,257
------ ------
$4,499 $6,492
====== ======
NOTE 5: - INVENTORIES
Raw materials and components $11,624 $10,490
Work in progress 10,623 10,025
Finished products 14,734 20,813
------- -------
$36,981 $41,328
======= =======
See also Note 2g.
F-24
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 6: - PROPERTY AND EQUIPMENT, NET
December 31,
-------------------
2003 2004
------- -------
Cost:
Office furniture and equipment $ 1,582 $ 1,707
Computers and manufacturing equipment 21,367 25,598
Motor vehicles 38 273
Leasehold improvements 2,552 2,709
------- -------
25,539 30,287
------- -------
Accumulated depreciation:
Office furniture and equipment 575 620
Computers and manufacturing equipment 12,137 16,523
Motor vehicles 20 35
Leasehold improvements 868 1,184
------- -------
13,600 18,362
------- -------
Depreciated cost $11,939 $11,925
======= =======
NOTE 7: - INTANGIBLE ASSETS, NET
Intangible assets:
Cost:
Current technology $17,871 $21,321
Customer relations 500 1,733
Tradename and Trademark -- 1,160
------- -------
18,371 24,214
------- -------
Accumulated amortization:
Current technology 6,106 8,677
Customer relations 100 272
Tradename and Trademark -- 36
------- -------
Accumulated amortization (6,206) (8,985)
------- -------
Amortized cost $12,165 $15,229
======= =======
Current technology amortization expenses amounted to $2,400, $2,507 and
$2,571 for the years ended December 31, 2002, 2003 and 2004, respectively.
Customer relations amortization expenses amounted to $100 and $172 for the
years ended December 31, 2003 and 2004, respectively.
F-25
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7: - INTANGIBLE ASSETS, NET (Continued)
Estimated amortization expenses for the years ended:
Amortization
expenses
Year ended December 31, ------------
2005 $4,365
2006 $4,290
2007 $3,035
2008 $1,825
2009 $ 624
NOTE 8: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
--------------------
2003 2004
------- -------
Employees and payroll accruals $ 8,452 $11,563
Service providers and consultants 3,584 8,028
Accrued expenses 1,150 1,031
Royalties payable to the OCS 1,477 2,005
Provision for merger and acquisition related expenses 3,133 2,522
Warranty provision 4,070 6,774
Advances from customers 260 10,737
Provision for agent commissions 2,740 3,702
Other 1,344 7,507
------- -------
$26,210 $53,869
======= =======
NOTE 9: - LONG-TERM DEBT
Long-term loan (1) $6,997 $5,248
Less-current maturities 1,749 1,742
------ ------
$5,248 $3,506
====== ======
As of December 31, 2004, the aggregate annual maturities
of the long-term loan are as follows:
First year (current maturities) $1,742
Second year $1,753
Third year $1,753
(1) During 2003, the Company entered into a long-term loan agreement with
a bank designated for the settlement of a portion of its OCS royalties
payment obligation (see also Note 10).
The loan is linked to the U.S. dollar and is payable in four equal
annual installments carrying variable interest of LIBOR + 0.33% per
annum. The accrued interest as of December 31, 2004, amounted to $72.
F-26
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10: - OTHER LONG-TERM LIABILITIES
Under an arrangement previously entered with the Office of the Chief
Scientist in Israel's Ministry of Industry and Trade ("the OCS"), the
company settled its liability for the amount due of $8,534. The repayment
to the OCS could be made over a period of five years from the date of
settlement. The liability is linked to Israel's Consumer Price Index
("CPI") and bears annual interest of 4% (see also Note 9).
This Arrangement enables the Company to participate in new OCS programs
under which it will be eligible to receive grants for research and
development projects without any royalty repayment obligations excluding
OCS program grants resulting from InnoWave's former operations which were
not included in the Arrangement.
NOTE 11: - COMMITMENTS AND CONTINGENT LIABILITIES
a. Premises occupied by the Company are leased under various lease agreements.
The lease agreements for these premises will expire in 2007.
The Company has leased various motor vehicles under operating lease
agreements. These leases expire in fiscal year 2007.
