UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
|_| 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, 2002
-----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-30628
ALVARION LTD.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL
-----------------------------------------------
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
21A HABARZEL STREET, TEL AVIV 69710, ISRAEL
-------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
ORDINARY SHARES, NIS 0.01 PAR VALUE PER SHARE
---------------------------------------------
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT.
NONE
---------------
(TITLE OF CLASS)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
51,915,629 ORDINARY SHARES, NIS 0.01 PAR VALUE PER SHARE
--------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark which financial statement item the registrant has elected
to follow.
|_| Item 17 |X| Item 18
INTRODUCTION
We are a leading provider of wireless broadband and wideband
connectivity infrastructure. Our solutions are used by telecom carriers, service
providers and private network operators worldwide. Our products provide a
wireless telecom alternative to wired access solutions. They 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, by market segment and frequency band, 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 26 GHz and comply with
industry standards. We offer products that enable network operators to deploy
outdoor, fixed and mobile wireless connectivity to a local area network, or LAN.
We were incorporated in September 1992 under the laws of the State of Israel.
In April 2003, following the completion of our acquisition of most of
the assets and assumption of related liabilities of InnoWave ECI Wireless
Systems Ltd., a wholly-owned subsidiary of ECI Telecom Ltd., or InnoWave,
wideband products were added to our product line.
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.
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" and "BreezeNET
DS.5800" are trademarks of Alvarion. All other trademarks and tradenames
appearing in this annual report are owned by their respective holders.
TABLE OF CONTENTS
PAGE
PART I
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......................................................................21
A. HISTORY AND DEVELOPMENT OF THE COMPANY..........................................................21
B. BUSINESS OVERVIEW...............................................................................21
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.................................................................49
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES..................................................52
D. TREND INFORMATION...............................................................................53
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................................................53
A. DIRECTORS AND SENIOR MANAGEMENT.................................................................53
B. COMPENSATION....................................................................................56
C. BOARD PRACTICES.................................................................................56
D. EMPLOYEES.......................................................................................61
E. SHARE OWNERSHIP.................................................................................62
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............................................64
A. MAJOR SHAREHOLDERS..............................................................................64
B. RELATED PARTY TRANSACTIONS......................................................................65
C. INTERESTS OF EXPERTS AND COUNSEL................................................................66
ITEM 8. FINANCIAL INFORMATION...........................................................................66
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.........................................66
B. SIGNIFICANT CHANGES.............................................................................67
i
TABLE OF CONTENTS
(CONTINUED)
PAGE
ITEM 9. THE OFFER AND LISTING...........................................................................67
A. OFFER AND LISTING DETAILS.......................................................................67
B. PLAN OF DISTRIBUTION............................................................................68
C. MARKETS.........................................................................................68
D. SELLING SHAREHOLDERS............................................................................68
E. DILUTION........................................................................................68
F. EXPENSES OF THE ISSUE...........................................................................68
ITEM 10. ADDITIONAL INFORMATION..........................................................................68
A. SHARE CAPITAL...................................................................................68
B. MEMORANDUM AND ARTICLES OF ASSOCIATION..........................................................69
C. MATERIAL CONTRACTS..............................................................................70
D. EXCHANGE CONTROLS...............................................................................71
E. TAXATION........................................................................................71
F. DIVIDENDS AND PAYING AGENTS.....................................................................78
G. STATEMENT BY EXPERTS............................................................................78
H. DOCUMENTS ON DISPLAY............................................................................78
I. SUBSIDIARY INFORMATION..........................................................................79
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................79
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........................................79
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................................................79
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS....................79
ITEM 15. CONTROLS AND PROCEDURES.........................................................................80
ITEM 16. [RESERVED]......................................................................................80
PART III
ITEM 17. FINANCIAL STATEMENTS............................................................................80
ITEM 18. FINANCIAL STATEMENTS............................................................................80
ITEM 19. EXHIBITS........................................................................................81
ii
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, 2001 and 2002 and for each of the years ended
December 31, 2000, 2001 and 2002 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. We have derived the selected
consolidated financial data as of December 31, 1998, 1999 and 2000 and for each
of the years ended December 31, 1998 and 1999 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.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 33,009 $ 44,752 $ 101,460 $ 98,968 $ 88,849
Cost of sales...................................... 17,889 23,528 55,608 59,484 55,120
Write-off of excess inventory and
provision for inventory purchase
commitments....................................... -- -- -- 53,881 250
------------ ------------ ------------ ------------ ------------
Gross profit (loss)................................ 15,120 21,224 45,852 (14,397) 33,479
Operating expenses:
Research and development, gross.................... 5,899 8,958 16,818 27,078 27,597
less royalty-bearing grants........................ 1,042 2,078 4,345 5,982 3,520
------------ ------------ ------------ ------------ ------------
Research and development, net...................... 4,857 6,880 12,473 21,096 24,077
Amortization of current technology................. -- -- -- 1,200 2,400
Selling and marketing.............................. 10,970 14,692 26,226 30,258 26,570
General and administrative......................... 1,883 2,289 4,132 6,226 6,018
Amortization of deferred stock compensation........ -- -- 18 726 580
In-process research and development write-off...... -- -- -- 26,300 --
Merger expenses.................................... -- -- -- 2,841 --
Restructuring costs................................ -- -- -- 5,437 1,102
One-time expense related to a settlement of an OCS
program........................................... -- -- -- 6,535 --
------------ ------------ ------------ ------------ ------------
Total operating expenses........................... 17,710 23,861 42,849 100,619 60,747
------------ ------------ ------------ ------------ ------------
Operating income (loss)............................ (2,590) (2,637) 3,003 (115,016) (27,268)
Financial income (expenses), net................... 292 (527) 7,031 8,540 6,587
Other expenses..................................... -- (470) -- (3,535) --
------------ ------------ ------------ ------------ ------------
Net income (loss).................................. $ (2,298) $ (3,634) $ 10,034 $ (110,011) $ (20,681)
============ ============ ============ ============ ============
Basic net earnings (loss) per share................ $ (0.22) $ (0.32) $ 0.40 $ (2.80) $ (0.38)
============ ============ ============ ============ ============
Weighted average number of shares
---------------------------------------------------
used in computing basic net earnings
(loss) per share................................ 10,664 11,232 24,938 39,298 53,941
============ ============ ============ ============ ============
Diluted net earnings (loss) per share.............. $ (0.22) $ (0.32) $ 0.33 $ (2.80) $ (0.38)
============ ============ ============ ============ ============
Weighted average number of shares
used in computing diluted net earnings
(loss) per share................................ 10,664 11,232 30,807 39,298 53,941
============ ============ ============ ============ ============
2
AS OF DECEMBER 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................................... $ 7,611 $ 22,418 $ 159,793 $ 167,371 $ 74, 237
Total assets......................................... 19,368 36,620 252,837 307,595 272,075
Shareholders' equity................................. $ 8,988 $ 23,899 $ 212,495 $ 254,251 $ 227,830
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
CONTINUING ADVERSE CONDITIONS IN THE TELECOMMUNICATIONS INDUSTRY AND IN THE
MARKET FOR TELECOMMUNICATIONS EQUIPMENT HAVE LED TO DECREASED DEMAND FOR OUR
PRODUCTS AND HAVE HARMED AND MAY CONTINUE TO HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our systems are used by telecom carriers and service providers. Many
telecom carriers and service providers in markets throughout the world have
experienced, and are continuing to experience, substantial declines in sales and
revenues and have incurred significant operating losses. In addition, many
carriers and service providers using wireless broadband, or Wireless Broadband,
are emerging companies with unproven business models. Many carriers and service
providers have stopped deploying new networks or have ceased operations
completely and are no longer potential users of our products. The general
worldwide economic downturn has curtailed the ability of existing and
prospective carriers and service providers to finance purchases of products such
as ours, leading to a sharp decline in orders for new telecommunications
equipment. Also, 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.
For these reasons, we have experienced declines in revenues and the
trading price of our shares has declined. Even after giving effect to the
addition to our revenues of the business previously conducted by Floware from
August 1, 2001 and thereafter, our revenues were approximately $88.8 million and
$99.0 million in 2002 and 2001, respectively, compared with approximately $101.5
million in 2000. This decrease in revenues required us to reduce our expenses.
Accordingly, in the third and fourth quarters of 2001 and in the fourth quarter
of 2002, we terminated the employment of an aggregate of approximately 200 and
60 employees, respectively, constituting approximately 15% and 10% of our
existing workforce at such periods. If we are unable to maintain or increase our
revenues, we may need to further reduce our expenses, which may have a negative
impact on our future growth.
3
If these industry-wide conditions persist, they will likely continue
to have an adverse impact, which may be material, on our business, financial
condition and results of operations. In addition, market perception that these
conditions could have an impact upon us may harm the trading price of our
ordinary shares, whether or not our business or results of operations are
actually affected.
TERRORIST ATTACKS AGAINST THE UNITED STATES AND THE MILITARY ACTION
LED BY THE UNITED STATES AND CERTAIN OF ITS ALLIES AGAINST IRAQ 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
the terrorist attacks upon the United States 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.
In addition, on March 19, 2003, the United States and certain of its allies
began a comprehensive military action against Iraq in which they ultimately
prevailed. Despite the conclusion of the recent military conflict, its related
uncertainties may worsen the global economy, causing businesses to continue
slowing spending on telecommunications products and services and further
lengthen already long sales cycles. Any escalation in these events 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.
THE RECENT OUTBREAK OF SARS IN THE ASIA-PACIFIC REGION AND ITS CONTINUED SPREAD
COULD HARM SALES OF OUR PRODUCTS.
The recent outbreak of severe acute respiratory syndrome, or SARS,
that began in the Asia-Pacific Region may have a negative impact on our
business. Our business may be impacted by a number of SARS-related factors,
including, but not limited to, disruptions in the operations of our customers
and their partners, reduced sales in certain markets, and increased costs to
conduct our business abroad. In addition, the spread of the SARS virus and the
extent of local preventive measures could affect the production facilities of
our component manufacturers located in Asia. If this or any other factor hinders
our ability to obtain components for our products from our manufacturers on a
timely basis, there could be a significant disruption in our business. Any such
disruption could adversely affect our business, financial condition and results
of operations.
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 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 related
to inventory write-offs, charges for inventory purchase commitments, a write-off
of in-process research and development, merger related expenses and
restructuring related costs, one-time expenses related to our program with the
Office of the Chief Scientist of the Israeli Ministry of Industry and Trade, or
the OCS, and an investment write-down, in an aggregate amount of approximately
$98.5 million. We may continue to incur operating and net losses again in the
future. Losses 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.
4
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.
Factors that may contribute to fluctuations in our quarterly results
of operations include:
o the uneven pace of spectrum licensing to wireless carriers;
o the size and timing of orders and the timing of large scale
projects;
o customer deferral of orders in anticipation of new products,
product features or price reductions;
o the high level of competition that we encounter;
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, due to the current SARS epidemic or other reasons;
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 software and hardware development problems;
o one-time charges;
5
o mergers or acquisitions;
o the size and timing of approval of grants from the
Government of Israel;
o the geopolitical situation;
o fluctuations in the exchange rate of the NIS against the
dollar; and
o general economic conditions in the wide range of markets in
which we operate and throughout the world.
Our customers ordinarily require the delivery of products promptly
after their orders are accepted. Our business usually does not have a
significant backlog of accepted orders. Consequently, revenues in any quarter
depend on orders received and accepted in that quarter. The deferral of the
placing and acceptance of any large order from one quarter to another could
materially adversely affect our results of operations for the previous quarter
and the subsequent 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. This may also have a material adverse affect on the
market price of our ordinary shares.
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.
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 17 2003, the last sales price of our ordinary shares on the
Nasdaq National Market was $3.47. We may continue to experience significant
volatility in the future, based on the following factors, among others:
o our prospects;
o actual or anticipated fluctuations in our sales and results
of operations;
o variations between our actual or anticipated results of
operations and the published expectations of analysts;
o general conditions in the Wireless Broadband products
industry and general conditions in the telecommunications
equipment industry;
o announcements by us or our competitors of significant
technical innovations, acquisitions, strategic partnerships,
joint ventures and capital commitments;
6
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 Latin America, and the effect of
any hostilities with Iraq on our operations and results;
o departures of key personnel; and
o regulatory considerations.
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. These liabilities and indemnification obligations could have an adverse
affect on us.
BECAUSE WE CHANGED OUR NAME, OUR POTENTIAL CUSTOMERS MAY NOT RECOGNIZE OUR NEW
BRAND. THIS MAY CAUSE OUR REVENUES AND PROFITABILITY TO DECLINE AND WE MAY
EXPERIENCE DIFFICULTIES IN RECRUITING QUALIFIED PERSONNEL.
On August 1, 2001, upon the merger with Floware, the name of the
combined company was changed to Alvarion Ltd. Because we have marketed and
continue to market most of our products under the BreezeCOM and WALKair names,
our existing customers and business partners and investors generally may not
recognize our new name and brand. In 2002, we incurred significant marketing
expenses relating to the promotion of our new name and brand. We will continue
to incur marketing expenses in order to build our new brand identity. If we fail
to build this brand recognition, our revenues and profitability may decline.
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
liabilities of InnoWave and hired 150 former employees of InnoWave. We expect
integrating these new assets and employees to be difficult, time consuming and
costly. The integration of operations could distract management from our
day-to-day business. We must successfully complete the integration of the
following operations, among others:
7
o product offerings, including the branding of the acquired
products under our corporate name;
o research and development, including strategic planning;
o sales and marketing, including channel management conflicts;
o customer service functions;
o worldwide offices;
o human resources and other administrative functions; and
o management information systems.
In addition, as we integrate our credit policies across InnoWave's
former customer base, we may not be able to retain all of these customers and we
may experience reduced purchases of products from the customers that we do
retain.
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. In
particular, if the integration of InnoWave's business is not successful:
o we may lose key personnel;
o we may lose key customers;
o we may not be able to retain or expand our market position;
and
o the market price of our ordinary shares may decline.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In August 2001 we completed our merger with Floware. In April 2003,
we completed the acquisition of most of the assets and assumption of related
liabilities of InnoWave and hired 150 former InnoWave employees. Our rapid
growth has significantly strained our management, operational and financial
resources. Any future growth 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.
8
WE MAY PURSUE MERGERS AND ACQUISITIONS THAT PRESENT RISKS AND MAY NOT BE
SUCCESSFUL.
In the future, we may 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 making
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.
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 also encounter intense and increased
competition in the wireless LAN market. 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 Wireless Broadband access
systems. 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.
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.
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, offer our products as part of integrated systems or solutions to
the same extent as our competitors, successfully develop or introduce new
products that are less costly or offer better performance than those of our
competitors or offer purchasers of our products payment and other commercial
terms as favorable as those offered by our competitors. A failure to accomplish
one or more of these objectives could materially adversely affect our sales and
profitability, harming our financial condition and results of operation.
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;
9
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, time division multiplexing, modem
and radio technologies and other technologies. 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 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 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
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 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.
10
THERE MAY NOT BE MARKET ACCEPTANCE OF OUR WIRELESS LAN PRODUCTS BECAUSE OF THEIR
DATA TRANSMISSION RATES.
Several of our competitors offer, and others intend to offer,
wireless LAN products that operate at data rates higher than 11 Mbps, the
maximum data rate currently offered by our wireless LAN products. Because data
transmission rates are ordinarily a major factor considered by end-users in
selecting wireless LAN products, we may lose potential customers and market
share. In addition, we may be unable to recover any market share lost because of
the earlier entry of our competitors into the market.
OUR WIRELESS BROADBAND BUSINESS DEPENDS IN PART ON ORIGINAL EQUIPMENT
MANUFACTURERS AND SYSTEMS INTEGRATORS, IN PARTICULAR OUR STRATEGIC PARTNERS
SIEMENS, ALCATEL, NERA AND DATANG.
The success of the sales of our Wireless Broadband products currently
depends in part on existing relationships with original equipment manufacturers,
or OEMs, or other system integrators, particularly Siemens, Alcatel, Nera and
Datang. 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 original equipment manufacturers' and systems
integrators' active marketing and sales efforts as well as the quality of their
integration efforts and post-sales support. This reliance on original equipment
manufacturers and systems integrators exposes this business to a number of
risks, each of which could result in a significant reduction in the sales of our
Wireless Broadband products. We face the risk of termination of these
relationships and the promotion of competing products or emphasis on alternative
technologies by these original equipment manufacturers 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 original
equipment manufacturers' 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 17.7% of our sales in
2000, 13.7% of our sales in 2001 and 20.9% of our sales in 2002. 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 them do not
prevent the distributors of our products from selling competitive products, and
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 14.5% of our
sales in 2002. 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.
