Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company. See definitiondefinitions of “accelerated filer"accelerated filer", "large accelerated filer" and large accelerated filer”"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ Non-Accelerated Filer ☐ | Accelerated Filer ☐ Emerging Growth Company ☐ |
The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☒ | U.S. | GAAP |
| ☐ | International | Financial Reporting Standards as issued by the International Accounting Standards Board |
| ☐ | Other |
If “Other”"Other" has been checked in responsersponse to the previous question indicate by check mark which financial statements the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PRELIMINARY NOTE
This annual report contains historical information and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to NICE’sNICE's business, financial condition and results of operations. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal”"anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "project," "should," "strategy," "continue," "goal" and “target”"target" and similar expressions, as they relate to NICE or its management, are intended to identify forward-looking statements. Such statements reflect the current beliefs, expectations and assumptions of NICE with respect to future events and are subject to risks and uncertainties. The forward-looking statements relate to, among other things: operating results; anticipated cash flows; gross margins; adequacy of resources to fund operations; our ability to maintain our average selling prices despite the aggressive marketing and pricing strategies of our competitors; our ability to maintain and develop profitable relationships with our key distribution channels; the financial strength of our key distribution channels; and the market’smarket's acceptance of our technologies, products and solutions.
In connection with the “safe harbor”"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. Many factors could cause the actual results, performance or achievements of NICE to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, competition with existing or new competitors, changes in executive management, changes in general economic and business conditions, disruption in credit markets, rapidly changing technology, changes in currency exchange rates and interest rates, difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel, changes in business strategy and various other factors, both referenced and not referenced in this annual report. These risks are more fully described under Item 3, “Key"Key Information – Risk Factors”Factors" of this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. NICE does not intend or assume any obligation to update these forward-looking statements. Investors should bear this in mind as they consider forward-looking statements and whether to invest or remain invested in NICE-Systems Ltd.’sNICE's securities.
In this annual report, all references to “NICE,” “we,” “us,” “our”"NICE," "we," "us," "our" or the “Company”"Company" are to NICE-SystemsNICE Ltd., a company organized under the laws of the State of Israel, and its wholly owned subsidiaries. For a list of our significant subsidiaries, please refer to page 5352 of this annual report.
In this annual report, unless otherwise specified or unless the context otherwise requires, all references to “$”"$" or “dollars”"dollars" are to U.S. Dollars, all references to “EUR”"EUR" are to Euros, all references to “GBP”"GBP" are to British Pounds, all references to “CHF”"CHF" are to Swiss Francs and all references to “NIS”"NIS" are to New Israeli Shekels. Except as otherwise indicated, the financial statements of and information regarding NICE are presented in U.S. dollars.
TABLE OF CONTENTS
| PART I | Page | |
| 1 | ||
| 1 | ||
| 1 | ||
| 94 | ||
| 95 | ||
| 99 | ||
| 101 | ||
PART II | ||
| Item 16. | [Reserved] | |
PART III | ||
| F-1 | ||
PART I
Not Applicable.
Item 2. Offer Statistics and Expected Timetable.
Not Applicable.
Item 3. Key Information.
Selected Financial Data
The following selected consolidated balance sheet data as of December 31, 20132015 and 20142016 and the selected consolidated statements of income data for the years ended December 31, 2012, 20132014, 2015 and 20142016 have been derived from our audited Consolidated Financial Statements. These financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated statements of income data as of December 31, 20102012 and 20112013 and the selected consolidated balance sheet data for the years ended December 31, 2010, 20112012, 2013 and 20122014 have been derived from other Consolidated Financial Statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating"Operating and Financial Review and Prospects”Prospects" and the Consolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report.
| Year Ended December 31, | ||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||
| (U.S. dollars in thousands, except per share data) | ||||||||||||||||||||
| OPERATING DATA: | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Products | $ | 276,319 | $ | 280,140 | $ | 289,560 | $ | 317,900 | $ | 306,252 | ||||||||||
| Services | 482,552 | 541,375 | 582,435 | 608,967 | 709,290 | |||||||||||||||
| Total revenues | 758,871 | 821,515 | 871,995 | 926,867 | 1,015,542 | |||||||||||||||
| Cost of revenues | ||||||||||||||||||||
| Products | 78,878 | 69,335 | 63,919 | 66,363 | 53,032 | |||||||||||||||
| Services | 215,519 | 230,279 | 239,592 | 237,219 | 284,701 | |||||||||||||||
| Total cost of revenues | 294,397 | 299,614 | 303,511 | 303,582 | 337,733 | |||||||||||||||
| Gross profit | 464,474 | 521,901 | 568,484 | 623,285 | 677,809 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development, net | 103,818 | 115,431 | 123,141 | 128,485 | 141,528 | |||||||||||||||
| Selling and marketing | 194,346 | 214,579 | 231,097 | 225,817 | 268,349 | |||||||||||||||
| General and administrative | 94,654 | 86,467 | 83,360 | 90,349 | 116,569 | |||||||||||||||
| Amortization of acquired intangible assets | 31,455 | 29,438 | 19,157 | 12,528 | 17,187 | |||||||||||||||
| Restructuring expenses | 1,870 | 527 | 5,435 | - | - | |||||||||||||||
| Total operating expenses | 426,143 | 446,442 | 462,190 | 457,179 | 543,633 | |||||||||||||||
| Operating income | 38,331 | 75,459 | 106,294 | 166,106 | 134,176 | |||||||||||||||
| Financial income and other net | 8,268 | 3,927 | 3,765 | 5,304 | 10,305 | |||||||||||||||
| Income before taxes on income | 46,599 | 79,386 | 110,059 | 171,410 | 144,481 | |||||||||||||||
| Taxes on income (tax benefits) | (14,799 | ) | 26,915 | 9,909 | 30,832 | 21,412 | ||||||||||||||
| Net income from continuing operations | 61,398 | 52,471 | 100,150 | 140,578 | 123,069 | |||||||||||||||
| Discontinued operations: | ||||||||||||||||||||
| Gain on disposal and (loss) income from operations | 7,301 | 4,294 | 4,965 | 152,459 | (8,235 | ) | ||||||||||||||
| Taxes on income | 805 | 1,490 | 2,040 | 34,206 | (2,086 | ) | ||||||||||||||
| Net income on discontinued operations | 6,496 | 2,804 | 2,925 | 118,253 | (6,149 | ) | ||||||||||||||
| Net income | 67,894 | 55,275 | 103,075 | 258,831 | 116,920 | |||||||||||||||
Basic earnings per share from continuing operations | $ | 1.01 | $ | 0.87 | $ | 1.69 | $ | 2.36 | $ | 2.06 | ||||||||||
Basic earnings per share from discontinued operations | $ | 0.10 | $ | 0.05 | $ | 0.05 | $ | 1.99 | $ | (0.10 | ) | |||||||||
Basic earnings per share | $ | 1.11 | $ | 0.92 | $ | 1.74 | $ | 4.35 | $ | 1.96 | ||||||||||
| Weighted average number of shares used in computing basic earnings per share (in thousands) | 60,905 | 60,388 | 59,362 | 59,552 | 59,667 | |||||||||||||||
Diluted earnings per share from continuing operations | $ | 0.99 | $ | 0.85 | $ | 1.64 | $ | 2.29 | $ | 2.02 | ||||||||||
Diluted earnings per share from discontinued operations | $ | 0.10 | $ | 0.04 | $ | 0.05 | $ | 1.93 | $ | (0.10 | ) | |||||||||
Diluted earnings per share | $ | 1.09 | $ | 0.89 | $ | 1.69 | $ | 4.22 | $ | 1.92 | ||||||||||
| Weighted average number of shares used in computing diluted earnings per share (in thousands) | 62,261 | 61,380 | 60,895 | 61,281 | 61,035 | |||||||||||||||
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| At December 31, | ||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||
| (U.S. dollars in thousands) | ||||||||||||||||||||
| BALANCE SHEET DATA*: | ||||||||||||||||||||
| Working capital** | $ | 122,108 | $ | 61,023 | $ | 107,090 | $ | 256,089 | $ | 13,713 | ||||||||||
| Total assets | 1,649,676 | 1,646,030 | 1,632,952 | 1,849,613 | 2,631,876 | |||||||||||||||
| Shareholders' equity | 1,191,088 | 1,204,796 | 1,213,456 | 1,415,149 | 1,511,332 | |||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
(U.S. dollars in thousands, except per share data) | ||||||||||||||||||||
OPERATING DATA: | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Products | $ | 325,429 | $ | 355,760 | $ | 369,381 | $ | 377,558 | $ | 388,357 | ||||||||||
Services | 364,022 | 438,071 | 509,631 | 571,726 | 623,282 | |||||||||||||||
Total revenues | 689,451 | 793,831 | 879,012 | 949,284 | 1,011,639 | |||||||||||||||
Cost of revenues | ||||||||||||||||||||
Products | 107,190 | 116,256 | 122,917 | 117,833 | 116,741 | |||||||||||||||
Services | 161,885 | 191,049 | 228,306 | 247,115 | 258,842 | |||||||||||||||
Total cost of revenues | 269,075 | 307,305 | 351,223 | 364,948 | 375,583 | |||||||||||||||
Gross profit | 420,376 | 486,526 | 527,789 | 584,336 | 636,056 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development, net | 97,083 | 109,127 | 121,387 | 136,563 | 148,560 | |||||||||||||||
Selling and marketing | 178,407 | 199,044 | 230,162 | 248,618 | 264,207 | |||||||||||||||
General and administrative | 76,345 | 95,650 | 96,134 | 88,304 | 85,602 | |||||||||||||||
Amortization of acquired intangible assets | 19,489 | 23,677 | 32,590 | 30,571 | 20,310 | |||||||||||||||
Restructuring expenses | - | - | 1,884 | 527 | 5,552 | |||||||||||||||
| Total operating expenses | 371,324 | 427,498 | 482,157 | 504,583 | 524,231 | |||||||||||||||
Operating income | 49,052 | 59,028 | 45,632 | 79,753 | 111,825 | |||||||||||||||
Financial income, net | 9,339 | 10,783 | 6,738 | 4,037 | 3,768 | |||||||||||||||
Equity in losses of affiliated company | - | - | - | - | (565 | ) | ||||||||||||||
Other income (expenses), net | (154 | ) | (162 | ) | 1,530 | (110 | ) | (3 | ) | |||||||||||
Income before taxes on income | 58,237 | 69,649 | 53,900 | 83,680 | 115,025 | |||||||||||||||
Taxes on income | 9,530 | 12,386 | (13,994 | ) | 28,405 | 11,950 | ||||||||||||||
Net income | 48,707 | 57,263 | 67,894 | 55,275 | 103,075 | |||||||||||||||
| Basic earnings per share | $ | 0.78 | $ | 0.91 | $ | 1.11 | $ | 0.92 | $ | 1.74 | ||||||||||
Weighted average number of shares used in computing basic earnings per share (in thousands) | 62,652 | 62,924 | 60,905 | 60,388 | 59,362 | |||||||||||||||
| Diluted earnings per share | $ | 0.76 | $ | 0.89 | $ | 1.09 | $ | 0.89 | $ | 1.69 | ||||||||||
Weighted average number of shares used in computing diluted earnings per share (in thousands) | 64,132 | 64,241 | 62,261 | 61,830 | 60,895 | |||||||||||||||
At December 31, | ||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||
Working capital | $ | 173,909 | $ | 173,543 | $ | 137,635 | $ | 76,425 | $ | 128,190 | ||||||||||
Total assets | 1,534,418 | 1,581,836 | 1,660,945 | 1,657,058 | 1,642,091 | |||||||||||||||
Shareholders’ equity | 1,160,760 | 1,158,644 | 1,191,088 | 1,204,796 | 1,213,456 | |||||||||||||||
*Including assets and liabilities that were accounted for as discontinued operations
**Including deferred revenues and advances from customers that are classified as long-term liabilities
Risk Factors
Risks Relating to Global Economy, Competition and Markets
Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
Adverse economic conditions in markets in which we operate can harm our business. Global financialbusiness, and our results of operations can be affected by adverse changes in local and global economic conditions, during recent years have been characterized by increased volatility slowdowns, recessions and several financial institutions either went into bankruptcy or had to be rescued by governmental authorities. Among these uncertainties are the financial conditions of certain governments in Europe, which may have an impact on the entire Euro zone, and the economic unrest in Russia and Eastern Europe.
instability. To the extent that our business suffers as a result of such unfavorable economic and market conditions, our operating results may be materially adversely affected. In particular, enterprises may reduce spending in connection with their contact centers, financial institutions may reduce spending in relation to trading floors and operational risk management (as IT-related capital expenditures are typically lower priority in times of economic slowdowns), and our customers may prioritize other expenditures over our solutions. In addition, enterprises’ ordering and payment patterns are influenced by market conditions and could cause fluctuations in our quarterly results. If any of the above occurs, and our customers or partners significantly reduce their spending or significantly delay or fail to make payments to us, our business, results of operations, and financial condition would be materially adversely affected.
Disruption to the global economy could also result in a number of follow-on effects on our business, including a possible (i) slow-down in our business, resulting from lower customer expenditure, inability of customers to pay for products and services, insolvency of customers or insolvency of key partners and vendors, (ii) negative impact on our liquidity, financial condition and share price, which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the future on terms favorable to us, and (iii) decreases in the value of our assets that are deemed to be other than temporary, which may result in impairment losses.
