UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|_| 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, 2003
-----------------
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.
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(Exact name of Registrant as specified in its charter)
Israel
------
(Jurisdiction of incorporation or organization)
21A HaBarzel Street, Tel Aviv 69710, Israel
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(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
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(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.
56,545,385 Ordinary Shares, NIS 0.01 par value per share
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark which financial statement item the registrant has elected
to follow.
|_| Item 17 |X| Item 18
INTRODUCTION
We are a leading provider of wireless broadband connectivity
infrastructure. Our solutions are used by telecom carriers and service providers
worldwide. Our products are used to provide broadband data and voice services,
for subscribers in the "last mile" of connectivity, for feeding cellular
networks and for private networks. With our comprehensive product offerings, we
provide a broad range of integrated wireless solutions, addressing different
markets and frequency bands, designed to address the various business models of
carriers and service providers. Our products operate in licensed and
license-free bands ranging from 2.4 GHz to 28 GHz and comply with industry
standards.
We were incorporated in September 1992 under the laws of the State of
Israel. On August 1, 2001, we merged with Floware Wireless Systems Ltd., a
company incorporated under the laws of the State of Israel, referred to as
Floware. 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. In April 2003, we completed the
acquisition of most of the assets and assumption of certain liabilities of
InnoWave ECI Wireless Systems Ltd., a wholly-owned subsidiary of ECI Telecom
Ltd., or InnoWave.
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 and "MGW" are 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................................19
A. HISTORY AND DEVELOPMENT OF THE COMPANY....................19
B. BUSINESS OVERVIEW.........................................19
C. ORGANIZATIONAL STRUCTURE..................................36
D. PROPERTY, PLANTS AND EQUIPMENT............................36
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..............37
A. OPERATING RESULTS.........................................37
B. LIQUIDITY AND CAPITAL RESOURCES...........................51
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES............57
D. TREND INFORMATION.........................................57
E. OFF-BALANCE SHEET ARRANGEMENTS............................58
F. TABULAR DISCLOSURE OF CONTRACTURAL OBLIGATIONS............58
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................58
A. DIRECTORS AND SENIOR MANAGEMENT...........................58
B. COMPENSATION..............................................62
C. BOARD PRACTICES...........................................62
D. EMPLOYEES.................................................67
E. SHARE OWNERSHIP...........................................69
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.........70
A. MAJOR SHAREHOLDERS........................................70
B. RELATED PARTY TRANSACTIONS................................72
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TABLE OF CONTENTS
(continued)
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C. INTERESTS OF EXPERTS AND COUNSEL..........................72
ITEM 8. FINANCIAL INFORMATION.....................................72
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION...............................................72
B. SIGNIFICANT CHANGES.......................................73
ITEM 9. THE OFFER AND LISTING.....................................73
A. OFFER AND LISTING DETAILS.................................73
B. PLAN OF DISTRIBUTION......................................74
C. MARKETS...................................................75
D. SELLING SHAREHOLDERS......................................75
E. DILUTION..................................................75
F. EXPENSES OF THE ISSUE.....................................75
ITEM 10. ADDITIONAL INFORMATION....................................75
A. SHARE CAPITAL.............................................75
B. MEMORANDUM AND ARTICLES OF ASSOCIATION....................75
C. MATERIAL CONTRACTS........................................77
D. EXCHANGE CONTROLS.........................................77
E. TAXATION..................................................78
F. DIVIDENDS AND PAYING AGENTS...............................86
G. STATEMENT BY EXPERTS......................................86
H. DOCUMENTS ON DISPLAY......................................86
I. SUBSIDIARY INFORMATION....................................87
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK......................................................87
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES....87
PART II.....................................................................88
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...........88
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS...............................89
ITEM 15. CONTROLS AND PROCEDURES...................................89
ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS;
PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................89
ii
TABLE OF CONTENTS
(continued)
Page
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A. AUDIT COMMITTEE FINANCIAL EXPERT.....................89
B. CODE OF ETHICS.......................................89
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES...............89
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES...........................................90
PART III...................................................................90
ITEM 17. FINANCIAL STATEMENTS.....................................90
ITEM 18. FINANCIAL STATEMENTS.....................................90
ITEM 19. EXHIBITS.................................................91
iii
PART I
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 KEY INFORMATION
A. SELECTED FINANCIAL DATA
We have derived the following selected consolidated financial data
presented below as of December 31, 2002 and 2003 and for each of the years ended
December 31, 2001, 2002 and 2003 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 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 activities of the assets
and assumed liabilities of InnoWave which were acquired on April 1, 2003. We
have derived the selected consolidated financial data as of December 31, 1999,
2000 and 2001 and for each of the years ended December 31, 1999 and 2000 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.
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
Statement of Operations Data:
Sales $ 44,752 $ 101,460 $ 98,968 $ 88,849 $ 127,208
Cost of sales 23,528 55,608 59,484 55,120 68,535
Write-off of excess inventory
and provision for inventory
purchase commitments -- -- 53,881 250 6,562
--------- --------- --------- --------- ---------
Gross profit (loss) 21,224 45,852 (14,397) 33,479 52,111
Operating costs and expenses:
Research and development, gross 8,958 16,818 27,078 27,597 27,351
less grants 2,078 4,345 5,982 3,520 3,846
--------- --------- --------- --------- ---------
Research and development, net 6,880 12,473 21,096 24,077 23,505
Selling and marketing 14,692 26,226 30,258 26,570 32,904
General and administrative 2,289 4,132 6,226 6,018 6,323
Merger and acquisition
related expenses -- -- 2,841 -- 2,201
Amortization of intangible
assets -- -- 1,200 2,400 2,606
Amortization of deferred
stock compensation -- 18 726 580 511
In-process research and
development write-off -- -- 26,300 -- --
Merger expenses -- -- 2,841 -- --
Restructuring -- -- 5,437 1,102 --
One-time expense related to a
settlement of an OCS program -- -- 6,535 -- --
--------- --------- --------- --------- ---------
Total operating expenses 23,861 42,849 100,619 60,747 68,050
--------- --------- --------- --------- ---------
Operating income (loss) (2,637) 3,003 (115,016) (27,268) (15,939)
Financial income (expenses), (527) 7,031 8,540 6,587 4,127
Other expenses (470) -- (3,535) -- --
--------- --------- --------- --------- ---------
Net Income (loss) $ (3,634) $ 10,034 $(110,01 $ (20,681) (11,812)
Basic net earnings (loss)
per share $ (0.32 $ 0.40 $ (2.80) $ (0.38) $ (0.23
Weighted average number of
shares used in computing
basic net earnings
(loss) per share 11,232 24,938 39,298 53,941 52,127
========= ========= ========= ========= =========
Diluted net earnings (loss)
per share $ (0.32 $ 0.33 $ (2.80) $ (0.38) $ (0.23)
========= ========= ========= ========= =========
Weighted average number of
shares used in computing
diluted net earnings
(loss) per share 11,232 30,807 39,298 53,941 52,127
========= ========= ========= ========= =========
2
1999 2000 2001 2002 2003
-------- --------- -------- --------- ---------
Consolidated Balance
Sheet Data:
Working capital........... $22,418 $159,793 $167,371 $ 74,237 $ 90,359
Total assets.............. 36,620 252,837 307,595 272,075 284,957
Shareholders' equity...... $23,899 $212,495 $254,251 $227,830 $ 220,202
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 affect 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 us, our Business and our Industry
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. Many
carriers and service providers using wireless broadband, or Wireless Broadband,
are emerging companies with unproven business models. 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. During 2003, we perceived an
improvement in the general market for telecommunications equipment. However, 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.
In addition, the number of carriers and service providers who are our
potential customers is small and is expected to remain small because of the
limited number of licenses granted in each country and the substantial capital
requirements involved in establishing networks.
We have a history of quarterly fluctuations in our results of operations and
expect these fluctuations to continue. 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 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.
3
Factors that may contribute to fluctuations in our quarterly results of
operations include:
o the uneven pace of spectrum licensing to wireless carriers;
o adoption of new standards in our industry;
o the size and timing of orders, such as occurred in the fourth
quarter of 2003 and in the first quarter of 2004, when we
received a large order from one of our customers, 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 the mix of product sales generally, including the mix of sales
between base stations and terminal stations and between product
families;
o the 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,
resulting primarily from the extensive marketing and
organizational efforts that carriers are required to make to
develop their subscriber base following the deployment of the
network infrastructure;
o one-time charges;
o mergers or acquisitions;
o the size and timing of approval of grants from the Government of
Israel;
o the geopolitical situation; and
o fluctuations in the exchange rate of the NIS against the dollar.
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
4
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 level or declining 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 have a history of losses and we may continue to incur losses in the future.
Except for the year ended December 31, 2000 when we had operating income
and net income of approximately $3.0 million and $10.0 million, respectively, we
have incurred operating and net losses in every fiscal year. For the year ended
2003, our operating loss and net loss were approximately $15.9 million and $11.8
million, respectively. For the year ended 2002, our operating loss and net loss
were approximately $27.3 million and $20.7 million, respectively. For the year
ended 2001, our operating loss and net loss were approximately $115.0 million
and $110.0 million, respectively. Net loss for 2001 included non recurring
expenses, such as write-off of excess inventory and provision for inventory
purchase commitments of $53.9 million, in-process research and development
write-off of $26.3 million, merger expenses of $2.8 million, restructuring costs
of $ 5.4 million and one-time expense of $6.5 million related to a settlement of
an OCS program. Although we achieved a net profit in the fourth quarter of 2003
of $81,000 and had operating income of $504,000 and a net profit of $1.4 million
in the first quarter of 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
affect on our business, financial condition and results of operations and the
value and market price of our ordinary shares.
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, both with respect to products that we currently offer and products that
we are developing. 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 performances. 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.
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 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
5
or more of these objectives could materially adversely affect our sales and
profitability, harming our financial condition and results of operation.
Standardization and increased competition may have an adverse effect on our
gross margins.
Standardization of product features may also 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.
If we do not increase our share of the Wireless Broadband equipment market, our
business will suffer.
To increase our share of the Wireless Broadband market, we must:
o sustain our attained technological position in designing,
developing, and manufacturing Wireless Broadband 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 end-users,
including local exchange carriers, Internet and application
service providers, public fixed or mobile telephone service
providers and private network operators.
Our efforts in these markets may not succeed. In addition, we may have to
provide extended payment terms to attract customers for our products. The
Wireless Broadband equipment 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.
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, including the recently developed WiMAX technology. These
technologies may be replaced with alternative technologies or may otherwise not
achieve the wide acceptance that we are seeking. In particular, there is
substantial risk that the Wireless Broadband technologies underlying our
BreezeMAX, BreezeACCESS and WALKair 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, such as DSL,
cable modem, fiber optic, coaxial cable, satellite
6
systems, third generation cellular systems or otherwise. Also, new or enhanced
products developed by other companies may be technologically superior to our
products and render our products obsolete.
The success of our Wireless Broadband technology depends on the following
factors, among others:
o acceptance of new and innovative technologies;
o acceptance of standards for Wireless Broadband products;
o its 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.
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 the IEEE 802.11,
802.11a and 802.11b wireless LAN standards of the Institute of Electrical and
Electronics Engineers, Inc., as well as to other industry standards, some of
which are still in the process of development. These include the IEEE 802.16a
Broadband Wireless Access Standard, the International Telecommunications Union
-- Telecommunications Standardization, H.323 Voice over IP and the European
Telecommunications Standards Institute Broadband Radio Access Network standard
(ETSIBRAN). We also participate in the WiMAX Forum, a non-profit organization
whose members are working to promote adoption of the IEEE 802.16a standard and
to certify the interoperability of compliant equipment.
Intel Corporation has announced its intention to develop IEEE
802.16a-compliant silicon. If Intel Corporation decides to cease development of
IEEE 802.16a-compliant silicon, the acceptance of this standard may be impeded
and we may be forced to make significant changes in our development plans. Our
future success depends in part on broad acceptance of these standards by the
wireless LAN and Wireless Broadband markets. Our focus on anticipated future
standards, including the IEEE 802.16a standard, may lead to delays in
introducing products designed for current standards. In addition, although we
developed our products with a view to compliance with existing standards and
anticipated future standards, we may not be able to introduce on a timely basis
products that comply with future industry standards.
Our strategy of seeking to anticipate and comply with industry standards
is subject to the following additional risks, among others:
7
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.
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.
Under the terms of our merger transaction with Floware and the terms of our
agreement with InnoWave, we are liable for Floware's pre-merger liabilities and
certain liabilities of InnoWave.
The merger of Floware with and into Alvarion, with Alvarion as the
surviving entity, resulted in our assuming all of the liabilities of Floware
existing at the time of the merger. In addition, as part of our acquisition on
April 1, 2003 of most of the assets of InnoWave, we assumed certain of
InnoWave's liabilities. If liability claims against Floware or InnoWave with
respect to our assumed obligations are successfully asserted, we would have to
assume these liabilities. In addition, in connection with the merger with
Floware, we agreed to indemnify the former Floware directors against certain
liability claims for a period of seven years following the effective time of the
merger (for which purpose we hold an insurance policy). These liabilities and
indemnification obligations could have an adverse affect on us.
We may not successfully integrate the business operations of InnoWave. Our
failure to do so might harm our results of operations and share price.
In April 2003, we completed the acquisition of most of the assets and
assumed liabilities of InnoWave and hired 150 former employees of InnoWave. 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. To successfully
integrate both companies' operations, we need to retain management, key
employees and business partners of both companies. 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.
8
Our failure to manage growth effectively could impair our business, financial
condition and results of operations.
Our rapid growth, including our merger with Floware in August 2001 and the
acquisition of most of the assets and assumed liabilities of InnoWave in April
2003, 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.
We may pursue mergers and acquisitions that present risks and may not be
successful.
In the future, we may continue to pursue acquisitions or enter into merger
transactions to enhance our technology and our leadership in the Wireless
Broadband market and diversify our product and service offerings and customer
base or for other strategic purposes. We have a limited history of pursuing and
consummating mergers and acquisitions and we cannot be certain that any future
mergers and acquisitions will be successful.
Acquiring businesses and companies may require us to expend significant or
greater than expected funding. We may be unable to raise the needed funding and
we may be required to divert funds from other intended uses. Either of these
circumstances could have a material adverse affect on our business, financial
condition and results of operations.
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 to well-defined current needs.
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.
Our Wireless Broadband 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 significant portion of our WALKair system 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 system integrator channels expose this business
to a number of risks, each of which could result in a significant reduction in
the sales of our Wireless Broadband
9
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 visibility of the BreezeACCESS and WALKair names
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.
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 13.7% of our sales in 2001,
20.9% of our sales in 2002 and 13.1% of our sales in 2003. 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 highly
dependent upon the acceptance of our products by our distributors and their
active marketing and sales efforts. 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.
We are also dependent upon the success of our direct sales efforts.
Direct sales accounted for a total of approximately 28.0% of our sales in
2001, 14.5% of our sales in 2002 and 28.4% of our sales in 2003. 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. 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.
If we lose large customers we may not succeed in replacing them.
In 2003, 13.9% of our sales were to a South American operator. This
customer has made additional orders in 2004. 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. If 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 affected.
10
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.
We depend on a limited number of manufacturing subcontractors with limited
manufacturing capacity, and are exposed to the risk that 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 limited 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.
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In addition, 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 2001 we
recorded an allowance for irrevocable inventory purchase commitments in our
financial statements in an aggregate amount of approximately $1.3 million and
$8.6 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.
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
inventory levels and expenses may be adversely affected and our business and
results of operations could suffer. For example, in 2001, the fulfillment of our
product and supply orders resulted in our receiving more products and components
than we were able to sell and caused an increase in our inventories. This
oversupply was caused by customer demand not meeting the sales forecasts that
were made when the orders were originally placed. In June and September 2001, we
wrote off this inventory and made provisions for purchase commitments in an
amount of approximately $53.9 million. In 2002, we wrote off additional
inventory in an amount of approximately $250,000 and in 2003 we wrote off
additional inventory and made provisions for purchase commitments in an amount
of approximately $6.6 million.
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:
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;
12
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.
Our products, particularly our licensed band products, have long and
unpredictable sales cycles. This could adversely impact our revenues and net
income.
The sales cycle for our licensed band products encompasses significant
technical evaluation and testing by each potential purchaser and a commitment of
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
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 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.
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 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
13
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. For
example, the licensing process in China is taking longer than
expected and has caused a delay in our ability to market our
products in the Chinese market.
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. For example, 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.
14
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.
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 confidentiality,
non-disclosure and assignment-of-inventions agreements to protect our
proprietary technology. We have obtained one patent 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.
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. 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
15
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 2001,
2002 and 2003 were generated elsewhere around the world. Our products are
marketed internationally and we are therefore subject to certain risks
associated with international sales, including:
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.
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 15, 2004, the last sales price of our ordinary shares on the
Nasdaq National Market was $10.56. 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;
16
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 that
reduce the need for our products;
o general economic and political conditions, particularly in
the United States and in South America, and the effect of
any hostilities with Iraq on our operations and results; and
o departures of key personnel.