Future minimum rental payments under such leases for the year ending
December 31, 2004 are as follows:
Lease of
Rental of motor
premises vehicles
--------- --------
2005 $4,241 $2,112
2006 1,293 1,698
2007 53 719
------ ------
$5,587 $4,529
====== ======
Total rental expenses for the years ended December 31, 2002, 2003 and 2004,
were $3,594, $3,991 and $4,537, respectively. Motor vehicle leasing
expenses for the years ended December 31, 2002, 2003 and 2004, were $2,041,
$2,219 and $2,079, respectively.
b. Litigation:
1. A lawsuit was filed by a former customer of interWAVE on December 8,
2004, for compensatory damages with respect to certain alleged damages
caused by interWAVE actions in the amount of approximately $4,000. As
this claim is yet in its preliminary stage, it is impractical to
predict its outcome. The management of the Company does not believe it
will have a material effect on the Company's financial results nor
could the Company's legal advisors estimate the likelihood of an
unfavorable outcome of this matter.
2. During 2001 a purported Class Action (the "Action") lawsuit was filed
against interWAVE asserting failure to disclose certain alleged
improper actions by various underwriters and interWAVE's officers and
directors under the Securities Act of 1933 and the Securities Exchange
Act of 1934 followed by interWAVE's initial public offering. A
stipulation of Settlement (the "Settlement") has been submitted to the
Court for preliminary approval.
F-27
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11: - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Under the Settlement interWAVE will be dismissed of all claims in
exchange for a contingent payment guarantee by the insurance companies
responsible for insuring interWAVE as an issuer. There is no guarantee
that the settlement will become effective as it is subject to certain
terms. In case settlement will not occur, the Company is of the
opinion that it has a good defense against the action. However, the
litigation results cannot be predicted at this point.
c. As of December 31, 2004, the Company obtained bank guarantees in the total
amount of approximately $15,131, in favor of vendors, customers, lessors
and Government authorities.
d. Royalties:
The Company participated in programs sponsored by the Israeli Government
for the support of research and development activities. During 2003 and
2004, the Company had recorded royalty-bearing grants from the Office of
the Chief Scientist of Israel's Ministry of Industry and Trade ("the OCS")
aggregating to $1,087 and $480, respectively, for certain of the Company's
research and development projects. The Company is obligated to pay
royalties to the OCS, amounting to 3%-5% of the sales of the products and
other related revenues generated from such projects, up to 100%. The
obligation to pay these royalties is contingent upon actual sales of the
products, and in the absence of such sales, no payment is required.
During 2003 and 2004, the Company has paid or accrued royalties to the OCS
in the amount of $1,167 and $3,151, respectively. As of December 31, 2003
and 2004, the aggregate contingent liability to the OCS amounted to $9,598
and $7,157, respectively.
NOTE 12: - SHARE CAPITAL
a. The Company listed its shares for trade on the NASDAQ National Market and
on the Tel-Aviv Stock Exchange.
b. Shareholders' rights:
The Ordinary shares confer upon the holders rights to receive notice to
participate and vote in general meetings of the Company, to receive
dividends, if and when declared and to receive, upon liquidation, a pro
rata share of any remaining assets.
c. Treasury stocks:
Through December 31, 2002, the Company resolved to implement a share
buy-back plan under which the total amount to be paid for the repurchased
shares shall not exceed $9,000.
As of December 31, 2004, the Company purchased 3,796,773 shares at a
weighted average price per share of approximately $2.07 per share.
d. Exchange offer plan:
During September 2002, the Company adopted a voluntary employee stock
option exchange program, under which the employees were offered the right
to cancel outstanding stock options carrying an exercise price above $4.6
in exchange for a future grant. The number of new options for each
participant was calculated under the terms of the plan based on each
participant's
F-28
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12: - SHARE CAPITAL (Continued)
cancelled options exercise price. The future grant took place six months
and one day from the cancellation date and ranged from 2% to 85% of the
number of cancelled options.
The new options, generally, vest over two and a half years of employment.
The exercise price of the new options is based on the quoted market price
of the Company's Ordinary shares at the time of the grant thereof. The
total number of options cancelled under the exchange program was 6,031,913.
e. Warrants:
In connection with Floware's merger, the Company issued warrants to
purchase 416,174 of its Ordinary shares exercisable through March 2005, at
a weighted average exercise price of $5.42 per share, in exchange for then
outstanding Floware warrants.
In connection with the acquisition of InnoWave, the Company issued to ECI
Telecom Ltd. a warrant to purchase 200,000 Ordinary shares of the Company
exercisable over a period of five years at an exercise price of $3 per
share.