In addition, over half of our sales are generated from North America. If there is deterioration or a crisis in the economic and financial stability in the United States, particularly in the financial services sector (which is our main industry vertical), our top tier customers could reduce spending or delay or postpone orders. This could have a material adverse effect on our sales in this region and our results of operations. Any such deterioration in the economic condition in the United States could also negatively impact the accuracy of our forecast of future trends and our plans for future business development.
2
We face risks relating to our global operations.
We sell our products and solutions throughout the world and intend to continue to increase our penetration of international markets. In each of 2012, 2013 and 2014, approximately 99% of our total sales were derived from sales to customers outside of Israel. Our future results could be materially adversely affected by a variety of factors relating to international transactions, including:
governmental controls and regulations, including import or export license requirements, trade protection measures and changes in tariffs;
compliance with applicable international and local laws, regulations and practices, including those related to trade compliance, anticorruption, data privacy and protection, tax, labor, employee benefits, customs, currency restrictions and other requirements;
fluctuations in currency exchange rates;
longer payment cycles in certain countries in our geographic areas of operations;
potential adverse tax consequences, including the complexities of foreign value added tax systems;
political instability, terrorism or the threat of terrorism and general security concerns;
political unrest, armed conflicts or natural disasters around the world;
reduced or differing protection for intellectual property rights in some countries; and
general difficulties in managing our global operations.
In addition, as of January 20, 2017, a new administration has been organized in the U.S., where the majority of our operations are conducted. During the election process, the intent to amend many of the current regulations was made public by the new administration. In addition, these political changes may affect U.S. trade relationships and agreements. We do not yet know what, if any changes, the new U.S. administration will make, and what the impact on us of any of those changes may be. However any such changes may have a significant impact on our business and operation, which may adversely affect our financial results.
Changes in the political or economic environments, business spending, and the availability and cost of capital in the countries in which we operate, particularly in emerging markets, as well asincluding the impact of such changes on foreign currency rates and interest rates, and the impact of economic conditions on underlying demand for our products and services, could have a material adverse effect on our financial condition, results of operations and cash flows.flow.
As we continue to explore the expansiona result of our global reach, an increasing focus of our business may bepresence, especially in emerging markets, including South Americawe face increasing challenges that could adversely impact our results of operations, reputation and business.
In light of our global presence, especially in emerging markets such as those in Asia, Eastern Europe and Latin America, we face a number of challenges in certain jurisdictions that provide reduced legal protection, including poor protection of intellectual property, inadequate protection against crime (including bribery, corruption and fraud) and breaches of local laws or regulations, as well as challenges relating to competition from companies that already have a local presence in the Pacific (“APAC”). In many of these emerging markets, we may be facedmarket, difficulties in recruiting sufficient personnel with risks that are more significant than if we were to do business in developed countries, which risks include undeveloped legal systems,appropriate skills and experience, unstable governments and economies, and potential governmental actions affectingthat may affect the flow of goods and currency. We
3
In addition, local business practices in jurisdictions in which we operate, and particularly in emerging markets, may be inconsistent with international regulatory requirements, such as anti-corruption and anti-bribery laws and regulations (including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act) to which we are subject. Although we implement policies and procedures designed to ensure compliance with these laws, we cannot assure youguarantee that one or morenone of these factorsour employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies or applicable law. Any such violation could have a materialan adverse effect on our international operations, business financial condition and results of operations.reputation, and may expose us to criminal or civil enforcement actions, including penalties and fines.
The markets in which we operate are highly competitive and we may be unable to compete successfully.
The markets for our products, solutions and related services are, in general, highly competitive. Our competitors include a number of large, established developers and distributors. Some of our principal competitors or potential competitors may have advantages over us, including greater resources, a broader portfolio of products, applications and services, larger patent and intellectual property portfolios and access to larger customer bases, all of which would enable them to better adapt better to new or emerging technologies or customer requirements or devote more resources to the marketing and sale of their products and services. Additionally, continued price reductions by some of our competitors, particularly at times of economic difficulty, may result in our loss of sales or require that we reduce our prices in order to compete, which would adversely affect our revenues, gross margins and results of operations.
In recent years, some of our competitors, including some of our partners, have increased their presence in our markets through internal development, partnerships and acquisitions. To the extent that we cannot compete effectively, our market share and, therefore, resultsInfrastructure vendors, including suppliers of operations, could be materially adversely affected. System integrators, as well astelecommunication infrastructure vendors, thatequipment, have decided and/or may decide in the future to enter our market space and compete with us by offering comprehensive solutions, could result in a substantial decline in our sales.solutions. Moreover, major enterprise software vendors, such as those from the traditional enterprise business intelligence and business analytics sector, Customer Relationship Management (or “CRM”"CRM"), or infrastructure players (mostly telephony or switch vendors), have entered or may decide to enter our market space and compete with us, in this emerging opportunity, either by internal development of comprehensive solutions or through acquisition of any of our existing competitors. Such competition could have a material adverse effect onIf we are not able to compete effectively with these market entrants or other competitors, we may lose market share and our business, financial condition or results of operations.operations could be adversely affected.
While the market for our software applications is constantly growing, successful development, positioning and sales execution of our products is a critical factor in our ability to successfully compete and maintain growth. As a result, we expect to continue making significant expenditures on research and development and marketing. In addition, our software solutions may compete with software developed internally by potential clients, as well as software and other solutions offered by competitors. We cannot ensure that the market awareness or demand for our new products or applications will grow as rapidly as we expect, or that the introduction of new products or technological developments by others will not adversely impact the demand for our products.
4
Successful marketing of our products and services to our customers and partners will be critical to our ability to maintain growth. We cannot assure you that our products or existing partnerships will permit us to compete successfully. The market for some of our solutions is highly fragmented and includes products offering a broad range of features and capabilities. Consolidation through mergers and acquisitions, or alliances formed, among our competitors in this market, who may have greater resources than we have, could substantially influence our competitive position.
If we are unable to develop or maintain our relationships with existing and new distributors and strategic partners, our business and financial results could be materially adversely affected.
We have agreements in place with many distributors, dealers and resellers to market and sell our products and services in addition to our direct sales force. Moreover, inIn certain regions, such as Asia and Eastern Europe, we predominantly work through such partners. Our financial results could be materially adversely affected if our contracts with distribution channel partners or our other partners were terminated, if our relationship with our distribution channel partners or our other partners were to deteriorate, or if the financial condition of our distribution channel partners or our other partners were to weaken.
We believe that developing partnerships and strategic alliances is an important factor in our success in marketing our products. In some markets we have only recently started to develop a number of partnerships and strategic alliances. We cannot assure you that we willmay not be able to develop such partnerships or strategic alliances on terms that are favorable to us, if at all. Failure to develop such arrangements that are satisfactory to us may limit our ability to successfully market and sell products and may have a material adverse effect on our business and results of operations.
We leverage strategic relationships with third parties such as system integrators and technology and telephony providers. We also license technology from certain third parties. Certain of these license agreements permit either party to terminate all or a portion of the agreement without cause at any time.
As our market opportunities change and as we grow our reliancebusiness, our dependency on particular distribution channels and strategic partners may increase or we may need to create new strategic partnerships and alliances to address changing market needs, all of whichneeds. We may negatively impact our growth and gross margins. There can be no assurance that we willnot be successful in maintaining, creating or expanding these channels and partnerships.
partnerships, which may negatively impact the development of our business, our growth, gross margins and results of operations.
In addition, the execution of our growth strategy also depends on our ability to create new alliances and enter into strategic partnerships with certain market players. Even if we are able to enter into such alliances, it may be under terms that are not favorable to us, or we may not be able to realize the benefits that are anticipated through such alliances. If we are not successful at these efforts, we may lose sales opportunities, customers and market share, which may have a material adverse effect on our business and results of operations.
5
The markets in which we operate are characterized by rapid technological changes and frequent new products and service introductions.
We operate in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards might exert price pressures on our existing products or render them obsolete. Our markets are also characterized by consistent demand for state of the art technology and products. Existing and potential competitors might introduce new and enhanced products that could adversely affect the competitive position of our products. Our most significant market is the market for Customer Interaction applications. Customer Interaction applicationsmarkets are utilized by entities in various sectors to capture, store, retrieve and analyze recorded data. The market for our Customer Interaction applications is, in particular, dominated by a group of highly competitive vendors that are introducing dynamic competitive offerings around evolving industry standards.
We believe that our ability to anticipate changes in technology and industry standards and to successfully develop and introduce new, enhanced and differentiated products, on a timely basis, in each of the markets in which we operate, is a critical factor in our ability to grow our business. As a result, we expect to continue to make significant expenditures on research and development, particularly with respect to new software applications, which are continuously required in all our business areas. Moreover, in the event that we do not anticipate changes in technology or industry practices and/or fail to timely address market needs or not be able to provide the products that are in demand, we may lose market share and our results of operations may be materially adversely affected.
The growth of new communication channels could require substantial modification and customization of our current cross-channel products, as well as the introduction of new multi-channel products. Also, new products and technologies are being used by our customers to communicate with their customers, e.g., use of chatbots. Such introduction of new products and technologies may change the usage patterns of our products and applications by our customers, which may result in some of our products and applications becoming obsolete. We may not be able to timely and effectively address such market trends and needs.
Further, customer adoption of these new technologies may be slower than we anticipate. We cannot assure you that the market or demand for our products and solutions will be sustained or grow as rapidly as we expect (if at all), that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance, or that the introduction of new products or technological developments by others will not render our products obsolete. In addition, our products must readily integrate with major third party telephone, security, telephone, front-office and back-office systems. Any changes to these third party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Our inability to develop products that are competitive in technology and price and responsive to customer needs could have a material adverse effect on our business, financial condition and results of operations.
Therefore, some of the factors that could have a material adverse effect on our business, financial condition and results of operations include industry-specific factors; our ability to continuously develop, introduce, deliver and support commercially viable products, solutions and technologies; the market’smarket's rate of acceptance of the product solutions and technologies we offer; and our ability to keep pace with market and technology changeschanges; and our ability to compete successfully.
6
We depend on certain infrastructure vendors’vendors' installation base for a significant portion of our new and recurring sales.
We sell our products, either directly or through our other distribution channels, to customers who use infrastructure of certainour distributors or of other vendors, or operate in their environment. To the extent that certain infrastructure vendors such as Avaya, do not allow or support the integration of our products with itstheir infrastructure or products, or use other means to prevent us from selling our products to such customers, (for example, some of our largest customers currently use Avaya for their contact center infrastructure), we may experience a reduction in sales to these customers, which is broader than such infrastructure vendors’vendors' direct business with us. This could, of course, influence our ability to attract new customers that use such infrastructure products or continue rendering maintenance services and other services and generate recurring sales to theseexisting customers. As a result, we may sustain loss ofcould lose customers and market share, which maycould have a material adverse effect on our business, financial condition, or results of operation.
We depend on the stability of the financial services sector.
The occurrencefinancial services sector is our main industry vertical. If there is deterioration or a crisis in the economic and financial stability of catastrophic events, suchfinancial institutions, as hurricanes, storms, earthquakes, tsunamis, floodswell as any change in rules and other catastrophesregulations that adversely affectapply to this sector (such as deregulation in the business climatearea of compliance), customers in any ofthis sector, including our marketstop tier customers, could reduce spending or delay or postpone orders. This could have a material adverse effect on our business, financial conditionsales to this sector and our results of operations. Some of our operations are located in areas that have been in the past, and may be in the future, susceptible to such occurrences.
We depend on the success of our recording solutions.
Our recording solutions are based on a computer telephony integrated multi-channel voice recording and retrieval system. We are dependent on the success of our recording solutions to maintain profitability and sustain growth. Our recording solutions currently generate, and in recent years have generated, a largesignificant portion of our revenues, and we will continue to be dependent on the sales of our recording solutions and recurring revenues, such as maintenance services, in the next several years. However, there can be no assurance that the recording market will continue to grow.not decline significantly or that revenues generated from our recording solutions will not be significantly impacted. Also, certain switch manufacturers such as Avaya Inc. (“Avaya”) and Cisco Systems Inc. (“Cisco”), offer various types of recording solutions, which could result in a significant decline in sales of our recording solutions which could also result in a declineand in sales of related applications, or a significant decrease in the profit margin on such solutions, thatany of which could have a material adverse effect on our business, financial condition or results of operations.
Providing advanced software applications and a multi-product offering has required and will continue to require,requires, among other things, the continuous evolution of our sales force, maintenance and support offerings, manpower, research and development, and customer installation methods, as well as our route to market. The sale of advanced software applications is also subject to prolonged processes of customization, implementation and testing. Therefore, the increasing proportionsale of advanced software applications in our overall sales mix leadsmay lead to a longer period between the time we "book" an order and the time we recognize the revenue from such orders. All of the aboveThese factors could result in a delay in revenue recognition and materially adversely affect our results of operations.
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A significant portion of our business relies on software applications, however, weapplications. We cannot guarantee that the pace ofour customers' adoption of advance software applications by customers will meet our expectation and planning. This could mean thatAs a result, certain applications may not reach athe critical mass in sales and revenues which would negatively impact our results of operation, duenecessary to offset the high cost of developing and maintaining such advanced applications.applications, which could negatively affect our results of operation.