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 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 and
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 2003, 2002 or 2001 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 2004 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.
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
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
17
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 all our revenues are generated in U.S. dollars. A portion of
our expenses, primarily labor 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 2003, the value of the dollar decreased in relation to
the NIS by 7.6%, and the deflation rate in Israel was -1.9%.
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 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 restrict our ability to manufacture particular products or
transfer particular technology outside of Israel. If we fail to comply with
these conditions in the future, the benefits received could be canceled and we
could be required to refund any payments previously received under these
programs, pay increased taxes 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 and
tax benefits 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.
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.
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 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
18
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.
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.
Our principal executive offices are located at 21A HaBarzel Street, Tel
Aviv 69710, Israel and our telephone number is 972-3-645-6262. In 1995, we
established a wholly-owned subsidiary in the United States, Alvarion, Inc., a
Delaware corporation. Alvarion, Inc. is located at 5858 Edison Place, Carlsbad,
CA, 92008 and its telephone number is (760) 517-3100.
B. BUSINESS OVERVIEW
General
We are a leading provider of wireless broadband connectivity
infrastructure. Our solutions are used by telecom carriers and service providers
worldwide. Our products are used to provide broadband data and voice services,
for subscribers in the "last mile" of connectivity, for feeding cellular
networks and for private 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 and service providers.
19
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/MDUs.
Our products operate in licensed and license-free bands, ranging from 2.4
GHz to 28 GHz and comply with industry standards. Our core technologies include
spread spectrum radio, linear radio, digital signal processing, modems,
networking protocols and very large systems integration, or VLSI.
Broadband Wireless Access Overview
Growth of the Broadband Wireless Access, or BWA, market is currently
driven by demand for broadband connectivity. We expect that this growth will be
affected by:
o Demand in un-served areas where wire infrastructure cannot fill the
demand for broadband.
o International regulatory changes enabling increased competition and
resulting in increased allocation of spectrum.
o Adoption of industry standards.
o Introduction of low cost wireless technology based on international
standards.
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 were DSL and cable modems
cannot fulfill the demand for broadband, the broadband wireless solution is an
effective alternative to meet this demand. Our products also support demand for
voice in areas were infrastructure is poor or does not exist.
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.
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 802.16a specification, led its harmonization with ETSI,
and became a principal founder of the WiMAX Forum, a non-profit industry
organization chartered to ensure interoperable 802.16 systems from multiple
vendors. The scope of the 802.16-based standard is the
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Wireless MAN (Metropolitan Area Network), supporting larger range outdoor access
networks with more performance and dedicated high-end services. Once standards
are accepted, product costs generally decrease and product interoperability is
possible, factors aiding in market growth.
Second Generation Technology
Second-generation broadband wireless solutions is based on an OFDM
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 the
operators. Low cost solutions can create a larger demand for broadband wireless
applications. In July 2003, Intel Corporation announced its intention to develop
IEEE 802.16a-compliant silicon chip. At the same time, we signed a strategic
agreement with Intel to work together to incorporate Intel's 802.16a 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.
Our Target Customers
We market and sell our products to two primary types of customers:
telecom carriers; and service providers and regional carriers.
Telecom Carriers
Deregulation in the global telecommunications industry has increased the
number of carriers providing data and voice access to the global
telecommunications network. These include incumbent local exchange carriers,
competitive local exchange carriers seeking to compete effectively in various
markets and cellular operators who 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 whom can eventually become cellular customers. BWA has emerged as an
attractive last-mile alternative to wired access solutions under certain
circumstances. Certain telecom carriers are deploying our products to provide
voice and broadband services in rural areas.
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, MTU/MDU 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.
Service Providers and Regional Carriers
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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 alternative to service providers and regional carriers seeking to
supply their customers with reliable comprehensive data and voice solutions.
Geographic Markets
Alvarion Wireless Broadband installations include two types of
applications for different geographic markets:
Developing regions - Low density population areas in countries with in high
developed countries levels of economic development that have limited
telecommunications infrastructures and do not yet have
high penetration for access technologies for broadband
services, such as cable and ADSL, or complementary to
ADSL and cables where they do not have full coverage.
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 areas. Our products are used primarily
by telecom carriers, by service providers and by regional carriers. Telecom
carriers and service providers using our products include, among others:
o Telmex;
o TPSA;
o Millicom International Cellular S.A.;
o MultiTel S.A.;
o AMA Wireless;
o Iberbanda SA;
o EDN Sovintel;
o Megafon;
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o Mobifon Titan Broadband;
o Telecel Paraguay SA;
o Entel PCS Telecommunications SA;
o Meridian Telecoms Inc.;
o Vivendi Telecom Hungary;
o China Mobile;
o China Telecom;
o China Netcom;
o China Unicom;
o Irish Broadband;
o Neo Sky 2003 S.A;
o Equant Russia Limited; and
o Reliance
Our OEM partners are Siemens, Alcatel, Nera and Datang Telephone Corp.
Our Solutions
Our product offerings include two different types of wireless broadband
applications: access; and bridging and backhauling.
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 in accordance with the
geographic needs of their regions of operation. The applications are either
broadband data, voice or telecommunication multiservices.
BWA solutions are implemented in a modular infrastructure, enabling swift,
cost-effective rollout 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, which presents voice and data interfaces to the customer network. The
entire BWA network is connected to the carrier data backbone.
Our BreezeMAX, BreezeACCESS, MGW/eMGW and WALKair BWA products provide
carriers with comprehensive BWA 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, while delivery heightened bandwidth
flexibility and service differentiation. Our BWA products offer carriers
comprehensive, scalable and rapidly deployable solutions to their last mile
connectivity needs independent of landline infrastructure.
Bridging and Backhauling
We offer applications in which wireless equipment is used as Wireless
Broadband network bridging or backhauling.
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Our BreezeAccess LB, BreezeNET DS.11 and BreezeNET DS.5800 allow
cost-effective IP-based bridging and backhauling in the unlicensed bands,
offering carriers, wireless Internet service providers, and enterprises the
ability to increase the bandwidth of their point-to-point networks and extend
wireless links throughout their operating environments. Operators, service
providers, and enterprise customers can increase their network capacity while
reducing capital and operational expenditures for their backhaul, access, and
LAN extension applications that previously required them to acquire frequency,
deploy high cost radio links, and/or lease expensive wire-line services due to
poor line of sight conditions.
Our Products
We manufacture and sell the following products:
Internet Protocol-based Access Products:
o BreezeMAX
o BreezeACCESS access products (BreezeACCESS II, V, MMDS, XL, VL,
OFDM).
Multiservice Access Products:
o WALKair products (WALKair 1000 and 3000);
o MGW and eMGW
Bridging and Backhauling Products:
o BreezeNET products (BreezeNET DS.11, PRO.11 and DS.5800);
o BreezeACCESS connectivity products (BreezeNET B and BreezeACCESS
LB)
Network Management Products:
o BreezeMANAGE, WALKnet, BreezeVIEW and AlvariSTAR network
management products.
Internet Protocol-based 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.
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 the BWA solution for providers wanting
to boost their revenue potential.
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BreezeACCESS enables high-speed, data and voice, point-to-multipoint BWA
applications. BreezeACCESS access products operate in several frequency bands to
meet the needs of service providers and telecom operators worldwide. The
BreezeACCESS IP-based 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 IP-based products allow service providers to offer their
subscribers a wireless connection to the Internet and to public telephone
networks simultaneously utilizing Internet Protocol technology. BreezeACCESS
uses wireless packet data switching technology in which the transmitted data is
divided into small sets of data packets. Wireless packet data switching enables
efficient use of system resources since users utilize the network only when data
is transmitted or received. BreezeACCESS provides an always-on, leased-line
equivalent connection to the network. In addition to fast Internet access and IP
telephony services, BreezeACCESS 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.
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 data rates of up to 12 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 and up to 54 Mbps in the case of BreezeACCESS VL, by utilizing the
available radio spectrum in a more efficient manner than current technologies.
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 VL, OFDM-based products operate in the unlicensed,
5.725-5.850 GHz ISM band, and provide data rates of up to 54 Mbps.
BreezeACCESS IP-based products include BreezeACCESS II, BreezeACCESS V,
BreezeACCESS XL, BreezeACCESS VL, BreezeACCESS OFDM and BreezeACCESS MMDS.
BreezeACCESS II products operate in the unlicensed, 2.4 GHz ISM band, and
provide data rates of up to 3 Mbps.
BreezeACCESS V products operate in the unlicensed, 5 GHz ISM band, and
provide data rates of up to 3 Mbps.
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BreezeACCESS MMDS products operate in the 2.5-2.7 GHz MMDS licensed bands,
which are licensed in North and South America and other countries worldwide, and
provide data rates of up to 3 Mbps.
Multiservice Access Products
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.
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 GHz
band.
The WALKair product family is comprised of the indoor and outdoor unit of
a terminal station, installed at a subscriber's premises, and the indoor and
outdoor unit of a base station, installed at the center of a cell. In addition,
WALKair products include system management software. WALKair is modular in
design, allowing for a low initial investment, and is scalable for future
growth. The WALKair system supports a variety of customer interfaces and
services such as EI, Ethernet, V35/ X21, Frame Relay and leased line BR,
providing integrated high-speed data and voice services.
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.
Our integrated WALKair/BreezeACCESS base station, AlvariBASE, which
operates in the 3.5 GHz licensed band, enables operators to create a BWA
solution that provides both BreezeACCESS and WALKair services in a coverage
area, using a unified infrastructure. AlvariBASE allows BreezeACCESS and WALKair
customer premises equipment to connect wirelessly to the same base station,
using the same antennas and outdoor radio units in the base.
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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 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.
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Bridging and Backhauling Products
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, BreezeNET
PRO.11 and BreezeNET DS.5800.
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 DS.5800 products utilize DSSS radio technology leverage on the
IEEE 802.11 standard. BreezeNET DS.5800, consisting of an indoor interface unit
and an outdoor radio unit, provides point-to-point wireless bridging and
backhauling at data rates of up to 11 Mbps and is designed specifically for
challenging environments and adverse weather conditions. BreezeNET DS.5800,
providing an indoor/outdoor architecture and operating in the unlicensed 5.8 GHz
band, is suited for high-speed building-to-building connectivity, enabling
wireless Internet backhauls, campus interconnectivity and community-wide
networking without exposure to interference from more common 2.4 GHz systems.
BreezeACCESS Connectivity Products
We have extended our BreezeACCESS product family to provide wireless
connectivity solutions. We have added additional products for backhauling and
feeding with our BreezeACCESS LB products.
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.
BreezeACCESS LB products function as point-to-point wireless bridges,
using a standard Ethernet interface. BreezeACCESS LB, operating in the
unlicensed 5.8 GHz band, provides data rates of up to 72 Mbps and enables
connectivity in near and non-line-of-sight conditions. Its advanced capacity and
link availability reduces costs and avoids the need for more expensive backhaul
systems such as leased lines
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or pure line-of-sight wireless systems. BreezeACCESS LB products are comprised
of an indoor interface unit and an outdoor radio unit. BreezeACCESS LB's
OFDM-based technology also reduces interference and multi-path conflicts.
Network Management Products
We provide advanced management applications for our BWA 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 BWA networks. Our network management products are:
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 AlvariSTAR, which configures, monitors and manages our
BreezeACCESS and WALKair products.
BreezeMANAGE, WALKnet, BreezeVIEW and AlvariSTAR 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 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.
Networking Technology
A key to the commercial success of our products lies in their
compatibility with existing and emerging network protocols and applications. We
have developed a protocol that permits an increased data rate while maintaining
full compatibility with the IEEE 802.11 standard. The load balancing capability
developed and implemented in BreezeNET PRO.11 products allows for a maximum
aggregate
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throughput of approximately 25 Mbps, subject to conditions. Seamless and
reliable operation at roaming speeds of up to 60 miles per hour has enabled us
to support vehicular applications with high mobility requirements.
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
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, 2.5-2.7 GHz, or MMDS, 3.4-3.6 GHz, 5.7
GHz, 10.5 GHz and 26 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. 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 clients by addressing
promptly new needs, such as new frequency bands or the combined base station
architecture present in AlvariBASE.
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 and DSP reprogramming,
allow us to introduce advanced features to our products and to follow amendments
to emerging standards.
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 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 802.11a/g standards and
the recently approved 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-
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house supports our WALKair products, with a full duplex point-to-multipoint
single carrier trellis-coded 64QAM modem.
We have developed the BreezeMAX base station platform, which is designed
to support the WiMAX (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 802.16e standard for combined mobile and fixed
operation, while enjoying the benefits of OFDMA and smart-antenna processing.
The base station architecture and capabilities is closely aligned with the CPE
ASICs and reference design developed by Intel in the course of our
collaboration, in order to assure optimum performance in future WiMAX
deployments.
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.
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 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 technology officer, chaired a
task group of the IEEE 802.11a, a wireless LAN work group involved with
high-data rate standardization. We are a principal founder of the WiMAX Forum, a
non-profit organization whose members are working to promote adoption of the
IEEE 802.16 OFDM standard and to certify to interoperability of compliant
equipment. The scope of the 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. Alvarion's director of
business development, Mohammad Shakouri, is the Vice-Chair of WiMAX and chairs
the Marketing Working Group. Alvarion's engineers actively participate in the
technical group for defining inter-operability profiles and tests. We also
actively participate in - IEEE 802.16. Broadband Wireless Access work group, to
define and improve the OFDM mode, selected by WiMAX, for both fixed and mobile
applications. Our employee, Marianna Goldhammer, is the HiperMAN Chair and ETSI
- BRAN (Broadband Radio Access Networks) Vice-Chair. HiperMAN has adopted the
802.16 OFDM mode. Ms. Goldhammer is acting to align the IEEE and ETSI standards.
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 130 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.
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Our products are aimed at the Wireless Broadband and wideband market. 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, 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 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 Datang. 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 expanding our efforts to seek 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.
During 2003, one of our customers, a South American operator, accounted
for 13.9% of our sales. In addition, companies affiliated with Siemens accounted
for 8.5% and 11.4% of our sales in 2003 and 2002 respectively and companies
affiliated with Alcatel accounted for 3.7% and 10.3% of our sales in 2003 and
2002 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 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. We also offer our clients extended warranty and service
agreements.
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
32
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 an exacting 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 marketing forecasts done on a monthly basis.
Our products are currently manufactured primarily by several
subcontractors located in Israel. These subcontractors purchase, on our behalf,
many of the components for our products.
Part of our production is conducted in our facility in Tel Aviv. For this
part of our production, we have arrangements with several subcontractors, who
manufacture components for our products, or conduct either electronic assembly
or mechanical assembly. The electronic assembly, and some mechanical assembly of
electronic components is carried out by one assembly subcontractor who is based
in Israel.
The quality assurance, final assembly and testing operations of our
products are performed by us at our facilities in Tel Aviv and Omer and at our
subcontractors', R.H. Electronics Ltd., U.S.R. Electronics Ltd. and Sanmina SCI,
facilities in Israel. 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 R.H. Electronics and U.S.R. Electronics as part of our Approved
Enterprise program.
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 at our Tel Aviv and Omer
facilities.
We are ISO 9001 certified, which verifies that our manufacturing processes
adhere to established standards. We require that our contract manufacturers be
ISO 9002 certified.
Several components and sub-assemblies included in our products are
presently obtainable only from a limited group of suppliers and subcontractors,
and some of these components are custom-made for us.
Proprietary Rights
In order to protect our proprietary rights in our products and
technologies, we rely primarily upon a combination of trademark, trade secret,
and copyright law and confidentiality, non-disclosure and assignment of
inventions agreements. We have over 20 patents issued by patent offices in
several countries, with additional 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 software
products with features based upon, or otherwise similar to, those of our
products.
33
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 affect 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 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 global presence;
o effective "broadcast" coverage area;
o data transmission rates;
o efficiency of the transmission on the wireless network;
o network scalability;
o services supported;
o power consumption;
o product miniaturization;
o ease of installation;
o product time to market;
o comprehensiveness of product portfolio;
o ability to bundle products;
o ability to implement network solutions;
34
o product certifications;
o relationships with OEMs;
o effective distribution channels; and
o ability to support new industry standards.
Companies that are engaged in the manufacture and sale, or the
development, of products that compete with our Wireless Broadband products
include Alcatel, Ericsson, Marconi plc, SR Telecom, Wi-Lan Inc., Airspan Inc.,
Proxim, Inc., Motorola, Aperto Networks Navini, IP wireless and Remec, Inc. Our
products also compete with alternative telecommunications transmission media,
including leased lines, copper wire, fiber-optic cable, cable modems, television
modems and satellite.
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 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, namely in 5GHz. In
the United States, FCC rules were modified to include additional 255MHz of
spectrum. 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
35
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 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 GmbH*, incorporated under the laws of Germany;
o Floware 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 Kermadec Telecom B.V., incorporated under the laws of Netherlands;
o Alvarion - Tadipol-ECI Sp.z o.o.,** incorporated under the laws of
Poland;
o Alvarion Telsiz Sistemleri Ticaret A.(a).**, incorporated under the
laws of Turkey; and
o Alvarion de Mexico S.A de C.V, incorporated under the laws of
Mexico.