11
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 have recently begun 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 24 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 delays in delivery due to the SARS epidemic or other
factors:
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.
12
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.
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 2001 we recorded
an allowance for irrevocable inventory purchase commitments in our financial
statements in an aggregate amount of approximately $8.6 million as a result of
over-estimation of our sales. If we experience such 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 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.
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;
13
o suppliers could increase component prices significantly and
with immediate effect on the manufacturing costs for our
products;
o we may not be able to develop alternative sources for
product components;
o suppliers could discontinue the manufacture or supply of
components used in our products. This may require us to
modify our products, which may cause delays in product
shipments, increased manufacturing costs and increased
product prices;
o we may be required to hold more inventory for longer periods
of time than we otherwise might in order to avoid problems
from shortages or discontinuance; and
o due to the political situation in the Middle East, we may
not be able to import necessary components.
In the past, we experienced delays and shortages in the supply of
components on more than one occasion. We may experience such delays in the
future, harming our business and results of operations.
OUR PRODUCTS, PARTICULARLY OUR LICENSED BAND PRODUCTS, HAVE LONG AND
UNPREDICTABLE SALES CYCLES. THIS COULD ADVERSELY IMPACT OUR REVENUES, NET INCOME
(LOSS) AND THE MARKET PRICE OF OUR ORDINARY SHARES.
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, among other reasons, by a carrier's need to
obtain financing to purchase systems incorporating our products and by 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.
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). Our future success depends in part on broad acceptance of these
standards by the wireless LAN and Wireless Broadband markets. 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.
14
Our strategy of seeking to anticipate and comply with industry
standards is subject to the following additional risks, among others:
o the standards ultimately adopted by the industry may vary
from those anticipated by us, causing our products (which
were designed to meet anticipated standards) to fail to
comply with established standards;
o even if our products do comply with established standards,
these standards are not mandatory and consumers may prefer
to purchase products that do not comply with them or that
comply with new or competing standards; and
o product standardization may have the effect of lowering
barriers to entry in the markets in which we seek to sell
our products, by diminishing product differentiation and
causing competition to be based upon criteria such as the
relative size and marketing skills of competitors. We may
have greater disadvantages in competing on the basis of
these criteria than on the basis of product differentiation.
These risks, among others, may harm our sales and, consequently, our
results of operations.
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 regulation
of frequency licensing began during 1999 in many countries in Europe and Latin
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.
15
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 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 to authorized users of the spectrum, and to
accept interference caused by other users, if our products
operate in the license-free bands.
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 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.
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.
16
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 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, over 99% of our sales in 2000,
2001 and 2002 were generated elsewhere around the world. Our products are
marketed internationally and we are therefore subject to certain risks
associated with international sales, including:
17
o regulation of incumbent and new carriers in each country and
conditions imposed on radio frequency licenses of carriers
in each country, which our products may not comply with;
o the standardization of, and certification requirements for,
national telecommunications equipment and changes in
regulatory requirements, which our products may not comply
with;
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.
o 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 action
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.
WE MAY NOT SATISFY THE NASDAQ NATIONAL MARKET'S CONTINUED LISTING REQUIREMENTS.
IF WE CANNOT SATISFY THESE REQUIREMENTS, THE NASDAQ NATIONAL MARKET COULD DELIST
OUR ORDINARY SHARES. THIS MAY ALSO CAUSE THE DELISTING OF OUR ORDINARY SHARES
FROM THE TEL AVIV STOCK EXCHANGE. NO OTHER ACTIVE PUBLIC MARKET FOR OUR ORDINARY
SHARES MAY DEVELOP, WHICH WOULD LIKELY MAKE OUR ORDINARY SHARES AN ILLIQUID
INVESTMENT AND DECREASE THEIR VALUE.
Our ordinary shares are quoted on the Nasdaq National Market. To
continue to be listed, among other things, our ordinary shares must have a
minimum bid price of at least $1.00 per share. Although the market price of our
ordinary shares has never been as low as $1.00 per share, from time to time, our
ordinary shares have had a minimum closing bid price of approximately $1.55 per
share. We cannot assure you that we will continue to satisfy the minimum bid or
other continued listing requirements in the future. If we are unable to continue
to satisfy the minimum bid or other continued listing requirements, our ordinary
shares may be delisted from the Nasdaq National Market and trading in our
ordinary shares may be conducted in the over-the-counter market in the so-called
"pink sheets" or, if available, the "OTC Bulletin Board Service" or, if
available, another market. Delisting from the Nasdaq National Market may also
result in us being delisted from the Tel Aviv Stock Exchange. As a result, an
investor would likely find it significantly more difficult to dispose of, or to
obtain accurate quotations as to the value of, our ordinary shares and the
prices of our ordinary shares may be lower than those that might otherwise be
available through the Nasdaq National Market or the Tel Aviv Stock Exchange.
18
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 2002, 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
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 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. 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. The
future of the "peace process" is uncertain and has deteriorated due to ongoing
violence between Israel and the Palestinians. Due to the volatile security
situation in Israel, our insurance carrier no longer insures our facilities and
assets for damage or loss resulting from terrorist incidents. Additionally,
several countries still restrict business with Israel and with Israeli
companies. We could be adversely affected by the continuation or deterioration
of Israel's conflict with the Palestinians, by negative developments in the
"peace process" 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 or that the timing of this devaluation lags behind inflation in
Israel. If the dollar costs of our operations in Israel increase, our
dollar-measured results of operations will be adversely affected.
19
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 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 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.
20
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. 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.
On April 1, 2003, we completed an acquisition of most of the assets
and the assumption of related liabilities of InnoWave. InnoWave was a provider
of fixed wireless wideband voice and data point-to-multipoint solutions.
InnoWave offered an enhanced MultiGain Wireless product, or eMGW, that is a
wireless digital subscriber line alternative access solution operating in the
1.5GHz to 5.7GHz frequency bands. InnoWave also offered a modular MultiGain
Wireless system that uses frequency hopping CDMA technology to provide scalable
toll quality voice, high-speed voice band data, and ISDN-BRI services in the
800MHz to 3.8GHz frequency bands. Its products were utilized by over 700,000
subscribers, and have been deployed by over 60 operators around the world,
including many incumbent telecom operators, or ILECs, in developing regions.
In connection with the acquisition, we agreed to pay $9.1 million in
cash and other purchase related expenses, and granted a warrant to purchase
200,000 of our ordinary shares over a period of five years at an exercise price
of $3.00 per share, having a fair value of approximately $78,000 at February 19,
2003, the announcement date of the transaction. In addition, we expect to record
charges of approximately $3 million related to acquisition and integration
costs. In connection with the acquisition, we hired approximately 150 former
employees of InnoWave.
We expect this acquisition to:
o expand our product offerings with a range of wideband voice
and data solutions;
o enhance our ILEC customer base;
o increase our wireless subscribers installed base; and
o position us in the growing wideband voice and data segment
within the Wireless Broadband market.
B. BUSINESS OVERVIEW
GENERAL
We are a leading provider of wireless broadband and wideband
connectivity infrastructure. Our solutions are used by telecom carriers, service
providers and private network operators worldwide. Our products provide a
wireless telecom alternative to wired access solutions. They 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, by market segment and frequency band, designed to address the various
business models of carriers and service providers. We offer products that enable
network operators to deploy outdoor, fixed and mobile wireless connectivity to a
LAN.
21
We provide solutions for most Wireless Broadband point-to-multipoint
bands 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 26 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.
OUR TARGET CUSTOMERS
We market and sell our products to three primary types of customers:
telecom carriers; service providers and regional carriers; and private network
operators.
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 cellular operators, incumbent local
exchange carriers and competitive local exchange carriers seeking to compete
effectively in various market segments. Broadband Wireless Access, or BWA, has
emerged as an attractive last-mile alternative to wired access solutions.
Wireless Broadband systems are especially attractive to cellular
operators who are able to leverage their infrastructure, radio base-station
sites and customer base, together with their marketing and customer support
investments, to offer broadband competitive Internet access services to their
customer base. 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 of the residential market segments, because of its bandwidth, low capital
and operating costs and sophisticated data and voice services.
The modular architecture of our Wireless Broadband products enables
carriers to deploy our products gradually with customer demand, 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
In today's competitive telecommunications markets, Internet service
providers and regional carriers seek to offer their customers comprehensive
solution packages. As emerging market segments, such as SOHOs and SMEs, expand
their service requirements, the demand upon service providers and regional
carriers to deliver enhanced data and voice services with fast and reliable
connectivity increases.
22
Leveraging the potential of these emerging markets 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.
PRIVATE NETWORK OPERATORS
Enterprises expanding across multiple sites, whether on a campus or
in a metropolitan area, face the challenge of maintaining and upgrading their
networks to ensure reliable and effective enterprise-wide communication. Issues
such as building-to-building connectivity and integration of indoor and outdoor
solutions are material in determining network deployment across the entire
enterprise. In response, communities and organizations, including homeland
security agencies, such as police and fire departments, emergency medical
service bureaus and military and government installations, have begun to utilize
wireless technologies to open their wired computer network infrastructure to
mobile users and to provide an alternative to wired building-to-building
connectivity.
CUSTOMERS OF OUR PRODUCTS
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. Approximately 600,000 of our product units are deployed
worldwide. Our products are used primarily by cellular carriers and other
telecom carriers, by service providers, by regional carriers and by private
network operators and managers. Our customers include, among others, Alestra
Millicom International Cellular S.A., MultiTel S.A., Novis Telecom SA, SpeedNet
Corporation, Telefonica de Argentina, AMA Wireless, Iberbanda SA, EDN Sovintel,
Mobifon Titan Broadband, Telecel Paraguay SA, Entel PCS Telecommunications SA,
Meridian Telecoms Inc., Vivendi Telecom Hungary, China Mobile, Neo Sky 2003 S.A
and Equant Russia Limited. Our major OEM partners are Siemens, Alcatel, Nera and
Datang Telephone Corp.
OUR SOLUTIONS
Our product offerings provide three different types of wireless
broadband applications: access, backhauling and feeding, and private network
connectivity.
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 and private network
operators. The applications are either broadband data, voice or
telecommunication multiservices.
23
Our BreezeACCESS and WALKair BWA products, which offer data rates
ranging from 3 to 54 Mbps, provide carriers with comprehensive BWA solutions for
high-speed access to voice and data in the licensed and license-free bands,
heightened bandwidth flexibility and service differentiation. Our solutions
provide these operators with services that are comparable to leased line and
fiber connectivity. Our BreezeACCESS BWA products offer service providers and
regional operators comprehensive, scalable and rapidly deployable solutions to
their "last mile" connectivity needs in the unlicensed band, independent of
landline infrastructure. This enables service providers and regional operators
to provide their business customers with high speed Internet connectivity and
complementary service options, including voice over Internet protocol, or VoIP,
virtual private networks, or VPN, and quality of service, or QoS. These products
also allow private network operators and managers to deliver reliable, secure
and mobile access across multiple sites and across city and county sized areas.
BACKHAULING AND FEEDING
We offer applications in which wireless equipment is used as
backhauling for Wireless Broadband networks and cellular networks.
Mobile telephone base stations are often backhauled using leased
lines or point-to-point wireless links. WALKair's point-to-multipoint systems
are a cost-effective alternative which can reduce capital and operating expenses
and increase the bandwidth available for voice and data systems. Its modular
architecture requires a small initial investment and features simple, fast and
non-service interrupting upgrades upon capacity growth or site addition. WALKair
is designed to meet the requirements of cellular base station backhaul
applications, as it exhibits reliability, allows for link redundancy and
diversity and provides the interfaces required by cellular telephony networks.
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.
PRIVATE NETWORK CONNECTIVITY
We offer specialized applications utilizing Wireless Broadband
technologies for private network connectivity applications.
Our solutions meet the building-to-building and outdoor connectivity
needs of enterprises, communities, local authorities, public security and
similar specialized network operators, including unique applications like
broadband mobility, municipal connectivity, transport, public safety and
security.
OUR PRODUCTS
We manufacture and sell the following products:
INTERNET PROTOCOL-BASED ACCESS PRODUCTS:
o BreezeACCESS access products (BreezeACCESS II, V, XL, VL,
OFDM and MMDS).
24
MULTISERVICE ACCESS PRODUCTS:
o WALKair products (WALKair 1000 and 3000);
o Alvarix; and
o AlvariBASE.
BACKHAULING, FEEDING AND PRIVATE NETWORK CONNECTIVITY PRODUCTS:
o BreezeNET products (BreezeNET DS.11, PRO.11 and DS.5800);
o BreezeACCESS connectivity products (BreezeACCESS LB, GO, TM
and SU-M); and
o BreezeSECURE.
NETWORK MANAGEMENT PRODUCTS:
o BreezeMANAGE, WALKnet, BreezeVIEW and AlvariSTAR network
management products.
INTERNET PROTOCOL-BASED ACCESS PRODUCTS
BreezeACCESS IP-based Access Products
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.
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.
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.
BreezeACCESS XL products are offered in multiple radio variants in
the 3.5 GHz licensed bands to accommodate spectrum licenses around the world,
and provide data rates of up to 3 Mbps.
BreezeACCESS OFDM, or orthogonal frequency division
multiplexing-based, products, support higher speed wireless broadband access
products currently in the licensed 3.5 frequency band, and provide data rates of
up to 12 Mbps.
25
BreezeACCESS VL, OFDM-based products, released in January 2003,
operate in the unlicensed, 5.725-5.850 GHz ISM band, and provide data rates of
up to 54 Mbps.
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
split 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.
OFDM technology, on which BreezeACCESS OFDM and the recently
introduced 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 non-line-of-sight, or
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).
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.
26
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.
Alvarix
Our Alvarix system, released in July 2002, is a flexible and
cost-effective access solution for carriers in the 26GHz band. 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. Alvarix may be used for a wide range of
SME and MDU/MTU applications, and allows for converged Wireless Broadband and
cellular backhauling.
AlvariBASE
In order to broaden the range of our BWA systems and to provide an
integrated solution for various BWA market segments, we introduced in February
2002 AlvariBASE, an integrated WALKair/BreezeACCESS base station. The integrated
base station, 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. This
enables operators to address a wide variety of end users from a single
deployment and to provide a broad range of services.
BACKHAULING, FEEDING AND PRIVATE NETWORK CONNECTIVITY PRODUCTS
BreezeNET Products
Our BreezeNET products are designed to provide high reliability
building-to-building bridging solutions and support of mobile connectivity, as
well as 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.
27
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, released in June 2002, 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 product line, products for traffic management
with our BreezeACCESS TM product line, products for private networks, or PWLAN,
with our BreezeACCESS GO product line, and products for homeland security
applications with our BreezeACCESS SU-M product line.
BreezeACCESS LB products, released in January 2003, 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 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.
BreezeACCESS GO, released in January 2003, was designed as a
cost-effective solution for operators of wireless LANs in large, medium and
small public access "hot spots," such as airports, convention centers, hotels
and cafes. BreezeACCESS GO consists of a public access controller, which is an
integrated, small access point and gateway, and a provisioning and operations
support system, the software responsible for the back-office management of the
network infrastructure. The public access controller is a plug-and-play system
that works seamlessly with any TCP/IP based client. It provides continuous
information to the back-office support system about users and network traffic
and enables user authentication for Internet access, industry standard security
support, and voice over IP support. The back-office support system, which
manages all public access controllers within the network, provides the
configuration, authentication, authorization and accounting, billing, credit
card processing, roaming settlement and network monitoring of the wireless LAN.
28
BreezeACCESS TM, a traffic management solution released in December
2002, is a stand-alone network appliance designed to facilitate subscription
control, measure customer usage of resources and provide adequate bandwidth
support in wireless networks. BreezeACCESS TM products allow service providers
to monitor their BWA networks by identifying bottlenecks or excessive bandwidth
usage, enabling the implementation of timely corrective action. BreezeACCESS TM,
typically located at the network base station, enables the monitoring and
management of bi-directional wireless network traffic for every subscriber and
application, through a web browser interface. It also features an accounting
services module, which aids the measurement of customer resource usage for
accurate billing. An additional software package enables the integration of
per-usage accounting and external customer care and billing systems.