We depend on a small number of significant customers.
While no single customer of ours accounted for more than five percent of our aggregate revenues in 2014,2016, we do have a small number of significant customers in each sector of our business, each of which could be material to a particular area of our business. In addition, in our Security business, there may be certain transactions that could account for at least five percent of our revenues in a particular year. Such transactions are subject to certain risks (as discussed in the immediately following risk factor "We face risks related to large projects."), which could have a material adverse effect on our revenues and operating results.
We expect that sales of our products and services to relatively few significant customers could continue to account for a substantial percentage of our sales in the foreseeable future. There can be no assurance that we will be able to retain these key customers or that such customers will not cancel purchase orders, reschedule, or decrease their level of purchases. Loss, cancellation or deferral of business to such customers could have a material adverse effect on our business and operating results.
We face risks relating to large projects.
Our strategy is to continue investing in, enhancing and securing our business and operations and continuing to growgrowing our business, both organically and through acquisitions. Investments in, among other things, new markets, products, solutions, and technologies, research and development, infrastructure and systems, geographic expansion, and additional qualified and experienced personnel, are critical to achieving our growth strategy. Growth of our revenue depends on the success of all these factors, including our ability to capture market share, attract new clients, develop our strategic partnerships, introduce our solutions and services to new global markets, strengthen and improve our solutions through significant investments in research and developments and successfully consummate and integrate acquisitions. However, such investments and efforts may not be successful, and, even if successful, may negatively impact our short-term profitability. Furthermore, in the event of an acquisition we may decide to reduce profits over the short-term in order to achieve long-term expansion or growth, which may involve risks. Additionally, the terms of the credit agreement (the "Credit Agreement") that we entered into in connection with our senior secured credit facility (the "Credit Facility") contains restrictions that could affect our ability to make strategic acquisitions or investments.
Our success depends on our ability to effectively and efficiently execute our growth strategy.strategy effectively and efficiently. If we are unable to successfully execute our growth strategy successfully and properly manage our investments and expenditures, our results of operations and stock price may be materially adversely affected. In addition, as a result of the execution of our growth strategy, our short term profitability may be negatively impacted, including as a result of an acquisition.
We cannot assure youguarantee that we will be able to sustain our growth in future years. The increasing proportion of advanced software applications in our overall sales mix might not compensate for the slowing growth rates of our recording solutions and other more mature products. In addition, our new solutions might not achieve wide market acceptance, and therefore might fail to support revenue growth. The failure to successfully implement our growth strategy successfully could affect our ability to sustain growth and could materially adversely affect our results of operations.
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Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.investments, including our recent acquisition of inContact. In particular, we may not succeed in making additional acquisitions or be effective in integrating such acquisitions.
As part of our growth strategy, we have made a significant number of acquisitions over the past few years, including a total of seven acquisitions during the years 2011 through 2013 (see Item 5, “Operating"Operating and Financial Review and Prospects—Recent Acquisitions”Acquisitions" in this annual report for a description of certain of these acquisitions), and. We expect to continue to make acquisitions and investments in the future.future as part of our growth strategy. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process ofThere can be no assurance that we will be successful in making additional acquisitions. Even if we are successful in making additional acquisitions, integrating an acquired company’scompany's business into our operations and/or of investing in new technologies may (1) may result in unforeseen operating difficulties and large expenditures and (2) may absorb significant management attention that would otherwise be available for the ongoing development of our business, both of which may result in the loss of key customers and/or personnel and expose us to unanticipated liabilities.
In November 2016, we completed our acquisition of inContact. Our success in realizing the anticipated benefits of the acquisition of inContact, and the timing of the realization of such benefits, depends on the successful integration of our business and operations with the acquired business and operations of inContact. The integration of inContact may be complex, costly and time-consuming. The difficulties of integration of inContact include, among others:
• unanticipated issues in integrating technologies, products, logistics, information, communications and other systems;
• unanticipated changes in applicable laws and regulations; and
• other unanticipated issues, expenses and liabilities.
Other risks commonly encountered with acquisitions include the effect of acquisitions on our financial and strategic position, the inability to integrate successfully or commercialize acquired technologies and achieve expected synergies or economies of scale on a timely basis and the potential impairment of acquired assets. Further, we may not be no assuranceable to retain the key employees that may be necessary to operate the business we willacquire and we may not be successfulable to attract, in making additional acquisitions. a timely manner, new skilled employees and management to replace them.
In recent years, several of our competitors have also completed acquisitions of companies in our markets or in complementary markets. As a result, it may be more difficult for us to identify suitable acquisitions or investment targets or to consummate acquisitions or investments once identified on acceptable terms or at all. If we are not able to execute on our acquisition strategy, we may not be able to achieve our growth strategy, may lose market share, or may lose our leadership position in one or more of our markets.
We may alsooften compete with others to acquire companies, and such competition may result in decreased availability of, or an increase in price for, suitable acquisition candidates. In addition, weWe also may not be able to consummate acquisitions or investments that we have identified as crucial to the implementation of our strategy for other commercial or economic reasons. Further, we may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities, in countries where we seek to consummate acquisitions or make investments. For those and other reasons, we may ultimately fail to consummate an acquisition, even if we announce the intended acquisition.
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We may require significant financing to complete an acquisition or investment, whether through bank loans, raising of debt or otherwise. WeIn connection with the inContact acquisition, we incurred additional indebtedness pursuant to the Credit Facility and, through our wholly owned subsidiary Nice Systems, Inc. ("Nice Systems"), through the issuance of exchangeable senior notes (the "Notes"). In the future, we cannot assure you that such financing options will be available to us on reasonable terms, or at all. If we are not able to obtain suchthe necessary financing, it could have an impact on our abilitywe may not be able to consummate a substantial acquisition or investment and execute our growth strategy. Alternatively,In addition, if we may issue aconsummate one or more significant amountacquisitions in which the consideration consists, in whole or in part, of our ordinary shares as consideration for an acquisition, which would have a dilutive effect onor American Depositary Shares ("ADSs") representing our existing shareholders.ordinary shares, our shareholders may suffer immediate dilution of their interests in us or the value of their interests in us. Our shareholders may also suffer substantial dilution if we issue ADSs upon the conversion of the Notes.
Our unevenseasonal sales patterns could significantly impact our revenues and earnings.
We encounter quarter-to-quarter seasonality, especially given the increasing proportion of advanced software applications in our overall sales mix. The sales cycle for our products and services is variable, typically rangingranges between a few weeks to several months from initial contact with the potential client to the signing of a contract. Frequently, sales orders accumulate towards the latter part of a given quarter. In addition, our revenues are typically highest in the fourth quarter and lowest in the first quarter. We believe this seasonality is typical for many software companies and that it may become more pronounced as the proportion of advanced software applications in our overall sales mix continues to increase. Additionally, as a high percentage of our expenses, particularly employee compensation, are relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have a material adverse impact on our quarterly operating results.
We believe this seasonality is typical for many software companies and that it may alsobecome more pronounced as the proportion of advanced software applications in our overall sales mix continues to increase. Additionally, as a high percentage of our expenses, particularly employee compensation and other overhead costs, are relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have ana material adverse impact on our quarterly operating results.
Fluctuations in our results of operations may result from our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements, the bookingtiming and success of new product introductions and enhancements or product initiation by our competitors, the purchasing and budgeting cycles of our customers and general economic, industry and market conditions, amongst other factors.
In addition, our quarterly operating results may be subject to significant fluctuations due to additional factors, including the timing and size of orders and shipments to customers (including delays in execution of customer orders), variations in distribution channels, mix of products and services, new product introductions, competitive pressures and general economic conditions. It is difficult to predict the exact mix of products and services for any period between hardware, software and services as well as within the product category between interaction-related platforms and related applications and transactional related platforms and applications. Changes in the mix of products and services across our different business lines may significantly impact our revenues. Further, the period of time from order to delivery of our platforms and applications is short, and therefore our backlog for such products is currently, and is expected to continue to be, small and substantially unrelated to the level of sales in subsequent periods. As a result, our results of operations for any quarter may not necessarily be indicative of results for any future period, and may be below our forecasts.
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Our quarterly results may be volatile at times, which could cause us to miss our forecasts.
We generally provide forecasts as to expected future revenues in the coming fiscal quarters and fiscal year. These forecasts are based on management estimation and expectations, our then-existing backlog and an analysis of assumptions and assessments that may not materialize or end up being inaccurate. We may not meet our expectations or those of industry analysts in a particular future quarter, during which such transactions were to be entered into.including as a result of the factors described in this Item 3.
We derive a substantial portion of our sales through indirect channels, making it more difficult for us to predict revenues because we depend partially on estimates of future sales provided by third parties. In addition, changes in our arrangements with our network of channel partners or in the products they offer, such as the introduction of new support programs for our customers, which combines support from our channel partners with back-end support from us, could affect the timing and volume of orders. Furthermore, our expense levels are based, in part, on our expectations as to future revenues. If our revenue levels are below expectations, our operating results are likely to be adversely affected, since most of our expenses are not variable in the short term.
We depend on our ability to recruit and retain key personnel.
In order to compete, we must recruit and retain executives and other key employees. Hiring and retaining qualified executives and other key employees is critical to our business, and competition for highly qualified and experienced managers in our industry is intense. In 2014, Zeevi Bregman, our former CEO, retired, and Mr. Barak Eilam assumed this role. In February 2015, we announced that Ms. Dafna Gruber, our CFO, will be retiring from her position, and be replaced by Ms. Sarit Sagiv following a transition period. There is no guarantee that additional key management members will not leave the Company, or if they do, that we will be able to identify and hire qualified replacements, or that the transition of new personnel will not cause disruption in our business.
In addition, due to our growth, or as a result of regular recruitment, we will be required to hire and integrate new employees. Recruiting and retaining qualified engineers and computer programmers to perform research and development and to commercialize our products, as well as qualified personnel to market and sell those products, are critical to our success. As of December 31, 2014,2016, approximately 24%26% of our employees were devoted to research and product development and approximately 23%22% were devoted to marketing and sales. There can be no assurance that we will be able to successfully recruit and integrate new employees.
There is often intense competition to recruit highly skilled employees in the technology industry. We have suffered from attrition in our workforce in previous years and we believe that such attrition will continue in the future. We may not be able to offer current and potential employees a compensation package that is satisfactory in order to keep them within our employ.employment.
In certain locations in which we have development centers, the rate of attrition is high and could have a negative impact on our ability to retain our employees in such centers, timely develop our products and service our customers. In addition, the migration of development and other activities and functions to low-cost countries may result in disruption to our business due to differing levels of employee knowledge, expertise and organizational and leadership skills, greater employee attrition and increased cost of retaining our most highly-skilled employees.
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An inability to attract and retain highly qualified employees may have an adverse effect on our ability to develop new products and enhancements for existing products and to successfully market such products, all of which would likely have a material adverse effect on our results of operations and financial position. Our success also depends, to a significant extent, upon the continued service of a number of key management, sales, marketing and development employees, the loss of any of whom could materially adversely affect our business, financial condition and results of operations.
We rely on software from third parties. If we lose the right to use that software, we would have to spend additional capital to redesign our existing software to adhere to new third party providers or develop new software.
We integrate and utilize various third party software products as components of our products and solutions to enhance their functionality. Our business could be disrupted if functional versions of these software products were either no longer available to us or no longer made available to us on commercially reasonable terms. Also, in the event that any of these third party vendors is unable to meet our requirements in a timely manner or that our relationship with any such vendor is terminated, we may experience disruption in our business until an alternative source of supply can be obtained. Any disruption, or any other interruption in a vendor's ability to provide components to us, could result in delays in making product deliveries or inability to deliver, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, some of our third party vendors use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. If we lost the right to use such third party software, we would be required to spend additional capital to either redesign our software to function with alternate third party software or develop these components ourselves. As a result, we might be forced to limit the features available in our current or future products and solutions offerings and the commercial release of our products and solutions could be delayed.
Incorrect or improper use of our products and solutions or failure to properly provide professional services and maintenance services could result in negative publicity and legal liability.
Our products and solutions are complex and are deployed in a wide variety of network environments. The proper use of our software requires training and, if our software products are not used correctly or as intended, inaccurate resultsthere may be produced.inaccurate results. Our products may also be intentionally misused or abused by clients who use our products. The incorrect or improper use of our products and solutions or our failure to properly provide professional services and maintenance services, including installation, training, project management, product customizations and consulting to our clients may result in losses suffered by our clients, which could result in negative publicity and product liability or other legal claims against us.
Undetected errors or malfunctions in our products or solutionsservices could directly impair our financial results and we could face potential product liability claims against us.claims.
Our software products and services are highly complex. Despite extensive testing by us and by our clients, our products and services may include errors, failures, bugs or other weaknesses. Such errors, failures, bugs or other weaknesses in our products released by usand services could result in product returns, loss of or delay in market acceptance of our products and services, loss of competitive position, or claims by clients or others, which would seriously harm our revenues, financial condition and results of operations. Correcting and repairing such errors, failures or bugs could also require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our product licensing.
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In addition, the identification of errors in our software applications and services or the detection of bugs by our clients may damage our reputation in the market as well as our relationships with existing clients, which may result in our inability to attract or retain clients.