As of December 31, 2004, 381,682 warrants were exercised for the Company's
Ordinary shares and the remaining warrants expired. As of December 31,
2004, there are no outstanding warrants.
f. Share options:
Since 1994, the Company has granted options to purchase Ordinary shares to
key employees, directors and consultants as an incentive to attract and
retain qualified personnel under several plans. Under the terms of these
plans, options generally vest ratably over a period of up to four years,
commencing on the date of grant. The options generally expire no later than
10 years from the date of grant, and are non-transferable, except under the
laws of succession. Each option may be exercised to purchase one Ordinary
share for an exercise price that is generally equal to the quoted market
price of the underlying share on the date of grant. Options that are
cancelled or forfeited before expiration become available for future
grants.
The Company has six stock option plans under which 24,998,651 Ordinary
shares were reserved for issuance. As of December 31, 2004, 1,757,766
Ordinary shares of the Company are still available for future grants under
the various option plans.
F-29
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12: - SHARE CAPITAL (Continued)
A summary of the Company's stock option activity and related information is
as follows:
Year ended December 31,
----------------------------------------------------------------------------
2002 2003 2004
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
Amount exercise Amount exercise Amount exercise
of options price of options price of options price
---------- -------- ---------- -------- ---------- --------
Outstanding at the
beginning of the year 16,017,081 $5.88 8,074,838 $3.18 12,856,308 $ 3.45
Granted 489,300 $1.77 8,019,296 $3.51 4,233,566 $15.72
Exercised (361,934) $0.62 (2,607,138) $1.89 (3,749,980) $ 2.69
Forfeited or cancelled (8,069,609) $8.58 (630,688) $7.08 (583,767) $ 7.89
---------- ---------- ----------
Outstanding at the end
of the year 8,074,838 $3.18 12,856,308 $3.45 12,756,127 $ 7.55
========== ===== ========== ===== ========== ======
Options exercisable at
the end of the year 5,286,793 $3.03 5,815,793 $2.9 4,587,519 $ 5.75
========== ===== ========== ===== ========== ======
In connection with the grant of certain share options to employees in 2002,
2003 and 2004, the Company recorded amortization of deferred stock
compensation of $580, $511 and $60, respectively, for the aggregate
differences between the respective exercise price of options at their dates
of grant and the fair value of the Ordinary shares subject to such options.
Unamortized deferred stock compensation is presented as a reduction in
shareholders' equity and is amortized ratably over the vesting period of
the related options.
The options outstanding as of December 31, 2004, have been classified into
range of exercise prices, as follows:
Options Weighted Options
outstanding average Weighted exercisable Weighted
as of remaining average as of average
Exercise price December 31, contractual exercise December 31, exercise
(range) 2004 life (years) price 2004 price
-------------- ------------ ------------ -------- ------------ --------
$ $ $
-------------- -------- --------
0.0021 - 0.003 114,456 2.6528 0.0026 114,456 0.00
0.56 - 0.639 51,297 1.6931 0.581 51,297 0.58
0.98 - 1.2692 286,408 3.7687 1.1098 286,408 1.11
1.9 - 2.74 5,822,698 7.4995 2.1590 2,741,166 2.10
2.992 - 4.6023 576,821 2.552 3.6271 564,215 3.61
5.01 - 7.39 666,572 7.584 5.9004 321,322 5.76
7.56 - 11.32 1,179,648 8.391 10.7539 162,749 10.71
11.46 - 17.16 3,941,930 9.655 13.5167 237,648 13.96
17.57 - 866.78 116,797 4.639 99.614 108,258 104.96
---------- ---------
12,756,627 7.55 4,587,519 5.75
========== ======= ========= ======
F-30
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12: - SHARE CAPITAL (Continued)
Weighted average fair value of options whose exercise price is greater
than, equal to or lower than the market price of the shares at date of
grant are as follows:
Weighted average fair value of
options granted at an exercise price
------------------------------------
2002 2003 2004
---------- ---------- ----------
Less than fair value at date of grant $ -- $ 0.16 $ 7.87
====== ====== ======
Equal to fair value at date of grant $ 0.73 $ 2.27 $ 5.86
====== ====== ======
Exceeds the fair value at date of grant $ -- $ -- $ 1.67
====== ====== ======
During 2003, the Company issued 300,000 options to purchase Ordinary shares
to one of its directors. As a result, the Company recorded deferred stock
compensation amounting to $183.
In connection with interWAVE's acquisition, the Company issued to interWAVE
former CEO 20,850 options to purchase Company's Ordinary shares. As a
result the company recorded deferred stock compensation amounting to $293.
These grants terms are included in the aforementioned tables.
i. Dividends:
In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company's Board of Directors has determined that
tax exempt income if any, will not be distributed as dividends.