BreezeACCESS SU-M, released in August 2002, is a mobile radio unit
designed for homeland security applications. It allows public safety agents,
such as police officers, fire fighters, emergency medical technicians and
military personnel, quick wireless access to remote servers from their location
in the field. BreezeACCESS SU-M enables the user in the field to extract
information, contact headquarters or other field officers, as well as send large
data files, including pictures and other pertinent information, with the same
speed and data integrity that exists in a wired infrastructure. BreezeACCESS
SU-M can also be deployed in combination with existing mobile data systems
currently used by many public safety organizations, providing a significant
increase in data capacity and throughput.
BreezeSECURE
BreezeSECURE, introduced in November 2002 provides a high level of
security to wireless communication by enabling the creation of a Virtual Private
Network, or VPN, between any pair of sites. It can protect systems using our
wireless access and connectivity solutions, including BreezeNET DS.11, BreezeNET
PRO.11 and BreezeACCESS. BreezeSECURE delivers data privacy using the Data
Encryption Standard, or DES, or Triple DES, or 3DES, encryption, key management
with Internet Key Exchange, or IKE, protocol and MD5 or SHA data authentication.
It provides multiple firewall features, including Demilitarized Zone, or DMZ,
and extensive filtering capabilities. Featuring an SNMP agent, a web-based user
interface and TFTP client, BreezeSECURE is easy to setup, monitor and maintain
from either the LAN or over the wireless network.
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 popular HP Open View network management platform, enable configuring,
managing faults and monitoring performance of all system components from a
central management station.
29
In April 2003, following the completion of our acquisition of most of
the assets and assumption of related liabilities of InnoWave, wideband products
were added to our product line.
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 throughput of approximately 25 Mbps, subject to conditions. Seamless
and reliable operation at roaming speeds of up to 60 m.p.h. 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.
30
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 product line. Additional ASIC
developed in-house supports our WALKair products, with a full duplex
point-to-multipoint single carrier trellis-coded 64QAM modem.
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 to 2 Mbps. 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 also actively
participate in the IEEE 802.16.3 Broadband Wireless Access work group, the
European ETSI Transmission and Multiplexing working group 4, or TM4, which deals
with fixed radio systems, and the ETSI Project broadband radio access network,
or BRAN technical committee. Marianna Goldhamer, our director of strategic
technology, serves as a liaison officer between the IEEE 802.16 work group and
ETSI BRAN HIPERMAN and ETSI TM4 working groups.
SALES, MARKETING AND SUPPORT OF OUR PRODUCTS
We market our products through an extensive network of more than 200
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.
31
We currently sell and distribute our products in more than 100
countries worldwide. The use of different types of marketing channels through
our partnership network enables us to market our products to many different
market segments and to meet the differing needs of our customers.
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 (through its local companies), 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.
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 2002, no single customer accounted for more than 10% of our
sales. However, companies affiliated with Siemens accounted for 11.40% of our
sales in 2002 and companies affiliated with Alcatel accounted for 10.32% of our
sales in 2002.
We operate in various regions. Our subsidiaries and representative
offices, located throughout North America, South America, Europe and Asia,
support our international marketing network.
In accordance with the foregoing, 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, providing 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 and their ability to sell
and support our products. The seminars are held in various countries and in
different languages according to need.
32
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 at our
subcontractors' facilities, R.H. Electronics Ltd.'s facility in Nazareth, Israel
and U.S.R. Electronics Ltd.'s facility in Carmiel, Israel. Equipment owned by us
and used for final assembly and testing is located 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, packaging and shipping.
Our packaging and shipping activities are conducted at our Tel Aviv 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 one patent issued by the United States Patent and
Trademark Office. We also have two proprietary developments for which we have
applied for patent protection in the United States, Europe and Israel; two
proprietary developments for which we have applied for patent protection in the
United States only, and an additional proprietary development for which we have
filed for a preliminary patent application in the United States. We have
trademark registrations in Israel, Chile, Hong-Kong, the United States and the
European Union. 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. See "Item 3--Key Information--Risk Factors."
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. See "Item 3--Key Information--Risk
Factors."
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. See "Item 3--Key
Information--Risk Factors."
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 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 cell-to-cell mobility;
o power consumption;
o product miniaturization;
o ease of installation;
o product time to market;
34
o comprehensiveness of product portfolio;
o ability to bundle products;
o ability to implement network solutions;
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, Netro Corporation, Wi-Lan Inc., Airspan
Inc., Proxim, Inc., Motorola, Aperto Networks and Remec, Inc. Our products are
also competing with other wireless telecommunications products from Cisco
Systems, Inc., Lucent Technologies, Inc., and 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 Latin
America and continues in many countries in these and other regions. 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.
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 of 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.
35
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 Tadipol-ECI Sp.z o.o.**, incorporated under the laws of
Poland; and
o InnoWave Telsiz Sistemleri Ticaret A.(a).**, incorporated
under the laws of Turkey.
*Alvarion SARL and Alvarion GmbH are wholly-owned subsidiaries of
Alvarion UK LTD. In addition, we have a representative office in China.
**Kermadec Telecom B.V, Tadipol-ECI Sp.z o.o. and InnoWave Telsiz
Sistemleri Ticaret A.(a) were acquired as part of our acquisition of the assets
of InnoWave.
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real property. On December 31, 2002, we leased an
aggregate of approximately 164,000 square feet in Israel for annual lease
payments (including management fees) of approximately $2.7 million and incur
annual parking expenses in connection with this lease of approximately $493,000,
based on the December 31, 2002 exchange rate between the dollar and the NIS.
These premises consist mainly of our corporate headquarters and two separate
36
warehouses. We started occupying the main premises in April 2001, which serves
as our corporate headquarters as well as the site at which we conduct our
research and development activities and some quality assurance, final assembly
and testing operations. While our main lease expires in March 2006, parts of
this lease expire in July 2004. The warehouse leases expire in February 2004. In
2002, aggregate annual lease payments for these premises were approximately
$75,000. We lease approximately 16,650 square feet of office facilities in
Carlsbad, California, at an annual rent of approximately $158,000. These
premises serve as the corporate headquarters of our U.S. subsidiary and as our
principal sales and marketing office in North America. We also lease office
space for the operation of our facilities in Miami, Florida, U.K., France,
Germany, Romania, China, Hong Kong, Uruguay, Japan, Brazil and Poland.
We believe that the facilities we currently lease are adequate for
our current requirements and that additional space will be available to us on
reasonably terms, if needed.
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 and wideband
connectivity infrastructure. Our solutions are used by telecom carriers, service
providers and private network operators worldwide. Our products provide a
wireless telecom alternative to wired access solutions. They 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, by market segment and frequency band, designed to address the various
business models of carriers and service providers. We offer products that enable
network operators to deploy outdoor, fixed and mobile wireless connectivity to a
local area network.
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. The merger has been accounted for using the
purchase method of accounting. We have consolidated the results of the Floware
business in our financial statements from August 1, 2001.
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.
The warrant, which has an exercise price of $3 per share, expires on the fifth
anniversary of the date of grant and had a fair value of $78,000 on February 19,
2003, the date on which the agreement was announced.
37
Our systems have been developed for sale to, and use by, telecom
carriers and service providers. Many of these customers and potential customers
for our products throughout the world have experienced, and are continuing to
experience, substantial declines in sales and services and have incurred
significant operating losses. For these and other reasons, since 2001 our
industry and our specific market within that industry have experienced a sharp
decline in orders for new telecommunications equipment. See "Item 3--Key
Information--Risk Factors" above. We are currently unable to determine how long
these circumstances will continue or whether they reflect a permanent
contraction, a temporary downturn or some other trend. As noted below, these
circumstances have substantially impacted our results of operations for 2002 and
2001 and our balance sheets as of December 31, 2002 and 2001.
CRITICAL ACCOUNTING PRINCIPLES
Our financial statements are prepared in accordance with accounting
principles, and audited in accordance with audit standards generally accepted in
the 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 so 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:
Functional and Reporting Currency. A majority of our revenues is
generated, and a substantial portion of our expenses is denominated and
determined, in U.S. dollars. Hence, the dollar is our functional and reporting
currency and monetary accounts maintained in other currencies are re-measured
into dollars in accordance with Statement of the Financial Accounting Standards
No. 52 "Foreign Currency Translation" ("SFAS No. 52").
We do not believe that, historically, inflation in Israel, as well as
exchange rate fluctuations between the NIS and the dollar, have had a material
effect on our results of operations.
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 1d to our financial statements describes the
write-offs and provisions which we made and recorded in 2002 and 2001 to reflect
the decline from our expectations in the value of inventory which had become
excessive, unmarketable or otherwise obsolete or the inventory of new materials
and components which we had purchased or committed to purchase during 2001 in
anticipation of forecasted sales which we did not consummate.
38
Restructuring. Note 9 to our financial statements describes
restructuring charges that we recorded in 2002 and 2001 in connection with cost
reduction plans that we implemented in response to the decline in revenues that
we experienced during the last two years. Although we do not anticipate
significant changes, actual costs may differ from these estimates. 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.
While we are hopeful that we will not be required to record similar
reductions in the valuation of our assets (or to recognize similar expense items
as a result thereof) in the future, we have no assurance that the estimates and
assumptions reflected in our financial statements will necessarily be accurate
as to enable us to avoid similar charges in the future.
Intangible assets. Since the transaction with Floware was accounted
for under the purchase method of accounting, our balance sheet as of December
31, 2002 and 2001 includes goodwill and current technology, intangible assets,
which totaled more than $50.4 million and $52.8 million, respectively, which we
acquired in connection with the merger. Notes 2i and 2j to our financial
statements describes the estimates and tests we have made during 2002 to assess
and determine whether our recorded intangible assets (goodwill 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 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 multiples valuation methods, based on our
management's future operations projections. No indication of impairment was
identified.
Current Technology. In addition and 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, 2002 has been also reviewed and determined that there was no
impairment. The acquired current technology is amortized over a period of 7
years in a straight-line method.
Should any of these intangibles have been impaired and must therefore
be written down or written off, such charge would result in a corresponding
reduction in our shareholders' equity and a corresponding charge to our
statement of operations.
Contingencies. We are, from time to time, subject to proceedings and
other claims related to vendors and other matters. For example, a third party
has made a demand to enforce an alleged seven-year lease agreement for the lease
of approximately 150,700 square feet at a monthly rate of approximately $
300,000. We are required to assess the likelihood of any outcomes to these
matters as well as potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies is made after
careful analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
39
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 two 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. 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.
Revenue Recognition. We generate revenues mainly from selling our
products indirectly through distributors and OEM's and directly to end-users.
Revenues from products are recognized in accordance with Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101")
when the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the seller's price to the buyer is fixed or
determinable and collectibility is reasonably assured.
We generally do not grant a right of return. However, we do grant to
certain distributors limited rights of return on unsold products. As a result of
significant decline in the demand for our products, since the third quarter of
2001, we have deferred recognizing revenues on shipments to such distributors
until they resell our products to their customers.
Prior thereto, we analyzed and monitored inventory levels and
distributors' sales based on inventory lists and point of sale reports received
on each balance sheet date from these distributors. Our experience was that such
distributors maintained an inventory of at least one month's supply of products
to allow them to serve the demands of their customers. Therefore, we deferred
revenue recognition for inventory held by a distributor that exceeded our
estimate of that distributor's monthly amount of sales. We calculated one month
of sales based on the distributor's actual sales in the prior quarter.
We generally do not grant right of return to OEM's and end users. In
certain instances, when such 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.
40
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, 2000, 2001 and 2002.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 2001 2002
------------------------ ------------------------ -----------------------
TOTAL TOTAL TOTAL
REVENUES PERCENTAGE REVENUES PERCENTAGE REVENUES PERCENTAGE
---------- ---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
Israel................. $ 789 0.8% $ 656 0.7% $ 655 0.7%
U.S.A.................. 50,317 49.6 32,010 32.3 28,434 32.0
Chile.................. 87 0.0 4,032 4.1 8,440 9.5
Japan.................. 1,728 1.7 8,110 8.2 6,754 7.6
Sweden................. 7,354 7.3 5,046 5.1 1,530 1.7
Other.................. 41,185 40.6 49,114 49.6 43,036 48.5
---------- ---------- ---------- ---------- ---------- ----------
$ 101,460 100.0% $ 98,968 100.0% $88,849 100.0%
========== ========== ========== ========== ========== ==========
The following table sets forth, for the periods indicated, selected
items from our consolidated statement of operations as a percentage of total
sales:
YEAR ENDED DECEMBER 31,
2000 2001 2002
---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Sales......................................................................... 100.0% 100.0% 100.0%
Cost of sales................................................................. 54.8 60.1 62.0
Write-off of excess inventory and provision for
purchase committments......................................................... -- 54.4 0.3
---------- ---------- ----------
Gross profit (loss)........................................................... 45.2 (14.5) 37.7
Operating expenses:
Research and development, gross............................................... 16.6 27.4 31.1
Less royalty-bearing grants................................................... 4.3 6.1 4.0
---------- ---------- ----------
Research and development, net................................................. 12.3 21.3 27.1
Amortization of current technology............................................ -- 1.2 2.7
Selling and marketing......................................................... 25.8 30.6 29.9
General and administrative.................................................... 4.1 6.3 6.8
Amortization of deferred stock compensation................................... -- 0.7 0.7
In-process research and development write-off................................. -- 26.6 --
Merger expenses............................................................... -- 2.9 --
Restructuring costs........................................................... -- 5.5 1.2
One-time expense related to a settlement of an OCS program.................... -- 6.6 --
---------- ---------- ----------
Total operating expenses...................................................... 42.2 101.7 68.4
---------- ---------- ----------
Operating income (loss)....................................................... 3.0 (116.2) (30.7)
Financial income, net......................................................... 6.9 8.6 7.4
Other expenses................................................................ -- (3.6) --
---------- ---------- ----------
Net income (loss)............................................................. 9.9% (111.2)% (23.3)%
========== ========== ==========
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
41
sales is primarily attributable to the continuous downturn in economic
conditions worldwide, specifically in the telecommunications equipment market.
This downturn has had a significant impact on our customers and the markets in
which they sell their products. Many of the new operators that we have sold
products to in the past have ceased or cut-back operations and have not placed
additional orders for our products. We are replacing these customers with
established telecom operators. Another factor that has impacted our sales is a
slowdown in the spectrum allocation process in various countries. This slowdown
has delayed our sales in these countries. However, despite these factors we have
managed to partially offset their impact and maintain our sound 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 operation 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 decreased in sales.
In 2002, we recorded additional charges related to write-off of
excess inventory in the aggregate amount of approximately $250,000 a decrease of
approximately 99.5% compared with the write-off of $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 had built
significant inventories in 2000 to sell equipment to customers, primarily in the
United States, to provide fast Internet access utilizing the unlicensed band.
Due to the current economic environment and reduced capital spending,
particularly in the telecommunications equipment markets, we determined that it
is unlikely that we will 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 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
by the end of 2001, for the early repayment of all royalties arising from future
sales with respect to our outstanding contingent royalties balance with the OCS.
Under this mutual 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.
42
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.
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, to our workforce reduction initiative
which we implemented at the end of 2001 and to the decrease in sales reflected
in decreased employees 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. 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. 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 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.
Restructuring costs. The restructuring related expenses consist of
approximately $1.1 million and $5.4 million for charges related to a
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.
43
Net income (loss). In 2002, net loss was approximately $(20.7)
million, compared with a net loss of approximately $(110.0) million in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Sales. Sales in 2001 were approximately $99.0 million, a decrease of
approximately 2.5%, compared with sales of approximately $101.5 million in 2000.
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 net sales is primarily attributable to a
downturn in economic conditions worldwide, specifically in the
telecommunications equipment market in 2001. This downturn has had a significant
impact on our customers and the markets in which they sell their products. Our
sales were also impacted by a change in the composition of our customers from
new operators to established carriers. Many of the new operators that we have
sold products to in the past have ceased or cut-back operations and have not
placed additional orders for our products. We replaced these customers with
established telecom operators. Another factor that has impacted our sales is a
slowdown in the spectrum allocation process in various countries. This slowdown
has delayed our sales in these countries. These factors are offset in part by
our increased sales in Latin America, Southeast Asia and in developing
countries. In these areas, as a result of the lack of wired infrastructure, the
demand for our products has increased.