Further, since our products are used by our customers for among other things,important aspects of their business, such as compliance recording and operational risk management functions that are often critical to our clients and must adhere to certain rules and regulations, any errors or defects in, or other performance problems with, our products and services could hurt our reputation and may damage our customers' business. If that occurs, we arecould lose futures sales, our existing customers could elect not to renew, and we could potentially be subject to product liability claims. In particular, some of our customers, including financial institutions, may suffer significant damages as a result of a failure of our solutions to perform their functions. Although we attempt to limit any potential exposure through quality assurance programs, insurance and contractual terms, we cannot assure you that we will be able to eliminate or successfully limit our liability for any failure of our solutions. Any product liability insurance we carry may not be sufficient to cover our losses resulting from any such product liability claims. The successful assertion of one or more large product liability claims against us could have a material adverse effect on our results of operations and financial condition.
Risks Relating to our Cloud Offering
Our Cloud Software-as-a-Service business model may not be successful or profitable.
The portion of our cloud-based business has grown significantly as a result of the acquisition of inContact and our internal development efforts, and therefore we are more dependent now on the success and profitability of this business area. We may not be able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings. Additionally, the increasing prevalence of cloud and SaaS delivery models offered by us and our competitors may unfavorably impact pricing in both our on-premise enterprise software business and our cloud business, as well as overall demand for our on-premise software product and service offerings, which could reduce our revenues and profitability. With the move to cloud based solutions, including following the acquisition of inContact, we cannot guarantee that revenues generated from our cloud offerings will compensate for a loss of business in our on-premise enterprise software business. If we do not successfully execute our cloud strategy or anticipate the cloud needs of our customers, our reputation as a cloud services provider could be harmed and our revenues and profitability could decline.
In addition, cloud computing may make it easier for new competitors to enter our markets due to the lower up-front technology costs and easier implementation and for existing market participants to compete with us on a greater scale. Such increased competition is likely to heighten the pressure to decrease pricing, which could have a negative effect on our revenues and results of operations.
The business model of our cloud offerings differs from the business model for the sale of products and services, particularly in that the period for recognizing the revenue from such orders is usually spread over the term of the subscription rather than being tied to a single date. Our cloud offerings are generally purchased by customers on a subscription basis and revenues from these offerings are generally recognized ratably over the term of the subscriptions. Therefore, a significant shift to SaaS-based sales could result in a delay in revenue recognition and materially adversely affect our results of operations and our rate of growth and profitability.
Moreover, the deferred revenue that results from sales of our cloud offerings may prevent any deterioration in sales activity associated with our cloud offerings from becoming immediately observable in our consolidated statement of operations. This is in contrast to revenues associated with our software licenses arrangements in which new software licenses revenues are generally recognized in full at the time of delivery of the related software licenses. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription period.
In addition, the integration of inContact into our cloud strategy may not be as efficient or scalable as anticipated, which could adversely affect our ability to fully realize the benefits we anticipate from this acquisition.
The stability and growth of our cloud related revenues depends on our ability to attract and retain on-going customers, and attract customers in the small to medium business sector.
The revenue model for companies selling software services under the cloud model is to attract customers, retain such customers through the renewal of their monthly subscription contracts and encourage such customers to add additional agent seats and functionality.
As more of our cloud offerings are targeted at small to medium businesses, and not just large size enterprise customers, we may be required to invest more sales efforts in that market segment, diverting our sales resources to a greater number of smaller transactions. In this market segment, we may also encounter greater unpredictability, resulting from the financial stability of customers that may be more vulnerable at times of economic downturn, all of which could negatively impact our results of operation.
As our industry matures, as our clients experience seasonal trends in their businesses, or as competitors introduce lower costs and/or differentiated products or services that are perceived to compete favorably with our services, our ability to add new clients and renew, maintain or up-sell existing clients based on pricing, technology and functionality could be impaired.
We also have relationships with third-party channel partners to attract new customers. Such third-party channel partner relationships may be terminated by either party, and as a result reduce the number of new customers we can attract to our product offering and cause disruptions with existing customer relationships, which could adversely impact our results of operations. The termination of a reseller partner relationship may cause existing customers of that third-party reseller to become more likely to discontinue their services, which could have a significant adverse effect on our results of operations. In addition, acquisitions of our customers or of our third-party channel partners could lead to cancellation of our contracts with those customers or by the acquiring companies.
We are dependent on third-party computer hardware, software and cloud computing platforms that may be difficult to replace.
We rely on computer hardware leased and software licensed from, and cloud computing platforms provided by, third parties in order to offer our services, including Platform as a Service provided by strategic partners. These hardware, software and cloud computing platforms may not continue to provide competitive features and functionality, or may not be available at reasonable prices, on commercially reasonable terms or at all. Any loss of the right to use any of these hardware, software or cloud computing platforms could significantly increase our expenses and otherwise result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained through purchase or license and integrated into our services. As we grow our business, we will continue to depend on both existing and new strategic relationships with such vendors. Our inability to establish and foster these relationships could adversely affect the development of our business, our growth and our results of operations.
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Defects or disruptions in our cloud services could impact demand for our services and subject us to substantial liability.
Our cloud services may have errors or defects that could result in unanticipated downtime for our subscribers and harm to our reputation and our business. We have from time to time found defects in, and experienced disruptions to, our services, and new defects or disruptions may occur in the future. In addition, our customers may use our services in unanticipated ways that may cause a disruption in services for other customers attempting to access their data. Since our customers use our services for important aspects of their business, any errors, defects, disruptions in service or other performance problems could harm our reputation and may damage our customers' businesses. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which may harm our business and adversely affect our results.
We currently serve our customers from third-party data center hosting facilities and cloud computing platform providers. Any damage to, or failure of, our systems generally could result in interruptions in our services. We have from time to time experienced interruptions in our services and such interruptions may occur again in the future. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our or our third party vendors' systems and infrastructure. This could result in interruptions in our services, which may cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our attrition rates and our ability to attract new customers, all of which would reduce our revenues. Also, we may not be entitled to indemnification or to recuperate any such loss or damage from third party service providers, which may result in us bearing alone the burden of any such liability or losses.
Facilities at which customer data is stored or through which we render our services may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, as well as local administrative actions, changes to legal or permitting requirements and litigation to stop, limit or delay operation. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our services. Even with disaster recovery and business continuity arrangements in place, our services could be interrupted.
We are also dependent on our computer databases, billing systems and accounting computer programs, network and computer hardware that houses these systems to effectively operate our business and market our services. Our clients may become dissatisfied by any system failures that interrupt our ability to provide our service to them. Substantial or repeated system failures would significantly reduce the attractiveness of our services. Significant disruption in the operation of these systems would adversely affect our business and results of operations.
Privacy concerns and legislation, evolving regulation of cloud computing, cross-border data transfer restrictions and other regulations may limit the use and adoption of our services and adversely affect our business.
Governments are adopting new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. In some cases, foreign data privacy laws and regulations, such as the European Union's Data Protection Directive, and the country-specific laws and regulations that implement that directive, also govern the processing of personal information. These and other requirements could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to offer our services in certain locations or our customers' ability to deploy our solutions globally.
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In addition, regulatory issues relating to the Internet, in general, could affect our ability to provide our services. In the United States, legislation has been adopted that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in the United States Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally.
Furthermore, our customers expect us to meet voluntary certification or other standards established by third parties. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions.
Industry-specific regulation and other requirements and standards are evolving and unfavorable industry-specific laws, regulations, interpretive positions or standards could harm our business.
Our customers and potential customers conduct business in a variety of industries, including financial services and telecommunications. Regulators in certain industries have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit our customers' use and adoption of our services and reduce overall demand for our services. Compliance with these regulations may also require us to devote greater resources to support certain customers, which may increase costs and lengthen sales cycles. For example, some financial services regulators have imposed guidelines for use of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or if our customers are unable to obtain regulatory approval to use our services where required, our business may be harmed. If in the future we are unable to achieve or maintain industry specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results.
In some cases, industry-specific laws, regulations or interpretive positions may also apply directly to us as a service provider. Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business.
Some of our enhanced services are dependent on leased network connectivity lines, and a significant disruption or change in these services could adversely affect our business.
A significant portion of our cloud software solutions are provided to customers through a dedicated network of equipment we own that is connected through leased network connectivity lines based on Internet protocol with capacity dedicated to us. We also move a portion of our voice long distance service over this dedicated network.
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We lease network connectivity lines and space at co-location facilities for our equipment from third-party suppliers. These co-location facilities represent the backbone of our dedicated network. If any of these suppliers is unable or unwilling to provide or, if we desire, expand their current levels of service to us, the services we offer to customers may be adversely affected. We may not be able to obtain substitute services from other providers at reasonable or comparable prices or in a timely fashion. Any resulting disruptions in the services we offer that are provided over our dedicated network would likely result in customer dissatisfaction and adversely affect our operations. Furthermore, pricing increases by any of the suppliers we rely on for our dedicated network could adversely affect our results of operations if we are unable to pass through pricing increases.
We rely on third party network service providers to originate and terminate public switched telephone network calls, and thus significant failures in these networks could harm our operations.
For our business in the unified communications market, we leverage the infrastructure of third party network service providers to provide telephone numbers, public switched telephone network call termination and origination services, and local number portability for our customers rather than deploying our own network throughout the United States. If any of these network service providers ceases operations or otherwise terminate the services that we depend on, the delay in switching our technology to another network service provider, if available, could have an adverse effect on our business, financial condition or operating results.
Interruptions or delays in our services through third-party error, our own error or the occurrence of unforeseeable events, could harm our ability to deliver our services, which could harm our relationships with customers and subject us to liability.
We provide some of our services through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in various locations globally. Our hosting providers do not guarantee that our customers' access to our solutions will be uninterrupted, error-free or secure. Our operations depend on our providers' ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or network connectivity failures, criminal acts and similar events. Our back-up computer hardware and systems may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at all facilities. In the event that our hosting facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our service as well as delays and/or additional expense in arranging new facilities and services. Any or all of these events could cause our customers to lose access to the services they are purchasing from us. In addition, the failure by our third-party hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.
Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our customers' service to their customers. Any interruptions or delays in our services, whether as a result of third-party error, our own error, natural disasters or security breaches, and whether accidental or willful, could harm our relationships with customers and our reputation. This in turn could cause a reduction in our revenue, subject us to liability, and cause us to issue credits or pay penalties or cause customers to fail to continue service, any of which could adversely affect our business, financial condition and results of operations. In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.
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We provide certain service level commitments to our customers, which could cause us to provide credits for future services if the stated service levels are not met for a given period and could adversely impact our revenue.
Our customer agreements for cloud offerings provide service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our service, we may be contractually obligated to provide these customers with credits for future services. Our revenue could be adversely impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any such extended service outages could harm our reputation, revenue and operating results.
Risks Relating to Our FinancesFinancial Condition
Our debt could adversely affect our financial condition and prevent us from fulfilling our obligations under our financing arrangements.
In connection with the inContact acquisition, we incurred indebtedness pursuant to the Credit Facility available to us under the Credit Agreement and through the issuance of the Notes. The debt incurred could have important consequences to our financial condition and business. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
make it more difficult for us to satisfy our other financial obligations;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
expose us to interest rate fluctuations since the interest on the Credit Agreement is imposed at variable rates;
make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such debt;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt;
limit our ability to borrow additional funds as needed;
restrict our ability to prepay the Notes or to pay cash upon exchanges of the Notes; and
limit our ability to pay dividends, redeem stock or make other distributions.
Our ability to make payments on and to refinance our debt, to fund planned capital expenditures and to maintain sufficient working capital will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, business, regulatory and other factors that may be beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Credit Agreement or from other sources in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our debt, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our debt on or before the maturity thereof, any of which could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition and the value of our outstanding debt. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
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A failure to comply with the covenants and other provisions of our outstanding debt could result in events of default under such instruments, which could permit acceleration of our Notes and borrowings under our Credit Agreement. Any required prepayment or exchange of our Notes or Credit Facility as a result of an event of default or fundamental change triggering such right would lower our current cash on hand such that we would not have those funds available for use in our business, which could adversely affect our operating results.
We are subject to a number of restrictive covenants under the Credit Agreement, which restrict our business and financing activities.
The Credit Agreement imposes, and the terms of any future debt may impose, operating and other restrictions on us. Such restrictions in many respects limit or prohibit, among other things, our and our subsidiaries' ability to:
incur or guarantee additional debt;
pay dividends on our ordinary shares or redeem, repurchase or retire our equity interests or subordinated debt;
transfer or sell our assets:
make certain payments or investments;
make capital expenditures;
create certain liens on assets;
create restrictions on the ability of our subsidiaries to pay dividends or make other payments to us;
engage in certain transactions with our affiliates; and
merge or consolidate with other companies.
The restrictions under the Credit Agreement may, in certain circumstances, prevent us from taking actions that management believes would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that do not have similar restrictions. In the event of any event of default under the Credit Agreement, the lenders under the Credit Agreement could elect to terminate their commitments or cease making further loans and accelerate the outstanding loans, and, in any such case, we could ultimately be forced into bankruptcy or liquidation. Because the indenture governing the Notes and the Credit Agreement has customary cross-default provisions, if our obligations under the Credit Agreement are accelerated we may be unable to repay or refinance the amounts due under the Credit Agreement or the Notes.