NOTE 13: - TAXES ON INCOME
Income derived by Alvarion Ltd. is generally subject to the regular Israeli
corporate tax rate of 35%. However, as detailed below, income derived in
Israel from certain "Approved Enterprises" will enjoy certain tax benefits
for a specific definitive period. The allocation of income derived from
approved enterprises is dependent upon compliance with certain requirements
with the Investment Law.
a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959:
Alvarion Ltd. has been granted status as an "Approved Enterprise" under the
Law for the Encouragement of Capital Investments, 1959 ("the investment
law"). According to the provision of the law, Alvarion Ltd. has elected the
"alternative benefits" track provisions of the investment law, pursuant to
which Alvarion has waived its right to grants and instead receives a tax
benefit on undistributed income derived from the "Approved Enterprise"
program. The entitlement to tax benefits depends upon compliance with the
investment law regulations. In 1995, Alvarion Ltd. was first granted the
status of "Approved Enterprise" regarding the production facilities in
Tel-Aviv. By reason of the tax benefits, the income derived from this
"Approved Enterprise" will be tax exempt for a period of four years, and
will be taxed at a reduced rate of 10% to 25% for six additional years
(depending on the percentage of foreign investment in the Company). The
10-year period of benefits will commence with the first year in which
Alvarion Ltd. earns taxable income. In 1997, Alvarion Ltd.'s production
facility in Nazareth was granted status as an
F-31
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13: - TAXES ON INCOME (Continued)
"Approved Enterprise". Accordingly, Alvarion Ltd.'s income from that
"Approved Enterprise" will be tax-exempt for a period of 10 years. The
10-year period of benefits will commence with the first year in which
Alvarion Ltd. earns taxable income.
During February 2000, Alvarion Ltd. submitted an expansion request for its
third "Approved Enterprise" regarding its production facilities in Nazareth
and Carmiel (which was relocated during 2004 to Migdal Haemek). The income
derived from this "Approved Enterprise" will be tax-exempt for a period of
10 years. The 10-year period of benefits will commence with the first year
in which Alvarion Ltd. earns taxable income. Alvarion Ltd.'s expansion
request has been approved.
The period of tax benefits is subject to limits of the earlier of 12 years
from the commencement of production, or 14 years from receiving the
approval. The period of benefits for the first, second and third plans have
not yet commenced, and will expire in 2008, 2010 and 2014, respectively.
In connection with its merger with Floware in 2001, Alvarion Ltd. assumed
the following Floware Ltd. "Approved Enterprise" agreement:
Floware Ltd. was granted an "Approved Enterprise" status for its 1997 plan
regarding the production facility in Or-Yehuda. After the merger, the
operations were relocated to Alvarions's facilities in Tel-Aviv. The income
derived from this "Approved Enterprise" will be tax-exempt for a period of
two years and will enjoy a reduced tax rate thereafter of 10%-25% for an
additional period of five to eight years (depending on the percentage of
foreign investment in the Company). The period of benefits will commence
with the first year in which Alvarion Ltd. earns taxable income.
In order to maintain its eligibility for benefits following the merger with
Floware, the Company must continue to meet specified conditions, however,
Alvarion has yet to finalize the status of the tax benefits with the tax
authorities following the merger of Floware.
InnoWave was granted an "Approved Enterprise" status for its 1997 plan
regarding the production facility in Omer. During 1999, InnoWave's request
for an expansion was approved.
During 2003, the Company had applied for the assignment of InnoWave's
former "Approved Enterprise" status to Alvarion. As of December 31, 2004,
such approval has been obtained.
Alvarion Ltd.'s entitlement to the above benefits is conditional upon its
fulfilling the conditions stipulated by the Investment Law, regulations
published thereunder and the letters of approval for the specific
investments in "Approved Enterprises". In the event of failure to comply
with these conditions, any benefits which were previously granted may be
canceled and Alvarion Ltd. may be required to refund the amount of the
benefits, in whole or in part, including interest.
If these retained tax-exempt profits are distributed in a manner other than
in the complete liquidation of the Company the distribution 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 15%-20%
for an "Approved Enterprise". As of December 31, 2004, the accumulated
deficit of the Company does not include tax-exempt profits earned by the
Company's "Approved Enterprise".
F-32
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13: - TAXES ON INCOME (Continued)
A recent amendment to the Investment Law (the "Amendment"), that has been
officially published and effected since of April 1, 2005, has significantly
changed the provisions of the Investment Law. The Amendment limits the
scope of enterprises, which may be approved by the Investment Center by
setting criteria for the approval of a facility as an Approved Enterprise.