In 2001, following our merger with Floware, we anticipated a
considerable growth in our sales. However we have experienced a significant
decline in demand for our products primarily due to the general worldwide
economic downturn. This slowdown has curtailed the ability of our existing and
prospective customers to finance purchases of products such as ours, leading to
a sharp decline in orders for new telecommunications equipment. The effect of
the slowdown in the worldwide markets decreased the sales of our products
originally developed by BreezeCOM by approximately 10%, from $101.5 million in
2000 to $91.3 million in 2001. Such decrease was partially offset by revenues
from products originally developed by Floware, which are included in our results
of operations from August 1, 2001 in a total amount of approximately $7.7
million.
Cost of sales. Cost of sales was approximately $59.5 million in 2001,
an increase of approximately 7.0% compared with cost of sales of approximately
$55.6 million in 2000. 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 increase is primarily attributable to a
change in the mix of our product sales to products that incur higher costs of
sale. Cost of sales as a percentage of sales increased to approximately 60.1% in
2001 from approximately 54.8% in 2000, primarily because the amount of our sales
of licensed products increased relative to the amount of our sales of unlicensed
products and the cost of sales as a percentage of sales is higher on licensed
products than on other products as a result of competition and high volume.
In 2001, we recorded charges related to the write-off of excess
inventory and provisions for inventory purchase commitments in the aggregate
amount of approximately $53.9 million. Our previous purchasing policy, as well
as our purchasing commitments, had been based on higher revenue forecasts. In
particular, we had built significant inventories in 2000 to sell equipment to
customers, primarily in the United States, to provide fast Internet access
utilizing the unlicensed band. Due to the economic environment and reduced
capital spending, particularly in the telecommunications equipment markets, we
determined that it is unlikely that we will be able to utilize or market our
entire inventory or purchase commitments in the next few quarters. There were no
similar charges in 2000.
44
Research and development expenses. Gross research and development
expenses were approximately $27.1 million in 2001, an increase of approximately
61.0% compared with gross research and development expenses of approximately
$16.8 million in 2000. Gross research and development expenses in 2001 reflect
research and development expenses of BreezeCOM prior to August 1, 2001 and
research and development expenses of Alvarion (BreezeCOM and Floware combined)
from August 1, 2001. This increase is primarily attributable to an increase in
employee-related expenses due to our broader product offerings under development
after the merger and to increased costs of development-related raw materials.
Research and development, gross, as a percentage of sales increased to 27.4% in
2001 from 16.6% in 2000, 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 $6.0 in 2001 and $4.3 million in 2000. Research and
development expenses, net, were approximately $21.1 million in 2001, compared
with approximately $12.5 million in 2000.
Amortization of current technology. A current technology charge of
$1.2 million was recorded in 2001. This charge is attributable to the current
technology that we acquired pursuant to our merger with Floware. There were no
similar charges in 2000.
Selling and marketing expenses. Selling and marketing expenses were
approximately $30.3 million in 2001, an increase of approximately 15.4% compared
with selling and marketing expenses of approximately $26.2 million in 2000.
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. Selling and marketing
expenses as a percentage of sales increased to 30.6% in 2001 from 25.8% in 2000.
This increase is primarily attributable to our retention of some additional
selling and marketing personnel worldwide to service our broader product
offerings after our merger with Floware as well as costs associated with our new
subsidiaries.
General and administrative expenses. General and administrative
expenses were approximately $6.2 million in 2001, an increase of approximately
50.0% compared with general and administrative expenses of approximately $4.1
million in 2000. 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. 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. This increase is primarily attributable to our merger with
Floware and being a public company. General and administrative expenses as a
percentage of sales increased to 6.3% in 2001 from 4.1% in 2000.
Amortization of deferred stock compensation. A deferred stock
compensation charge of $726,000 was taken in 2001 relating to our stock options
into which Floware stock options were converted pursuant to the terms of our
merger agreement with Floware. In 2000, amortization of deferred stock
compensation at the total amount of $18,000 is attributable only to BreezeCOM's
stock options.
In process research and development write-off. After the merger with
Floware, we recorded a one-time charge write-off of $26.3 million for acquired
in-process research and development. The amount allocated to in-process research
and development, was determined based on an appraisal completed by an
independent third-party appraiser using established valuation techniques in the
high-technology industry, and was expensed upon the merger because technological
feasibility had not been established and no future alternative uses existed.
45
Merger expenses. The merger related expenses recorded in 2001 consist
of approximately $2.8 million of indirect merger related expenses, in connection
with our merger with Floware.
Restructuring costs. The restructuring related expenses consist of
approximately $5.4 million for a one-time charge related to a cost-reduction
program that we began implementing in July and November 2001. Pursuant to this
program we reduced our workforce by approximately 200 employees and realigned
our research and development and sales and marketing efforts.
One-time expense related to a settlement of an OCS program. We have
recorded in 2001 a one-time charge of approximately $6.5 million for the early
repayment of royalties to the OCS. The original terms of the grants that we
received from the OCS required us to pay royalties to the OCS when we began
commercial sales of the products developed with the grants. We have entered into
an agreement with the OCS to pay a fixed amount of approximately $6.5 million
over a period of up to five years to settle all potential future royalty
obligations with respect to grants already received.
Financial income, net. Financial income, net, was approximately $8.5
million in 2001, an increase of approximately 21.5%, compared with financial
income, net, of approximately $7.0 million in 2000. The increase in financial
income is primarily attributable to the interest income on the cash held by
Floware that we acquired in our merger with Floware, partially offset by a
decrease in interest rates on our investments.
Other expenses. Other expenses primarily consist of a one-time charge
of $3.5 million for an investment write-off. The investment in a privately held
US company occurred in 2000. Due to the continuing loss and negative cash flows
incurred by this private company and other valuation criteria, we wrote-off our
entire investment of $3.5 million in 2001.
Net income (loss). In 2001, net loss was approximately $(110.0)
million, compared with a net income of approximately $10.0 million in 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
As the time of our merger with Floware, Floware was in the process of
developing new technologies that we valued at $26.3 million. The projects under
development were WALKnet, WALKair 1300, and WALKair 3000. As of the date of the
merger, none of these products 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 network management system for the WALKair family
(WALKair 1000, WALKair 1300, and WALKair 3000). In 2001, 100 percent of this
project was attributable to the existing technology within WALKair 1000. This
amount will 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 in-process research and development. Accordingly, we
have applied the relevant revenue split between the current technology and
in-process research and development project, in order to fairly represent the
projected cash flows of the technology being developed.
46
The In-Process Research and Development portion of this project
represents the development of the required functionality of WALKnet required to
support WALKair 3000.
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 is estimated to be 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 an additional
approximately $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. Currently, total expected expenses for this project
are approximately $3.3 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 and is estimated to be completed in
the first quarter of 2004. Sales of this product are 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 $4,746,000 had been spent in this project.
Thus, the technical development was estimated to be approximately 44% complete.
Currently, total estimated expenses for this project are approximately $17
million. Total expenses incurred as of December 31, 2002 under this project were
approximately $14 million.
47
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 will 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.
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 2002, the devaluation of the NIS against the dollar
has exceeded the rate of inflation in Israel and we have experienced a decrease
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.
48
For a discussion of certain policies or factors relating to our being
an Israeli company and our location in Israel, please see "Item 3--Key
Information--Risk Factors--Risks Relating to our Location in Israel."
B. LIQUIDITY AND CAPITAL RESOURCES
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. We raised approximately $20 million from the private
placement of 2,424,242 Series B Convertible Preferred Shares in November 1999,
approximately $107 million from the sale of 5,750,000 ordinary shares in our
initial public offering in March 2000 and approximately $73 million from the
sale of 2,150,000 ordinary shares in our July 2000 follow-on offering. We also
obtained approximately $55.5 million in cash and cash equivalents, marketable
securities and deposits as a result of our merger with Floware in 2001.
Our operating activities consumed cash of approximately $18.4 million
in 2000, $38.1 million in 2001 and $9.5 million in 2002. The negative cash flows
in 2002 include our net loss in this period together with increase in trade
payables and other accounts payables partially offset by decrease in trade
receivables, other accounts receivables and inventories, reflecting our reduced
cash burn during this year. The negative cash flows in 2001 include our net loss
in this period, partially offset by non-recurring expenses related to the
merger, costs related to the settlement of the OCS program and investment
write-off, together with a decrease in inventories' level, reflecting the
inventory write-offs. The negative cash flows in 2000 include our net income
together with increases in trade receivables and inventories, reflecting the
growth in our sales and operations during this period.
Our investing activities consumed cash of approximately $158.4
million in 2000 and provided cash of approximately $61.1 million and $6.4
million in 2001 and 2002 respectively. The amounts for 2002 and 2001 are
attributable primarily to proceeds from the maturity of marketable securities
and from the sale of short-term bank deposits partially offset by investments in
short-term and long-term bank deposits and in marketable securities, research
and development equipment and manufacturing equipment. The amounts for 2001 also
reflect the cash resulted from the merger with Floware. The amounts for the year
2000 are attributable primarily to investments in short-term bank deposits and
marketable securities, research and development equipment and manufacturing
equipment, partially offset by proceeds from the maturity of marketable
securities.
Capital expenditures were approximately $4.6 million in 2000, $6.0
million in 2001 and $4.3 million in 2002. These expenditures principally
financed the purchase of research and development equipment and manufacturing
equipment.
Net cash provided by financing activities totaled approximately
$178.6 million in 2000, $2.2 million in 2001 and consumed $6.3 million in 2002.
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 May
20, 2003, 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 2001 and 2000 are attributable primarily to proceeds
from the issuance of shares in connection with the initial public offering and
follow-on public offering in 2000, and the exercise of options.
49
Our working capital was approximately $74.2 million as of December
31, 2002 compared to $167.4 million as of December 31, 2001 and $159.8 million
as of December 31, 2000. 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. The increase in working capital from December
31, 2000 to December 31, 2001 is primarily attributable to the increase in cash
reserves as a result of our merger with Floware, partially offset by the cash
consumed to finance operating activities in 2001. The increase in working
capital from December 31, 1999 to December 31, 2000 is primarily attributable to
the increase in our cash reserves as a result of our initial public offering and
our follow-on public offering partially offset by the cash consumed to finance
operating activities in 2000.
We believe that cash generated from operations, our cash balances,
governmental research and development grants, the net proceeds from our initial
and follow-on public offerings and the cash, cash equivalents, marketable
securities and bank deposits acquired in our merger with Floware will provide
sufficient cash resources to finance our operations and the projected expansion
of our selling and marketing and research and development activities, at least
for the next twelve months. 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 us allocated to Alvarion Ltd, from sources other
than an "Approved Enterprise," as detailed below, during the period of tax
benefits and thereafter is taxable at the regular corporate tax rate of 36%.
However, 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. 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 up 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.
50
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 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. In order to maintain eligibility for this program and benefits
following the merger, we must continue to meet specified conditions.
We have 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.
As of December 31, 2002, (from August 1, 2001) we had available tax
loss carryforwards amounting to approximately $108 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 as of December 31, 2002 of BreezeCOM and Floware at
the effective time of the merger can be carried forward to subsequent years and
may be set off against our taxable income beginning with the tax year
immediately following the merger. This set off is limited per each calendar year
to the lesser of:
o 20% of the aggregate net tax operating losses of the merging
companies prior to the effective time of the merger; and
o 50% of the combined company's taxable income in the relevant tax
year before the set off of losses from preceding years.
These restrictions, with several modifications, also apply to the set
off of capital losses of the merging companies against capital gains of the
combined company. Our available tax losses carryforwards in Alvarion Ltd. are
nominated in NIS and therefore subject to the effect of currency fluctuations of
the NIS in relation to the dollar.
As of December 31, 2002, the state and the U.S. federal tax losses
carryforward of our U.S. subsidiary amounted to approximately $7.2 million and
$14.8 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
2007 and 2022, respectively.
As a result, we do not anticipate being subject to income tax in
Israel at least through 2005, at the earliest.
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, we cannot assure
you that the tax authorities will not modify the tax benefits that we enjoyed
prior to the merger.
51
Our effective corporate tax rate may substantially exceed the Israeli
tax rate. Our Brazilian, French, German, Hong Kong, Japanese, Romanian, U.K.,
Uruguay, Polish, Dutch, Turkish 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 royalty bearing programs
sponsored by the Israeli Government for the support of research and development
activities. We had obtained royalties 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 such projects. The obligation to pay royalties
was contingent on actual sales of the products funded.
We accrued grants from the OCS totaling approximately, $4.3 million
in 2000, $6.0 million in 2001 and $3.5 million in 2002. 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 actual future sales level. 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 amount is linked to the
Consumer Price Index ("CPI") and bears annual interest of 4%.
Such arrangement enables us to participate in a new OCS program under
which we will be eligible to receive research and development grants for generic
research and development projects without any royalty repayment obligations.
Following this agreement, future grants that we may receive with respect to our
research and development projects are restricted only to fund our generic
research and are limited to financing 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.
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 and wireless LAN markets. 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.
52
As of December 31, 2002, our research and development staff consisted
of 208 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 $16.8
million, or 16.6% of sales in 2000, $27.1 million, or 27.4% of sales in 2001 and
$27.6 million or 31.1% of sales in 2002. The OCS reimbursed us for approximately
$4.3 million in 2000, $6.0 million in 2001 and $3.5 million in 2002.
D. TREND INFORMATION
Our systems are used by telecom carriers and service providers. Many
telecom carriers and service providers in markets throughout the world have
experienced, and are continuing to experience, substantial declines in sales and
revenues and have incurred significant operating losses. Many carriers and
service providers have stopped deploying new networks or have ceased operations
completely and are no longer potential users of our products. In 2001, we
experienced a significant decline in demand for our products by carriers and
service providers, particularly in North America. The decline was primarily
attributable to a decline in orders received by end-users of our products for
new telecommunications equipment. We are also impacted by a general reduction in
spending in the United States. In addition, the spectrum allocation process in
various countries in which we operate has been slower than we expected. This
slowdown has delayed our sales in these countries. As a result of the decline in
sales and revenues which we experienced since 2001, we are focusing our sales
and marketing efforts in developing countries, targeting well-financed
operators, mainly cellular operators, and entering new activities in the BWA
market.
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
Aharon Dovrat.............. 71 Chairman of the board of directors
Dr. Meir Barel............. 52 Vice Chairman of the board of directors
Benny Hanigal.............. 53 Director
Anthony Maher.............. 57 Director
Dr. Orna Berry............. 53 External Director
Robin Hacke................ 43 External Director
Amnon Yacoby............... 52 Director
Zvi Slonimsky.............. 53 Chief Executive Officer and Director
Tzvi Friedman.............. 42 President and Chief Operating Officer
Amir Rosenzweig............ 43 President, Alvarion, Inc.
Dafna Gruber............... 38 Chief Financial Officer
Zvi Harnik................. 43 Executive Vice President - Research and Development
Benny Glazer............... 52 Senior Vice President - Corporate Sales
MR. AHARON DOVRAT has been Chairman of our board of directors since
April 1999. Mr. Dovrat is the founder and Chairman of Dovrat & Company, Ltd., a
privately-held investment company, and the founder and Chairman of Isal, Ltd., a
publicly-traded investment company, which he founded in January 1999. Between
1991 and December 1998, Mr. Dovrat served as Chairman of Dovrat, Shrem &
Company, Ltd., a company publicly traded on the Tel-Aviv Stock Exchange that
operates in the areas of investment banking and direct investment fund
management, underwriting, securities and brokerage services, real estate and
industry. Between 1965 and 1991, Mr. Dovrat served as President and Chief
Executive Officer of Clal (Israel) Ltd., a holding company. Mr. Dovrat serves as
a member of the board of directors of Tecnomatix Technologies Ltd., a software
company, and Delta Galil Ltd., a textile company.
53
DR. MEIR BAREL served as the Chairman of the board of directors of
Floware since 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, 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. BENNY HANIGAL has been our Director since our inception and
served as Chairman of our board of directors until February 1999. Since August
2001, Mr. Hanigal is a partner in Sequoia Capital Venture Fund. In 1985, Mr.
Hanigal founded Lannet, 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.