The conditional exchange feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional exchange feature of the Notes is triggered, holders of Notes will be entitled at their option to exchange the Notes at any time during specified periods. If one or more holders elect to exchange their Notes, we may elect to settle all or a portion of our exchange obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to exchange their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital and adversely affect covenants under the Credit Agreement.
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We face foreign exchange currency risks.
The announcement of Brexit caused significant currency exchange rate fluctuations that generally resulted in the sharp devaluation of the GBP and the strengthening of the U.S. dollar against foreign currencies in which we conduct business. In addition, the outcome of Brexit and interest rate changes in certain countries, may continue to cause volatility in the currency markets. These currency fluctuations may adversely affect our results of operations.
We monitor foreign currency exposure and may use various instruments to preserve the value of sales transactions, expenses and commitments; however, this cannot assure our full protection against risks of currency fluctuations that could affect our financial results. As part of our efforts to mitigate these risks, we use foreign currency hedging mechanisms, which provide protection against risk, but may entail a loss of opportunity for favorable gain. Therefore, we may be unableineffective in protecting us against adverse currency fluctuations and can also limit opportunities to benefitprofit from a favorable gainexchange rate fluctuations that may result from such currency fluctuations.would otherwise be favorable. For information on the market risks relating to foreign exchange, please see Item 11, “Quantitative"Quantitative and Qualitative Disclosures about Market Risk”Risk" in this annual report.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits in various jurisdictions, the timingstiming of which areis unpredictable. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. If we are assessed additional taxes, it could have a material adverse effect on our results of operations and financial condition.
In recent years we have seen changes in tax laws resulting in an increase in applicableeffective tax rates, in part stemming from public pressure to increase taxespecially increased liabilities of corporations and to limitlimitations on the ability to gainbenefit from strategic tax planning, with a focusthese laws particularly focused on international corporations. Such legislative changes in one or more jurisdictions in which we operate may have implications on our tax liability and have a material adverse effect on our results of operations and financial condition. In Israel specifically, we have experienced in recent years an increase in corporate
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The Organization for Economic Cooperation and Development has recently introduced the base erosion and profit shifting project. This project contemplates changes to numerous international tax rate,principles, as well as reduction in favorablenational tax treatment, which has resulted in an increase inincentives, and these changes, if adopted by individual countries, could adversely affect our effective tax rate. Such trend, which is partly attributable to political and public pressure, may continue and may results in a higher effective tax rate, which will negatively impact our results of operation.
provision for income taxes.
We might recognize a loss with respect to our financial investments.
We invest most of our cash through a variety of financial investments. If the obligor of any of theseour financial investments defaults or undergoes reorganization in bankruptcy, we may lose a portion of such investment and our financialassets and income may decrease. In addition, a downturn in the credit markets could adversely affect our financial income, the liquidity of our investments, or the downgrading of the credit rating of our investments could causeresult in a reduction in the market value of our holdings and reduce the liquidity of our investments, which could require us to recognize some loss.a loss and would adversely affect our assets and income. For information on the types of our investments, see Item 11, “Quantitative"Quantitative and Qualitative Disclosures About Market Risk”Risk" in this annual report.
Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with U.S. GAAP. These principles are subject to interpretation by the Securities and Exchange Commission (the "SEC") and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
For example, the Financial Accounting Standards Board ("FASB") has issued new accounting standards for revenue recognition and leasing, and while we know that these standards will have an impact on us we are still evaluating the extent of the impact these new accounting standards will have on our consolidated financial statements and related disclosures. Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. For additional information regarding these updated standards, see the section titled "Recently Issued Accounting Pronouncements" in Item 5.
Risks Relating to Regulatory Environment, Intellectual Property and Data Protection
We may face risks relating to inadequate intellectual property protection and liability resulting from infringement by our products or solutions of third party proprietary rights.
Our success is dependent, to a significant extent, upon our proprietary technology. We currently hold 150202 U.S. patents and 6350 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 8977 patent applications pending in the United States and other countries. We rely on a combination of patent, trade secret, copyright and trademark law, together with non-disclosure and non-competition agreements, as well as third party licenses to establish and protect the technology used in our systems. However, we cannot assure you that such measures will be adequate to protect our proprietary technology, that competitors will not develop products with features based upon, or otherwise similar to our systems, that third party licenses will be available to us or that we will prevail in any proceeding instituted by us in order to enjoin competitors from selling similar products. In most of the areas in which we operate, third parties also have patents which could be found applicable to our technology and products. Such third parties may include competitors, as well as large companies, which invest millions of dollars in their patent portfolios, regardless of their actual field of business. Although we believe that our products and solutions do not infringe upon the proprietary rights of third parties, we cannot assure you that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
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We generally distribute our software products under software license agreements that restrict the use of our products by terms and conditions prohibiting unauthorized reproduction or transfer of the software products. However, effective copyrights and other intellectual property rights protection may be inadequate or unavailable to us in every country in which our software products are available, and the laws of some foreign countries may not be as protective of intellectual property rights as those in Israel and the United States.
In the past we received, from time to time, "cease and desist" letters alleging patent infringements. Although there are currently no formal infringement claims or other actions pending against us, in the event that we are required to defend ourselves against any such claims or actions we could be subject to substantial costs and diversion of management resources.
In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms, anyterms. Any of whichthese may have a material adverse impact on our business or financial condition.
We face risks relating to our use of certain “open source”"open source" software tools.
Certain of our software products contain a limited amount of open source code and we may use more open source code in the future. In addition, certain third party software that we embed in our products contains open source code. Open source code is code that is covered by a license agreement that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
As a result of our use of open source software, we could be subject to suits by parties claiming ownership of what we believe to be open source code and we may incur expenses in defending claims that we did not abide by the open source code license. In addition, third party licensors do not provide intellectual property protection with respect to the open source components of their products, and therefore we may not be indemnified by such third party licensors in the event that we or our customers are held liable in respect of the open source software contained in such third party software. If we are not successful in defending against any such claims that may arise, we may be subject to injunctions and/or monetary damages or be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenues and cash flow.
Moreover, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use an open source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our competitors may have access to our products without cost to them, which could harm our business.
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We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. The use of such open source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts.
If we fail to prevent information security breaches, our operations, financial condition and reputation may be harmed.
Our services involve the storage and transmission of customers' proprietary information, and security breaches could expose us to a risk of loss of this information and possible liability. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT data, our customers' data or our data, including our intellectual property and other confidential business results of operations and financial condition could be materially adversely affected by changes in the legal and regulatory environment.information.
Cyber security attacks are becoming increasingly sophisticated and in many cases may not be identified until a security breach actually occurs. If we fail to recognize and deal with such security attacks and threats and if we fail to update our products and solutions and prevent such threatened attacks in real time to protect our customers' or consumerother parties' sensitive information, whether retained in our systems or by our customers using our products, our business and reputation will be harmed.
Third parties may attempt to breach our security measures or inappropriately take advantage of our solutions, including our SaaS and hosting services, through computer viruses, electronic break-ins and other disruptions. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data, our data or our systems. Furthermore, our customers may authorize third party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our services. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our business.future sales, disrupt our business and lead to legal liability.
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Risks Relating to Regulatory Environment
Changes in the legal and regulatory environment could materially and adversely affect our business, results of operations and financial condition.
Our business, results of operations and financial condition could be materially and adversely affected if laws, regulations or standards relating to our business and products, us or our employees (including labor laws and regulations) are constantly implemented or changed. Such implemented laws and regulations include requirements in the United States, Europe and other territories in relation to, data privacy and protection, anti-bribery and anti-corruption, import and export, labor, tax and environmental and social issues. It is expected that the recently appointed administration in the U.S. will promulgate new or amended or abolish regulations that may impact our customers' business or our operations, such as Dodd –Frank Act or consumer protection laws, and which may reduce the demand for our products and services and may adversely affect our results of operations.
From time to time, we may also operate pursuant to specific authorizations of, and commitments towards, U.S., Israeli or other governmental authorities and agencies. While we make every effort to comply with such requirements, we cannot assure you that we will be fully successful in our efforts, and that our business will not be harmed. Failure to comply with such laws, regulations, authorizations and commitments could results in fines, damages, civil liability and criminal sanctions against us, our officers and our employees, prohibitions on the conduct of our business and damage to our reputation.
We believe there is a global trend toward adoption and enforcement of data privacy, information security and cyber related legislation and procedures. Regulations or interpretive positions may be enforced specifically with respect to the use of SaaS and hosting services and other outsourced services. Adoption of such legislation and regulations may require that we invest in the modification of our solutions to comply with such legislation and regulations, cause a reduction in the use of our solutions and services or subject ourselves or our customers to liability resulting from a breach of such regulations. If we are unable to comply with these specific requirements or guidelines, or privacy and information security legislation in handling this information, we failgeneral, it could materially adversely affect our business and results of operations.
Failure to comply with privacy legislation or procedures we couldmay cause us to incur civil liability to government agencies, customers, shareholders and individuals whose privacy wasmay have been compromised.
In addition, our revenues would be harmedadversely affected if we fail to adapt our products and services to changes in rules and regulations applicable to the business of certain of our clients, such as rules and regulations regarding securities trading, broker sales compliance and anti-money laundering, laws and regulations, which could have an impact on their need for our products and services. There are growing compliance and regulatory initiatives and changes for corporations and public organizations around the world that are driven by events and concerns such as accounting scandals, security threats and economic conditions.
While we attempt to prepare in advance for these new initiatives and standards, we cannot assure you that we will be successful in our efforts, that such changes will not negatively affect the demand for our products and services, or that our competitors will not be more successful or prepared than us. Alternatively, a reduction in the implementation of compliance and regulatory requirements in the industries in which we operate could result in a decrease in demand, which could materially and adversely affect our business and results of operations.
In certain industries in which we operate, there may be regulations or guidelines for use of SaaS and hosting services that mandate specific controls or require enterprises to obtain certain approvals prior to outsourcing certain functions. In addition, we may be limited in our ability to transfer or outsource business to certain jurisdictions, and may be limited in our ability to undertake development activity in certain jurisdictions, which may impede on our efficiency and adversely affect our business results of operations.
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The accounting method for convertible debt securities that may be harmed.settled in cash, such as the Notes, may have a material effect on our reported financial results.
In addition, convertible or exchangeable debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method if we have the ability and intent to settle exchanges in cash, the effect of which is that the ADSs deliverable upon exchange of the Notes are not included in the calculation of diluted earnings per share except to the extent that the exchange value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of ADSs that would be necessary to settle such excess (if we elected to settle such excess in ADSs) are deemed issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of our solutions, including our SaaS and hosting services, which could be the target of hackers and other criminals who wish to gain access to such information. The occurrence of information security breaches (or the belief that any such breach has occurred) in the internal and external operation of our business or by third parties using our products and solutions could harm our business, financial condition and operating results. Cyber security attacks are becoming increasingly sophisticated and in many cases may not be identified until a security breach actually occurs.treasury stock method. If we failare unable to recognize and deal with such security attacks and threats and to updateuse the treasury stock method in accounting for the ADSs deliverable upon exchange of the Notes, our products and solutions and prevent such threatened attacks in real time to protect our customers’ or other parties’ sensitive information, whether retained in our systems or by our customers using our products, our business and reputation willdiluted earnings per share would be harmed.
If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002,over financial reporting, it could have a material adverse effect on our business, operating results, and share price.the price of our ordinary shares and ADSs.
Risks Relating to our Presence in Israel
We are subject to the political, economic and security conditions in Israel.
Our headquarters, and primary research and development facilities, as well as the facilitiesand a substantial percentage of Flextronics Israel Ltd., our key manufacturer,manufacturing capabilities, are located in the State of Israel, and we are directly affected by the political,Israel. Political, economic and securitymilitary conditions to whichin Israel is subject.directly affect our operations. Since the establishment of the State of Israel, in 1948, a number of armed conflicts have taken place, between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. In past years there was a high level of violenceintensity. There have been ongoing hostilities between Israel and the Palestinians, including continuous rocket and missile attacks on certain areas of the country over the last couple of years, and negotiations between Israel and representatives of the Palestinian Authority in an effort to resolve the state of conflict have been sporadic and have failed to result in peace. The establishment in 2006 of a government in the Gaza territory by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. During the last several years, Israel has engaged in armed conflicts with Hamas, which involved additional missile strikes from the Gaza Strip into Israel and disrupted most day-to-day civilian activity in the proximity of the border with the Gaza Strip.years. There can be no assurance that such attacks will not hithave an impact our premises or major infrastructure and transport facilities in the country, which may have a material adverse effect on our ability to conduct business. Recent political events
Israel also faces threats from Hezbollah militants in Lebanon, from ISIS and continuous unrestrebel forces in various countries in the Middle East, including Israel’sSyria, and from Iran. Moreover, some of Israel's neighboring countries (including the ongoing civil war in Syria), have shaken and continue to impact the stability of those countries. In addition, Iran has threatened to attack Israel, is known to have long range missiles, which could hit every location in Israel, and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon, which could result in rocket and missile shooting towards Israel.recently undergone or are undergoing significant political changes. Any of these situations could escalate in the future and turn violent, which could affect the Israeli economy generally and us in particular, and have a severenegative impact on our ability to operate. In addition, acts of terrorism, armed conflicts or political instability in the region could negatively affect global and local economic conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political developments involving Israel or the Palestinians or other countries in the Middle East or North Africa. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional companies may restrict doing business with Israel and Israeli companies or boycott Israel as a result of an increase in hostilities or due to disagreement with Israel’sIsrael's policies and agenda. This may also seriously harm our operating results, financial condition and the ability to expand our business. Our products are heavily dependent upon components imported from, and most of our sales are made to, countries outside of Israel. Accordingly, our business, financial condition and results of operations could be materially adversely affected if trade between Israel and its present trading partners were interrupted or curtailed.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Some of our officers and employees are obligated to perform up to 36 days of annual military reserve duty, and inin the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be called to active duty at any time, for extended periods of time and on very short notice. notice. The absence of a number of our officers and employees for significant periods could disrupt our operations and harm our business. We cannot assess the full impact of these obligations on our workforce or business if conditions should change.