Additionally, the Amendment enacted major changes in the manner in which
tax benefits are awarded under the Investment Law so that companies no
longer require Investment Center approval in order to qualify for tax
benefits.
The Amendment provides that terms and benefits included in any certificate
of approval already granted will remain subject to the provisions of the
law as they were on the date of such approval.
Alvarion Ltd. has had no taxable income since inception.
b. Tax benefits under the Law for the Encouragement of Industry (Taxation),
1969:
Alvarion Ltd. is an "industrial company" under the above law and, as such,
is entitled to certain tax benefits, mainly accelerated depreciation of
machinery and equipment. For tax purposes only, the Company may also be
entitled to deduct over a three-year period expenses incurred in connection
with a public share offering and to amortize know-how acquired from third
parties.
c. In accordance with paragraph 9(f) of SFAS No. 109, Alvarion Ltd. has not
provided deferred income taxes on the difference between the reporting
currency and the tax bases of assets and liabilities.
Commencing with taxable year 2003, the Company has elected to measure its
results for Israeli tax purposes on the basis of amounts denominated in US
dollar.
This election obligates the Company for a three-year-period.
d. Pre-tax income (loss):
Year ended December 31,
--------------------------------------
2002 2003 2004
--------- --------- ------
Domestic $ (20,696) $ (11,798) $ (939)
Foreign 15 (14) 1,790
--------- --------- ------
$ (20,681) $ (11,812) $ 851
========= ========= ======
e. Carryforward losses:
As of December 31, 2004, Alvarion Ltd. had an available tax loss
carryforward amounting to approximately $89,000, may be carried forward, in
order to offset taxable income in the future, for an indefinite period.
In addition, an accumulated net tax operating loss carryforward, in a total
amount of approximately $69,000, resulted from the merger with Floware
which may be carried forward to subsequent years and may be set off against
the merged company's taxable income, commencing with the tax year
immediately following the merger. This set off is limited to the lesser of:
F-33
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13: - TAXES ON INCOME (Continued)
1. 20% of the aggregate net tax operating losses carryforward of the
merged companies prior to the effective time of the merger; and
2. 50% of the combined company's taxable income in the relevant tax year
before the set off of losses from preceding years.
These restrictions, with several modifications, also apply to the set off
of capital losses of the merged companies against capital gains of the
combined company.
As of December 31, 2004, the state and the federal tax losses carryforward
of the U.S. subsidiary excluding former interWAVE tax losses carryforward
amounted to approximately $6,559 and 17,529, respectively. Such losses are
available to be offset against any future U.S. taxable income of the U.S.
subsidiary and will expire in 2008 and 2023, respectively.
Utilization of U.S. net operating losses may be subject to substantial
annual limitations due to the "change in ownership" provisions ("annual
limitations") of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net
operating losses before utilization.
Following the acquisition of interWAVE, the Company analyzed the annual
limitations on its net operating loss carryforward as of the acquisition
date and its alternatives to benefits from such losses. As of December 31,
2004, the Company has yet to finalize the estimated amount of net operating
loss carryforward from the interWAVE acquisition.
f. Reduction in corporate tax rate:
In June 2004, the Israeli Parliament approved an amendment to the Income
Tax Ordinance (No. 140 and Temporary Provision), which progressively
reduces the corporate tax rate from 36% to 35% in 2004 and to a rate of 30%
in 2007.
g. Deferred taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
December 31,
------------------------
2003 2004
--------- ---------
Tax assets in respect of:
Allowance for doubtful accounts $ 114 $ 109
Severance pay and accrued vacation pay 457 1,873
Other deductions for tax purposes 2,386 1,642
Net loss carryforward 19,525 19,693
--------- ---------
Total deferred tax assets before valuation allowance 22,482 23,317
Valuation allowance (22,482) (23,317)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
F-34
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13: - TAXES ON INCOME (Continued)
The Company has provided valuation allowances in respect of deferred tax
assets resulting from tax loss carryforward and other temporary
differences, since the Company has a history of losses over the past three
years. Management currently believes that it is more likely than not that
the deferred tax assets regarding the loss carryforward and other temporary
differences will not be realized in the foreseeable future.
The main reconciling items between the statutory tax rate of the Company
and the effective tax rate are the non-recognition of tax benefits resulted
from the Company's accumulated net operating losses carryforward due to the
uncertainty of the realization of such tax benefits and the effect of the
"Approved Enterprise".