MR. ANTHONY MAHER was a member of Floware's board of directors since
1997 and until the merger 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. Mr. Maher was until January 2002 a member
of the board 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 at 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. ORNA BERRY has been our external Director since August 2000, a
position to which she was reappointed upon our merger with Floware. Since August
2000, Dr. Berry is a venture partner in Gemini Israel Funds Ltd. Between 1997
and 2000, Dr. Berry served as the Chief Scientist of the Ministry of Industry
and Trade of the Government of Israel. Prior to this, Dr. Berry was the
co-founder and the president of ORNET Data Communication Technologies Ltd., from
1993 to 1997. From 1989 to 1992, Dr. Berry was the chief scientist of Fibronics.
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 and Haifa Universities.
MS. ROBIN HACKE was a member of Floware's board of directors since
its initial public offering in August 2000 and was appointed as an external
director by Floware's shareholders in December 2000. Ms. Hacke was appointed as
an external director of Alvarion upon our merger with Floware in August 2001.
Since January 2003, Ms. Hacke has 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.
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.
54
MR. AMNON YACOBY founded Floware and served as its Chief Executive
Officer and as a member of its board of directors until its merger with us. Mr.
Yacoby is currently a member of our board of directors. Following our merger
with Floware and 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-Israel
Institute for Technology.
MR. ZVI SLONIMSKY joined us as our President and Chief Operating
Officer in May 1999 and in June 2000 he became our Chief Executive Officer.
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. 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.
In the years 1989 through 1991, Mr. Slonimsky was the General Manager of DSPG
Ltd., the Israeli-based subsidiary of DSPG, Inc. Prior thereto, he held various
management positions in Tadiran, 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 President and
Chief Operating Officer and has served in this capacity in Alvarion since our
merger with Floware. Prior thereto from 1988, 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 summa cum laude bachelor degree in
electrical engineering (B.SC.E.E) and a cum laude masters degree in electrical
engineering (M.Sc.E.E.) from Tel Aviv University and a Sloan Program masters
degree in management (M.Sc.M.) from the London Business School.
MR. AMIR ROSENZWEIG was appointed President of Alvarion, Inc. in July
2001. Prior to joining Alvarion, between 1998 and 2001, Mr. Rosenzweig served as
President, Chief Executive Officer and a Director of MTS Ltd. 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 a B.Sc degree in Electronics Engineering and an M.B.A. degree, both from
the Tel Aviv University.
MS. DAFNA GRUBER has been our Chief Financial Officer since 1997 and
our Controller between 1996 and 1997. Ms. Gruber was a controller at Lannet, a
worldwide leading data communications company subsequently acquired by Lucent
from 1993 to 1996. Ms. Gruber has a B.A. degree in Accounting and Economics from
Tel Aviv University and is a certified public accountant since 1991.
55
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. Prior to this period, Mr. Harnik served as Vice
President of Research and Development in Midbartech from September 1999 to April
2000. 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.
During 1996 and 1997, Mr. Glazer served as President and CEO of NuLAN
Technologies, a manufacturer of videoconferencing systems. In 1995, he was the
President and CEO of North Hills, a data communications company, until its
acquisition by Nbase. 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 (13 persons) for the year ended December 31,
2002 (including persons who served as directors or executive officers for only a
portion of 2002, and whether or not serving as such as of December 31, 2002) was
approximately $1.5 million. This amount includes approximately $178,000 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
$123,010 in compensation in 2002. As of December 31, 2002, our directors and
executive officers held outstanding options to purchase an aggregate of
2,072,959 ordinary shares, at exercise prices ranging from $0.639 to $5.79, with
expiration dates ranging from January 1, 2007 to May 1, 2011. Of these options,
options to purchase 1,710,576 ordinary shares were granted pursuant to our share
option plans or assumed in connection with our merger with Floware and options
to purchase 362,383 ordinary shares were outstanding pursuant to an agreement
between us and the grantee. 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
3,288,230 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.
56
C. BOARD PRACTICES
APPOINTMENT OF DIRECTORS AND TERMS OF OFFICERS
Our directors, other than our external directors, are elected by our
shareholders at an annual general shareholders' meeting and hold office until
the next annual general shareholders' meeting which is required to be held at
least once in every calendar year, but not more than fifteen months after the
last preceding annual general shareholders' meeting. Until the next annual
general shareholders' meeting, shareholders may elect new directors to fill
vacancies in, or increase the number of the members of the board of directors in
a special meeting of the shareholders. Our board of directors may appoint any
person as a director temporarily to fill any vacancy created in the board of
directors. Any director so appointed may hold office until the first general
shareholders' meeting convened after the appointment and may be re-elected. The
appointment and terms of office of all our executive officers are determined by
our board of directors, except that the appointment of the chairman of the board
of directors, the chief executive officer and the president must also be
approved by the shareholders. The terms of office of the directors must be
approved, under the Companies Law, by the audit committee, the board of
directors and the shareholders.
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
independent, or external directors. 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 interests 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 an additional three years. The external directors must
be elected by the majority of the shareholders in a general meeting, provided
that either such majority includes at least one-third of the shares of
non-controlling shareholders voted on the matter, 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 an
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.
57
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 the Companies Law, as
external directors 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 US securities law requirements, our audit
committee assists the board of directors in fulfilling its responsibilities for
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 with the board for and among the independent auditors, internal
audit and financial and executive management. The members of our audit committee
are Mr. Hanigal, Dr. Berry and Ms. Hacke.
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 the law and orderly business procedure. The internal
auditor may be an employee of the company but may not be an affiliate or office
holder, or a relative of any affiliate or office holder, and may not be a member
of the company's independent accounting firm or its representative. Mr. Eyal
Weitzman, 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 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 an office holder. 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.
58
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 shareholder 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 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, 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."
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 liability or expense
incurred by an office holder as a result of an act done by him in his capacity
as an office holder, as follows:
59
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 enter into a contract for the insurance of the
liability of our office holders in respect of a liability imposed on an office
holder 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 favor 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:
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' meeting, in 2001 we entered into agreements with our directors and
officers, or 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.
60
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.
COMMITTEES
Our board of directors has established compensation and audit
committees. The compensation committee, which consists of Mr. Dovrat, Dr. Barel
and Dr. Berry, assists the board of directors in administering our share option
plans and other issues relating to employee compensation. The audit committee,
which consists of Mr. Hanigal, Dr. Berry and Ms. Hacke, exercises the powers
conferred upon it by the Companies Law, as described above under "Audit
Committee."
D. EMPLOYEES
In April 2003, in connection with the acquisition of most of the
assets and assumption of related liabilities of InnoWave, we hired approximately
150 former employees of InnoWave. Of these new employees, 53 were employed in
research and development, 51 in operations, 40 in sales and marketing and 6 in
administration and management.
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,
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.
As of December 31, 2000, we had 441 full-time employees and 19
part-time employees. Of the full time employees, 153 were engaged in research
and development, 113 in operations, 155 in sales and marketing and 20 in
administration and management. Of our full-time employees as of December 31,
2000, 309 were located in Israel, 97 in the United States and 35 in our other
branch offices.
We consider our relations with our employees to be excellent 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.
61
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.
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 1, 2003. The percentage of outstanding ordinary shares is based on
51,530,688 ordinary shares outstanding as of June 1, 2003.
NUMBER OF PERCENTAGE OF OUTSTANDING
NAME ORDINARY SHARES ORDINARY SHARES
---- --------------- ---------------
Aharon Dovrat 200,000 *
Dr. Meir Barel 212,309 *
Zvi Slonimsky 100,000 *
Tzvi Friedman -- --
Amir Rosenzweig -- --
Dafna Gruber -- --
62
Zvi Harnik -- --
Benny Glazer -- --
Amnon Yacoby 1,649,050 3.2%
Benny Hanigal 177,430(1) *
Anthony Maher 40,651 *
Dr. Orna Berry -- --
Robin Hacke 536 *
------------------------
* Less than 1%.
(1) The ordinary shares are held in trust for Mr. Hanigal.
As of June 1, 2003, the directors and executive officers listed
above, as a group, held options to purchase 5,315,016 of our ordinary shares at
a weighted average exercise price of $2.39 with expiration dates ranging from
January 2007 to May 2011. 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, a total of
20,588,178 ordinary shares have been reserved for the granting of options to our
employees, officers, directors and consultants pursuant to our share option
plans. These options 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 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 4,127,639 ordinary shares have been
exercised, options to purchase 8,385,700 ordinary shares are available for
future grant and options to purchase 8,074,839 ordinary shares, including
options issued pursuant to the terms of the Floware merger, were outstanding as
of December 31, 2002, at a weighted average exercise price of $3.18 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
8,074,839 options outstanding expire between eight and ten years from the date
of grant.
The share option plans are administered by the board of directors or
by the compensation committee acting by the authority of our 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.
63
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 prices
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 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 1, 2003, by each person
or entity we know to own beneficially more than 5% of our outstanding ordinary
shares based on information provided to us by the holders or disclosed in public
filings with the Securities and Exchange Commission. The voting rights of the
shareholders listed below are not different from the voting rights of our other
shareholders. The percentage of outstanding ordinary shares is based on
51,530,688 ordinary shares outstanding as of June 1, 2003. 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
---- ------ -------
Entities affiliated with Star Ventures(1) 8,599,752 16.7%
Siemens Aktiengesellschaft(2) 5,812,495 11.3%
HM Investments, L.P. Group(3) 2,865,840 5.6%
--------------------------
(1) Consists of 1,426,609 ordinary shares held by STAR Management of Investment
(1993) Limited Partnership (Israel Star Partnership); 284,579 ordinary
shares held by SVE Star Ventures Enterprises No. II, a German Civil Law
Partnership (with limitation of liability) (SVE II); 1,770,788 ordinary
shares held by SVE STAR Ventures Enterprises No. III, a German Civil Law
Partnership (with limitation of liability) (SVE III); 145,966 ordinary
shares held by SVE STAR Ventures Enterprises No. IIIA, a German Civil Law
Partnership (with limitation of liability) (SVE IIIA); 657,764 ordinary
shares held by SVM STAR Ventures Managementgesellschaft mbH Nr. 3 & Co.
Beteiligungs KG (SVE IV); 1,556,656 ordinary shares held by SVE Star
Ventures Enterprises No. V, a German Civil Law Partnership (with limitation
of liability) (SVE V); 181,338 ordinary shares held by SVM STAR Ventures
64
Managementgesellschaft mbH Nr. 3 & Co. Beteiligungs KG Nr. 2 (SVE VI);
1,644,767 ordinary shares held by SVE Star Ventures Enterprises No. VII, a
German Civil Law Partnership (with limitation of liability) (SVE VII); and
620,232 ordinary shares held by SVM STAR Ventures Management GmbH Nr. 3
(Star Germany) (collectively, the Star Group). Star Germany manages the
investments of SVE II, 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 II, 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 II, 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 98,744 ordinary shares held by Dr. Barel which
are exercisable within 60 days of June 1, 2003, and 212,309 ordinary shares
held directly by Dr. Barel. Entities affiliated with Star Ventures
beneficially owned 15.1%, 16.0% and 16.5% of our outstanding share capital
as of December 31, 2000, 2001 and 2002, respectively. The number of
ordinary shares beneficially owned by entities affiliated with Star
Ventures includes approximately 4,556,283 ordinary shares which these
entities received, upon completion the merger, in exchange for the Floware
ordinary shares they beneficially owned prior to the merger.
(2) Siemens became a shareholder of our company upon the exchange of its shares
in Floware, in connection with our merger with Floware. Siemens
beneficially owned 12.1% and 11.2% of our outstanding share capital as of
December 31, 2001 and 2002, respectively.
(3) Represents 2,666,927 ordinary shares owned by HM Investments, L.P. Benny
Hanigal, a director, is a principal owner and director of the general
partner of HM Investments, L.P. and, accordingly, has the sole power to
vote or direct the vote, and to dispose or direct the disposition of, the
shares owned by HM Investments, L.P. Mr. Hanigal disclaims beneficial
ownership of such shares, except to the extent of any pecuniary interest
therein. Includes outstanding options to purchase 21,483 ordinary shares
held by Mr. Hanigal, which are exercisable within 60 days of June 1, 2003,
and 177,430 ordinary shares held in trust for Mr. Hanigal. HM Investments,
L.P. beneficially owned 10.1%, 5.2% and 5.5% of our outstanding share
capital as of December 31, 2000, 2001 and 2002, respectively.
As of June 1, 2003, there were 61 holders of our ordinary shares of
record registered with a United States mailing address, including banks, brokers
and nominees. As of June 1, 2003, these holders of record held approximately
33,878,249 ordinary shares representing approximately 65.7% of our then
outstanding share capital. Because these holders of record include banks,
brokers and nominees, the beneficial owners of these ordinary shares may include
persons who reside outside the United States.
To the best of our knowledge, we are not directly or indirectly owned
or controlled by another corporation, by any foreign government or by any other
natural or legal person or persons severally or jointly and currently there are
no arrangements that may, at a subsequent date, result in a change in our
control.
B. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH SHAREHOLDERS
As of June 1, 2003, Siemens held 11.3% 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
65
Siemens has undertaken to sell the WALKair 1000 system, the WALKair 3000 system,
BreezeACCESS II and BreezeACCESS V as its preferred solutions for the WBA
market. Siemens has also undertaken not to use, sell, market or distribute to
any of its customers, any existing or future Siemens product, or any product
from any other source, which is similar in its function and/or use to either the
WALKair 1000 system, the WALKair 3000 system, BreezeACCESS II or BreezeACCESS V
except in limited circumstances, including where our systems do not meet a
customer's requirements or a customer refuses to purchase our systems. We are
currently in the process of finalizing 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 11.4% of our
sales in 2002.
Our 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. 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.
The demand is in its opening motion and, yet, it would be premature to assess
the likelihood of litigation, nonetheless its outcome. We intend to vigorously
defend against the claim in the event that litigation takes place. Although
litigation is inherently risky and its results cannot be predicted with a
reasonable degree of certainty, we believe that we have good defences against
the third party claim which may prevail in court.
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 2002,
export sales were approximately $88.2 million constituting 99.3% 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."
66
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, 2002.
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 July 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
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 2001 and 2002 and as reported by the Tel Aviv Stock Exchange, in NIS, since
our ordinary shares commenced trading on the Tel Aviv Stock Exchange in July
2001:
NASDAQ NATIONAL MARKET TEL AVIV STOCK EXCHANGE
2001 HIGH LOW HIGH LOW
---- ---- --- ---- ---
First Quarter.................. $ 17.5000 $ 5.2813 N.A. N.A.
Second Quarter................. $ 7.6300 $ 4.0000 N.A. N.A.
Third Quarter.................. $ 5.7500 $ 1.5500 NIS 21.99 NIS 7.98
Fourth Quarter................. $ 3.7500 $ 1.6000 NIS 16.97 NIS 8.62
2002 HIGH LOW HIGH LOW
---- ---- --- ---- ---
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
----
First Quarter.................. $ 2.3700 $ 1.8000 NIS 9.59 NIS 8.69
67
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 2002.................. $ 2.3700 $ 1.9300 NIS 11.19 NIS 8.54
January 2003................... $ 2.3700 $ 1.8000 NIS 9.13 NIS 8.81
February 2003.................. $ 1.9800 $ 1.8400 NIS 9.41 NIS 8.69
March 2003..................... $ 1.9400 $ 1.8200 NIS 9.59 NIS 9.22
April 2003..................... $ 3.4400 $ 2.1700 NIS 12.28 NIS 10.15
May 2003....................... $ 2.6300 $ 2.4800 NIS 15.70 NIS 11.57
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares began trading on the Nasdaq National Market on
March 23, 2000 under the symbol "BRZE." Prior to that date, there was no market
for our ordinary shares. On August 1, 2001, upon the completion of our merger
with Floware and the change of our name to Alvarion Ltd., our symbol was changed
to "ALVR." In July 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.
68
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following is a summary description of certain provisions of our
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).
The 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 the general meeting of 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.
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 favor
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."
69
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.
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 21 days, nor less than four days, prior to the date of the
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.
70
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.
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 for so long as (1) our
ordinary shares are quoted on the Nasdaq National Market or listed on a stock
exchange in a country appearing in a list approved by the Controller of Foreign
Currency; and (2) we qualify as an Industrial Company. The Israeli tax
authorities might determine that we do not qualify as an Industrial Company. We
might not maintain our Nasdaq listing or our status as an Industrial Company in
the future.