* Alvarion SARL and Alvarion GmbH are wholly-owned subsidiaries of
Alvarion UK LTD. In addition, we have a representative office in China.
** 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
36
We do not own any real property. On December 31, 2003, we leased an
aggregate of approximately 239,000 square feet in Israel for annual lease
payments (including management fees) of approximately $3.4 million and incur
annual parking expenses in connection with this lease of approximately $593,000,
based on the December 31, 2003 exchange rate between the dollar and the NIS.
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. While our main lease expires
in March through May 2006, parts of this lease expire in April 2005. We also
lease approximately 20,000 square feet of office facilities in Carlsbad,
California, at an annual rent of approximately $156,000. These premises serve as
the corporate headquarters of our U.S. subsidiary 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, U.K., France, Germany, Romania,
China, Hong Kong, Uruguay, Japan, Brazil, Mexico 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
infrastructure. Our solutions are used by telecom carriers and service providers
worldwide. Our products are used to provide broadband data and voice services,
for subscribers in the "last mile" of connectivity, for feeding cellular
networks and for private networks. With our comprehensive product offerings, we
provide a broad range of integrated wireless broadband solutions, addressing
markets and frequency bands, designed to address the various business models of
carriers and service providers.
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 and
multi-tenant units/multi-dwelling units.
Our products operate in licensed and license-free bands, ranging from 2.4
GHz to 28 GHz and comply with industry standards. Our core technologies include
spread spectrum radio, linear radio, digital signal processing, modems,
networking protocols and very large systems integration, or VLSI.
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.
37
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.
2003 Highlights
o InnoWave Acquisition - On April 1, 2003, we signed an agreement to
acquire certain assets and assume certain liabilities of InnoWave
for $ 9,100,000 in cash, a warrant to purchase 200,000 of our
ordinary shares and other purchase related expenses.
o Agreement with Intel - In July 2003, we signed a strategic agreement
with Intel Corporation to work together to incorporate Intel's
802.16a chips into our line of WiMAX standard-based technology.
o WiMAX -- During 2003 we co-founded the WiMAX Forum, a non-profit
organization whose members are working to promote adoption of the
IEEE 802.16a standard and to certify interoperability of compliant
equipment. The scope of the 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.
o Large customer order-- During 2003 a South American operator placed
two orders of a total amount of approximately $40 million for our
advanced eMGW solution to be shipped towards the first half of 2004.
The South American operator has standardized on eMGW as the basis
for its 3.5 GHz wireless access network which will bring high-speed
Internet and voice services to its rural and suburban regions.
During 2004, this customer placed another order in the amount of $18
million for a network extension.
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 inevitably differ
from the results estimated or assumed and the differences may be substantial as
to require subsequent write-offs, write-downs or similar 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 and directly to end-users.
38
Revenues from products are recognized in accordance with Staff Accounting
Bulletin No. 104 "Revenue Recognition in Financial Statements" ("SAB No. 104"),
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.
We generally do not grant a right of return to our OEMs and end users. In
certain instances, when such a right has been granted, we defer revenue until
the right of return expires, at which time revenue is recognized provided that
all other revenue recognition criteria are met.
During 2003, the Emerging Issues Task Force issued EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). The provisions
of EITF 00-21 apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. This addresses certain aspects of accounting by a
vendor for arrangements under which it will perform multiple revenue-generating
activities, including, how to determine whether an arrangements involving
multiple deliverables contains more than one unit of accounting.
In cases under which we are obligated to perform post-delivery
installation services, we consider the sale of equipment and installation to be
one unit of accounting in accordance with EITF 00-21 guidelines. As such,
revenues generated from such arrangements 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.
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
balance sheet date which includes a review of, among other factors, an estimate
of future demand for products within specific time horizons, valuation of
existing inventory, as well as product lifecycle and product development plans.
The estimates of future demand that we use in the valuation of inventory are the
basis for the 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 1e to our financial statements describes the
write-offs and provisions which we made and recorded in 2003, 2002 and 2001 to
reflect the decline from our expectations in the value of inventory which had
become
39
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 focus as we balance the need to maintain strategic inventory levels
to ensure competitive lead times versus the risk of inventory obsolescence
because of rapidly changing technology and customer requirements.
Derivative instrument. To hedge against the risk of overall changes in
cash flows resulting from forecasted foreign currency salary payments during the
year, we have instituted a foreign currency cash flow hedging program. We hedge
portions of our forecasted expenses denominated in NIS with put and call options
(zero - cost collar). During 2003 we recognized gains of $2.2 million related to
this hedging program. All amounts have been included in salary expenses in the
statement of operations.
In addition we entered into a forward exchange contracts to hedge a
portion of our NIS trade payables denominated in foreign currency for a period
of one to three months. The purpose of our foreign currency hedging activities
is to protect us from changes in the foreign exchange rate. During 2003 we
recognized gains of $360,000 related to the forward exchange contracts.
For both of these programs, we are required to make estimates concerning
the estimated foreign exchange rates, our salary payment obligations and our
foreign currency payable obligations. To the extent that these estimates are
incorrect, these hedging programs may fail to provide us with the desired
result.
Restructuring. In response to the decline in revenues that we experienced
in 2002 and 2001, we announced a restructuring program to prioritize our
initiatives around a focus on profit contribution, high-growth areas of our
business, reduction of expenses, and improved efficiency. This restructuring
program charges described in Note 9 to our financial statements include a
worldwide workforce reduction, abandonment of excess facilities, and
restructuring of certain other business functions. In addition, in the event
that adverse conditions continue to prevail, generally in our industry or
particularly with respect to our business, we may be required to implement
further restructuring measures. We are not currently able to determine whether
or to what extent such circumstances may continue.
Intangible assets. Since the transaction with Floware in 2001 which was
accounted for under the purchase method of accounting and the acquisition of
InnoWave in 2003, our balance sheet as of December 31, 2003 and 2002 includes
acquired intangible assets, such as goodwill, current technology and customer
relations, which totaled approximately $50.4 million as of these dates. In the
course of the analysis and valuation of intangible assets, we use financial and
other information including financial projections. Projections are based solely
on the information that was available at the acquisition date and may differ
from actual results. Notes 2k and 2l to our financial statements describes the
estimates and tests we have made during 2003 and 2002 to assess and determine
whether our recorded intangible assets (goodwill, customer relations and current
technology) have indications of impairment.
Goodwill. In accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible assets", ("SFAS No.142"), goodwill is
required to be tested for impairment at least annually. During 2003 and 2002, we
performed the required transitional and annual impairment tests of the company
as a single reporting unit as defined in SFAS No.142, in order to determine
whether the goodwill related to the reporting unit was impaired. The reporting
unit fair value was determined by an independent consultant, using discounted
cash flows and market approach and market multiples valuation
40
methods, based on our management's future operations projections. No indication
of impairment was identified.
Customer relations. When an operating entity is acquired, the target
company is often a party to ongoing relationships that are of material value to
the acquirer. To the extent that future cash flow of the 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 Innowave acquisition totaled $500,000. This value is estimated by performing
a discounted cash flow analysis, which entails forecasting cash flows to be
generated by customer relations, net a fair return on all contributory assets of
the business. 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 customer relations as of December 31, 2003 has been reviewed and it
was determined that there was no impairment. The amount of customer relations is
amortized over a period of 3.75 years on a straight-line method reflecting the
expected attrition in customer relationships.
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. 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, 2003 and 2002 has also been reviewed and
it was determined that there was no impairment. The acquired current technology
is amortized over 4.75 years and 7.75 years reflecting different product
amortization schedules in a straight-line method.
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
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
41
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, 2001, 2002 and 2003.
2001 2002 2003
----------------------- ------------------------ -----------------------
Total Total Total
Revenues Percentage Revenues Percentage Revenues Percentage
-------- ---------- -------- ---------- -------- ----------
Israel............................ $ 656 0.7% $ 655 0.7% $ 1,294 1.0%
U.S.A............................. 32,010 32.3 28,434 32.0 31,710 24.9
Mexico............................ 1,411 1.4 873 1.0 18,655 14.7
Russia............................ 2,240 2.3 4,087 4.6 9,802 7.7
Angola............................ -- -- 401 0.5 6,519 5.1
Chile............................. 4,032 4.1 8,440 9.5 4,180 3.3
Sweden............................ 5,046 5.1 1,530 1.7 2,362 1.9
Japan............................. 8,110 8.2 6,754 7.6 217 0.2
Other (each less than 5%)......... 45,463 45.9 37,675 42.4 52,469 41.2
-------- ------ -------- ------ -------- -----
$ 98,968 100.0% $ 88,849 100.0% $127,208 100.0%
======== ====== ======== ====== ======== =====
42
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,
-------------------------------------------
2001 2002 2003
--------- --------- ---------
Sales $ 98,968 $ 88,849 $ 127,208
Cost of sales 59,484 55,120 68,535
Write-off of excess inventory and
provision for inventory purchase
commitments 53,881 250 6,562
--------- --------- ---------
Gross profit (loss) (14,397) 33,479 52,111
--------- --------- ---------
Operating costs and expenses:
Research and development, net 21,096 24,077 23,505
Selling and marketing 30,258 26,570 32,904
General and administrative 6,226 6,018 6,323
Merger and acquisition related expenses 2,841 -- 2,201
Amortization of intangible assets 1,200 2,400 2,606
Amortization of deferred stock
compensation 726 580 511
In-process research and development
write-off 26,300 -- --
Restructuring 5,437 1,102 --
One-time expense related to a settlement
of an OCS program 6,535 -- --
--------- --------- ---------
Total operating expenses 100,619 60,747 68,050
--------- --------- ---------
Operating loss (115,016) (27,268) (15,939)
Financial income, net 8,540 6,587 4,127
Other expenses (3,535) -- --
--------- --------- ---------
Net loss $(110,011) $ (20,681) $ (11,812)
Year Ended December 31,
-----------------------------
2001 2002 2003
---- ---- ----
Statement of Operations Data:
Sales ...................................................... 100.0% 100.0% 100.0%
Cost of sales .............................................. 60.1 62.0 53.9
Write-off of excess inventory and
provision for inventory purchase
commitments .............................................. 54.4 0.3 5.1
----- ----- -----
Gross profit (loss) ........................................ (14.5) 37.7 41.0
Operating costs and expenses:
Research and development, gross ............................ 27.4 31.1 21.5
Less - grants .............................................. 6.1 4.0 3.0
----- ----- -----
Research and development, net .............................. 21.3 27.1 18.5
Selling and marketing ...................................... 30.6 29.9 25.9
General and administrative ................................. 6.3 6.8 5.0
Merger and acquisition related expenses .................... 2.9 -- 1.7
Amortization of intangible assets .......................... 1.2 2.7 2.0
Amortization of deferred stock
compensation ............................................. 0.7 0.7 0.4
In-process research and development
write-off ................................................ 26.6 -- --
Restructuring .............................................. 5.5 1.2 --
One-time expense related to a settlement
of an OCS program ........................................ 6.6 -- --
----- ----- -----
Total operating expenses ................................... 101.7 68.4 53.5
----- ----- -----
Operating loss ............................................. (116.2) (30.7) (12.5)
Financial income, net ...................................... 8.6 7.4 3.2
Other expenses ............................................. (3.6) -- --
----- ----- -----
Net loss ................................................... (111.2)% (23.3)% (9.3)%
===== ===== =====
43
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
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.
Sales since April 1, 2003 reflect the combined sales of Alvarion with former
InnoWave operations whereas results in 2002 and the first three months of 2003
reflect sales derived only by Alvarion. 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, South 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. Cost of sales since April 1, 2003 reflect the combined
cost of sales of Alvarion with former InnoWave operations whereas results in
2002 and the first three months of 2003 reflect the cost of sales derived only
by Alvarion. 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. We periodically assess our inventories valuation in accordance with
dead and slow moving items based on revenues forecasts and technological
obsolescence. Should inventories on hand exceed our estimates or become obsolete
and must therefore be written down or written off, such charge would result in a
corresponding reduction in our inventory and shareholders' equity and a
corresponding charge to our statement of operations. Changes in demand for our
products and in our estimates for demand create changes in provisions for dead
inventory. 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.
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. Gross research and development expenses since April 1,
2003 reflect the combined expenses of Alvarion with former InnoWave expenses
whereas expenses in 2002 and the first three months of 2003 reflect expenses
derived only by Alvarion. The decrease in gross research and development
expenses in 2003 was a result of our restructuring initiatives carried out by
the end of 2002, partially offset by the consolidation of InnoWave 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
44
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.
Selling and marketing expenses since April 1, 2003 reflect the combined expenses
of Alvarion with former InnoWave expenses, whereas expenses in 2002 and the
first three months of 2003 reflect expenses derived only by Alvarion. 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
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 $6.3 million in 2003, an increase of approximately 5.0% compared
with general and administrative expenses of approximately $6.0 million in 2002.
General and administrative expenses since April 1, 2003 reflect the combined
expenses of Alvarion with former InnoWave expenses whereas expenses in 2002 and
the first three months of 2003 reflect expenses derived only by Alvarion. This
increase is primarily attributable to the enlargement 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 nature of the acquisition related
expenses consist of approximately $ 2.2 million comprised of charges related to
information technology systems integration expenses, bonuses, compensation and
related expenses to synergy of employees and human resources, marketing,
administrative and other expenses.
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, and as a result of the acquisition of InnoWave, we also 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 range between 3.75 to 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 stock options into which Floware stock options were
converted pursuant to the terms of our merger agreement with Floware. This
amortization is due to 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.
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
45
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.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Sales. Sales in 2002 were approximately $88.8 million, a decrease of
approximately 10.2% compared with sales of approximately $99.0 million in 2001.
Sales in 2002 reflect sales by Alvarion whereas sales in 2001 reflect sales by
BreezeCOM prior to August 1, 2001 and sales by Alvarion (BreezeCOM and Floware
combined) from August 1, 2001, the effective date of the merger. The decrease in
sales is primarily attributable to the downturn in economic conditions worldwide
during this period, specifically in the telecommunications equipment market.
This downturn had a significant impact on our customers and the markets in which
they sell their products. Many of the new operators that we had sold products to
in the past ceased or cut-back operations and have not placed additional orders
for our products. Another factor that impacted our sales is a slowdown in the
spectrum allocation process in various countries. This slowdown delayed our
sales in these countries. However, despite these factors we managed to partially
offset their impact and maintain our presence in all regions due to our
diversified worldwide customer base, strong sales channels comprised of our OEM
partners, the wide range of distributors and direct sales, and the variety of
our products. During 2002 we continued to focus on selling to developing areas
where demand for our products continued to be high.
Cost of sales. Cost of sales was approximately $55.1 million in 2002, a
decrease of approximately 7.3% compared with cost of sales of approximately
$59.5 million in 2001. Cost of sales in 2002 reflects cost of sales of Alvarion
whereas cost of sales in 2001 reflects cost of sales of BreezeCOM prior to
August 1, 2001 and cost of sales of Alvarion (BreezeCOM and Floware combined)
from August 1, 2001. This decrease is primarily attributable to the continued
implementation of operational efficiency measures and cost reduction programs,
which we implemented during 2002. Cost of sales as a percentage of sales
increased to approximately 62.0% in 2002 from approximately 60.1% in 2001,
primarily because of high competition, the mix of our products and sales through
different sales channels and the enlarged effect of the fixed costs in
connection with the decrease in sales.
Write-off of excess inventory and provision for inventory purchase
commitments. In 2002, we recorded additional charges related to the write-off of
excess inventory in the aggregate amount of approximately $250,000, a decrease
of approximately 99.5% compared with $53.9 million in 2001. Prior to 2001, our
previous purchasing policy, as well as our purchasing commitments, had been
based on higher revenue forecasts. In particular, we built significant
inventories in 2000 to sell equipment to customers, primarily in the United
States, to provide fast Internet access utilizing unlicensed bandwidth. Due to
the economic environment and reduced capital spending in this period,
particularly in the telecommunications equipment markets, we determined that it
was unlikely that we would be able to utilize or market our entire inventory or
purchase commitments in the next few quarters.
Research and development expenses, net. Gross research and development
expenses were approximately $27.6 million in 2002, an increase of approximately
1.9% compared with gross research and development expenses of approximately
$27.1 million in 2001. Gross research and development expenses in 2002 reflect
research and development expenses of Alvarion. Gross research and development
expenses in 2001 reflect research and development expenses of BreezeCOM prior to
46
August 1, 2001 and research and development expenses of Alvarion (BreezeCOM and
Floware combined) from August 1, 2001. This increase is primarily attributable
to increased costs of development-related raw materials related to our broader
product offerings under development after the merger. Research and development,
gross, as a percentage of sales increased to 31.1% in 2002 from 27.4% in 2001,
primarily as a result of the increase in absolute terms of such expense coupled
with the decrease in our revenues. Grants from the OCS, totaled approximately
$3.5 million in 2002 and $6.0 million in 2001. This decrease is primarily
attributable to the agreement we entered into with the OCS in 2001, for the
early repayment of all royalties arising from future sales with respect to our
then outstanding contingent royalties balance with the OCS. Under this
agreement, future grants that we may receive with respect to our research and
development projects are restricted only to fund our generic projects and are
limited to finance up to 50% of these projects. In addition to the grants
received under this agreement, we obtain grants from the OCS to fund certain
other research and development projects as part of our participation in the
Magnet Consortium. Research and development expenses, net, were approximately
$24.1 million in 2002, compared with approximately $21.1 million in 2001.