NOTE 14: - GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
a. The Company manages its business on a basis of one reportable segment (See
Note 1a for a brief description of the Company's business) and follows the
requirements of Statement of Financial Accounting Standard No. 131
"Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131").
b. The following present's total revenues for the years ended December 31,
2002, 2003 and 2004, and long-lived assets as of December 31, 2002, 2003
and 2004:
December 31, December 31,
---------------------------------- ----------------------------------
2002 2003 2004 2002 2003 2004
-------- --------- --------- ------- ------- --------
Long- Long- Long-
Total Total Total lived lived lived
revenues revenues revenues assets assets assets
-------- --------- --------- ------- ------- --------
Israel $ 655 $ 1,294 $ 2,268 $59,976 $60,892 $109,262
United States (including
Canada) 28,434 31,710 34,772 1,040 834 2,022
Europe (without Russia) 23,907 26,836 45,491 509 531 700
Russia 4,087 9,802 13,794 -- -- --
Chile 8,440 4,180 203 -- -- --
Mexico 873 18,655 64,005 -- 38 253
Japan 6,754 217 48 6 -- 12
Africa (without Angola) 4,036 6,704 17,911 -- -- --
Angola 401 6,519 374 -- -- --
Asia (without Japan) 7,628 13,198 9,102 -- 15 --
Latin America (without
Mexico, Chile) 3,634 8,093 13,539 25 25 155
------- -------- -------- ------- ------- --------
$88,849 $127,208 $201,507 $61,556 $62,335 $112,404
======= ======== ======== ======= ======= ========
F-35
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14: - GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION (Continued)
Major customers' data as percentage of total sales:
Year ended December 31,
--------------------------------------
2002 2003 2004
---------- ----------- -----------
Customer A 0% 13.90% 30.58%
===== ===== =====
Customer B (related party in 2002 and
2003, see Note 15) 11.40% 8.50% 2.4%
===== ===== =====
Customer C 10.32% 3.68% 0.01%
===== ===== =====
NOTE 15: - RELATED PARTY
The Company generated revenues from the sales of its products to one of the
Company's former shareholders in the ordinary course of business. The
balances with and the revenues derived from that former related party were
as follows:
a. Balances with that related party:
December 31,
---------------------
2003 2004
--------- ---------
Trade receivables $2,985 $2,237
====== ======
b. Revenues from that related party:
Year ended December 31,
---------------------------------
2002 2003 2004
------- ------- -------
Total revenues $10,185 $10,883 $4,892
======= ======= ======
NOTE 16: - SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development:
Year ended December 31,
---------------------------------
2002 2003 2004
-------- ------- -------
Research and development costs $27,597 $27,351 $31,713
Less -- grants 3,520 3,846 3,897
------- ------- -------
$24,077 $23,505 $27,816
======= ======= =======
b. Allocation of amortization of deferred stock compensation:
Cost of revenues $ 72 $ 60 $ --
Research and development, net 310 261 --
Selling and marketing 114 96 --
General and administrative 84 94 60
------- ------- -------
$ 580 $ 511 $ 60
======= ======= =======
F-36
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16: - SELECTED STATEMENTS OF OPERATIONS DATA (Continued)
c. Financial income, net:
Year ended December 31,
-----------------------------------------------
2002 2003 2004
---------- ---------- ----------
Financial income:
Interest and others $ 6,445 $ 4,710 $ 4,072
Gain on sale of held-to-maturity
marketable securities 13 -- --
Foreign currency translation differences 455 (8) 187
---------- ---------- ----------
6,913 4,702 4,259
---------- ---------- ----------
Financial expenses:
Interest and bank expenses (326) (575) (438)
---------- ---------- ----------
$ 6,587 $ 4,127 $ 3,821
========== ========== ==========
d. Net earnings (loss) per share:
The following table sets forth the computation of basic and diluted net
earnings (loss) per share:
Numerator:
Numerator for basic and diluted net
earnings (loss) per share- income
(loss) available to shareholders of
Ordinary shares $ (20,681) $ (11,812) $ 851
========== ========== ==========
Denominator:
Denominator for basic net earnings
(loss) per share- weighted average
number of Ordinary shares 53,940,722 52,127,250 56,549,169
---------- ---------- ----------
Effect of dilutive securities:
Employee stock options *) -- *) -- 7,205,148
---------- ---------- ----------
Denominator for diluted net earnings
(loss) per share -- adjusted weighted
average number of shares 53,940,722 52,127,250 63,754,317
========== ========== ==========
* ) Antidilutive.
F-37