71
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, or (3) shareholders who acquired their shares prior
to an initial public offering. 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
exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on a stock exchange, provided such shareholders did not
acquire their shares prior to an initial public offering. 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.
72
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. Dividends distributed from income
generated by an Approved Enterprise are subject to 15% tax, which is withheld at
source.
For information with respect to the applicability of Israeli capital
gains taxes to the sale of our ordinary shares by United States residents, see
"--Israeli Taxation of our Shareholders--Capital Gains Tax," above.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS WITH RESPECT TO THE
OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES
The following is a discussion of the material United States federal
income tax consequences applicable to "U.S. Holders" (as defined below) who
beneficially own our ordinary shares. The discussion is based on the Internal
Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury
regulations promulgated thereunder, and existing administrative rulings and
court decisions in effect as of the date of this annual report, all of which are
subject to change at any time, possibly with retroactive effect. 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;
73
o persons who have owned at any time or who own, directly,
indirectly, constructively or by attribution, five percent or
more of either the total value or 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.
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 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; and
o a trust if the trust were in existence and qualified as a "United
States person," within the meaning of the Code, on August 20,
1996 under the law as then in effect and elected to continue to
be so treated.
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. 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
74
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 receipt, 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 or exchange 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 in consideration for the sale or exchange 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. Provided we were
not a PFIC as to such U.S. Holder, 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 sale or exchange. The deductibility of a capital loss
recognized on the sale or exchange of ordinary shares is subject to limitations.
Any gain or loss generally will be treated as United States source income or
loss for United States foreign tax credit purposes. In addition, a U.S. Holder
who receives foreign currency upon the sale or exchange of our ordinary shares
and converts the foreign currency into U.S. dollars subsequent to receipt will
have foreign exchange gain or loss, based on any appreciation or depreciation in
the value of the foreign currency against the U.S. dollar, which will generally
be United States source ordinary income or loss.
Passive Foreign Investment Company Status
Generally a foreign corporation is treated as a PFIC for United
States federal income tax purposes if either:
o 75% or more of its gross income (including the pro rata gross
income of any company (U.S. or foreign) in 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 in the taxable year,
generally referred to as the "asset test."
75
As a result of the combination of our substantial holdings of cash,
cash equivalents and securities and the recent decline in the market price of
our ordinary shares, 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, we
do not believe that we were a PFIC for 2001 or 2002 despite the relatively low
market price of our ordinary shares during much of that 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 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 such of our ordinary shares;
o the amount allocated to each year other than (i) the year of the
dividend payment or disposition and (ii) any year prior to our
becoming a PFIC, would be subject to tax at the highest
individual or corporate marginal tax rate, as applicable, in
effect for that year, and an interest charge would be imposed
with respect to the resulting tax liability;
o the U.S. Holder would be required to file an annual return on IRS
Form 8621 regarding distributions received in respect of, and
gain recognized on dispositions of, our ordinary shares; and
o any U.S. Holder who acquired our ordinary shares upon the death
of a U.S. Holder would not receive a step-up of the income tax
basis to fair market value for such shares. Instead, such U.S.
Holder beneficiary 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.
In the event that we are deemed to be a PFIC for 2002, if a U.S.
Holder makes a valid QEF election with respect to our ordinary shares for 2002:
76
o the U.S. Holder would be required for each taxable year,
including and subsequent to 2002, 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 shares of the PFIC 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 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.
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 deemed
rateable allocations of gain, the interest charge, and the denial of basis
step-up at death (described above). Subject to our shares ever ceasing to be
marketable, a mark-to-market election 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 proposed regulations which would be effective when
finalized, a U.S. Holder who makes a mark-to-market election would not include
mark-to-market gain or loss under these rules for any taxable year in which we
are not a PFIC and we are not treated as a PFIC with respect to such U.S.
Holder.
77
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.
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 30%) upon any dividends paid in the United
States on our ordinary shares, unless they:
o furnish a correct taxpayer identification number and certify that
they are not subject to backup withholding on an IRS Form W-9; or
o 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 ordinary shares and
also to backup withholding (currently at a rate of 30%) on such proceeds unless
the U.S. Holder provides an IRS Form W-9 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. 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.
78
In addition, the Securities and Exchange Commission maintains an
Internet website at http://www.sec.gov that contains reports, proxy statements,
information statements and other material that are filed through the Securities
and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval, or
EDGAR, system. We began filing our reports through the EDGAR system in November
2002.
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 2001 and 2002, 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
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.
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
79
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, 2002
the net offering proceeds were used to finance the continued growth of our
business and for general corporate purposes.
ITEM 15. CONTROLS AND PROCEDURES
(a) We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the periods specified in the rules and forms of the Securities and
Exchange Commission. Such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed to provide a reasonable level of
assurance of reaching our desired control objectives. Our Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective in reaching that level of reasonable
assurance.
Within 90 days prior to the filing date of this annual report on Form
20-F, we have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
(b) There have been no significant changes in our internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this annual report on Form 20-F.
ITEM 16. [RESERVED]
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.
80
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.
12.1 Consent of Kost, Forer & Gabbay
12.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to
12.3 Section 906 of the Sarbanes-Oxley Act of 2002.
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.
---------------------
* 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)
81
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this amended annual report on its behalf.
ALVARION LTD.
/s/ Zvi Slonimsky
By: Zvi Slonimsky
Chief Executive Officer
Date: March 22, 2004
82
CERTIFICATIONS
I, Zvi Slonimsky, certify that:
1. I have reviewed this amended annual report on Form 20-F/A of Alvarion Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date; 5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and 6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 22, 2004
/s/ Zvi Slonimsky
Zvi Slonimsky
Chief Executive Officer
83
CERTIFICATIONS
I, Dafna Gruber, certify that:
1. I have reviewed this amended annual report on Form 20-F/A of Alvarion Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date; 5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and 6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 22, 2004
/s/ Dafna Gruber
Dafna Gruber
Chief Financial Officer
84
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.
12.1 Consent of Kost, Forer & Gabbay
12.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to
12.3 Section 906 of the Sarbanes-Oxley Act of 2002.
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.
---------------------
* 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)
85
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
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-36
- - - - - - -
ERNST & YOUNG
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, 2001 and
2002, 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, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2001 and 2002,
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel /s/ KOST FORER & GABBAY
February 4, 2003 A Member of Ernst & Young Global
F-2
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
--------------------------------------------
2001 2002
-------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,802 $ 22,356
Short-term bank deposits 65,305 -
Marketable securities (Note 3) 56,019 41,199
Trade receivables (net of allowance for doubtful accounts of $ 830 and $ 918 as of
December 31, 2001 and 2002, respectively) 17,079 11,750
Other accounts receivable and prepaid expenses (Note 4) 9,273 4,872
Inventories (Note 5) 31,064 27,502
-------------------- -------------------
Total current assets 210,542 107,679
-------------------- -------------------
LONG-TERM INVESTMENTS:
Long-term bank deposits - 43,748
Marketable securities (Note 3) 29,843 55,360
Severance pay fund 3,217 3,732
-------------------- -------------------
Total long-term investments 33,060 102,840
-------------------- -------------------
PROPERTY AND EQUIPMENT, NET (Note 6) 11,153 11,116
-------------------- -------------------
CURRENT TECHNOLOGY, NET (Note 7) 15,600 13,200
-------------------- -------------------
GOODWILL 37,240 37,240
-------------------- -------------------
Total assets $ 307,595 $ 272,075
==================== ===================
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,
-------------------------------------
2001 2002
----------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 23,224 $ 15,847
Other accounts payable and accrued expenses (Note 8) 19,947 17,595
----------------- ----------------
Total current liabilities 43,171 33,442
----------------- ----------------
LONG-TERM LIABILITIES:
Accrued severance pay 4,945 5,446
Other long-term liabilities (Note 10) 5,228 5,357
----------------- ----------------
Total long-term liabilities 10,173 10,803
----------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS' EQUITY (Note 13):
Share capital -
Ordinary shares of NIS 0.01 par value:
Authorized: 85,080,000 shares as of December 31, 2001 and 2002;
Issued: 54,649,268 shares and 55,011,202 shares as of December 31, 2001 and
2002, respectively; Outstanding:54,649,268 and 51,915,629 shares as of
December 31, 2001 and 2002, respectively 141 142
Additional paid-in capital 370,853 370,978
Treasury shares at cost - (6,543)
Deferred stock compensation (1,165) (488)
Accumulated deficit (115,578) (136,259)
----------------- ----------------
Total shareholders' equity 254,251 227,830
----------------- ----------------
Total liabilities and shareholders' equity $ 307,595 $ 272,075
================= ================
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 PER SHARE DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002
------------------ ----------------- -----------------
Sales (Notes 16 and 17) $ 101,460 $ 98,968 $ 88,849
Cost of sales 55,608 59,484 55,120
Write-off of excess inventory and provision for inventory purchase
commitments - 53,881 250
------------------ ----------------- -----------------
Gross profit (loss) 45,852 (14,397) 33,479
------------------ ----------------- -----------------
Operating expenses:
Research and development, net (Note 18a) 12,473 21,096 24,077
Amortization of current technology - 1,200 2,400
Selling and marketing 26,226 30,258 26,570
General and administrative 4,132 6,226 6,018
Amortization of deferred stock compensation (Note 18b) 18 726 580
In-process research and development write-off - 26,300 -
Merger expenses - 2,841 -
Restructuring costs (Note 9) - 5,437 1,102
One-time expense related to a settlement of an OCS program (Note 10) - 6,535 -
------------------ ----------------- -----------------
Total operating expenses 42,849 100,619 60,747
------------------ ----------------- -----------------
Operating income (loss) 3,003 (115,016) (27,268)
Financial income, net (Note 18c) 7,031 8,540 6,587
Other expenses (Note 18d) - (3,535) -
------------------ ----------------- -----------------
Net income (loss) $ 10,034 $ (110,011) $ (20,681)
================== ================= =================
Basic net earnings (loss) per share (Note 15) $ 0.40 $ (2.80) $ (0.38)
================== ================= =================
Diluted net earnings (loss) per share (Note 15) $ 0.33 $ (2.80) $ (0.38)
================== ================= =================
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
NUMBER OF
SHARES OUTSTANDING
------------------------------- ADDITIONAL
PREFERRED ORDINARY PREFERRED ORDINARY PAID-IN
SHARES SHARES SHARES SHARES CAPITAL
--------------- -------------- -------------- --------------- ---------------
Balance at January 1, 2000 3,372,172 11,720,872 $ 8 $ 38 $ 39,472
Net income - - - - -
Issuance of Ordinary shares, net - 7,900,000 - 19 175,319
Exercise of warrants - 417,676 - 1 1,585
Exercise of employee stock options - 1,347,428 - 4 1,172
Conversion of Preferred shares into Ordinary
shares (3,372,172) 6,744,344 (8) 16 (8)
Issuance of warrants to a customer - - - - 444
Amortization of deferred stock compensation - - - - -
--------------- -------------- -------------- --------------- ---------------
Balance at December 31, 2000 - 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) - - -
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
=============== ============== ============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6(a)
** TABLE CONTINUED **
ALVARION LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DEFERRED TOTAL
TREASURY STOCK ACCUMULATED SHAREHOLDERS'
SHARES COMPENSATION DEFICIT EQUITY
--------------- ----------------- ----------------- ------------------
Balance at January 1, 2000 $ - $ (18) $ (15,601) $ 23,899
Net income - - 10,034 10,034
Issuance of Ordinary shares, net - - - 175,338
Exercise of warrants - - - 1,586
Exercise of employee stock options - - - 1,176
Conversion of Preferred shares into Ordinary
shares - - - -
Issuance of warrants to a customer - - - 444
Amortization of deferred stock compensation - 18 - 18
--------------- ----------------- ----------------- ------------------
Balance at December 31, 2000 - - (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) - - (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 $ (6,543) $ (488) $ (136,259) $ 227,830
=============== ================= ================= ==================
The accompanying notes are an integral part of the consolidated financial
statements.
F-6(b)
** TABLE COMPLETE **
ALVARION LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002
--------------- ----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 10,034 $ (110,011) $ (20,681)
Adjustments required to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 1,861 3,302 3,575
Amortization of deferred stock compensation 18 864 580
Amortization of deferred stock compensation to customer 444 - -
Compensation in respect of shares granted to former directors - 185 -
Interest and amortization of premium on held-to-maturity marketable
securities, bank deposits and other long-term liabilities (3,012) 394 261
Loss (gain) due to sale and impairment of held-to-marurity 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 current technology - 1,200 2,400
Write-off of investment - 3,500 -
Decrease (increase) in trade receivables (12,094) 13,562 5,329
Decrease (increase) in other accounts receivable and prepaid expenses (5,831) 1,598 4,401
Decrease (increase) in inventories (35,569) 32,380 3,562
Increase (decrease) in trade payables 14,160 (17,693) (6,976)
Increase (decrease) in other accounts payable and accrued expenses 11,011 (1,592) (1,962)
Accrued severance pay, net 604 (160) (14)
Others (5) 35 27
--------------- ----------------- -----------------
Net cash used in operating activities (18,379) (38,071) (9,511)
--------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (4,617) (6,023) (4,260)
Proceeds from sale of property and equipment 14 145 34
Proceeds from maturity of bank deposits 28,251 147,881 74,568
Investment in bank deposits (78,742) (136,810) (52,821)
Investment in held-to-maturity marketable securities (184,509) (132,323) (135,350)
Proceeds from maturity of held-to-maturity marketable securities 84,707 157,719 114,854
Proceeds from sale of held-to-maturity marketable securities - 6,973 9,478
Investment in other long-term investment (3,500) - -
Cash and cash equivalents resulted (used) pursuant to the merger of
Floware (a) - 23,566 (118)
--------------- ----------------- -----------------
Net cash provided by (used in) investing activities (158,396) 61,128 6,385
--------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of Ordinary shares and exercise of options and
warrants, net 178,560 2,165 223
Purchase of treasury shares - - (6,543)
--------------- ----------------- -----------------
Net cash provided by (used in) financing activities 178,560 2,165 (6,320)
--------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 1,785 25,222 (9,446)
Cash and cash equivalents at the beginning of the year 4,795 6,580 31,802
--------------- ----------------- -----------------
Cash and cash equivalents at the end of the year $ 6,580 $ 31,802 $ 22,356
=============== ================= =================
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,
------------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Supplemental disclosure of cash flows activities:
Cash paid during the year for interest $ 137 $ 358 $ 41
================= ================= =================
Non- cash and cash equivalents investing and financing transactions:
Purchase of property and equipment against trade payables 777 882 481
Accrued issuance expenses (460) - -
----------------- ----------------- -----------------
$ 317 $ 882 $ 481
================= ================= =================
(a) Cash and cash equivalents from the merger of 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
=================
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, service providers and private
network operators worldwide. The Company's products
provide a wireless telecom alternative to wired access
solutions used to provide broadband data and voice
services for subscribers in the "last mile" of
connectivity and for feeding cellular networks and private
networks. The Company's product offerings provide a range
of integrated wireless broadband and wideband solutions by
market segment and frequency band, designed to address the
various business models of carriers and service providers.
The Company's products operate in licensed and
license-free bands ranging from 2.4 GHz to 26 GHz.
As for geographic markets and major customers, see Note
16.
On August 1, 2001, following by a merger with Floware
Wireless Systems Ltd., the Company changed its name from
BreezeCOM Ltd. to Alvarion Ltd.
b. Alvarion Ltd. has nine active wholly-owned subsidiaries:
in the United States ("Alvarion Inc."), in the United
Kingdom ("Alvarion UK Ltd."), in France ("Alvarion SARL
France ") in Romania ("Alvarion SRL"), in Brazil ("Floware
Do Brasil LTDA."), in Hong-Kong ("Alvarion Asia Pacific
Ltd."), in Germany ("Alvarion GmbH"), in Japan ("Alvarion
Japan KK") and a new subsidiary which was established
during 2002 in Uruguay ("Alvarion Uruguay S.A.").
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 approximately $
155,377.