Selling and marketing expenses. Selling and marketing expenses were
approximately $26.6 million in 2002, a decrease of approximately 12.2% compared
with selling and marketing expenses of approximately $30.3 million in 2001.
Selling and marketing expenses in 2002 reflect selling and marketing expenses of
Alvarion. Selling and marketing expenses in 2001 reflect selling and marketing
expenses of BreezeCOM prior to August 1, 2001 and selling and marketing expenses
of Alvarion (BreezeCOM and Floware combined) from August 1, 2001. This decrease
is primarily attributable to decreased royalties paid as part of our
aforementioned agreement with the OCS, our workforce reduction initiative, which
we implemented at the end of 2001 and the decrease in sales reflected in
decreased employee- related expenses. Selling and marketing expenses as a
percentage of sales decreased to 29.9% in 2002 from 30.6% in 2001. This decrease
is primarily attributable to the effect of the reduction in some selling and
marketing personnel worldwide, which occurred at the end of 2001 as well as
reduced costs associated with our subsidiaries.
General and administrative expenses. General and administrative expenses
were approximately $6.0 million in 2002, a decrease of approximately 3.3%
compared with general and administrative expenses of approximately $6.2 million
in 2001. General and administrative expenses in 2002 reflect the general and
administrative expenses of Alvarion. General and administrative expenses in 2001
reflect the general and administrative expenses of BreezeCOM prior to August
2001 and the general and administrative expenses of Alvarion (BreezeCOM and
Floware combined) from August 1, 2001. This decrease is primarily attributable
to expenses cutoff. General and administrative expenses as a percentage of sales
increased to 6.8% in 2002 from 6.3% in 2001 mainly due to the decrease in sales.
Amortization of current technology. As a result of the merger with
Floware, we also 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. Current
technology charges of $2.4 million and $1.2 million were recorded in 2002 and
2001, respectively.
Amortization of deferred stock compensation. Deferred stock compensation
charges of $580,000 and $726,000 were recorded in 2002 and 2001, respectively,
relating to our stock options into which Floware stock options were converted
pursuant to the terms of our merger agreement with Floware. This amortization is
due to deferred compensation of approximately $2.1 million related to stock
options granted to employees of Floware through July 31, 2001 with exercise
prices per share determined to be below the estimated fair values per share at
the dates of grant. The deferred stock compensation is being amortized to
expense over the vesting periods of the applicable options.
47
Restructuring costs. The restructuring costs consist of approximately $1.1
million and $5.4 million for charges related to cost-reduction programs that we
implemented in November 2002 and July and November 2001. Pursuant to these
programs we reduced our workforce by approximately 260 employees and realigned
our research and development and sales and marketing efforts.
Financial income, net. Financial income, net, was approximately $6.6
million in 2002, a decrease of approximately 22.9%, compared with financial
income, net, of approximately $8.5 million in 2001. The decrease in financial
income is primarily attributable to the decrease in interest rates on our
investments and the decrease in our cash reserves.
Net loss. In 2002, net loss was approximately $(20.7) million, compared
with a net loss of approximately $(110.0) million in 2001.
In-Process Research and Development related to our merger with Floware
At the time of our merger with Floware, Floware was in the process of
developing new technologies that we valued at $26.3 million. The technologies
under development were WALKnet, WALKair 1300, and WALKair 3000. As of the date
of the merger, none of these new technologies had demonstrated their
technological or commercial feasibility. Significant risk existed because
Floware was unsure of the obstacles it 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 Floware would be able to
realize any value from the sale of the technology to another party.
As the in-process technologies had no alternative use in the event that
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.
The products under development at the time of the acquisition of Floware
included the following:
WALKnet
WALKnet is the integrated network management system for the WALKair family
(WALKair 1000, WALKair 1300, and WALKair 3000). At that time, the WALKnet's
platform was applied as the basis of a new management network research and
development project designed to be integrated into our new underdeveloped
technologies (WALKair 1300 and WALKair 3000). In 2001, 100% of this project was
attributable to the existing technology within WALKair 1000. This amount was
expected to decrease gradually so that in 2004, 0 percent of this project will
be attributable to the existing technology within WALKair 1000, and 100 percent
will be attributable to what was deemed at the valuation date as in-process
research and development. As such, we have applied the relevant revenue split
between the current technology dealing with the existing WALKair 1000 system and
in-process research and development projects pertaining to the development of
the future WALKair 1300 and WALKair 3000 systems, in order to fairly represent
the projected cash flows of the technology being developed.
The In-Process Research and Development portion of this project represents
the development of the required functionality of WALKnet required to support
WALKair 3000 and WALKair 1300.This new functionality was to develop WALKnet into
a completely new application with about one hundred new screens, including new
configuration screens, shelf handling cap, ATM handling capabilities and SLA
management capabilities. These new capabilities within the WALKnet system
presented additional, significant new functionalities to the existing WALKnet
system.
48
The WALKnet project started in the third quarter of 2000 and was completed
in the first quarter of 2002. We expect sales of this product to run until 2010.
We have assessed a percentage of completion for WALKnet in order to allocate
only the value of research and development performed as of the merger date. The
percentage of completion was primarily based on our estimates as to the cost
spent on the project prior to the date of the merger out of the total estimated
budget. As of the date of the merger, approximately $1,124,000 had been spent
while an additional approximately $230,000 was thereafter incurred to complete
the project. Thus, the technical development was estimated to be approximately
83% complete. Total expenses incurred under this project were in compliance with
the original estimates.
WALKair 1300
WALKair 1300 is a new terminal station designed to be supported by the
WALKair 1000 base station. This product has got a significant cost reduction
over the WALKair 1000 Terminal Station. As of the date of the merger, this
product had not reached its technical feasibility. WALKAir 1300 is based around
ASIC technology, and this was the first time that Floware developed a product
involving ASIC. The sales of WALKair 1300 terminal stations were expected to
replace that of WALKair 1000 in 2003 onwards. The WALKair 1300 project started
in the second quarter of 2000 and was completed in the fourth quarter of 2003.
Sales of this product are expected to run until 2010. We have assessed a
percentage of completion for WALKair 1300 in order to allocate only the value of
research and development performed as of the valuation date. The percentage of
completion was primarily based on the cost spent till the date of the merger on
the project out of the total estimated budget. As of the date of the merger,
approximately $881,000 had been spent, while approximately an additional
$1,200,000 was expected to be required to complete the project. Thus, the
technical development on the merger date was estimated to be approximately 42%
complete. Total expenses for this project are approximately $5 million.
WALKair 3000
WALKair 3000 was Floware's new product providing significant upgrades to
the WALKair 1000 product with an innovative re- designed core technology. The
WALKair 3000 project started in January 2000. Sales of this product were
expected to run from 2004 until 2010. We have assessed a percentage of
completion for WALKair 3000 in order to allocate only the value of research and
development performed as of the date of the merger. The percentage of completion
was primarily based on the cost spent till that date on the project out of the
total estimated budget. As of the date of the merger, approximately $4.7 million
had been spent in this project. Thus, the technical development was estimated to
be approximately 44% complete. Total expenses incurred as of December 31, 2003
under this project were approximately $17 million.
Associated Development Risks as of the Merger Date
Several uncertainties existed at the date of the merger as to the final
form, configuration, feasibility and the market acceptance of the final projects
described above. As mentioned above, the whole concept of WALKair 1300 is based
on "ASIC" technology. This was the first time Floware was incorporating ASIC
technology in any of its products. ASIC itself was a high risk factor and could
have caused a significant delay in the release of WALKair 1300. In addition,
Floware has incorporated within ASIC both analog and digital signals. Such a
technology is known as "Mixed Signal ASIC" and, as of the date of the merger,
was very difficult to implement, and held significant risk that the analog parts
would
49
not perform to its specification. As for WALKair 3000, since it is a fully
redesigned system, there was a risk of whether the project will be completed as
scheduled and whether its technology will be feasible.
Valuation and Allocation Approach
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 will be successful and that the
product's development and commercialization would meet our management's current
time schedule.
Discount Rate
In determining applicable discount rates to be used in the valuation of
the in-process technologies, we have analyzed the risks of an investment in
Floware. In arriving at appropriate discount rates, we considered the weighted
average cost of capital. The weighted average cost of capital was calculated to
be 25%. The discount rate applicable to in-process projects reflects the risks
inherent in each project, as described above. An overall after-tax discount rate
of 30% was applied to the in-process projects' cash flows.
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 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 2003, the evaluation 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.
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."
50
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
Our operating activities consumed cash of approximately $38.1 million in
2001, $9.5 million in 2002 and earned cash of $664,000 in 2003. Our investing
activities provided cash of approximately $61.1 million in 2001, $6.4 million in
2002 and used cash of approximately $2.7 million in 2003.
Capital expenditures were approximately $6.0 million in 2001, $4.3 million
in 2002 and $3.1 million in 2003. These expenditures principally financed the
purchase of research and development equipment and manufacturing equipment.
Net cash provided by financing activities totaled approximately $2.2
million in 2001, consumed $6.3 million in 2002 and totaled $2.0 million in 2003.
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. During 2002 we began repurchasing our shares. As of June
15, 2004, 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
amounts of cash provided in 2002 is attributable primarily to proceeds from the
issuance of shares in connection with the exercise of options. In 2003 the
amounts of cash provided is attributable primarily to proceeds from the issuance
of shares in connection with the exercise of employees' options at the amount of
approximately $4.9 million and from the proceeds of the long term debt of $6.9
million partially offset by the repurchase of shares of approximately $1.3
million and the settlement of our debt to the OCS of $8.5 million.
Total cash and cash equivalents and total investments were $153.6 million
as of December 31, 2003, a decrease of approximately $9.1 million or 5.6 % from
$ 162.7 million at December 31, 2002. The change in cash reserves was a result
of cash used for the acquisition of InnoWave of $9.3 million, the repurchase of
ordinary shares for $1.3 million, partially offset by cash provided from the
issuance of ordinary shares of $4.9 million related to the exercise employee
stock options and cash used for all other operating, investing and financing
activities of $3.4 million.
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, short-term bank borrowings and cash generated from
operations and from the exercise of 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
51
our merger with Floware in 2001and approximately $26 million was received and
accrued as financial income from 2000 through 2003.
Accounts Receivable, Net. Accounts receivable, net was $21.2 million and
$11.8 million as of December 31, 2003 and December 31, 2002, respectively. Days
sales outstanding ("DSO") in receivables as of December 31, 2003 and December
31, 2002 were 61 days and 48 days, respectively. Increase in DSO's in 2003 is
primarily a result of significant increase in revenues achieved towards the end
of the year with the related collection first becoming due in 2004.
Inventories. Inventories were $37 million as of December 31, 2003, an
increase of $9.5 million or 34.5% from $27.5 million at December 31, 2002.
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. Inventory turns were approximately two
times in fiscal 2003 and 2002. 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 for future customers' needs and market changes.
WORKING CAPITAL
Our working capital was approximately $90.4 million as of December
31, 2003, compared to $74.2 million as of December 31, 2002 and to $167.4
million as of December 31, 2001. 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. The decrease in working capital from December 31, 2001 to December 31,
2002 is primarily attributable to investment of our cash reserves in long term
deposits and marketable securities, decrease in trade receivables, inventories
and other accounts receivables together with a decrease 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.
Leases. We lease office space in several worldwide locations. Rent
expense totaled $4 million in 2003, $3.6 million in 2002, and $2.9 million in
2001, respectively. We also lease various motor vehicles under operating lease
agreements, which expire in 2006. Motor vehicles leasing expenses for the year
ended December 31, 2003 were $2.2 million, for the year ended December 31, 2002
were $2.0 million and for the year ended December 31, 2001 were $1.5 million.
52
Future annual minimum lease payments under all non-cancelable operating
leases as of December 31, 2003 were as follows (in thousands):
Rental Lease of
of motor
Premises vehicles
-------- --------
2004 $ 2,918 $ 2,029
2005 2,003 1,357
2006 620 453
------- -------
$ 5,541 $ 3,839
======= =======
Royalties. During 2003, we recorded royalty-bearing grants from the
OCS for the support of research and development activities aggregating to $1.1
million 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. In addition, grants received after
January 1, 1999 also bear interest at the rate of LIBOR. 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, we paid or accrued royalties to the OCS in the amount of
$1.2 million. As of December 31, 2003, the aggregate contingent liability to the
OCS amounted to $9.8 million.
The following table of our material contractual obligations as of December
31, 2003, summarizes the aggregate effect that these obligations are expected to
have on our cash flows in the periods indicated:
=============================================================================
Payments due by period
===================================================
During the During the
Less than second and fourth and
Contractual Obligations Total 1 year third years fifth years
=============================================================================
Long-Term Debt $ 7,000,000 $1,700,000 $3,500,000 $1,800,000
=============================================================================
Rental Lease Obligations $ 5,500,000 $2,900,000 $2,600,000 -
=============================================================================
Motor vehicle Leases $ 3,800,000 $2,000,000 $1,800,000 -
=============================================================================
Total $16,300,000 $6,600,000 $7,900,000 $1,800,000
=============================================================================
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 12 months. We believe that the
most strategic uses of our cash resources include working capital,
53
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 of 36%. 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, 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 2008. The period
of benefits for the Nazareth plan has not yet commenced, and will expire in
2010.
During 1997, 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
54
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.
During 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. 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 10
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.
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. As of June 15, 2004 such approval has not yet
been obtained.
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 in a manner other
than in the complete liquidation of the company they would be taxed at the
corporate tax rate applicable to such profits as if we had not elected the
alternative system of benefits, currently between 15%-20% for an "Approved
Enterprise". As of December 31, 2003, our accumulated deficit does not include
tax-exempt profits earned by our "Approved Enterprise."
As of December 31, 2003, in the Israeli company we had available tax loss
carryforwards amounting to approximately $91 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 $65 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.
55
As of December 31, 2003, the state and the U.S. federal tax losses
carryforward of our U.S. subsidiary amounted to approximately $6.5million and
$15.1 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
2008 and 2023, respectively.
As a result, we do not anticipate being subject to income tax in Israel
until at least 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 and the InnoWave
acquisition, we cannot assure you that the tax authorities will not modify the
tax benefits that we enjoyed prior to the merger.
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 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 China and in the 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
Through December 2001, we participated in royalties bearing programs
sponsored by the Israeli Government for the support of research and development
activities. We had obtained grants from the OCS and were obligated to pay
royalties to the OCS, amounting to 3%-5% of the sales of the products and other
related revenues generated from the projects funded by the OCS. The obligation
to pay royalties was contingent on actual sales of the products funded.
We accrued grants from the OCS totaling approximately $6.0 million in
2001, $3.5 million in 2002 and $3.8 million in 2003. In December 2001, we
entered into an agreement with the OCS for early payment of all royalties
arising from future sales with respect to previous research and development
grants to us. Under the arrangement, we settled our outstanding contingent
royalty commitment, regardless of the actual level of future sales. As a result
of this agreement, we recorded a one-time operating charge of $ 6.5 million with
respect to the payments, which we are obligated to the OCS.
Under the arrangement, 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%. During
2003, we settled the amount due for $ 8.5 million.
Such arrangement enables us to participate in new OCS programs under which
we will be eligible to receive grants for generic 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 this grants, we obtain grants from the OCS to fund certain
other research and development projects as part of our participation in the
Magnet Consortium.
56
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, 2003, our research and development staff consisted of
297 full time employees. Our research and development is conducted at our
facilities in Israel and Romania. We occasionally use independent subcontractors
for portions of our development projects.
Our gross research and development expenses were approximately $27.1
million, or 27.4% of sales in 2001, $27.6 million or 31.1% of sales in 2002 and
$$27.4 or 21.5% of sales in 2003. The OCS reimbursed us for approximately $6.0
million in 2001, $3.5 million in 2002 and $3.8 million in 2003.
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 "white zones" 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 South America, China, India, Africa and Eastern Europe are
choosing to leapfrog 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 South America that calls for tens of thousands of lines to be
rolled out over a few quarters. Our acquisition of InnoWave positions us to
serve the needs of the developing regions as a result of additional products.
Regulatory Factors
During 2003, the Chinese Ministry of Information Industry, awarded
licenses in 32 cities. Each of the major Chinese operators, in turn, awarded
business to Alvarion together with one of its local partners. Additional
licenses will be awarded on a provincial level in 2004, and we expect China to
become an important market over the next few years. We are also active in
additional developing areas, such as Russia and Africa, and we see future
potential in other deregulating low tele-density regions, such as India.
57
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. Broadband wireless solutions provide a fast and cost effective
way to meet this requirement. Currently, we are working with telcos in the UK,
France, and Sweden on the trial-phase of universal access projects.
Role of Standards
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 802.16
standard and we helped found the WiMAX Forum in 2003 to promote its adoption.