Service of process upon us, our Israeli subsidiaries, our directors and officers, and the Israeli experts, if any, named in this annual report, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and substantially all of our directors, officers, and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may be difficult to collect within the United States. Additionally, it may be difficult to enforce civil liabilities under U.S. federal securities law in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
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Subject to specific time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary or compensatory judgment in a non-civil matter, provided that the following conditions are met:
| · | subject to limited exceptions, the judgment is final and non-appealable; |
| · | the judgment was given by a court competent under the laws of the state in which the court is located and is otherwise enforceable in such state; |
| · | the judgment was rendered by a court competent under the rules of private international law applicable in Israel; |
| · | the laws of the state in which the judgment was given provides for the enforcement of judgments of Israeli courts; |
| · | adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; |
| · | the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; |
| · | the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and |
| · | an action between the same parties in the same matter was not pending in any Israeli court at |
We currently benefit from local government programs as well as international programs and local tax benefits that may be discontinued or reduced.
We derive and expect to continue to derive significant benefits from various programs including Israeli tax benefits relating to our “Preferred Enterprise”"Preferred Technology Enterprise" programs and certain grants from the National Association for Technology and Innovation (formerly known as the Office of the Chief Scientist of the Ministry of Economy, (or “OCS”Economy) of the State of Israel (the "NATI"), for research and development.
To be eligible for tax benefits as a Preferred Technology Enterprise, we must continue to meet certain conditions. While we believe that we meet the statutory conditions to entitle us to previously obtained Israeli tax benefits, there can be no assurance that the tax authorities in Israel will concur. Should it be determined that our Preferred Enterprise programs have not, or do not meet the statutory conditions, our provision for income taxes will increase materially.
To be eligible for OCS-relatedNATI-related grants and benefits, we must continue to meet certain conditions, including conducting the research, development, manufacturing of products developed with such OCSNATI grants in Israel (unless a special approval has been granted for performing manufacturing activities outside Israel) and as of 2012, providing the OCSNATI with an undertaking that the know-how to be funded and any derivatives thereof is wholly owned by us, upon its creation. Under Israeli law, products incorporating know-how developed with grants from the OCS are required to be manufactured in Israel, unless prior approval of a governmental committee is obtained. As a condition to obtaining this approval, we may be required to pay to the OCS up to 300% of the grants we received and to repay these grants on an accelerated basis, depending on the portion of manufacturing performed outside Israel. In addition, we are prohibited from transferring to third parties the know-how developed with these grants without the prior approval of a governmental committee and, possibly, the payment ofpaying a fee. See Item 4, “Information"Information on the Company—Research and Development”Development" in this annual report, for additional information about OCSNATI programs.
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If grants, programs and benefits available to us or the laws, rules and regulations under which they were granted are eliminated or their scope is further reduced, or if we fail to meet the conditions of existing grants, programs or benefits and are required to refund grants or tax benefits already received (together with interest and certain inflation adjustments) or fail to meet the criteria for future Preferred Technology Enterprises, our business, financial condition and results of operations could be materially adversely affected including an increase in our provision for income taxes.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, us,our company, which could prevent a change of control.control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, and tender offers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to someour shareholders whose country of our shareholders.residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These and other similar provisions could delay, prevent or impede an acquisition of us. us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
See Item 10, “Additional"Additional Information—Mergers and Acquisitions”Acquisitions" in this annual report, for additional discussion about someregarding anti-takeover effects of Israeli law.
Risks relatedRelating to our Ordinary Shares and ADSsSecurities
Numerous factors, some of which are beyond our control, may cause the market price of our ADSs, ordinary shares or our ADSs, each of which represents one ordinary share,and the Notes to fluctuate significantly. These factors include, among other things, announcements of technological innovations, developmentthings:
| · | Quarterly variations in our operating results; |
| · | Changes in expectations as to our future financial performance, including financial estimates by securities |
| · | Perceptions of our company held by analysts and investors; |
| · | Additions or departures of key personnel; |
| · | Announcements related to dividends; |
| · | Development of or disputes concerning our intellectual property rights; |
| · | Announcements of technological innovations; |
| · | Customer orders or new products by us or our competitors; |
| · | Acquisitions or investments by us or by our competitors and partners; |
| · | The exchangeability of the Notes for ADSs; |
| · | Hedging or arbitrage trading activity involving ADSs by holders of the Notes; |
| · | Modification of hedge positions by counterparties to the hedge transactions we entered into simultaneously with the issuance of the Notes, including the possible entry into or unwinding of derivative transactions with respect to the ADSs or the purchase or sale of the ADSs or other NICE securities in secondary market transactions; |
| · | Currency exchange rate fluctuations; |
| · | Earnings releases by us, our partners or our competitors; |
| · | General financial, economic and market conditions; |
| · | Political changes and unrest in regions, natural catastrophes; |
| · | Market conditions in the industry and the general state of the securities markets, with particular emphasis on the technology and Israeli sectors of the securities markets; and |
| · | General stock market volatility. |
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Our ADSs and ordinary shares are traded on different markets and this may result in price variations.
Our ADSs have been listed on The NASDAQ Stock Market since 1996 and our ordinary shares have been traded on the Tel Aviv Stock Exchange, or disputes concerningthe "TASE", since 1991. Trading in our intellectual property rights, customer orders or new products by us orsecurities on these markets takes place in different currencies (our ADSs are traded in U.S. dollars and our competitors, acquisitions or investments by us or by our competitorsordinary shares are traded in New Israeli Shekels), and partners, currency exchange rate fluctuations, earnings releases by us, our partners or our competitors, general economicat different times (resulting from different time zones, different trading days and market conditions, political changes and unrest in regions, natural catastrophes, market conditionsdifferent public holidays in the industryUnited States and Israel). As a result the general statetrading prices of our securities on these two markets may differ due to these factors. In addition, any decrease in the price of our securities on one of these markets with particular emphasiscould cause a decrease in the trading price of our securities on the technology and Israeli sectorsother market.
Substantial future sales or the perception of the securities markets.
Additionally, future exchanges of the Notes for ADSs, or the perception that these exchanges may occur, could reduce the market price of the ordinary shares or ADSs. This could also impair NICE's abilities to raise additional capital through the sale of its securities.
The market prices of the ordinary shares and the ADSs, which may fluctuate significantly, will directly affect the market price for the Notes.
We expect that the market price of the ordinary shares and the ADSs will affect the market price of the Notes. This may result in greater volatility in the market price of the Notes than would be expected for non-exchangeable notes. The market price of the ordinary shares and the ADSs will likely fluctuate in response to a number of factors, many of which are beyond our control. Holders who receive ADSs upon exchange of the Notes will therefore be subject to the risk of volatility and depressed prices of ADSs. In addition, we deem appropriate. Followingexpect that the market price of the Notes will be influenced by yield and interest rates in the capital markets, our creditworthiness and the occurrence of certain events affecting us that do not require an acquisition,adjustment to the exchange rate. Fluctuations in yield rates in particular may give rise to arbitrage opportunities based upon changes in the relative values of the Notes and ADSs. Any such arbitrage could, in turn, affect the market prices of ADSs and the Notes.
Holders of our ADSs held by new holders may become freely tradable.are not treated as shareholders of our company.
Holders of our ADSs are not treated as shareholders of our company unless they withdraw the ordinary shares underlying the ADSs from the depositary, which holds the ordinary shares underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our company, other than the rights that they have pursuant to the deposit agreement with the depositary.
We have not registered, and do not currently intend to register, the Notes, the ADSs into which the Notes are exchanged or exchangeable or the ordinary shares represented thereby. There are restrictions on Noteholders' ability to transfer or resell the Notes, ADSs and the underlying ordinary shares.
The Notes, the ADSs deliverable upon exchange of the Notes and the ordinary shares represented thereby were offered and sold pursuant to an exemption from registration under the Securities Act and applicable state securities laws, and we have not registered, and do not currently intend to register, the Notes, the ADSs or such ordinary shares. Therefore, Noteholders may transfer or resell the Notes only in a transaction registered under or exempt from the registration requirements of the Securities Act and applicable state securities laws, and may be required to bear the risk of their investment for an indefinite period of time.
The fundamental change and make-whole fundamental change provisions of the Notes may delay or prevent an otherwise beneficial attempt to acquire our company.
The fundamental change prepayment rights of the Noteholders under the Notes, which would allow Noteholders to require that we prepay all or a portion of their Note upon the occurrence of a fundamental change, and the provisions under the Notes requiring an increase to the exchange rate for exchanges in connection with a make-whole fundamental change, in certain circumstances may delay or prevent an acquisition of NICE that would otherwise be beneficial to our shareholders.
Company Background
NICE was founded on September 28, 1986, as NICE Neptun Intelligent Computer Engineering Ltd., and on October 14, 1991 was renamed NICE-Systems Ltd. On June 6, 2016 we were renamed NICE Ltd., which is our legal and commercial name. NICE is a company limited by shares organized under the laws of the State of Israel. Our headquarters are located at 13 Zarchin Street, P.O. Box 690, Ra'anana 4310602, Israel (Tel. +972-9-775-3151). In the United States, our subsidiary, NICE Systems, is located at 221 River Street, Hoboken, New Jersey 07030.
In the last three fiscal years, our principal capital expenditures were the acquisition of other businesses, repurchases of our ADRs and distributions of dividends. For information regarding our acquisitions and ordinary share repurchases, please see Item 5, "Operating and Financial Review and Prospects—Recent Acquisitions," and "Liquidity and Capital Resources," in this annual report. For additional information regarding our ordinary share repurchases, please also see Item 16E, "Purchases of Equity Securities by the Issuer and Affiliated Purchasers," in this annual report.
For a breakdown of total revenues by products and services and by geographic markets for each of the last three years, please see Item 5, "Operating and Financial Review and Prospects – Results of Operation," in this annual report.
About NICE
NICE Systems is a global leading software company enabling enterprisesleader in omnichannel analytics and security-sensitivecloud solutions for the Customer Engagement and Financial Crime & Compliance markets.
Our mission is to empower organizations to make smart business decisions through deep human understanding.
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We provide software solutions that help organizations understand their customers and employees and predict their intentions and their needs to create exceptional customer experiences, understand their workforce to drive greater efficiency, and identify suspicious behaviour to prevent financial crime and non-compliant activities.
We do this by providing customer engagement platforms, capturing interactions and transactions across multiple channels and sources and applying best-in-class analytics to this data to provide real-time insight and uncover intent. NICE helps its customers improve their service and security by applying machine learning to cross-industry data and offering customers collective insights. Our solutions allow organizations to operationalize this insight and embed it within their workflows and daily business processes.
NICE is at the forefront of two industry transformations: the adoption of cloud-delivered fully-integrated customer engagement platforms and the shift of financial institutions to integrated risk management platforms for handling end-to-end financial crime prevention.
In both cases, deep integration of process automation and analytics enables customers to achieve much greater effectiveness and efficiency.
Our advanced technologies and core competencies around customer interaction platforms, data capture, process automation, advanced real-time analytics and cloud services were developed organically and through multiple acquisitions.
We rely on several key assets to drive our growth:
· Our loyal customer base. Today, more than 25,000 organizations in over 150 countries, including 85 of the Fortune 100 companies, are using NICE solutions.
· Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
· Our market-leading products and technologies for customer engagement, data capture, analytics, and cloud, which are protected by a broad array of patents.
· Our ability to quickly drive mainstream adoption for innovative solutions and new technologies, which we introduce to the market through our direct sales force and distribution network.
· Our skilled employees and domain expertise in our core markets allows us to bring our customers the right solutions to address three main aspectskey business challenges and build strong customer partnerships.
· Our services, customer support and operations, which enable our customers to quickly enjoy the benefits of people’s lives: preventing financial crimesour solutions, with multiple deployment models in the cloud or on-premises throughout the world and fraud, ensuring securitysupport for full value realization and public safety and providing perfect customer experiences.success.
We have established a leadership position in many of our areas of operation throughby offering comprehensive and innovative enterprise-grade solutions and technologies, continuous development oftechnologies. Our customers, across all sizes and verticals, including banking, telecommunications, healthcare, insurance, retail, travel, public safety, state and local government and more, are benefiting from the tangible and practical business value that our product portfolio, deep domain expertise, global reach, and agile response to changes in our industry.