The purchase price consisted of 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, 2000 and 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 continuity 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,
-----------------------------------------
2000 2001
------------------- -------------------
Net revenues $ 139,937 $ 137,099
=================== ===================
Net income (loss) $ 12,410 $ (130,848)
=================== ===================
Basic and diluted net earnings (loss) per share $ 2.50 $ (2.43)
=================== ===================
F-10
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
d. Inventories write-off:
The Company periodically assesses its inventories
valuation in accordance with 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, the Company recorded inventories write-offs
in a total amount of $ 45,281 and additional $ 8,600
related to the Company's commitments to purchase
inventories no longer required. As of December 31, 2002,
approximately $ 3,400 of the provision for inventories
purchases commitments is included in the trade payables
balance.
During 2002, the Company recorded an inventories write-off
in a total amount of $ 250.
e. Restructuring:
As for restructuring costs, see Note 9.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US
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.
F-11
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Principles of consolidation:
The consolidated financial statements include the accounts
of Alvarion Ltd. and its wholly-owned subsidiaries.
Intercompany transactions and balances, including profits
from intercompany sales not yet realized outside the
Company, have been eliminated in consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments
that are readily convertible to cash, with maturities of
three months or less at the date acquired.
e. Short-term and long-term bank deposits:
Bank deposits with maturities of more than three months
and up to one year are included in short-term bank
deposits. Bank deposits with maturities of one year or
more are included in long-term bank deposits. As of
December 31, 2002, most of the bank deposits are in U.S.
dollars and bear interest at a weighted average interest
rate of 3.6%. 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, 2001 and 2002 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, interest and
declines in value that are other-than-temporary, 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.
F-12
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 raw material and components used
and the cost of production including: Labor and overhead
are calculated on a periodic average basis, which
approximates actual costs 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 1d).
h. 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 20 - 33
Motor vehicles 15
Leasehold improvements Over the term of the lease
i. Impairment of long-lived assets:
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-lived
Assets" ("SFAS No. 144"), whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted
cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
As of December 31, 2002, no impairment losses have been
identified.
j. Goodwill and current technology:
Goodwill - the Company assesses the carrying value of
goodwill in accordance with Statement of Financial
Accounting Standard No. 142 "Goodwill and Other Intangible
Assets" ("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.
F-13
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
SFAS No. 142 requires goodwill to be tested for impairment
on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down
when impaired, rather than being amortized as previous
accounting standards required. Goodwill attributable to
the Company as a 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 discounted cash flows and market
multiples. 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, the Company performed the required
transitional and annual impairment tests of goodwill's
fair value. Based on management projections, expected
future undiscounted operating cash flows and market
multiples, no indication of goodwill impairment was
identified.
Current technology - Statement No. 142 also requires that
intangible assets acquired in a business combination for
which the date is on or after July 1, 2001, 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. The acquired current technology from
Floware's merger is being amortized over a period of seven
years on the straight-line method.
k. 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 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.
l. 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.
In December 2002, the FASB issued Statement of Financial
Accounting Standard No. 148, "Accounting for Stock Based
Compensation Transmission and Disclosure - an amendment of
FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148
permits two additional transition methods for entities
that adopt the fair value based method of accounting for
stock-based employee compensation. The transition guidance
and annual disclosure provisions of SFAS No. 148 are
F-14
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
effective for fiscal years ending after December 15, 2002,
with earlier application permitted in certain
circumstances. The interim disclosure provisions are
effective for financial reports containing financial
statements for interim periods beginning after December
15, 2002. As at the balance sheet date, the Company
continues to apply APB No. 25 (see also Note 13).
Pro forma information regarding the Company's net income
(loss) and net earnings (loss) per share is required by
SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair
value method prescribed by SFAS No. 123.
The fair value for options granted in 2001 and 2002 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:
2000 2001 2002
----------------- ----------------- -----------------
Dividend yield 0% 0% 0%
Expected volatility 49% 84% 53%
Risk-free interest 6-7% 2.5-5% 1.5%
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,
------------------------------------------------------------
2000 2001 2002
----------------- ----------------- ----------------
Net income (loss) available to Ordinary shares - as
reported $ 10,034 $ (110,011) $ (20,681)
Add - stock-based employee compensation - intrinsic value 18 864 580
Deduct - stock-based employee compensation -fair value (4,850) (12,182) (7,618)
----------------- ----------------- ----------------
Pro forma:
Net income (loss) $ 5,202 $ (121,329) $ (27,719)
================= ================= ================
Earning per share:
Earning (loss) as reported $ 0.40 $ (2.80) $ (0.38)
================= ================= ================
Diluted as reported $ 0.33 $ (2.80) $ (0.38)
================= ================= ================
Pro forma basic earnings (loss) $ 0.21 $ (3.09) $ (0.51)
================= ================= ================
Pro forma diluted earnings (loss) $ 0.17 $ (3.09) $ (0.51)
================= ================= ================
The Company applies SFAS No. 123 and Emerging Issues Task
Force ("EITF") No. 96-18 "Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18"), with respect to options and
warrants issued to non-employees. SFAS No. 123 requires
the use of option valuation models to measure the fair
value of the options and warrants at the date of grant.
F-15
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Revenue recognition:
The Company generates revenues mainly 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. 101 "Revenue Recognition in
Financial Statements" ("SAB No. 101") 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 collectibility is reasonably assured.
The Company generally does not grant a right of return.
However, the Company does grant to certain distributors
limited rights of return on unsold products. As a result
of significant decline in the demand for the Company's
products, since the third quarter of 2001, the Company has
deferred recognizing revenues on shipments to such
distributors until they resell the Company's products to
their customers.
Prior thereto, for distributors that had such rights of
return, the Company analyzed and monitored inventory
levels and distributors' sales based on inventory lists
and point of sale reports received on each balance sheet
date from these distributors. The Company has experienced
that such distributors maintained an inventory of at least
one month's supply of products to allow them to serve the
demands of their customers. Therefore, the Company
deferred revenue recognition for inventory held by a
distributor that exceeded its estimate of that
distributor's monthly amount of sales. The Company
calculated one month of sales based on the distributor's
actual sales in the prior quarter.
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.
n. Warranty costs:
The Company offers a twelve to twenty-four months warranty
period for defective products for all of its products. The
specific terms and conditions of those warranties 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.
F-16
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Changes in the Company's product liability during the
period are as follows:
Balance at the beginning of the year $ 2,640
Warranties issued during the year 1,057
Settlements made during the year (1,510)
Changes in liability for pre-existing warranties during the year (985)
--------------
Balance at the end of the year $ 1,202
==============
o. Research and development:
Research and development costs, net of grants received,
are charged to the statement of operations as incurred.
p. Grants and participants:
The Company received royalty bearing and non-royalty
bearing grants from the Government of Israel for the
funding of certain approved research and development
projects. These grants are recognized at the time the
Company is entitled to such grants on the basis of costs
incurred and included as a deduction from research and
development costs.
As for a one-time expense related to a settlement of an
OCS program, see Note 10.
q. Severance pay:
The Company's liability for severance pay is calculated
pursuant to Israeli severance pay law based on the most
recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date 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
Israeli severance pay law or labor agreements. The value
of these policies is recorded as an asset in the Company's
balance sheet. Severance pay expenses for the years ended
December 31, 2000, 2001 and 2002, were $ 1,254, $ 4,787
and $ 2,787, respectively.
r. Advertising expenses:
Advertising expenses are carried to the statement of
operations as incurred. Advertising expenses for the years
ended December 31, 2000, 2001 and 2002, were $ 296, $
1,138 and $ 351, respectively.
F-17
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
s. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is calculated based on
the weighted average number of Ordinary shares outstanding
during each year. Diluted net earnings per share is
calculated based on the weighted average number of
Ordinary share equivalents outstanding during each year,
plus dilutive potential Ordinary shares considered
outstanding during the year, in accordance with Statement
of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS No. 128").
All outstanding stock options and warrants in 2001 and
2002 have been excluded from the calculation of the
diluted net earnings (loss) per Ordinary shares because
all of these securities were anti-dilutive.
The total weighted average number of shares (in thousands)
related to the outstanding options, warrants and
convertible preferred shares that were excluded from the
calculations of diluted net earnings (loss) per share
because these securities are anti-dilutive was 377 for the
year ended December 31, 2000, 12,743 for the year ended
December 31, 2001 and 14,314 for the year ended December
31, 2002. (See also Note 13h).
t. 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 securities and trade
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. dollars deposits with major U.S.,
European and Israeli bank institutions. 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 Company's trade receivables are derived from sales to
customers located primarily in North and Latin America,
Europe and the Far East. Regarding most of its credit
balances, the Company is covered by foreign trade risk
insurance. Management is of the opinion that, the
allowance for doubtful accounts adequately covers
anticipated losses in respect of its accounts receivable
credit risks. An allowance for doubtful accounts is
determined with respect to accounts that have been
determined by the Company to be doubtful of collection.
Allowance for doubtful account expenses for the years
ended December 31, 2000, 2001 and 2002, were $ 256, $ 200
and $ 88, respectively.
F-18
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
As for derivative financial instruments, see Note 11.
u. 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 securities are based on
quoted market prices (see Note 3).
The fair value of long-term bank deposits and long-term
liabilities was estimated by discounting the future cash
flows, using rate currently available for deposits and for
the long-term liabilities of similar terms and maturity.
The carrying amount of the Company's long-term bank
deposits and long-term liabilities approximates their fair
value.
The fair value of derivative instruments is estimated by
obtaining current quotes from banks.
v. Derivative instruments:
Statement of Financial Accounting Standards Board
Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), requires
companies to recognize all of its derivative instruments
as either assets or liabilities in the statement of
financial position at fair value.
For 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.
F-19
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
w. Reclassification:
Certain amounts from prior years referring to balances of
inventory, trade receivables, trade payable, other
accounts payable and accrued expenses have been
reclassified to conform with the current period
presentation.
x. Impact of recently issued accounting standards:
In June 2002, the FASB issues Statement of Financial
Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No.
146"), which addresses significant issues regarding the
recognition, measurement, and reporting of costs
associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 requires that
costs associated with exit or disposal activities be
recognized when they are incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS
No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. The Company can not
estimate the impact of the adoption of SFAS No. 146 on
its results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34" ("FIN No. 45"). FIN No. 45
elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its
obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing
the guarantee. FIN No. 45 does not prescribe a specific
approach for subsequently measuring the guarantor's
recognized liability over the term of the related
guarantee. It also incorporates, without change, the
guidance in FASB Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others," which is
being superseded. The disclosure provisions of FIN No. 45
are effective for financial statements of interim or
annual periods that end after December 15, 2002, and the
provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective
of a guarantor's year-end. The Company does not expect the
adoption of FIN No. 45 to have a material impact on its
results of operations or financial position.
F-20
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of held to maturity marketable securities:
ESTIMATED
GROSS GROSS FAIR
UNREALIZED UNREALIZED MARKET
AMORTIZED COST GAINS LOSSES VALUE
------------------- ------------------ ----------------- -----------------
December 31, 2001:
U.S. corporate debentures:
Maturing within one year $ 56,019 $ 709 $ (26) $ 56,702
Maturing within one to two years 29,843 551 (135) 30,259
------------------- ------------------ ----------------- -----------------
$ 85,862 $ 1,260 $ (161) $ 86,961
=================== ================== ================= =================
December 31, 2002:
U.S. corporate 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
=================== ================== ================= =================
The Company sold held-to-maturity marketable securities during the
years ended December 31, 2001 and 2002 amounting to $ 6,973 and
$ 9,478, including net gains (losses) amounting to $ (307) and $ 13,
respectively.
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
--------------------------------------
2001 2002
----------------- -----------------
Government authorities $ 1,556 $ 2,307
Prepaid expenses 2,194 1,190
Others 5,523 1,375
----------------- -----------------
$ 9,273 $ 4,872
================= =================
NOTE 5:- INVENTORIES
Raw materials and components $ 9,658 $ 10,320
Work in process 12,632 10,121
Finished products 8,774 7,061
----------------- -----------------
----------------- -----------------
$ 31,064 $ 27,502
================= =================
See also Note 1d.
F-21
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 6:- PROPERTY AND EQUIPMENT
Cost:
Office furniture and equipment $ 1,608 $ 1,566
Computers and manufacturing equipment 13,503 16,806
Motor vehicles 77 33
Leasehold improvements 1,920 2,182
----------------- ------------------
17,108 20,587
----------------- ------------------
Accumulated depreciation:
Office furniture and equipment 312 451
Computers and manufacturing equipment 5,251 8,389
Motor vehicles 34 18
Leasehold improvements 358 613
----------------- ------------------
5,955 9,471
----------------- ------------------
Depreciated cost $ 11,153 $ 11,116
================= ==================
NOTE 7:- CURRENT TECHNOLOGY
Intangible assets related to the merger with Floware
Current technology - cost $ 16,800 $ 16,800
Accumulated amortization 1,200 3,600
---------------- ------------------
Amortized cost $ 15,600 $ 13,200
================ ==================
Current technology amortization expenses amounted to $ 1,200 and $
2,400 for the years ended December 31, 2001 and 2002, respectively.
The estimated amortization expenses for each of the five succeeding
years will be $ 2,400.
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
---------------------------------------
2001 2002
---------------- ------------------
Employees and payroll accruals $ 6,508 $ 6,061
Royalties payable and current maturities of the long-term debt to the OCS 2,135 3,571
Allowance for restructuring costs 1,972 616
Provision for merger related expenses 2,726 707
Warranty provision 2,640 1,202
Accrued expenses 2,685 4,072
Others 1,281 1,366
---------------- ------------------
$ 19,947 $ 17,595
================ ==================
F-22
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 2002 and 2001 restructuring plans
in accordance with EITF 94-3, "Liability Recognition for Certain
Employee Benefits and Other Cost to Exit an Activity (Including
Certain Cost in 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, 2002, 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 2002
---------------- ----------------- ---------------- --------------------
Write-down of long lived assets $ 1,123 $ - $ 1,123 $ -
Employees termination benefits 3,830 3,453 - 377
Lease abandonment 1,359 1,217 - 142
Other 227 130 - 97
---------------- ----------------- ---------------- --------------------
$ 6,539 $ 4,800 $ 1,123 $ 616
================ ================= ================ ====================
NOTE 10:- 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 the Israeli 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 such projects. The obligation to pay
royalties was contingent on actual sales of the products funded.
In December 2001, the Company 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 the Company.
Under the arrangement, the Company settled its outstanding contingent
royalty commitment, regardless of actual future sales level. As a
result of this agreement, the Company recorded a one-time operating
charge of $ 6,535 with respect to the payments, which the Company is
obligated to the OCS.
F-23
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 10:- OTHER LONG-TERM LIABILITIES (CONT.)
Under the arrangement, the repayment to the OCS could be made over a
period of five years from the date of settlement. The amount is
linked to Customer Price Index ("CPI") and bears annual interest of
4%.
Such an arrangement enables the Company to participate in a new OCS
programs under which it will be eligible to receive research and
development grants for research and development projects without any
royalty repayment obligations.
Royalties paid or accrued before entering to the above OCS
arrangement, for the years ended December 31, 2000, 2001 and 2002
amounted to $ 2,872, $2,425 and $ 0, respectively, were recorded
under selling and marketing expenses.
NOTE 11:- DERIVATIVE FINANCIAL INSTRUMENTS
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. As of December 31, 2001 and 2002, the
zero-cost collar expired.
In addition, the Company entered into forward foreign exchange
contracts to hedge certain trade payable payments denominated in
foreign currency. The purpose of the Company's foreign currency
hedging activities is to protect the Company from changes in the
foreign exchange rate .
During 2001 and 2002, the Company purchased forward contracts to
hedge a portion of its NIS trade payables for a period of one to
three months. These forward contracts are not designated as hedging
instruments as defined by SFAS No. 133.
The fair value amount of the forward contracts as of December 31,
2001 and 2002 were immaterial.
The notional amount of the hedged NIS trade payables balance as of
December 31, 2002 is $ 5,500.
NOTE 12:- 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 expire in May 2006 and November
2004, respectively.
The Company has leased various motor vehicles under
operating lease agreements. These leases expire in fiscal
year 2005.