In one of the major developments of 2003, Intel Corporation made a very
strong commitment to the standard and pledged to develop 802.16-compliant
silicon, which is to be available to equipment vendors by the end of 2004. We
have a strategic relationship with Intel. With the availability of mass produced
chips, the cost of customer premise equipment is expected to decline
dramatically. 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 CONTRACTURAL OBILGATIONS
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 our current directors
and executive officers:
Name Age Position
---- --- --------
Anthony Maher 57 Chairman of the board of directors**
Dr. Meir Barel...... 52 Vice Chairman of the board of directors**
Oded Eran........... 49 Director**
Benny Hanigal....... 53 Director*
Professor Raphael Amit 56 External Director**
Dr. Orna Berry...... 53 External Director****
Robin Hacke......... 43 External Director***
Amnon Yacoby........ 52 Director***
Dr. David Kettler 61 Director***
Zvi Slonimsky....... 53 Chief Executive Officer and Director***
Tzvi Friedman....... 42 President and Chief Operating Officer
Amir Rosenzweig..... 43 President, Alvarion, Inc.
58
Name Age Position
---- --- --------
Dafna Gruber........ 38 Chief Financial Officer
Zvi Harnik.......... 43 Executive Vice President - Research and
Development
Benny Glazer........ 52 Senior Vice President - Corporate Sales
* Term expiring at our 2005 Annual General Meeting
** Term expiring at our 2006 Annual General Meeting
*** Term expiring at our 2007 Annual General Meeting
**** Term expiring August 1st, 2004
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.
59
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.
Dr. Orna Berry has served as one of our external directors since August
2000, a position to which she was reappointed upon our merger with Floware.
Since August 2000, Dr. Berry has been a venture partner in Gemini Israel Funds
Ltd. From 1997 and 2000, Dr. Berry served as the Chief Scientist of the Ministry
of Industry and Trade of the Government of Israel. From 1993 to 1997, Dr. Berry
was the co-founder and the president of ORNET Data Communication Technologies
Ltd. From 1989 to 1992, Dr. Berry was the chief scientist of Fibronics Ltd.. Dr.
Berry also serves as an external director of Aladdin Knowledge Products Ltd., a
security solutions company, and as a director of Compugen Ltd., a biotechnology
company. Dr. Berry is also a member of the board of directors of several
privately held companies. Dr. Berry received her Ph.D. in Computer Science from
the University of Southern California and M.A. and B.A. degrees in Statistics
and Mathematics from Tel-Aviv University and Haifa University, respectively.
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. From January 2003 to July 2003, Ms. Hacke served as Managing Director of
Triport Advisors Ltd., a company founded by Ms. Hacke and that provides advisory
services to investment companies including Portview Communications Partners. She
also advises 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 and that
provided advisory services to 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. 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 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.
60
Dr. David Kettler has joined as a member of our board of directors in May
2004. He is a consultant for H.I.G. Capital in Atlanta through DAK Solutions
LLC. 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. He has actively contributed to Computer Science &
Telecommunications Board Committee Reports on the Internet and Broadband. Mr.
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.
Mr. Zvi Slonimsky has been our Chief Executive Officer since June 2002,
and 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 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 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 as Executive Vice President in April 2000 and
since our merger with Floware has served as Executive Vice President - Research
and Development. From September
61
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.
B. COMPENSATION
The aggregate direct labor costs associated with all of our directors and
executive officers as a group (16 persons) for the year ended December 31, 2003
(including persons who served as directors or executive officers for only a
portion of 2003, and whether or not serving as such as of December 31, 2003) was
approximately $1,899,674. This amount includes approximately $235,202 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 $140,451 in
compensation in 2003. As of December 31, 2003, our directors and executive
officers held outstanding options to purchase an aggregate of 4,965,483ordinary
shares, at exercise prices ranging from $0.98 to $6.39, with expiration dates
ranging from January 2007 to September 2013. In addition, as part of an option
exchange program that was conducted in September 2002, as more fully described
below under "- E. - Share Ownership - Share Option Plans," options to purchase
an aggregate of 3,907,550 ordinary shares previously held by directors and
executive officers were cancelled in September 2002. On March 23, 2003, options
to purchase an aggregate of 1,918,386 ordinary shares were issued to these
directors and executive officers as part of the option exchange program. The
exercise price per share in each of these option grants was $2.02, 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.
On March 23, 2003, options to purchase an aggregate of additional
1,323,671 ordinary shares were issued to our directors and executive officers at
an exercise price of $2.02.
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. Annual general shareholders' meetings are required to be
held at least once every calendar year, but not more than fifteen
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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. Any director so appointed may hold office until the third
general shareholders' meeting convened after the appointment by the board of
directors and may be re-elected by the shareholders. The terms of office of the
directors 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.
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 Companies Law. Under the Companies
Law, companies incorporated under the laws of Israel whose shares have been
offered to the public in or outside of Israel are required to appoint two
directors who qualify as external directors under the 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 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.
On July 30, 2001, our shareholders elected, effective as of August 1,
2001, the effective time of our merger with Floware, Dr. Orna Berry and Ms.
Robin Hacke, both of whom satisfy the requirements of
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the Companies Law, as external directors of the company. On September 30, 2003,
our shareholders elected, effective as of October 1, 2003, Professor Raphael
Amit, who satisfies the requirements of the Companies Law, as an external
director of the company. We have appointed the external directors to the
committees of our board of directors as required by law.
Audit Committee
Pursuant to the 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,
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. In addition, pursuant to the rules of the Nasdaq
National Market and U.S. securities law requirements, 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 control systems 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 Mr. Hanigal, Prof. Amit, Dr. Berry and Ms. Hacke, all of
whom are independent directors in accordance with Nasdaq listing requirements.
Prof. Amit qualifies as a financial expert for purposes of the Sarbanes-Oxley
Act of 2002 and Nasdaq listing requirements. Dr. Berry, Ms. Hacke and Professor
Amit qualify as external directors under the Companies Law.
Compensation Committee
The compensation committee of our board of directors, which consists of
Mr. Maher, Dr. Barel, Professor Amit, and Dr. Kettler, assists the board of
directors in administering our share option plans and other issues relating
to employee compensation.
Internal Auditor
The 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 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
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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 Companies Law. Under the 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 require audit committee,
board of directors and shareholder approvals.
Disclosure of Personal Interest
The 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
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 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 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 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,
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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 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 Companies Law each shareholder has a duty to act in
good faith in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing any power
he or she has in the company, such as in shareholder votes. In addition, certain
shareholders have a duty of fairness toward the company, although such duty is
not defined in the Companies Law. These shareholders include any controlling
shareholder, any shareholder who knows that 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
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 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
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
o financial liability imposed upon him in favour of another
person.
These provisions are specifically limited in their scope by the Companies
Law, which provides that a company may not indemnify or procure insurance for an
office holder for:
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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 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, 2003, we had 743 employees (including persons who
became our employees as a result of the InnoWave acquisition), of which 297 were
engaged in research and development, 178 in operations, 223 in sales and
marketing and 45 in administration and management. Of our full-time employees,
as of December 31, 2003, 601 were located in Israel, 59 in the United States and
83 at our other branch offices.
As of December 31, 2002, we had 579 employees, of which 571 were full-time
employees and 8 were part-time employees. Of all employees, 213 were engaged in
research and development, 163 in operations, 164 in sales and marketing and 39
in administration and management. Of our full-time employees as of December 31,
2002, 461 were located in Israel, 68 in the United States and 42 at our other
branch offices. During 2002, we terminated the employment of approximately 60
employees, in light of continuing adverse market conditions in the
telecommunications equipment industry.
As of December 31, 2001, we had 554 full-time employees and 9 part-time
employees. Of the full time employees, 227 were engaged in research and
development, 118 in operations, 167 in sales and marketing and 42 in
administration and management. Of our full-time employees as of December 31,
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2001, 448 were located in Israel, 59 in the United States and 47 at our other
branch offices. During 2001 we terminated the employment of approximately 200
employees, in light of adverse market conditions in the telecommunications
equipment industry.
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 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.
Israeli employers, including us, 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.
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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 15, 2004. The percentage of outstanding ordinary shares is based on
56,545,385 ordinary shares outstanding as of June 15, 2004.
Number of Percentage of Outstanding
Name Ordinary Shares Ordinary Shares
-------------------- ------------------ ---------------------------
Dr. Meir Barel -- -
Zvi Slonimsky -- -
Tzvi Friedman -- --
Amir Rosenzweig -- --
Dafna Gruber -- --
Zvi Harnik -- --
Benny Glazer -- --
Amnon Yacoby 1,255,473 2.2%
Benny Hanigal 177,430(1) *
Anthony Maher 40,651 *
Dr. Orna Berry -- --
Robin Hacke 536 *
Professor Raphael Amit -- --
Oded Eran -- --
Dr. David Kettler -- --
------------------------
* Less than 1%.
(1) The ordinary shares are held in trust for Mr. Hanigal.
As of June 15, 2004, the directors and executive officers listed above, as
a group, held4,665,127_____ options to purchase of our ordinary shares at a
weighted average exercise price of $5.11 with expiration dates ranging from
January 2007 to April 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
Pursuant to resolutions of our board of directors, as of December 31, 2003
a total of 20,588,178 ordinary shares have been reserved for issuance 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, Floware's Key Employee Share Incentive Plan (1996) and an option agreement
with a director.
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
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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.
Options granted under the share option plans generally vest over a period
of ranging from three months to four years. Of the options reserved under the
share option plans, options to purchase 6,734,779 ordinary shares have been
exercised, options to purchase 997,092 ordinary shares are available for future
grant and options to purchase 12,856,308 ordinary shares, including options
issued pursuant to the terms of the Floware merger, were outstanding as of
December 31, 2003, at a weighted average exercise price of $3.45 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
12,856,308 options outstanding expire between eight and ten years from the date
of grant.
The share option plans are administered by the board of directors. The
board of directors or the compensation committee designates the optionees, dates
of grant 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 generally may exercise
vested options granted under the share option plans for a period of between two
weeks and 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
8.5 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 15, 2004, 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
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ordinary shares is based on 56,545,385 ordinary shares outstanding as of June
15, 2004. 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.
Ordinary Shares
Beneficially Owned
--------------------
Name Number Percent
---- --------- --------
Fidelity Investments (1) 5,128,600 9.1%
Entities affiliated with Star Ventures(2) 4,256,905 7.5%
--------------------------
(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.
(2) Consists of 686,081 ordinary shares held by STAR Management of Investment
(1993) Limited Partnership (Israel Star Partnership); 1,016,888 ordinary
shares held by SVE STAR Ventures Enterprises No. III, a German Civil Law
Partnership (with limitation of liability) (SVE III); 83,756 ordinary
shares held by SVE STAR Ventures Enterprises No. IIIA, a German Civil Law
Partnership (with limitation of liability) (SVE IIIA); 447,314 ordinary
shares held by SVM STAR Ventures Managementgesellschaft mbH Nr. 3 & Co.
Beteiligungs KG (SVE IV); 602,631 ordinary shares held by SVE Star
Ventures Enterprises No. V, a German Civil Law Partnership (with
limitation of liability) (SVE V); 66,422 ordinary shares held by SVM STAR
Ventures Managementgesellschaft mbH Nr. 3 & Co. Beteiligungs KG Nr. 2 (SVE
VI); 748,361 ordinary shares held by SVE Star Ventures Enterprises No.
VII, a German Civil Law Partnership (with limitation of liability) (SVE
VII); and 415,560 ordinary shares held by SVM STAR Ventures Management
GmbH Nr. 3 (Star Germany) (collectively, the Star Group). Star Germany
manages the investments of SVE III, SVE IIIA, SVE IV, SVE V, SVE VI and
SVE VII. SVM Star Venture Capital Management Ltd. (Star Israel) manages
the investments of Israel Star Partnership. Dr. Meir Barel, one of our
directors, is the sole director and primary owner of Star Germany and Star
Israel. Dr. Barel has the sole power to vote or direct the vote, and the
sole power to dispose or direct the disposition of, the shares
beneficially owned by SVE III, SVE IIIA, SVE IV, SVE V, SVE VI, SVE VII
and Israel Star Partnership. Star Germany has the sole power to vote or
direct the vote, and the sole power to dispose or direct the disposition
of, the shares beneficially owned by SVE III, SVE IIIA, SVE IV, SVE V, SVE
VI and SVE VII. Star Israel has the sole power to vote or direct the vote,
and the sole power to dispose or direct the disposition of, the shares
beneficially owned by Israel Star Partnership. Dr. Barel disclaims
beneficial ownership of all of the shares held by the Star Group. Also
includes options to purchase 189,892 ordinary shares held by Dr. Barel
which are exercisable within 60 days of June 15, 2004. Entities affiliated
with Star Ventures beneficially owned 16.0%, 16.5% and 7.5% of our
outstanding share capital as of December 31, 2001, 2002 and 2003,
respectively. The number of ordinary shares beneficially owned by entities
affiliated with Star Ventures includes approximately 4,067,905 ordinary
shares which these entities received, upon completion the merger, in
exchange for the Floware ordinary shares they beneficially owned prior to
the merger.
As of June 15, 2004, 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 15, 2004, these holders of record held approximately
48,463,798 ordinary shares representing approximately 85.7% of
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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
Transactions with Shareholders
As of June 15, 2004, Siemens held 3.7% of our share capital and is one of
our major strategic partners. Pursuant to the terms of our merger with Floware
we assumed a five-year agreement that Floware had entered into with Siemens in
February 2000. We have subsequently entered into a new agreement at arm's-length
with Siemens, dated July 23, 2002. Pursuant to that agreement Siemens has the
right to sell Alvarion products under its own brand name. We have entered into
agreements with several local companies affiliated with Siemens to apply the
terms of our agreement with Siemens to these companies. Companies affiliated
with Siemens accounted for 8.5% of our sales in 2003.
Our former chairman of the board of directors, Aharon Dovrat, is the
father of ECI's chairman of the board of directors. Aharon Dovrat and his son
have interests in entities that hold approximately 7% of the outstanding capital
stock of ECI. InnoWave was a wholly-owned subsidiary of ECI. To avoid the
appearance of any conflict of interest, Aharon Dovrat did not participate in
meetings of our board of directors in which the acquisition of InnoWave's assets
from ECI was considered and did not vote thereon. Our acquisition of InnoWave's
assets is discussed above under "Item 4A--Information on the Company--History
and Development of the Company."
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 third party has made a demand to enforce an alleged agreement with us
under which, we should be the lessee, for the lease of approximately 150,700
square feet. Under the alleged agreement the monthly lease and maintenance
payments is approximately $300,000 and the lease is for a period of seven years.
In June 2004, we reached a settlement agreement with that third party. The
settlement agreement resulted in a payment to a third party of an immaterial
amount.
We received a notice from a former customer claiming reimbursement of
approximately $3 million from us. As this notice is yet in its preliminary
stage, it is impractical to predict its outcome.
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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 affect on our business, financial
condition or results of operations.
Export Sales
Export sales constitute a significant portion of our sales. In 2003,
export sales were approximately $125.9 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, 2003.
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.............. $53.1250 $ 9.6875 N.A. N.A.
2001.............. $17.5000 $ 1.5500 NIS 21.99 NIS 7.98
2002.............. $ 4.0500 $ 1.6400 NIS 18.04 NIS 8.54
2003 $11.5500 $ 1.8400 NIS 51.10 NIS 8.69
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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 2002 and 2003 and as reported by the Tel Aviv Stock Exchange, in NIS:
Nasdaq National Market Tel Aviv Stock Exchange
2002
----
First Quarter..... $ 4.0500 $ 2.2500 NIS 18.04 NIS 10.84
Second Quarter.... $ 2.3900 $ 1.8200 NIS 10.86 NIS 8.99
Third Quarter..... $ 2.2500 $ 1.6400 NIS 10.59 NIS 7.89
Fourth Quarter.... $ 2.3700 $ 1.8000 NIS 11.19 NIS 8.54
2003 High Low High Low
---- ---- --- ---- ---
First Quarter..... $ 2.2400 $ 1.8400 NIS 9.59 NIS 8.69
Second Quarter.... $ 4.0400 $ 2.1700 NIS 17.14 NIS 10.15
Third Quarter..... $ 7.3000 $ 4.0000 NIS 32.81 NIS 17.05
Fourth Quarter.... $11.5500 $ 6.6000 NIS 51.10 NIS 28.72
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 2003 $11.5500 $ 10.0000 NIS 51.10 NIS 43.92
January 2004 $11.6600 $ 15.0300 NIS 66.50 NIS 51.70
February 2004 $14.6000 $ 11.7900 NIS 64.60 NIS 55.30
March 2004 $16.7300 $ 12.2300 NIS 74.30 NIS 56.40
April 2004 $13.3500 $ 10.6700 NIS 60.00 NIS 50.00
May 2004 $11.3900 $ 9.1500 NIS 52.80 NIS 41.47
June 2004 (through $11.5500 $ 10.0600 NIS 52.14 NIS 47.96
June 15)
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
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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 began to trade also 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:
Section 4 of our articles of association permits us to engage in any
lawful business. Our purpose, as stated in Section 3 of our articles of
association, 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 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.