Business Overview
NICE is an industry leader operating in threetwo main business areas:markets: Customer Engagement and Financial Crime & Compliance. NICE's long term strategy is to strengthen its leadership position in these two market segments and further enhance its position in adjacent markets. During 2016, NICE achieved significant milestones in executing its long term strategy, including the acquisitions of inContact and Nexidia, which significantly enhanced our position as the leader in the Customer Engagement market.
Customer Engagement
Organizations that serve consumers are challenged to provide high quality service that is responsive to their customers' ever-changing needs and to differentiate themselves through efficient and effective customer engagement. In addition, they have to find ways to leverage customer interactions preventing financial crimes and fraudgenerate upsell opportunities. They need to accomplish these objectives while containing operational costs and security and public safety.
adhering to regulations. NICE Customer InteractionsEngagement solutions help organizations address these challenges.
NICE is a global leader in the Customer Interactions Solutions.Engagement market. Our portfolio of solutions serves thousands of organizations worldwide, transformingproviding an omnichannel customer engagement platform, data-driven insights that empower businesses to deliver consistent and personalized experience across the way theycustomer journey, delivered both on-premises and in the cloud. Additionally, our solutions optimize business performance and ensure compliance.
Our solutions serve contact centers, self-service channels, back office operations and retail branches, spanning multiple industries, including: banking, telecommunications, insurance, healthcare, business process outsourcing (BPO), government, utilities, travel, entertainment and e-commerce.
Our customers use our solutions to engage with their customers across communication channels and touch points.
With an engaged workforce and understanding of the intent and journey of its consumers, NICE allows organizations to deliverprovide the effortless, consistent and personalized experience that customers expect, as well as improve operational efficiency, enhanceensure regulatory compliance and increase revenues.
Financial Crime and& Compliance
Following are the key trends that are driving demand for our solutions:
| · |
| · | Cloud adoption is accelerating and demand is expanding across segments. Cloud delivery is becoming increasingly popular in providing flexible and cost-effective deployment models for enterprise systems. These include SaaS, Contact Center as a Service, Infrastructure as a Service, Platform as a Service, and other cloud-based solutions. By using cloud solutions, customers of all sizes can scale quickly and easily in all geographic locations while paying only for the amount of resources they use. There are several market needs driving this trend, including the desire for business agility, the pressure to continually improve operational efficiency and innovate to reduce total cost of ownership (“TCO”), and to ease implementation complexity. |
| · | Proliferation of analytics as a main driver for successful customer engagement. Organizations are increasingly implementing a customer-centric strategy to get better visibility to their customers’ multi-channel journey. Organizations are now moving from simple Business Intelligence tools to focused decisioning and real-time action solutions – being proactive instead of reactive and predictive/prescriptive instead of descriptive. Front and back office functions seek to employ analytics to better optimize their operations. In addition, organizations today are exploring cognitive engagement solutions, like interactive computing, predictive analytics and machine learning. |
| · | Organizations look at |
| · | Automation and Machine Learning are increasingly used to enhance customer experience and efficiency |
| · | Preventing financial crime and ensuring stringent compliance and evolving regulatory environments. Financial services regulators are calling for a fundamental change in |
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| · | An |
| · |
Strategy
We intend to maintainincrease our market-leading position by continuing to offer aand expand our comprehensive portfolio of solutions, differentiated by itsthe ability to use analytics and machine learning to drive decisions and actions, addressing various business needs through multiple business needs.models. Our brand, global reach, financial resources, extensive domain expertise and ability to deliver solutions for large organizations will also contribute to increasing our leadingmarket-leading position.
In recent years we have significantly enhanced our cloud offering, and we will continue to expand this offering. The cloud offering enables us to grow our value to our existing customers, as well as expand NICE's reach to the mid-market, considerably increasing our addressable market size.
We also intend to continue developingdrive additional growth by continuing to develop our direct contactrelationship with customers, nurturing our partner ecosystem, and creating growth in each of our business areas. Additionally, we intend to lead in new product categories, as we introduce novel solutions and enter additional market segments.
Our products and technologies can provide value in markets that are adjacent to our existing markets, such as back office operations, alternative payment service providers, fintech and others. We plan to expand our market reach into such adjacencies, by adapting our products and leveraging technology as well as our customer relationships and brand to expand our addressable market.
Continuing to deliver more comprehensive solutions to our existing customers
One of our main assets is our customer base. We believe there are many opportunities to up-sell and cross-sell within our existing customer base. This includes increasing our customers’customers' exposure to the full breadth of our solutions, migrating them to our next-generation portfolio, and providing them the benefits of our new and expanded offerings.
Continuing organic innovation and development, while also pursuing acquisitions
We intend to continue investing in innovation and development and plan to continue augmenting our organic growth with additional acquisitions that broaden our product and technology portfolio, expand our presence in selected vertical and adjacent markets and geographic areas, broaden our customer base, and increase our distribution channels.
Maximizing the synergetic potential across some of our businesses
While we bring deep domain expertise to a diverse set of industries, most of our solutions are based on the same methodology of capturing and analyzing massive amounts of structured and unstructured data, and driving automatic decisioning and guidance in real time. Thus, an important pillar of our corporate strategy is to maximize the synergies and cooperation between our business areas, where possible.
Introducing joint offerings and combining go-to-market efforts, as well as leveraging extensive complementary domain expertise, technological know-how, capabilities and development, are expected to enable us to grow our business through additional cross-sell and up-sell opportunities. Moreover, this synergetic approach reflects a core NICE value of nurturing a corporate culture focused on delivering encompassing and high-quality customer service.
Providing innovative, real-time analytics and machine learning and cross-channel solutions with significant impact onfor our customers’customers' businesses
Our solutions address the growing, unmet need to more accurately analyze and extract meaningful information from structured and unstructured data in real time; and to do so across multiple channels, in a wide variety of businesses and operational environments. We enable our customers to embed both real-time and offline analytics into their business processes, positively impacting these processes as they occur, which in turn has a positive impact on their businesses.
We plan to continue to enhance our capabilities in operationalizing Big Data with analytics, behavior prediction, decisioning and guidance. We also plan to continue enabling companiesorganizations to address the full lifecycle of interactions, transactions and events (i.e., before, during, and after they occur).
Offering an enterprise software business model
Our strategy is to offer our solutions in alignment with both on-premises and cloud-based enterprise software business models. Currently,
In the largest portion of our license sales is based on the perpetual licenseon-premises model under which customers purchase a license to use our software indefinitely, while also purchasing related professional services and annual software maintenance. We also offer some of our solutions under a term license, according to which customers purchase a license to use our software for a fixed period of time.
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We offer many of our solutions in cloud-based models, - either as a hosted license or as SaaS, providing our customers access to faster innovation, more flexibility as well as a lower TCO. Some customers prefer these models, as they lower the costs of deployment and allow them to scale the solutions faster, while reducing capital investments. We see a growing demand for these models and they could enhance our penetration into the smaller business market segment, as well as enable our existing customers to broaden their use of our products. We intend to continue offering our solutions in a variety of models, which enables us to be flexible in effectively addressing our customers’customers' needs. This, in turn, will enable us to focus on growth and improving profitability.
An increase in the proportion of recurring revenue (both from recurring maintenance and cloud sales) out of our overall revenue mix, is expected to provide increasingly predictable revenue streams.
Customer Engagement Business Strategy
Our strategy is to extend our market leading position in the customer engagement space, while continuing to expand beyond the contact center to the different customer experience channels and touch points with multiple delivery models. We will achieve that by providing solutions that focus on:
| · | Introducing the next-generation Customer Engagement platform, the Experience Center: Combining omnichannel routing, self-service, customer journey analytics, adaptive WFO and automation in the cloud. |
| · | Creating cloud transformation across the Customer Engagement portfolio for all segments and regions, to enhance flexibility, agility and lower TCO. |
| · | Providing a comprehensive suite of customer service essentials, from predictive omnichannel routing and WFO to advanced analytics based applications. |
| · | Infusing Analytics into each and every element of customer engagement. |
| · | Transforming the workforce through Adaptive Workforce Optimization (Adaptive WFO), by creating and managing agent personas through enhancement of the employee experience and engagement, in order to drive their motivation and reduce attrition. |
| · | Leveraging Artificial Intelligence and advanced process automation technologies to dramatically reduce routine employee activities and improve the efficiency of customer engagement solutions |
| · | Extending and increasing our offering to the SMB market segment, through cloud offerings. |
| · | Analyzing individual customer journeys and operationalizing the insights extracted to create business value in real-time for customer experience stakeholders. |
| · | Understanding the voice of the customer, across all touch points, and taking action to address the needs of Customer Experience Officers and other stakeholders in the marketing department. |
| · | Offering solutions to all customer touchpoints implemented in the contact center, as well as solutions that benefit back office operations, retail branches, and self-service channels. |
Financial Crime and Compliance Business Strategy
We plan to continue extending our market leading position by focusing on:
| · | Delivering integrated financial crime and compliance solutions that help financial services organizations to identify issues faster and earlier. |
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| · | Leveraging Big Data, machine learning and other advanced technologies, integrated with our financial crime and compliance platform to help customers reduce cost of operations. |
| · | Continuing to cross-sell and up-sell into our existing customer base around the world. |
| · | Continuing to focus on tier 1 clients by providing them with solutions to meet their needs via cloud and on-premise models. |
| · | Leveraging cloud and SaaS to expand the reach of our solutions to tier 2 customers, thereby providing us an opportunity to significantly enhance our addressable market. |
| · | Partnering with world-class consultancy and other firms to identify additional significant opportunities. |
| · | Increasingly selling holistic solutions, combining Financial Crime and Compliance offerings with Customer Engagement offerings. |
| · | Offering our solutions to verticals outside of the traditional financial services, such as gaming, energy, insurance, healthcare, industry regulators, government agencies, and alternative payments providers. |
Our Solutions
I. Customer InteractionsEngagement
Our Solutions’Solutions' Core Capabilities
Omnichannel Routing enables organizations to run their contact center in the cloud, route contacts and interactions to ensure agents positively and productively interact with customers on any channel. Organizations gain business flexibility by quickly deploying agents anytime, anywhere for maximum operational flexibility and implementing routing and interactive voice, IVR and digital channel response changes in hours, not months.
Omnichannel Recording and Interaction Management enables organizations to capture unstructuredstructured and structuredunstructured customer interaction and transaction data from multiple channels, including: phone calls, chats, emails, videos, customer feedback, web sessions, social media postings, and walk-in centers.
Employee Engagement enables organizations to improve agent's individual productivity, identify performance gaps, deliver targeted coaching, and effectively forecast workloads and schedule staff in an adaptive manner. It fosters performance-driven operations and culture, leverages the power of advanced analytics, and embeds the voice of the customer into daily operations to engage employees.
Customer InteractionsJourney Solutions enables organizations to analyze the entire customer journey across the various touchpoints, transactions and events. This solution allowsThese solutions allow our customers to gethave a comprehensive view of the customer intents and actions acrossthroughout their journey with the organization. Customer Interactions leveragesjourney. They also leverage Big Data infrastructure and predictive analytics models to identify and sequence individual customer’scustomer interactions across time and touch points.points, including calls, text, IVR, web, self-service and others. With this analysis, organizations can understand the context of each contact, uncover patterns, predict needs and personalize interactions in real time.
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Real-time DecisioningProcess Automation and Guidance isenables organizations to have a real-time decisioning engine whichthat supports business decisions. The engine draws on business rules and predictive models to automate mundane manual tasks through process insights derived from analytics that are applied while interactions are taking place, as an interaction is underway.well as post interactions or in batch mode. This combination enables organizations to make the right decision during individual interactions and across a mass number of interactions, which in turn drives future next-best-action guidance in real time through process automation.
The combination of the above capabilities enables organizations to operationalizeimprove customer insights across service, salesexperience and marketing processes.achieve business and operational goals. Solutions are available individually or as an integrated whole.