F-24
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
Future minimum rental payments under non-cancelable leases
for the year ending December 31, are as follows:
RENTAL OF LEASE OF
PREMISES MOTOR VEHICLES
------------------- --------------------
2003 $ 2,245 $ 1,755
2004 2,164 956
2005 2,015 431
2006 632 -
------------------- --------------------
$ 7,056 $ 3,142
=================== ====================
Total rental expenses for the years ended December 31,
2000, 2001 and 2002, were $ 1,161, $ 2,925 and $ 3,594,
respectively. Motor vehicle leasing expenses for the years
ended December 31, 2000, 2001 and 2002, were $ 813,
$ 1,453 and $ 2,041, respectively.
b. 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 is approximately $ 300 and the
lease is for a period of seven years. The demand is in its
opening motion and, yet, it would be premature to assess
the likelihood of litigation, nonetheless its outcome. The
Company intends to vigorously defend against the claim in
the event that litigation takes place. Although litigation
is inherently risky and its results cannot be predicted
with a reasonable degree of certainty, the Company's legal
advisor believes that the Company has good defenses
against the third party claim which may prevail in court.
c. As of December 31, 2002 the Company obtained bank
guarantees in the total amount of approximately $ 3,220,
mainly in favor of vendors, lessors and government
authorities.
NOTE 13:- SHARE CAPITAL
a. General:
In January 2000, the Company's shareholders approved a
stock split effected as a share dividend of one Ordinary
share per each issued and outstanding Ordinary share. The
dividend was paid to all holders of Ordinary shares out of
the Company's additional paid-in capital.
All share options and warrants per share amounts have been
retroactively adjusted for all periods presented.
b. Public offerings:
On March 23, 2000, the Company issued 5,750,000 Ordinary
shares in the Company's initial public offering at a
purchase price of $ 20 per share. The aggregate net
proceeds to the Company totaled approximately $ 103,809,
after deducting related offering expenses of $ 11,191.
F-25
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- SHARE CAPITAL (CONT.)
On July 28, 2000, the Company issued 2,150,000 Ordinary
shares in the Company's second public offering at a
purchase price of $ 35 per share, for the aggregate net
proceeds to the Company in the amount of approximately $
71,529, after deducting related offering expenses of $
3,721.
c. On June 27, 2001, the Company listed its shares for trade
on the Tel-Aviv Stock Exchange. Trading began during July
2001.
As for issuance of shares related to Floware's merger, see
also Note 1c.
d. Shareholders' rights:
The Ordinary shares confer upon the holders the right to
receive notices of participate and vote in the general
meetings of the Company and the right to receive
dividends, if and when declared and the right to receive,
upon liquidation, a pro rata share of any remaining
assets.
e. Treasury stocks:
Through December 31, 2002, the Company resolved to
implement a share buy-back plan under which the total sum
to be paid for the repurchased shares shall not exceed
$ 9,000.
As of December 31, 2002, the Company purchased 3,095,573
shares at a weighted average price per share of
approximately $ 2.11 per share.
f. Exchange offer plan:
During September 2002, the Company adopted a voluntary
employee stock option exchange program, under which the
employees were offered to cancel outstanding stock options
with carrying exercise price above $ 4.6 in exchange for a
replacement future grant. The number of new options for
each participant will be calculated under the terms of the
plan based on each participant's cancelled options
exercise price. The future grant will take place six
months and one day from the cancellation date and will
range from 2% to 85% of the number of cancelled options.
F-26
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- SHARE CAPITAL (CONT.)
The new options, generally, will vest over two and a half
years of employment. The exercise price of the new options
will be 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.
g. Warrants:
1. Warrants issued to a customer:
In March 2000, the Company issued a warrant to
purchase 143,600 Ordinary shares to one of its
customers at an exercise price of $ 20.00 per
share. This warrant is exercisable for a period
of two and a half years commencing September
23, 2000. The Company recorded the fair value
of this warrant, amounted to $ 444, as a
discount deducted from revenues. This entire
amount was amortized during 2000.
The fair value was calculated at the date of
the grant using a Black-Scholes option pricing
model with the following weighted-average
assumptions: a risk-free interest rate of 6.7%,
a dividend yield of 0%, volatility factors of
the expected market price of the Company's
Ordinary shares of 0.15, and weighted-average
expected life of the warrant of two years.
As of December 31, 2002, the warrant granted
was not exercised.
2. 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, were issued in exchange for
then outstanding Floware warrants. See also
Note 1c.
h. 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 which
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, 2002, 8,385,700 Ordinary shares of the
Company are still available for future grant under the
various option plans.
F-27
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- SHARE CAPITAL (CONT.)
A summary of the Company's stock option activity (except
options to consultants) and related information is as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------ -------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT OF EXERCISE AMOUNT OF EXERCISE AMOUNT OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- -------------- ---------------- -------------- --------------- --------------
Outstanding at the
beginning of the year 7,816,520 $ 2.19 9,367,507 $ 6.92 16,017,081 $ 5.88
Granted 3,538,750 $ 15.52 *)11,017,692 $ 5.43 489,300 $ 1.77
Exercised (1,347,428) $ 1.11 (1,886,746) $ 1.13 (361,934) $ 0.62
Forfeited or cancelled (640,335) $ 8.89 (2,481,372) $ 11.39 (8,069,609) $ 8.58
-------------- ---------------- ---------------
Outstanding at the end
of the year 9,367,507 $ 6.92 16,017,081 $ 5.88 8,074,838 $ 3.18
============== ============== ================ ============== =============== ==============
Options exercisable at
December 31, 2002 3,939,414 $ 3.45 5,957,460 $ 4.88 5,286,793 $ 3.03
============== ============== ================ ============== =============== ==============
*) 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 2000, 2001 and 2002, the Company recorded
amortization of deferred stock compensation of $ 18, $ 864
and $ 580, 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 deduction of shareholders'
equity and is amortized ratably over the vesting period of
the related options.
The options outstanding as of December 31, 2002, 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) 2002 LIFE (YEARS) PRICE 2002 PRICE
- ------------------------- ------------------- --------------- ------------- ------------------ ----------------
$ $ $
- ------------------------- ------------- ----------------
0.01- 0.03 542,849 3.69 0.009 529,428 0.009
0.294 64,504 2.49 0.294 64,504 0.29
0.56 - 0.7349 306,211 3.55 0.644 306,211 0.644
0.98-1.2692 1,309,345 4.39 1.102 1,186,317 1.090
1.9-2.5 2,555,049 6.16 2.400 613,833 2.481
2.992-4.6023 2,496,824 4.09 3.576 2,151,590 3.542
5.01-5.789 331,781 6.05 5.271 155,704 5.273
8.9297-13.2986 326,561 6.32 11.775 179,584 11.837
13.5-20 93,702 4.85 17.880 64,234 18.228
25-36.5 48,012 4.26 34.602 35,388 34.771
------------------- ------------- ------------------ ----------------
8,074,838 3.18 5,286,793 3.03
=================== ============= ================== ================
F-28
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- SHARE CAPITAL (CONT.)
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
------------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Less than fair value at date of grant $ - $ 3.31 $ -
================= ================= =================
Equal to fair value at date of grant $ 7.10 $ 1.63 $ 0.73
================= ================= =================
Exceeds the fair value at date of grant $ - $ 2.13 $ -
================= ================= =================
In addition, 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.
i Dividends:
In the event that cash dividends are declared in the
future, such dividends will be paid in NIS. The Company's
Board of Directors has determined that tax exempt income
if any, will not be distributed as dividends.
NOTE 14- TAXES ON INCOME
Income derived by Alvarion Ltd., from sources other than
an "Approved Enterprise", as detailed below, during the
period of tax benefits and thereafter is taxable at the
regular corporate tax rate of 36%.
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.
a. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959:
Alvarion Ltd. has been granted the status of 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 to enjoy
"alternative benefits" - 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. 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). The ten-year period
of benefits will commence with the first year in which
Alvarion Ltd. earns taxable income. In 1997, Alvarion
Ltd.'s new production facility in Nazareth was granted the
status of an "Approved Enterprise". Accordingly, Alvarion
Ltd.'s income from that "Approved Enterprise" will be
tax-exempt for a period of ten years. The ten year period
of benefits will commence with the first year in which
Alvarion Ltd. earns taxable income.
F-29
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
During February 2000, Alvarion Ltd. submitted an expansion
request for an "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 ten years. The ten years 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 Tel Aviv plan 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.
In connection with its merger with Floware, Alvarion Ltd.
adopted the following Floware Ltd. "Approved Enterprise"
agreement:
Floware Ltd. was granted an "Approved Enterprise" status
for its 1997 plan regarding the production facility in
Or-Yehuda. After the merger, the operations were relocated
to Alvarions's facilities in Tel-Aviv. The income derived
from this "Approved Enterprise" will be tax-exempt for a
period of two years and will enjoy a reduced tax rate
thereafter of 10% - 25% for an additional period of five
to eight years (depending on the percentage of foreign
investment in the Company). The period of benefits will
commence with the first year in which Alvarion Ltd. earns
taxable income.
In order to maintain its eligibility for this program and
benefits following the merger, Alvarion Ltd. must continue
to meet specified conditions. In addition, Alvarion has
yet to finalize the status of the tax benefits with the
tax authorities for the merged company.
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 instruments of approval for the specific
investments in "Approved Enterprises". In the event of
failure to comply with these conditions, the benefits 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, 2002, the accumulated deficit of the Company
does not include tax-exempt profits earned by the
Company's "Approved Enterprise".
F-30
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14- TAXES ON INCOME (CONT.)
On January 1, 2003, a comprehensive tax reform took effect
in Israel. Pursuant to the reform, resident companies are
subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of "controlled
foreign corporation" was introduced, according to which an
Israeli company may become subject to Israeli taxes on
certain income of a non-Israeli subsidiary if the
subsidiary's primary source of income is passive income
(such as interest, dividends, royalties, rental income or
capital gains). The tax reform also substantially changed
the system of taxation of capital gains.
Alvarion Ltd. 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. It 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
the Israeli 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.
d. Income (loss) before taxes on income:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Domestic $ 10,255 $ (98,276) $ (20,696)
Foreign (221) (11,735) 15
----------------- ----------------- -----------------
$ 10,034 $ (110,011) $ (20,681)
================= ================= =================
e. Carryforward losses:
As of December 31, 2002, Alvarion Ltd. had an available
tax losses carryforward amounting to approximately $
108,000, 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 losses
carryforward in a total amount of $ 65,000 of the merged
companies 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 beginning with
the tax year immediately following the merger. This set
off is limited to the lesser of:
F-31
F-30
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14- TAXES ON INCOME (CONT.)
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, 2002, the state and the federal tax
losses carryforward of the U.S. subsidiary amounted to
approximately $ 7,212 and $ 14,750, respectively. Such
losses are available to be offset against any future U.S.
taxable income of the U.S. subsidiary and will expire in
2007 and 2022, respectively.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may
result in the expiration of net operating losses before
utilization.
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,
-------------------------------------------
2001 2002
------------------- -------------------
Tax assets in respect of:
Allowance for doubtful accounts $ 222 $ 257
Severance pay and accrued vacation pay 690 333
Other deductions for tax purposes 1,782 1,964
Net loss carryforward 21,000 19,285
------------------- -------------------
Total deferred tax assets before valuation allowance 23,694 21,839
Valuation allowance (23,694) (21,839)
------------------- -------------------
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.
F-32
F-30
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14- TAXES ON INCOME (CONT.)
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 15:- EARNING (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net earnings (loss) per share.
a. Numerator:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Net income (loss) $ 10,034 $ (110,011) $ (20,681)
================= ================= =================
Numerator for basic and diluted net earnings (loss)
per share - income (loss) available to holders of
Ordinary shares $ 10,034 $ (110,011) $ (20,681)
================= ================= =================
NOTE 15:- EARNING (LOSS) PER SHARE
b. Denominator:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 2001 2002
----------------- ------------------- ------------------
Denominator for basic net earnings (loss) per share -
weighted average Ordinary shares 24,938 39,298 53,941
----------------- ------------------ ------------------
Effect of dilutive securities:
Employee stock options and warrants to consultants 5,832 *) - *) -
----------------- ------------------ ------------------
Dilutive potential Ordinary shares 37 *) - *) -
----------------- ------------------ ------------------
Denominator for diluted net earnings (loss) per share
- adjusted weighted average Ordinary shares,
assumed exercise of options and warrants 30,807 39,298 53,941
================= ================== ==================
*) The effect of the inclusion of the options and warrants in
2001 and 2002 would have been antidilutive.
NOTE 16:- GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
a. Summary information about geographic areas:
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-33
ALVARION LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 16:- GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION (CONT.)
The Company attributes revenues from customers, on the
basis of the location of the end customers.
b. The following presents total revenues for the years ended
December 31, 2000, 2001 and 2002, and long-lived assets as
of December 31, 2000, 2001 and 2002:
2000 2001 2002
---------------------------- ------------------------------ --------------------------------
LONG- LONG- LONG-
TOTAL LIVED TOTAL LIVED TOTAL LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
------------- -------------- -------------- -------------- --------------- --------------
Israel $ 789 $ 5,004 $ 656 $ 62,293 $ 655 $ 59,976
Export:
United States 50,317 691 32,010 1,212 28,434 1,040
Europe without Sweden,
England, Czech Republic
France and Germany 6,548 270 18,265 352 19,336 421
Sweden 7,354 - 5,046 - 1,530 -
England 2,610 61 3,631 50 1,348 25
Czech Republic 3,383 - 2,062 - 3,378 -
China 5,039 - 3,456 - 2,843 -
Chile 87 - 4,032 - 8,440 -
France 3,962 96 1,858 40 1,914 61
Germany 1,210 - 3,319 1 488 2
South Africa 768 - 1,183 - 1,895 -
Japan 1,728 - 8,110 - 6,754 6
Africa without South Africa 2,125 - 2,421 - 2,542 -
Asia without China and Japan 2,658 - 4,236 24 4,546 -
America without United States,
Argentina and Chile 8,300 - 7,063 21 4,434 25
Argentina 3,862 - 1,282 - 73 -
Australia 720 - 338 - 239 -
------------- -------------- -------------- -------------- --------------- --------------
$ 101,460 $ 6,122 $ 98,968 $ 63,993 $ 88,849 $ 61,556
============= ============== ============== ============== =============== ==============
c. Major customers' data as percentage of total sales:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Customer A 13.40% 0% 0%
================= ================= =================
Customer B 0% 3.16% 11.40%
================= ================= =================
Customer C 2.29% 5.54% 10.32%
================= ================= =================
F-34
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 shareholders in the ordinary course of
business. The balances with and the revenues derived from related
party were as follows:
a. Balances with related party:
DECEMBER 31,
--------------------------------------------
2001 2002
------------------- -------------------
Trade receivables $ 2,390 $ 3,039
=================== ===================
b. Revenues from related party:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 2001 2002
----------------- --------------- ----------------
Total revenues $ - $ 3,134 $ 10,185
================= =============== ================
NOTE 18:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development:
Research and development costs $ 16,818 $ 27,078 $ 27,597
Less - grants 4,345 5,982 3,520
----------------- ----------------- -----------------
$ 12,473 $ 21,096 $ 24,077
================= ================= =================
b. Amortization of deferred stock compensation:
Cost of revenues $ - $ 51 $ 72
Research and development, net - 341 310
Selling and marketing - 167 114
General and administrative 18 167 84
----------------- ----------------- -----------------
$ 18 $ *) 726 $ 580
================= ================= =================
*) In addition, the merger expenses include $ 138
amortization of deferred stock compensation
expenses for the year ended December 31, 2001.
F-35
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:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Financial income:
Interest and others $ 6,996 $ 9,156 6,445
Gain on sale of marketable securities - 13 13
Foreign currency translation differences 253 332 455
----------------- ----------------- -----------------
7,249 9,501 6,913
----------------- ----------------- -----------------
Financial expenses:
Interest and bank expenses (218) (541) (326)
Loss on sale and impairment of held to maturity
marketable securities - (420) -
----------------- ----------------- -----------------
(218) (961) (326)
----------------- ----------------- -----------------
$ 7,031 $ 8,540 $ 6,587
================= ================= =================
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)
Subsequent to the balance sheet date, the Company signed an agreement
to acquire certain assets and assume certain liabilities of InnoWave
ECI Wireless Systems Ltd. ("InnoWave"), for $ 9,100 in cash, a
warrant to purchase 200,000 ordinary shares of the Company and other
purchase related expenses. The warrant, which has an exercise price
of $3 per share, expires on the fifth anniversary of the date of its
grant and had a fair value of $ 78 on February 19, 2003, the date on
which the agreement was announced.
- - - - - - - - - - -
F-36