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.
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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
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; or (ii) a quarter of the directors of our company, or
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 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
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general meeting, except as otherwise permitted by the regulations under the
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
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--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 register is the American Stock Transfer & Trust Co.
and its address is 59 Maiden Lane, New York, NY 10038.
C. MATERIAL CONTRACTS
On August 1, 2001, we merged with Floware. 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. The transaction was completed on August 1, 2001. Under the terms of the
merger agreement, each ordinary share of Floware, outstanding at the effective
time of the merger, was automatically exchanged for 0.767 of our ordinary
shares.
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. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under the law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.
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.
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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 30% to 50% for individuals and 36% 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 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
78
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 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 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.
79
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 our 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.
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.
80
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 other entity treated as a corporation 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," a "foreign personal holding company" or a "foreign investment company"
(as such terms are defined in the Code) for any
81
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, as to
such U.S. Holder, 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 our company 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 of distribution, without
reduction 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." 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
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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,
generally referred to as the "asset test."
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 each year prior to 2001, we do not believe that we were a
PFIC for any such year and, based upon 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.
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
83
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 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 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 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
84
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
85
o provide proof that they are otherwise exempt from backup
withholding.
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
86
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 revenue and expenses are transacted in U.S.
dollars. A portion of our expenses, however, are denominated in NIS. During
2003, 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. Our hedging program reduces, but does not always entirely
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.
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.
87
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, 2003
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
We have established disclosure controls and procedures to ensure that
material information relating to us, including our consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of senior management and the Board of Directors.
As of the end of the period covered by this Annual Report on Form 20-F, we
carried out an evaluation, under the supervision and with the participation of
our senior management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended). Based upon the
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information that we are required to
disclose in reports filed under the Securities Exchange Act of 1934, as amended.
There have been no significant changes in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) of the Securities
Exchange Act of 1934, as amended) or in other factors during the fiscal quarter
and fiscal year ended December 31, 2003 that materially affected, or are
88
reasonably likely to materially affect, our internal control over financial
reporting subsequent to the date of our most recent evaluation.
ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; PRINCIPAL
ACCOUNTANT FEES AND SERVICES;EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT
COMMITTEES
A. 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 Item 401(h) of Regulation S-K.
B. CODE OF ETHICS
We have adopted a Code of Ethics that applies to all of our employees
including executives, senior officers and members of the board of directors. We
have attached a copy of the Code of Conduct as Exhibit 11 to this annual report.
C. 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, 2002:
Fee Category 2003 Fees 2002 Fees
------------ --------- ---------
Audit Fees $97,537 $57,410
Audit-Related Fees $40,850 $44,000
Tax Fees $24,424 $62,880
All Other Fees $15,000 $30,000
Total Fees $177,811 $194,290
Audit Fees: Consists of the aggregate fees billed for professional services
rendered for the audit of the our annual financial statements and services that
are normally provide 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."
These services primarily consist of advice and consultation for relocation
related issues.
89
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. For the year ended December 31, 2003, these services
primarily consist of due diligence services related to the InnoWave acquistion.
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
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.
90
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)*
1.2 Articles of Association*
1.3 Certificate of Name Change (English translation accompanied
by Hebrew original)****
2.1 Form of Ordinary Share Certificate*****
2.2 Form of Warrant*
4.1 Key Employee Share Incentive Plan (1994)*
4.2 Key Employee Share Incentive Plan (1996)*
4.3 Key Employee Share Incentive Plan (1997)*
4.4 1999 U.S. Stock Option Plan*
4.5 Floware Employee Stock Option Plan****
4.6 2002 Global Share Option Plan*******
4.7 Lease Agreement, dated April 16, 2000, between the
Registrant and Bet Dror Ltd. And Ziviel Investments Ltd.
(English summary accompanied by Hebrew original)*
4.8 Amended Manufacturing Agreement, dated February 6, 2000,
between the Registrant and R.H. Electronics Ltd.*
4.9 Registration Rights Agreement, dated as of November 4, 1999,
between the Registrant and the Shareholders party thereto,
as amended on January 18, 2000*
4.10 Agreement and Plan of Merger, dated as of April 5, 2001,
among Floware Wireless Systems Ltd. and the Registrant ***
4.11 Form of Indemnity Agreement for Directors and Executive
Officers******
4.12 Addendum, dated September 2000, to Lease Agreement between
the Registrant and Bet Dror Ltd. and Ziviel Investments Ltd.
(English summary accompanied by Hebrew original)******
4.13 Sublease Agreement, dated July 5, 2001, between Floware
Wireless Systems Ltd. and Ceragon Networks Ltd. (English
summary accompanied by Hebrew original)******
8 Subsidiaries of Alvarion Ltd.
11 Code of Ethics
12.1 Certification of Chief Executive Officer required by Rules
13a-14(a) and Rule 15d014(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 15d014(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.
14.1 Consent of Kost, Forer & Gabbay
91
-----------------
* Incorporated herein by reference to the Registration Statement on Form
F-1 (File No. 333-11572).
** Incorporated herein by reference to the Registration Statement on Form
F-1 (File No. 333-12294).
*** Incorporated herein by reference to the Registration Statement on Form
F-4 (File No. 333-13606).
**** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-13786)
***** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-14142)
****** Incorporated by reference to the Annual Report on Form 20-F for the
fiscal period ending December 31, 2001
******* Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-104070)
92
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: June 23, 2004
93
EXHIBIT INDEX
Exhibit No. Description
----------- --------------------------------------------------------------
1.1 Memorandum of Association (English translation accompanied by
Hebrew original)*
1.2 Articles of Association*
1.3 Certificate of Name Change (English translation accompanied by
Hebrew original)****
2.1 Form of Ordinary Share Certificate*****
2.2 Form of Warrant*
4.1 Key Employee Share Incentive Plan (1994)*
4.2 Key Employee Share Incentive Plan (1996)*
4.3 Key Employee Share Incentive Plan (1997)*
4.4 1999 U.S. Stock Option Plan*
4.5 Floware Employee Stock Option Plan****
4.6 2002 Global Share Option Plan*******
4.7 Lease Agreement, dated April 16, 2000, between the Registrant
and Bet Dror Ltd. and Ziviel Investments Ltd. (English summary
accompanied by Hebrew original)*
4.8 Amended Manufacturing Agreement, dated February 6, 2000,
between the Registrant and R.H. Electronics Ltd.*
4.9 Registration Rights Agreement, dated as of November 4, 1999,
between the Registrant and the Shareholders party thereto, as
amended on January 18, 2000*
4.10 Agreement and Plan of Merger, dated as of April 5, 2001, among
Floware Wireless Systems Ltd. and the Registrant ***
4.11 Form of Indemnity Agreement for Directors and Executive
Officers******
4.12 Addendum, dated September 2000, to Lease Agreement, between
the Registrant and Bet Dror Ltd. and Ziviel Investments Ltd.
(English summary accompanied by Hebrew original)******
4.13 Sublease Agreement, dated July 5, 2001, between Floware
Wireless Systems Ltd. and Ceragon Networks Ltd. (English
summary accompanied by Hebrew original)******
8 Subsidiaries of Alvarion Ltd.
11 Code of Ethics
12.1 Certification of Chief Executive Officer required by Rules
13a-14(a) and Rule 15d014(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 15d014(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.
14.1 Consent of Kost, Forer & Gabbay
-----------------
* Incorporated herein by reference to the Registration Statement on Form
F-1 (File No. 333-11572).`
** Incorporated herein by reference to the Registration Statement on Form
F-1 (File No. 333-12294).
*** Incorporated herein by reference to the Registration Statement on Form
F-4 (File No. 333-13606).
94
**** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-13786).
***** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-14142).
****** Incorporated by reference to the Annual Report on Form 20-F for the
fiscal period ending December 31, 2001
******* Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-104070)
95
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
Page
----------
Report of Independent Auditors 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-38
- - - - - - -
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
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, 2002 and 2003, 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, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2002 and 2003, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel /s/ KOST FORER GABBAY & KASIERER
February 5, 2004 A Member of Ernst & Young Global
F-2
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
-----------------------------------
2002 2003
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,356 $ 22,323
Short-term bank deposits - 30,036
Marketable securities (Note 3) 41,199 27,060
Trade receivables (net of allowance for doubtful accounts of $918 and
$712 as of December 31, 2002 and 2003, respectively) (Note 17) 11,750 21,199
Other accounts receivable and prepaid expenses (Note 4) 4,872 4,499
Inventories (Note 5) 27,502 36,981
---------------- ---------------
Total current assets 107,679 142,098
---------------- ---------------
LONG-TERM INVESTMENTS:
Long-term bank deposits 43,748 20,687
Marketable securities (Note 3) 55,360 53,510
Long-term receivables - 834
Severance pay fund 3,732 5,493
---------------- ---------------
Total long-term investments 102,840 80,524
---------------- ---------------
PROPERTY AND EQUIPMENT, NET (Note 6) 11,116 11,939
---------------- ---------------
INTANGIBLE ASSETS, NET (Note 7) 13,200 12,165
---------------- ---------------
GOODWILL 37,240 38,231
---------------- ---------------
Total assets $ 272,075 $ 284,957
================ ===============
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,
-----------------------------------
2002 2003
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 10) $ - $ 1,749
Trade payables 15,847 23,780
Other accounts payable and accrued expenses (Note 8) 17,595 26,210
---------------- ----------------
Total current liabilities 33,442 51,739
---------------- ----------------
LONG-TERM LIABILITIES:
Long-term debt (Note 10) - 5,248
Accrued severance pay 5,446 7,768
Other long-term liabilities (Note 11) 5,357 -
---------------- ----------------
Total long-term liabilities 10,803 13,016
---------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)
SHAREHOLDERS' EQUITY (Note 14): Share capital - Ordinary shares of NIS 0.01 par
value:
Authorized: 85,080,000 and 85,080,000 shares as of December 31,
2002 and 2003, respectively; Issued: 55,011,202 shares and
57,618,340 shares as of December 31, 2002 and 2003, respectively;
Outstanding: 51,915,629 and 53,821,567 shares as of December 31,
2002 and 2003, respectively 142 148
Additional paid-in capital 370,978 376,161
Treasury shares at cost 3,095,573 shares and 3,796,773 shares as of
December 31, 2002 and 2003, respectively (6,543) (7,876)
Deferred stock compensation (488) (160)
Accumulated deficit (136,259) (148,071)
---------------- ----------------
Total shareholders' equity 227,830 220,202
---------------- ----------------
Total liabilities and shareholders' equity $ 272,075 $ 284,957
================ ================
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,
---------------------------------------------------
2001 2002 2003
--------------- -------------- --------------
Sales (Notes 16 and 17) $ 98,968 $ 88,849 $ 127,208
Cost of sales 59,484 55,120 68,535
Write-off of excess inventory and provision for inventory
purchase commitments (Note 1e) 53,881 250 6,562
--------------- -------------- --------------
Gross profit (loss) (14,397) 33,479 52,111
--------------- -------------- --------------
Operating costs and expenses:
Research and development, net (Note 18a) 21,096 24,077 23,505
Selling and marketing 30,258 26,570 32,904
General and administrative 6,226 6,018 6,323
Merger and acquisition related expenses 2,841 - 2,201
Amortization of intangible assets 1,200 2,400 2,606
Amortization of deferred stock compensation (Note 18b) 726 580 511
In-process research and development write-off 26,300 - -
Restructuring (Note 9) 5,437 1,102 -
One-time expense related to a settlement of an OCS
program (Note 11) 6,535 - -
--------------- -------------- --------------
Total operating expenses 100,619 60,747 68,050
--------------- -------------- --------------
Operating loss (115,016) (27,268) (15,939)
Financial income, net (Note 18c) 8,540 6,587 4,127
Other expenses (Note 18d) (3,535) - -
--------------- -------------- --------------
Net loss $ (110,011) $ (20,681) $ (11,812)
=============== ============== ==============
Basic and diluted net loss per share $ (2.80) $ (0.38) $ (0.23)
=============== ============== ==============
Number of shares used in calculating basic and diluted
net loss per share 39,298,469 53,940,722 52,127,250
=============== ============== ==============
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
Ordinary shares Additional
-------------------------- paid-in Treasury
Number Amount capital shares
------------- ------------- ------------- ------------
Balance as of January 1, 2001 ...................................... 28,130,320 $ 78 $ 217,984 $ --
Net loss ........................................................ -- -- -- --
Exercise of employee stock options .............................. 1,837,925 4 2,161 --
Compensation in respect of shares granted to former directors ... -- -- 185 --
Issuance of shares, options and warrants pursuant to the merger
of Floware and exchange of options to employees ............... 24,681,023 59 150,594 --
Cancellation of deferred stock compensation due to termination of
employment .................................................... -- -- (71) --
Amortization of deferred stock compensation ..................... -- -- -- --
------------- ------------- ------------- ------------
Balance at December 31, 2001 ....................................... 54,649,268 141 370,853 --
Net loss ........................................................ -- -- -- --
Exercise of employee stock options .............................. 361,934 1 222 --
Purchase of Treasury shares ..................................... (3,095,573) -- -- (6,543)
Cancellation of deferred stock compensation due to termination
of employment .................................................. -- -- (97) --
Amortization of deferred stock compensation ..................... -- -- -- --
------------- ------------- ------------- ------------
Balance at December 31, 2002 ....................................... 51,915,629 142 370,978 (6,543)
Net loss ........................................................ -- -- -- --
Exercise of employee stock options .............................. 2,607,138 6 4,922 --
Purchase of Treasury shares ..................................... (701,200) -- -- (1,333)
Deferred stock compensation related to options granted
to a director .................................................. -- -- 183 --
Amortization of deferred stock compensation related to options
granted to a director ........................................ -- -- -- --
Issuance of warrant pursuant to acquisition of InnoWave ......... -- -- 78 --
Amortization of deferred stock compensation ..................... -- -- -- --
------------- ------------- ------------- ------------
Balance at December 31, 2003 ....................................... 53,821,567 $ 148 $ 376,161 $ (7,876)
============= ============= ============= ============
Deferred Total
stock Accumulated shareholders'
compensation deficit equity
-------------- ------------- -------------
Balance as of January 1, 2001 ...................................... $ -- $ (5,567) $ 212,495
Net loss ........................................................ -- (110,011) (110,011)
Exercise of employee stock options .............................. -- -- 2,165
Compensation in respect of shares granted to former directors ... -- -- 185
Issuance of shares, options and warrants pursuant to the merger
of Floware and exchange of options to employees ............... (2,100) -- 148,553
Cancellation of deferred stock compensation due to termination of
employment .................................................... 71 -- --
Amortization of deferred stock compensation ..................... 864 -- 864
-------------- ------------- -------------
Balance at December 31, 2001 ....................................... (1,165) (115,578) 254,251
Net loss ........................................................ -- (20,681) (20,681)
Exercise of employee stock options .............................. -- -- 223
Purchase of Treasury shares ..................................... -- -- (6,543)
Cancellation of deferred stock compensation due to termination
of employment .................................................. 97 -- --
Amortization of deferred stock compensation ..................... 580 -- 580
-------------- ------------- -------------
Balance at December 31, 2002 ....................................... (488) (136,259) 227,830
Net loss ........................................................ -- (11,812) (11,812)
Exercise of employee stock options .............................. -- -- 4,928
Purchase of Treasury shares ..................................... -- -- (1,333)
Deferred stock compensation related to options granted
to a director .................................................. (183) -- --
Amortization of deferred stock compensation related to options
granted to a director ........................................ 23 -- 23
Issuance of warrant pursuant to acquisition of InnoWave ......... -- -- 78
Amortization of deferred stock compensation ..................... 488 -- 488
-------------- ------------- -------------
Balance at December 31, 2003 ....................................... $ (160) $(148,071) $ 220,202
============== ============= =============
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,
----------------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Cash flows from operating activities:
Net loss .......................................................... $(110,011) $ (20,681) $ (11,812)
Adjustments required to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ...................................................... 3,302 3,575 4,128
Amortization of deferred stock compensation ....................... 864 580 511
Compensation in respect of shares granted to former directors ..... 185 -- --
Interest, amortization of premium and accretion of discounts on
held-to-maturity marketable securities, bank deposits and other
long-term liabilities ........................................... 394 261 148
Loss (gain) as a result of sale and impairment of held-to-maturity
marketable securities ........................................... 407 (13) --
Write-off of property and equipment ............................... 1,123 -- --
Expenses related to a settlement of an OCS program ................ 6,535 -- --
In-process research and development write-off ..................... 26,300 -- --
Amortization of other intangible assets ........................... 1,200 2,400 2,606
Write-off of investment ........................................... 3,500 -- --
Decrease (increase) in trade receivables .......................... 13,562 5,329 (5,683)
Discount accretion related to long-term receivables ............... -- -- 325
Decrease in other accounts receivable and prepaid expenses ........ 1,598 4,401 915
Decrease (increase) in inventories ................................ 32,380 3,562 (934)
Increase (decrease) in trade payables ............................. (17,693) (6,976) 6,524
Increase (decrease) in other accounts payable and accrued expenses (1,592) (1,962) 3,280
Accrued severance pay, net ........................................ (160) (14) 561
Others ............................................................ 35 27 95
--------------- -------------- ---------------
Net cash provided by (used in) operating activities ............... (38,071) (9,511) 664
--------------- -------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ................................ (6,023) (4,260) (3,105)
Proceeds from sale of property and equipment ...................... 145 34 --
Proceeds from maturity of bank deposits ........................... 147,881 74,568 8,025
Investment in bank deposits ....................................... (136,810) (52,821) (14,925)
Investment in held-to-maturity marketable securities .............. (132,323) (135,350) (55,232)
Proceeds from maturity of held-to-maturity marketable securities .. 157,719 114,854 69,861
Proceeds from sale of held-to-maturity marketable securities ...... 6,973 9,478 1,137
Proceeds from long-term receivables ............................... -- -- 915
Cash and cash equivalents resulted (used) pursuant to the merger of
Floware (a) and the acquisition of InnoWave (b) ................. 23,566 (118) (9,334)
--------------- -------------- ---------------
Net cash provided by (used in) investing activities ............... 61,128 6,385 (2,658)
--------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of employee stock options .................. 2,165 223 4,928
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 ............... 2,165 (6,320) 1,961
--------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents .................. 25,222 (9,446) (33)
Cash and cash equivalents at the beginning of the year ............ 6,580 31,802 22,356
--------------- -------------- ---------------
Cash and cash equivalents at the end of the year .................. $ 31,802 $ 22,356 $ 22,323
=============== ============== ===============
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,
---------------------------------------------------
2001 2002 2003
-------------- --------------- --------------
Supplemental disclosure of cash flows activities:
Cash paid during the year for interest $ 358 $ 41 $ 334
=========== =========== ===========
Non-cash transactions:
Purchase of property and equipment against trade payables $ 882 $ 481 $ 128
=========== =========== ===========
(a) Cash and cash equivalents from the merger with Floware (see also Note
1c):
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
short-term bank deposits and marketable securities) $ 9,865
Short-term bank deposits and marketable securities 31,902
Property and equipment 3,507
Accrued severance pay, net (509)
In-process research and development 26,300
Current technology 16,800
Goodwill 37,240
Deferred stock compensation 2,100
-----------
127,205
Issuance of Ordinary shares, options and warrants, net (150,653)
Accrued expenses related to the merger (118)
-----------
$ (23,566)
===========
(b) Cash and cash equivalents from the acquisition of InnoWave (see also
Note 1d):
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
Other intangible assets 1,572
Goodwill 991
-----------
9,412
(78)
Issuance of warrant -----------
$ 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
NOTE 1:- GENERAL
a. Alvarion Ltd. together with its worldwide subsidiaries ("the
Company") is a provider of wireless broadband connectivity
infrastructure. The Company's solutions are used by telecom
carriers and service providers worldwide. The Company's products
provide broadband data and voice services for subscribers in the
"last mile" of connectivity for feeding cellular networks and for
private network. The Company's product offerings provide a range
of integrated broadband wireless solutions by market segment and
frequency band, designed to address the various business models
of carriers and service providers. 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 operate in licensed and license-free bands ranging from
2.4 GHz to 28 GHz frequency bands.
As for geographic markets and major customers, see Note 16.
On August 1, 2001, following the merger with Floware Wireless
Systems Ltd., the Company changed its name from BreezeCOM Ltd. to
Alvarion Ltd.
b. Alvarion Ltd. has 14 wholly-owned subsidiaries: in the United
States, United Kingdom, France, Romania, Brazil, Hong-Kong,
Germany, Japan, Mexico, Turkey, Poland, Israel, Netherlands and
Uruguay.
c. Merger with Floware:
Effective August 1, 2001, Floware Wireless Systems Ltd.
("Floware") was merged into the Company in a stock-for-stock
transaction. The merger has been accounted for under Statement of
Financial Accounting Standard No. 141 "Business Combinations"
("SFAS No. 141") using the purchase method of accounting.
Floware, developed, manufactured and sold fixed broadband
wireless access systems used mainly by telecommunications
carriers that connect primarily business customers in the "last
mile" of connectivity.
The Company determined the fair value of the issued Ordinary
shares using Emerging Issues Task Force No. 99-12 "Determination
of the Measurement Date For the Market Price of Acquirer
Securities Issued in a Purchase Business Combination" ("EITF No.
99-12"). According to EITF No. 99-12 the fair value is determined
based on the average market price of the Company's Ordinary
shares a few days before and after the announcement date.
The total purchase price of the merger was $ 155,377.
The purchase price consisted of the issuance of 24,681,023 of the
Company's Ordinary shares (at an estimated fair value of
$130,316), options to purchase 5,230,469 of the Company's
Ordinary shares (at an estimated fair value of $ 19,612), a
warrant to purchase 416,174 of the Company's Ordinary shares (at
an estimated fair value of $ 725) and merger-related expenses of
approximately $ 4,724. The allocation of the purchase price based
on the fair value of assets acquired and liabilities assumed was
as follows:
F-9
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL (Cont.)
Net tangible assets $ 72,937
Intangible assets:
Goodwill 37,240
Current technology 16,800
Deferred stock-based compensation 2,100
In-process research and development 26,300
------------------
Total $ 155,377
==================
The amounts allocated to current technology are amortized on a
straight-line basis over seven years.
The amount allocated to deferred stock-based compensation relates to
the intrinsic value of the unvested Floware stock options assumed.
The Floware stock options generally vested over a period of four
years and accordingly, this deferred stock-based compensation is
amortized over the remaining vesting period of the individual awards
as of the merger date.
The amount allocated to in-process research and development ("IPRD")
was determined based on an appraisal performed by an independent
third party and was expensed upon consummation of the merger in
accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the
Purchase Method" ("FIN 4"), because technological feasibility had not
been established and no future alternative use existed for it.
The operations of Floware are included in the consolidated statements
from the effective date.
The unaudited pro forma information below assumes that the merger had
been consummated on January 1, 2001 and includes the effect of
amortization of current technology and the deferred stock-based
compensation from that date. The impact of non-recurring charges for
purchased IPRD has been excluded, as it does not represent a
continuing expense. 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 that date. The pro forma information is as
follows:
Year ended
December 31,
----------------
2001
----------------
Unaudited
----------------
Net revenues $ 137,099
================
Net loss $ (130,848)
================
Basic and diluted net earnings loss per share $ (2.43)
================
F-10
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL (Cont.)
d. Acquisition of InnoWave Wireless Systems:
On April 1, 2003, 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 with 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 No.141 and 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.
Based upon a valuation of tangible and intangible assets
acquired, the Company has allocated the total cost of the
acquisition, as follows:
At 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.
F-11
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL (Cont.)
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 of the 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 2j and 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 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)
================= ================
e. Inventories write-off:
The Company periodically assesses the valuation of its
inventories with respect to dead and slow moving items, revenue
forecasts and technological obsolescence. When inventories on
hand exceed the foreseeable demand or become obsolete, the value
of excess inventory, which at the time of the review was not
expected to be sold, is written off.
During 2001, 2002 and 2003, the Company recorded inventories
write-offs in a total amount of $ 45,281 $ 250 and $ 5,255,
respectively and an additional $ 8,600, $ 0 and $ 1,307,
respectively related to the Company's commitments to purchase
inventories no longer required.
F-12
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL (Cont.)
The purchase commitment liability is related to on-order
inventory that is in excess of the Company's future demand
forecasts, amounted to approximately $ 3,400 and $ 4,390 as of
December 31, 2002 and 2003, respectively.
During 2003, approximately $ 6,133 of inventory previously
written-off had been utilized.
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" ("SFAS No. 52"). 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:
F-13
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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, 2002 and 2003, most of the bank
deposits are in U.S. dollars and bear interest at a weighted
average interest rate of 3.6% and 4.06% 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" ("SFAS No. 115").
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.
In the years ended December 31, 2002 and 2003, 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 process and finished products is based on the cost of raw
material 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 (see also Note
1e).
h. Long-term trade receivables
F-14
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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.
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 term of the lease
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" ("SFAS No.
144"), whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future
undiscounted cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. As of
December 31, 2002 and 2003, no impairment losses have been
identified.
k. Other intangible assets, net:
Intangible assets acquired in a business combination should be
amortized over their useful life using a method of amortization
to reflect 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" ("SFAS No. 142"):
Current technology - (i) the acquired Floware current technology
is 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 - The amount allocated to the customer
relations is being amortized on a straight-line basis over 3.75
years reflecting the expected attrition in customer
relationships.
F-15
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l. Goodwill:
The Company assesses the carrying value of goodwill in accordance
with SFAS No. 142, under which goodwill acquired in a business
combination for which the date is on or after July 1, 2001,
should not be amortized, but tested for impairment at least
annually or between annual tests in certain circumstances, and
written down when impaired. 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 value. Fair value is determined using income approach
and market approach. Estimates used in the methodologies include
future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market
multiples.
During 2002 and 2003, the Company performed the required annual
impairment tests of goodwill's fair value. Based on management
projections, expected future discounted operating cash flows and
market multiples, no indication of goodwill impairment was
identified.
m. 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 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.
n. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Statement No. 25, "Accounting for Stock Options Issued to
Employees" ("APB No. 25") and FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44") in accounting for its employee stock
option plans. Under APB No. 25, when the exercise price of 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" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation. The Company continues to apply
the provisions of APB No. 25, in accounting for stock-based
compensation.
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.
F-16
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The fair value of options granted in 2001, 2002 and 2003 is amortized
over their vesting period and estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted
average assumptions:
2001 2002 2003
-------------- -------------- --------------
Dividend yield 0% 0% 0%
Expected volatility 84% 53% 94%
Risk-free interest 2.5-5% 1.5% 3%
Expected life of up to 4 years 4 years 4 years
Pro forma information under SFAS No. 123, is as follows:
Year ended December 31,
----------------------------------------------------
2001 2002 2003
-------------- ------------- ---------------
Net loss available to Ordinary shares - as $ (110,011) $ (20,681)
reported $ (11,812)
Add - stock-based employee compensation -
intrinsic value 864 580 511
Deduct - stock-based employee compensation
-fair value (12,182) (7,618) (8,064)
-------------- -------------- ---------------
Pro forma:
Net loss $ (121,329) $ (27,719) $ (19,365)
============== ============== ===============
Net loss per share:
Basic and diluted net loss, as reported $ (2.80) $ (0.38) $ (0.23)
============== ============== ===============
Pro forma basic and diluted net loss $ (3.09) (0.51) $ (0.37)
============== ============== ===============
o. Revenue recognition:
The Company generates revenues from selling its products
indirectly through distributors and OEMs and directly to
end-users.
Revenues from products are recognized in accordance with Staff
Accounting Bulletin No. 104 "Revenue Recognition in Financial
Statements" ("SAB No. 104"), 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.
The Company generally does not grant a right of return to its
OEMs and end users. In certain instances, when such a right has
been granted, the Company defers revenue until the right of
return expires, at which time revenue is recognized provided that
all other revenue recognition criteria are met.
F-17
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
During 2003, the Emerging Issues Task Force issued EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). The provisions of EITF 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June
15, 2003. This consensus addresses certain aspects of accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities, including, how to determine
whether an arrangements involving multiple deliverables contains
more than one unit of accounting.
In cases under which the Company is obligated to perform post
delivery installation services, the Company considers the sale of
equipment and installation to be one unit of accounting in
accordance with EITF 00-21 guidelines. As such, revenues
generated from such arrangements 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.
p. Warranty costs:
The Company offers a 12 to 36 months 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,
-------------------------------
2002 2003
-------------- --------------
Balance at the beginning of the year $ 2,640 $ 1,202
Warranties issued during the year 1,057 4,529
Settlements made during the year (1,510) (1,213)
Changes in liability for pre-existing warranties during the year,
including expirations (985) (448)
-------------- --------------
Balance at the end of the year $ 1,202 $ 4,070
============== ==============
q. Research and development:
Research and development costs, net of grants received, are
charged to the statement of operations as incurred.
F-18
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
r. 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. Total royalties accrued or paid
amounted to $ 2,425, $ 0 and $ 1,167 in 2001, 2002 and 2003,
respectively.
s. 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 for all
employees in Israel. Employees are entitled to one month's salary
for each year of employment or a portion thereof. The Company's
liability for all of its employees is fully provided by monthly
deposits with severance pay funds, insurance policies and by an
accrual. The value of these policies is recorded as an asset in
the Company's balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay
Law or labor agreements. The value of these policies is recorded
as an asset in the Israeli companies' balance sheets. Severance
pay expenses for the years ended December 31, 2001, 2002 and
2003, were $ 4,787, $ 2,787 and $ 2,410, respectively.
t. Advertising expenses:
Advertising expenses are carried to the statement of operations
as incurred. Advertising expenses for the years ended December
31, 2001, 2002 and 2003, were $ 1,138, $ 351 and $ 250,
respectively.
u. Basic and diluted net loss per share:
Basic net loss per share is computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted net loss per share is computed based on the weighted
average number of Ordinary shares outstanding during each year,
plus dilutive potential of Ordinary shares considered outstanding
during the year, in accordance with Statement of Financial
Standard No. 128, "Earnings Per Share." ("SFAS No. 128").
All outstanding stock options and warrants have been excluded
from the calculation of the diluted net loss per Ordinary share
because all such securities are anti-dilutive for all periods
presented. The total weighted average number of shares related to
the outstanding options and warrants excluded from the
calculations of diluted net loss per share was 12,473, 14,730 and
15,548 for the years ended December 31, 2001, 2002 and 2003,
respectively.
F-19
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v. 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 credit 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
experienced material losses. An allowance for doubtful accounts
is determined with respect to specific receivables whose
collection may be doubtful.
The allowance for doubtful accounts expenses (income) for the
years ended December 31, 2001, 2002 and 2003, was $ 200, $ 88 and
$ (582), respectively.
As for derivative financial instruments, see Note 12.
w. 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).
F-20
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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 estimated by
obtaining current quotes from banks.
x. 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. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the
type of hedging relationship. 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 designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change (see
also Note 12).
y. Impact of recently issued accounting standards:
In April 2003, the FASB issued SFAS No. 149 ("SFAS 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies (1) the accounting
guidance on derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 amends SFAS 133 to reflect decisions made
(1) as part of the Derivatives Implementation Group ("DIG")
process that effectively required amendments to SFAS 133, (2) in
connection with other projects dealing with financial
instruments, and (3) regarding implementation issues related to
the application of the definition of a derivative. SFAS 149 is
effective (1) for contracts entered into or modified after June
30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to
be applied prospectively.
F-21
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Generally, SFAS 149 improves financial reporting by (1) requiring that
contracts with comparable characteristics be accounted for similarly
and (2) clarifying when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS
149 is not expected to have a material impact on the Company's
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). The objective of FIN 46 is
to improve financial reporting by companies involved with variable
interest entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period end after December 31, 2003.
Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the
variable interest entity was established. As of December 31, 2003, the
Company does not expect the adoption of FIN 46 to have a material
impact on its consolidated financial statements.
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, 2002:
Corporate and bank debentures:
Maturing within one year ....... $ 41,199 $ 612 $ (7) $ 41,804
Maturing within one to two years 55,360 810 (14) 56,156
-------- -------- -------- --------
$ 96,559 $ 1,422 $ (21) $ 97,960
======== ======== ======== ========
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
======== ======== ======== ========
The Company sold held-to-maturity marketable securities during the
years ended December 31, 2001, 2002 and 2003 amounting to $ 6,973, $
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
2001, 2002 and 2003.
F-22
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- MARKETABLE SECURITIES (Cont.)
As of December 31, 2003, 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,
------------------------
2002 2003
------- -------
Government authorities $ 2,307 $ 1,552
Prepaid expenses 1,190 1,231
Others 1,375 1,716
------- -------
$ 4,872 $ 4,499
======= =======
NOTE 5:- NVENTORIES
Raw materials and components $10,320 $11,624
Work in process 10,121 10,623
Finished products 7,061 14,734
------- -------
$27,502 $36,981
======= =======
See also Note 1e.
NOTE 6:- ROPERTY AND EQUIPMENT, NET
Cost:
Office furniture and equipment $ 1,566 $ 1,582
Computers and manufacturing equipment 16,806 21,367
Motor vehicles 33 38
Leasehold improvements 2,182 2,552
------- -------
20,587 25,539
------- -------
Accumulated depreciation:
Office furniture and equipment 451 575
Computers and manufacturing equipment 8,389 12,137
Motor vehicles 18 20
Leasehold improvements 613 868
------- -------
9,471 13,600
------- -------
Depreciated cost $11,116 $11,939
======= =======
F-23
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- OTHER INTANGIBLE ASSETS
Intangible assets:
December 31,
-------------------------
2002 2003
-------- --------
Cost:
Current technology $ 16,800 $ 17,871
Customer relations -- 500
-------- --------
16,800 18,371
Accumulated amortization:
Current technology 3,600 6,106
Customer relations -- 100
-------- --------
Accumulated amortization (3,600) (6,206)
-------- --------
Amortized cost $ 13,200 $ 12,165
======== ========
Current technology amortization expenses amounted to $ 1,200, $ 2,400
and $ 2,507 for the years ended December 31, 2001, 2002 and 2003,
respectively. The estimated amortization expenses for each of the
succeeding years will be $ 2,542 for the first four years, $ 1,332 for
the fifth year and additional $131 for the sixth and seventh years.
Customer relations amortization expenses amounted to $ 100 for the
year ended December 31, 2003. The estimated amortization expenses for
each of the three succeeding years will be $ 133.
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
-------------------------
2002 2003
-------- --------
Employees and payroll accruals $ 6,061 $ 8,831
Accrued expenses 3,355 6,649
Royalties payable the OCS 3,571 1,477
Allowance for restructuring costs 616 --
Provision for merger and acquisition
related expenses 707 839
Warranty provision 1,202 4,070
Provision for agent commissions 717 2,740
Others 1,366 1,604
-------- --------
$17,595 $26,210
======== ========
F-24
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9: - RESTRUCTURING COSTS
During 2001, the Company announced that it was implementing a cost
reduction plan including the layoff of approximately 200 employees.
The Company recorded a charge of $ 5,437. The cash and non-cash
elements of the restructuring charge are $ 4,314 and $ 1,123,
respectively.
On November 5, 2002, the Company announced that it was implementing an
additional plan intended to further reduce costs and increase
efficiencies. As part of the cost reduction initiative, approximately
60 employees were laid off. The Company recorded restructuring charges
of $ 1,102.
The Company has accounted for the 2001 and 2002 restructuring plans in
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" and Staff Accounting Bulletin No. 100
"Restructuring and Impairment Charges ("SAB No. 100"), except for the
2001 write down of long-lived assets, which has been accounted for in
accordance with Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121").
As of December 31, 2003, the major components of the 2001 and 2002
restructuring plans charges are as follows:
Balance
Utilized as of
Original ----------------------------- December 31,
accruals Cash Non-cash 2003
-------- ---- -------- ------------
Write-down of long lived assets $1,123 $ -- $1,123 $ --
Employees termination benefits 3,830 3,830 -- --
Lease abandonment 1,359 1,359 -- --
Other 227 227 -- --
-------- ------ -------- ------------
$6,539 $5,416 $1,123 $ --
======== ====== ======== ============
NOTE 10:- LONG-TERM DEBT
December 31,
2003
------------
Long-term loan (1) $6,996
Less - current maturities 1,748
------------
$5,248
============
As of December 31, 2003, the aggregate annual maturities of the
long-term loan are as follows:
First year (current maturities) $1,748
Second year $1,749
Third year $1,749
Fourth year $1,750
F-25
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10:- LONG-TERM DEBT (Cont.)
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 11).
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, 2003,
amounted to $ 96.
NOTE 11:- OTHER LONG-TERM LIABILITIES
Through December 2001, the Company participated in royalties bearing
programs sponsored by the Israeli Government for the support of
research and development activities. The Company had obtained grants
from the Office of the Chief Scientist in Israel's Ministry of
Industry and Trade ("the OCS") and was obligated to pay royalties to
the OCS, amounting to 3%-5% of the sales of the products and other
related revenues generated from the projects funded by the OCS. The
obligation to pay royalties was contingent on actual sales of the
products funded.
In December 2001, the Company entered into an arrangement
(hereinafter: "the Arrangement") with the OCS for early payment of all
royalties arising from future sales with respect to previous research
and development grants to the Company. Under the Arrangement, the
Company settled its outstanding contingent royalty commitment,
regardless of the actual level of future sales. As a result of this
Arrangement, the Company recorded a one-time operating charge of $
6,535 with respect to the payments, which the Company is obligated to
make to the OCS.
Under the Arrangement, 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%. During 2003, the Company settled the amount due for $
8,534 (see also Note 10).
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 .
NOTE 12:- DERIVATIVE FINANCIAL INSTRUMENTS
a. 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 put and call options (zero -
cost collar). These option contracts are designated as cash flow
hedges, as defined by SFAS No. 133 and are all effective.
The Company recognized gains of $2,214 during the year ended
December 31, 2003. All amounts have been included in salary
expenses in the statement of operations.
F-26
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12:- DERIVATIVE FINANCIAL INSTRUMENTS (Cont.)
b. Fair Value Hedging Strategy
The Company enters into forward exchange contracts to hedge a
portion of its NIS trade payables denominated in foreign currency
for a period of one to three months. The purpose of the Company's
foreign currency hedging activities is to protect the Company
from changes in the foreign exchange rate.
The Company recognized gains of $360 during the year ended
December 31, 2003 related to the forward exchange contracts.
NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Premises occupied by the Company are leased under various lease
agreements. The lease agreements for the premises in Israel and
the U.S. will both expire in May 2006.
The Company has leased various motor vehicles under operating
lease agreements. These leases expire in fiscal year 2006.
Future minimum rental payments under non-cancelable leases for
the year ending December 31, 2003 are as follows:
Rental of Lease of
premises motor vehicles
--------- --------------
2004 $2,918 $2,029
2005 2,003 1,357
2006 620 453
--------- --------------
$5,541 $3,839
========= ==============
Total rental expenses for the years ended December 31, 2001, 2002
and 2003, were $ 2,925, $ 3,594 and $ 3,991, respectively. Motor
vehicle leasing expenses for the years ended December 31, 2001,
2002 and 2003, were $ 1,453, $ 2,041 and $ 2,219, respectively.
b. Litigations
1. A third party has made a demand to enforce an alleged
agreement with the Company under which, the Company
should be the lessee, for the lease of approximately
150,700 square feet. Under the alleged agreement the
monthly lease and maintenance payments are
approximately $ 300 and the lease is for a period of
seven years. The Company and the third party are
negotiating settlement and the management of the
Company does not believe it would have a material
effect on the Company's financial results (see also
Note 19).
F-27
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
2. The Company received a notice from a former customer
claiming for reimbursement of approximately $3,000 from
the Company. As this notice 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.
c. As of December 31, 2003 the Company obtained bank
guarantees in the total amount of approximately $9,911, 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, 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 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%-150% of the grants
received, linked to the U.S. dollar and for grants received
after January 1, 1999 also bearing interest at the rate of
LIBOR. 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, the Company has paid or accrued royalties to
the OCS in the amount of $1,167. As of December 31, 2003,
the aggregate contingent liability to the OCS amounted to
$9,778.
F-28
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 14:- SHARE CAPITAL
a. The Company listed its shares for trade on the Nasdaq National
Market and on the Tel-Aviv Stock Exchange.
As for issuance of shares related to Floware's merger, see also
Note 1c.
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, 2003, 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 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
fair market value 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. (See
also Note 1c).
In connection with the acquisition of InnoWave, the Company
issued to ECI Telecom Ltd. ("ECI") a warrant to purchase 200,000
Ordinary shares of the Company exerciseable over a period of five
years at an exercise price of $ 3 per share.
F-29
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 14:- SHARE CAPITAL (Cont.)
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 fair market value 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 five stock option plans under which 20,588,178
Ordinary shares were reserved for issuance. As of December 31,
2003, 997,092 Ordinary shares of the Company are still available
for future grants under the various option plans.
A summary of the Company's stock option activity (except options
to consultants) and related information is as follows:
Year ended December 31,
-------------------------------------------------------------------------------------
2001 2002 2003
---------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
average average average
Amount exercise Amount of exercise Amount of exercise
of options price options price options price
-------------- ------------ -------------- ------------ ------------- ------------
Outstanding at the 9,367,507 $ 6.92 16,017,081 $ 5.88 8,074,838 $ 3.18
beginning of the
year
Granted *)11,017,692 $ 5.43 489,300 $ 1.77 8,019,296 $ 3.51
Exercised (1,886,746) $ 1.13 (361,934) $ 0.62 (2,607,138) $ 1.89
Forfeited or
cancelled (2,481,372) $ 11.39 (8,069,609) $ 8.58 (630,688) $ 7.08
-------------- -------------- -------------
Outstanding at the
end of the year 16,017,081 $ 5.88 8,074,838 $ 3.18 12,856,308 $ 3.45
============== ============ ============== ============ ============= ============
Options exercisable
at December 31,
2002 5,957,460 $ 4.88 5,286,793 $ 3.03 5,815,793 $ 2.9
============== ============ ============== ============ ============= ============
*) Including 5,230,469 options granted to former Floware
employees at the merger date (see Note 1c).
In connection with the grant of certain share options to
employees in 2001, 2002 and 2003, the Company recorded
amortization of deferred stock compensation of $ 864, $ 580 and $
511, 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.
F-30
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 14:- SHARE CAPITAL (Cont.)
The options outstanding as of December 31, 2003, 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) 2003 life (years) price 2003 price
--------------------- --------------- ------------- ---------- --------------- -------------
$ $ $
--------------------- ---------- -------------
0.0023 - 0.003 225,821 3.1824 0.00 225,821 0.00
0.56 - 0.639 69,595 2.7772 0.60 69,595 0.60
0.96 - 1.2692 658,656 4.5022 1.10 637,641 1.09
1.9 - 2.74 8,024,162 8.2071 2.17 2,728,038 2.14
2.992-3.52 1,664,442 3.1681 3.58 1,662,750 3.55
4.6023 - 6.39 767,411 7.9963 5.69 239,973 5.31
8.9297-13.2986 1,405,727 8.9927 10.95 220,201 11.86
13.5 - 16.9492 29,324 5.5422 14.01 22,956 13.95
35.04 11,170 5.7220 35.04 8,818 35.04
--------------- ---------------
12,856,308 3.45 5,815,793 2.9
=============== ========== =============== =============
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
----------------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Less than fair value at date of grant $ 3.31 $ - $ 0.16
=============== ============== ===============
Equal to fair value at date of grant $ 1.63 $ 0.73 $ 2.27
=============== ============== ===============
Exceeds the fair value at date of grant $ 2.13 $ - $ -
=============== ============== ===============
During 2002 the Company issued 40,000 options to purchase
Ordinary shares with an exercise price of par value to its former
directors. Since the Company was committed to issue such shares
during 2001, the Company recorded a $ 185 charge as merger
expenses in 2001.
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.
The director's 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.
F-31
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME
Income derived by Alvarion Ltd. is generally subject to the regular
Israeli corporate tax rate of 36%. 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.
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
"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. 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, 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.
F-32
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
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 former
InnoWave's "Approved Enterprise" status to Alvarion. As of
December 31, 2003, such approval has not yet 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 they would
be taxed at the corporate tax rate applicable to such profits as
if the Company had not elected the alternative system of
benefits, currently between 15%-20% for an "Approved Enterprise".
As of December 31, 2003, the accumulated deficit of the Company
does not include tax-exempt profits earned by the Company's
"Approved Enterprise".
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. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985:
Results for tax purposes are measured in real terms of earnings
in NIS after certain adjustments for increases in the Consumer
Price Index. As explained in Note 2b, the financial statements of
Alvarion Ltd. are presented in U.S. dollars. The difference
between the annual change in Israel's Consumer Price Index and in
the NIS/dollar exchange rate causes a difference between taxable
income and the income before taxes shown in the financial
statements. 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.
F-33
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
Commencing with taxable year 2003, the Company has elected to
measure its results for Israeli tax purposes on the basis of
amounts nominated in US dollar. This election obligates the
Company for three years.
d. Income (loss) before taxes on income:
Year ended December 31,
---------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
Domestic $ (98,276) $ (20,696) $ (11,798)
Foreign (11,735) 15 (14)
--------------- --------------- ---------------
$ (110,011) $ (20,681) $ (11,812)
=============== =============== ===============
e. Carryforward losses:
As of December 31, 2003, Alvarion Ltd. had an available tax loss
carryforward amounting to approximately $ 91,000, which may be
carried forward, in order to offset taxable income in the future,
for an indefinite period.
In addition, the accumulated net tax operating loss carryforward,
in a total amount of approximately $ 65,000, resulted from the
merger with Floware and, at the effective time of the merger, 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:
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, 2003, the state and the federal tax losses
carryforward of the U.S. subsidiary amounted to approximately $
6,522 and $ 15,072, 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 of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
F-34
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- TAXES ON INCOME (Cont.)
f. 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,
------------------------------------
2002 2003
---------------- ----------------
Tax assets in respect of:
Allowance for doubtful accounts $ 257 $ 114
Severance pay and accrued vacation pay 333 457
Other deductions for tax purposes 1,964 2,386
Net loss carryforward 19,285 19,525
---------------- ----------------
Total deferred tax assets before valuation allowance 21,839 22,482
Valuation allowance (21,839) (22,482)
---------------- ----------------
Net deferred tax assets $ - $ -
================ ================
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.
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 16:- 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").
F-35
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16:- GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION (Cont.)
b. The following presents total revenues for the years ended
December 31, 2001, 2002 and 2003, and long-lived assets as of
December 31, 2001, 2002 and 2003:
2001 2002 2003
------------------------- ------------------------- -------------------------
Long- Long- Long-
Total lived Total lived Total lived
revenues assets revenues assets revenues Assets
------------ ----------- ------------ ----------- ------------ ------------
Israel $ 656 $ 62,293 $ 655 $ 59,976 $ 1,294 $ 60,892
United States (including
Canada) 32,010 1,212 28,434 1,040 31,710 834
Europe (without Russia,
Sweden, Czech Republic,
and Germany) 24,833 443 18,999 509 21,701 531
Sweden 5,046 - 1,530 - 2,362 -
Czech Republic 2,062 - 3,378 - 2,773 -
Russia 2,240 - 4,087 - 9,802 -
Chile 4,032 - 8,440 - 4,180 -
Mexico 1,411 - 873 - 18,655 38
Japan 8,110 - 6,754 6 217 -
Africa 3,604 - 4,437 - 13,223 -
China 3,456 - 2,843 - 5,086 -
Asia (without China and
Japan) 4,236 24 4,546 - 6,965 15
Latin America (without
Mexico, Chile) 6,934 21 3,634 25 8,093 25
Australia 338 - 239 - 1,147 -
------------ ----------- ------------ ----------- ------------ ------------
$ 98,968 $ 63,993 $ 88,849 $ 61,556 $ 127,208 $ 62,335
============ =========== ============ =========== ============ ============
c. Major customers' data as percentage of total sales:
Year ended December 31,
--------------------------------------------------
2001 2002 2003
-------------- -------------- --------------
Customer A 0% 0% 15.20%
============== ============== ==============
Customer B (related party, see Note 17) 3.16% 11.40% 8.50%
============== ============== ==============
Customer C 5.54% 10.32% 3.68%
============== ============== ==============
F-36
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 17:- RELATED PARTY
The Company generates revenues from the sales of its products to one
of the Company's shareholder in the ordinary course of business. The
balances with and the revenues derived from that related party were as
follows:
a. Balances with that related party:
December 31,
---------------------------------
2002 2003
--------------- ---------------
Trade receivables $ 3,039 $ 2,985
=============== ===============
b. Revenues from that related party:
Year ended December 31,
---------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
Total revenues $ 3,134 $ 10,185 $ 10,883
=============== =============== ===============
NOTE 18:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development:
Year ended December 31,
---------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
Research and development costs $ 27,078 $ 27,597 $ 27,351
Less - grants 5,982 3,520 3,846
--------------- --------------- ---------------
$ 21,096 $ 24,077 $ 23,505
=============== =============== ===============
b. Amortization of deferred stock compensation:
Cost of revenues $ 51 $ 72 $ 60
Research and development, net 341 310 261
Selling and marketing 167 114 96
General and administrative 167 84 94
--------------- --------------- ---------------
$ *) 726 $ 580 $ 511
=============== =============== ===============
*) In addition, the merger expenses include $ 138 in
amortization of deferred stock compensation expenses for the
year ended December 31, 2001.
F-37
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 18:- SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
c. Financial income, net:
Year ended December 31,
---------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
Financial income:
Interest and others $ 9,156 6,445 $ 4,710
Gain on sale of held-to-maturity marketable
securities 13 13 -
Foreign currency translation differences 332 455 (8)
--------------- --------------- ---------------
9,501 6,913 4,702
--------------- --------------- ---------------
Financial expenses:
Interest and bank expenses (541) (326) (575)
Loss on sale and impairment of held to
maturity marketable securities (420) - -
--------------- --------------- ---------------
(961) (326) (575)
--------------- --------------- ---------------
$ 8,540 $ 6,587 $ 4,127
=============== =============== ===============
d. Other expenses:
The investment in a privately-held U.S. company ("the Investee")
was stated at the lower of cost or estimated fair value, since
the Company owns less than 10% of the outstanding shares of the
Investee, and therefore does not have the ability to exercise
significant influence over the operating and financial policies
of the Investee.
During 2001, due to continuing losses and negative cash flows of
the Investee, the Company wrote-off the entire investment in the
amount of $ 3,500. The impairment loss was recorded in other
expenses.
- - - - - - - - - - -
Note 19:- SUBSEQUENT EVENTS (UNAUDITED)
In June 2004, the company reached a settlement agreement with the
third party (see note 13 (b)(1)). The settlement agreement resulted in
a payment to a third party of an immaterial amount.
F-38