Addressing Business and Operational Needs
1. 1.Omnichannel Routing
Solution | Description |
Automatic Contact Distributor (ACD) and Interactive Voice Response (IVR) | Ensure customer requests are routed to qualified agents or resolved with self-service through a skills-based omnichannel routing engine that provides a universal queue for real-time interaction management, and a consolidated interface with a seamlessly integrated IVR for routing strategies across all supported channels. |
Personal Connection | Provide inside sales an easier way to attain quota by connecting with more prospects every day and customer service the ability to reduce inbound calls through personalized, low cost, and proactive outbound notifications. |
Customer Engagement Channels | Enable contact centers to service customers via any channel, with extensive routing options, consolidated reporting and a state-of-the-art agent interface. Channels include inbound and outbound voice, callback, voicemail, email, chat, text/SMS, Social Media and work items. Other channels, such as video, are implemented using work items. |
2. Voice as a Service
Solution | Description |
Network and Voice Connectivity Solutions | Provide Voice as a Service network connectivity suite that delivers flexible and reliable telephony services built specifically for the contact center. Offering a full range of telephony options, with guaranteed voice quality. Through our partnership with a leading, independent 3rd party, proactive diagnostic tools and extensive telephony expertise we ensure 99.99%. |
3. Open Cloud Platform
Solution | Description |
CRM Integrations | Provide pre-built CRM integrations, such as the inContact Agent for Salesforce, empower agents to personalize omnichannel customer service. They provide seamless, bidirectional CRM integrations with your contact center that increase agent efficiency and independence by delivering a real-time 360-degree view of the customer. |
UCaaS Integrations | Provide pre-built or partner-provided integration with Unified Communication tools that enables seamless collaboration between contact center agents and experts in their organization. This easy to deploy integration provides a single solution for formal and informal contact center agents. |
APIs | Empower organizations to customize and integrate their contact center with other business critical solutions to create the optimal customer service environment. |
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4. Compliance and Risk
Solution | Description |
Compliance Omnichannel Recording | Proactively captures and retains all customer interactions across multiple touch points to help ensure compliance with government regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act |
| Trading Floor Compliance Solutions | |
| Essential Compliance | Enables trading floors to record and store transactions and interactions in any media, as well as |
| Communication Surveillance | Monitors trading activity across trading turrets, fixed and mobile phones, email, text and instant messaging, chat and social media. It automatically detects potential risks and enables compliance officers to see emerging trends, so that compliance breaches and fraud can be averted. It also enables firms to meet the requirements of the regulatory environment established with the introduction of the Dodd-Frank Act, and related rules and regulations. |
| Complaint Management | Enables organizations to use analytics to identify interactions at risk, and manage the process of handling the complaint. |
Compliance and Script Adherence | Monitors agent interactions, searches for any phrase, at any time, and utilizes the phrases in issue resolution and training exercises. Incorporates real-time monitoring and alerting to guide towards required behaviors. Knows which calls are contained in the audio and helps ensure reading for an audit. |
Solution | Description |
Contact Center Omnichannel Recording | Provides comprehensive call recording technology that adapts easily to the unique operational requirements of any contact center. It supports virtually any telephony environment |
| Performance Management | Maps enterprise business objectives to group and individual goals, and tracks and reports performance. It also automates critical managerial activities, including employee coaching, recognition, and performance improvement, allowing front-line managers to become more effective and efficient in developing their teams. Performance Management also includes unique capabilities, such as gamification, to engage and motivate and align employees around common and personalized business goals. |
| Workforce Management | Forecasts |
| Quality | Automates quality assurance processes and selection of calls for evaluation based on performance data. The solution facilitates root-cause evaluation, with easy drill down to interactions missing their Key Performance Indicator targets. Quality improvement is thus managed across voice, email, chat, and social media |
| Nexidia Interaction Analytics | Analyzes large quantities of customer interactions across multiple channels in real time to identify hot topics and root causes quickly, and to produce actionable insights. These insights are then leveraged to improve processes, enhance customer experience, increase sales, optimize marketing campaigns and reduce operational costs. |
| Back Office Workforce Optimization | Automates manual processes, integrates data from |
| Real-time Authentication | Leverages voice biometrics for authenticating customers in real time. |
| Call Volume Optimization | Leverages Big Data infrastructure and advanced predictive analytics to help organizations resolve customer needs in one contact, to predict and |
| Real-time | Automatically monitors agent activity in real time, enabling organizations to identify process bottlenecks and implement best practices. With this information, the solution navigates agents through complex processes using on-screen guidance, and automates routine tasks to shorten handle time and eliminate manual processing errors. |
| Interactive Voice Response ("IVR") Optimization | The IVR Optimization solution enables customers to reduce customer effort by increasing IVR containment rate, reducing IVR repeat calls, agent transfers, drop-offs and deflections and dramatically improving call center efficiency. |
| Robotic Automation | Robotic solution for the automation of routine back office and contact center processes. Operated on virtual machines and monitored centrally, these robots handle end-to-end processes, essentially performing any routine task which the human user would otherwise do manually. |
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6. Customer Experience
| Solution | Description |
| Total Voice of the Customer | Collects and analyzes comprehensive data from multiple interaction touch points and channels; analyzes interactions in real time and provides guidance on the next-best-action; proactively |
| Customer Journey Optimization | |
Customer Satisfaction | Understands the business practices and behaviors that drive customer satisfaction. Simplifies the customer experience, through methods such as quicker caller identification. Attracts new customers by offering an easier path to service than the competition. Statistically determines which business processes and agent behaviors have the greatest impact on customer behavior. |
Customer Churn | Analyzes historic defection data to create models for predicting future churn. Understands causes and effects of customer churn and how to design procedures to reduce the defection rate. Prioritizes at-risk customers based on search results combined with customer data. Collects information to refine retention marketing offers that are better tailored to customer types and demographics. |
Solution | Description |
Sales Performance Management | Provides the end-to-end ability to create, manage and distribute all aspects of a commissions program. It automates the process of commission, bonus and incentive administration, in support of any type of variable pay system that rewards employees for achieving targets aligned with the business strategy. |
| Uses customer intelligence, predictive models and machine learning to make insightful, real-time personalization decisions during customer interactions over the Web. The solution helps organizations improve customer retention, increase online conversion rates, and deliver better service by taking the next-best-action. | |
| Sales Effectiveness | Helps organizations optimize their campaigns. Locates and quantifies specific events by building the right metrics to align with corporate objectives such as offers made versus up-sell opportunities. Correlates data points such as customer spend and purchase history to build predictive models, prioritizing customers with a propensity to buy and create the next-best offer. Identifies high-performing agents, and bases best practices off their behavior. Establishes thresholds and works with agents, measuring performance against sales driven metrics. |
8. Public Safety Incident Debriefing and Investigation
Solution | Description |
NICE Inform | Enables public safety agencies and organizations across various industries to capture, consolidate, synchronize and manage multimedia incident information efficiently and effectively. It captures and processes event information from a variety of media: radio and call audio, video, text, Computer-Aided Dispatch (CAD) systems, Geographic Information Systems, and others. |
| NICE Investigate | Automates and expedites the end-to-end collection, analysis and sharing of all digital case evidence – from Records Management Systems, CAD, interview room and emergency call audio, documents, photos, private and public CCTV, body-worn and in-car video, social media and more – to help facilitate building and clearing more cases faster. |
9. Public Safety Emergency Response Optimization
Solution | Description |
NICE Multimedia Recording | Addresses the needs of emergency communications, dispatch and air traffic control operations. The recording platform automatically records, analyzes, stores, quickly retrieves and instantly replays telephony, radio and IP voice calls, operator console screens and SMS Text-to-911. TDM and VoIP recordings can be used to ensure compliance with regulations, provide case or incident evidence, and manage and improve departmental quality and productivity. |
| NICE Inform | Helps emergency centers to effectively record, manage and derive valuable insights from today's higher volume and variety of communications. It captures multimedia communications and helps manage, synchronize and put incidents into context – saving time, money and resources, while ensuring quality and compliance. |
II. Financial Crime and Compliance
Our Solutions’Solutions' Core Capabilities
Core platform: Financial Crime and Compliance solutions (also known as NICE Actimize solutions) share a single, flexible and scalable core platform that enables financial institutions, financial services providers, and others to expand the use of the company’sNICE's solutions over time. This eases implementation and lowers total cost of ownership.
Multi-channel transaction management: The solutions are proven to capture and analyze thousands of financial transactions a second from a variety of sources and channels.
Domain-specific advanced analytics: Comprehensive, domain-specific solutions detect anomalous customer or employee behavior in real-time,real time, leveraging industry-proven analytics.
Real-time decisioning and enforcement: A real-time decisioning engine draws on analyzed data to trigger alerts that enable optimal enforcement and resolution. Built-in capabilities for comprehensive workflow and investigation allow effective alert management.
Solutions are available individually or as an integrated whole.
Addressing Business Needs
1. Enterprise Risk Management
Solution | Description |
Enterprise Risk Case Manager | Enables firms to better manage and mitigate organizational risk by providing a single view of risk across the business. It serves as a central platform for managing alerts, cases, investigations, link analysis, regulatory reporting, financial losses, oversight and more, across multiple lines of business, channels, products, and regions, turning them into actionable insights. |
2. Anti-Money Laundering - solutions available individually or as an integrated whole
Solution | Description |
Suspicious Activity Monitoring | Leverages transaction analytics to |
| Watch List Filtering | Provides enterprise-wide customer and transaction screening against multiple watch |
| Customer Due Diligence | Provides integrated risk-based rating and continuous monitoring of accounts throughout the entire customer life-cycle, from initial applicant onboarding to periodic re-screening of existing customers. It is an open, flexible platform that can adapt to unique requirements across business segments, regions, and jurisdictions. |
| CTR Processing and Automation | Provides seamless automated Currency Transaction Reporting |
| FATCA Compliance | Helps U.S. and non-U.S. |
| AML Essentials | Addresses the challenges of financial institutions, with coverage that includes Transaction Monitoring, Customer Due Diligence, and Sanctions Screening. Actimize AML Essentials, a cloud-based offering that uses the same power and experience as our enterprise solutions, AML Essentials offers rapid deployment and reduces overhead to make compliance easier and at a lower total cost of ownership. |
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3. Fraud Prevention - solutions available individually or as an integrated whole
Solution | Description |
Card Fraud | Enables card issuers, acquirers and processors to detect fraudulent transactions, whether ATM, PIN, signature point-of-sale, or without a physical card. Market leading profile based behavioral analytics takes into account all available transaction, reference and location data to provide holistic coverage of card and account takeover. Solution includes: The Actimize Digital & Mobile Wallet Fraud protects customers from digital account takeover, and protects organizations from fraud liability and negative brand reputation. Monitors and protects a full range of wallet activity, including card/account provisioning, card present and not present purchases, person-to-person transfers, bill payments, and account-service events. The Actimize Pre-Paid Card Fraud solution identifies and prevents fraud in the pre-paid sector. From ATM to point-of-sale (POS) and Card-Not-Present (CNP), all transactions can be identified, interdicted on and alerted in real time. |
| Remote Banking Fraud | Provides end-to-end protection against account takeover from online, mobile, IVR, and contact center transactions. Unique industry-leading analytic models accurately detect anomalies and patterns in real time and Actimize open analytics offer the flexibility to develop in-house models and strategies. A central "risk hub" enables the sharing of internal and third-party data from multiple channels for fraud and cyber detection, operations, and investigations. By accurately and efficiently coordinating customer lifetime value, transaction amounts and service history, the solution optimizes fraud prevention by offering greater insight into cross-channel |
| Commercial Banking Fraud | |
| Employee Fraud | |
| Deposit Account Fraud | Helps institutions minimize deposit fraud losses by providing comprehensive account activity monitoring. The solution |
| Authentication-IQ | Manages multiple authentication methods and risk-based decisions by creating a complete customer profile, based on historical authentication activity, account servicing, and transactional behavior which is then used to identify suspicious behavior at log-in or throughout a session, producing real-time actionable risk scores. Manages the process of step up authentication, choosing the appropriate method, producing alerts and enabling real-time interdiction. Provides alert and case management in a unified context to prioritize investigations and optimize workflow across the enterprise. |
4. Financial Markets Compliance - comprised of solutions available individually or as an integrated whole
Solution | Description |
Institutional Trade Surveillance | Provides scenario management for identifying market manipulation and abuse, fair dealings with customers, and insider trading across asset classes (such as equities, fixed income, swaps and futures). It includes specific tools for desk supervision, control room surveillance, and trade reporting practices, to ensure comprehensive oversight and sales and trading |
| Retail Trade Surveillance | Addresses organization-wide compliance needs across a broad range of retail sales practices relating to Know Your Customer |
| Employee Trade Surveillance | Detects Conflicts of Interest and Rogue Trading. It completely automates the submission, review and approval process for |
| Enterprise Conflicts Management | Offers a unified approach to maintain controls and detect conflicts of interest before they occur on a global, enterprise-wide scale. Enables organizations to effectively manage employee requests for personal trades by evaluating details of the proposed trade in real time and automatically determining if the request should be approved, rejected, or escalated to a supervisor for approval. The solution includes detection models that compare executions with the employee's trade request history to determine whether the trade was pre-cleared and approved and to reconcile the trade details with the terms and conditions of the approved trade request. |
| Sales Practices and Suitability | Provides coverage for a broad range of sales practices and |
Strategic Alliances
We sell our solutions and products worldwide, both directly to customers and indirectly through selected partners to better serve our global customers. We partner with companies in a variety of sales channels, including service providers, system integrators, consulting firms, distributors, value-added resellers and complimentary technology vendors. These partners form a vital network for selling and supporting our solutions and products. For our business partners, weWe have established the NICE Business Partner Program,a business partner program, which provides full support and a broad portfolio of sales tools to help them promote the NICE offerings, helping to drive mutual revenue growth and success.
We also have strategic technology partnerships in place to ensure full integration with NICE’sNICE's offerings, delivering value added capabilities that address a variety of technology environments.
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Professional Service and Support
The NICE Professional Services and Support organization enables our customers to derive sustainable business value from our solutions. NICE solutions, coupled with the experience, expertise and global presence of our Professional Services and Support teams, continue to assist our customers in meeting regulatory requirements, as well as the increasing demands of their customers.
The Professional Service and Support offerings focus on enabling and sustaining business value for our customers. We address all stages of the technology lifecycle, including defining requirements, planning, design, implementation, customization, optimization, proactive maintenance and ongoing support.
Enabling Value
Solution Delivery optimizes solution delivery and enables our customers to achieve their specific business and organizational goals, on time and on budget. NICE solutions are delivered by certified project managers, technical experts, and application specialists. We follow a proven methodology that includes business discovery to map solutions to business processes.
Business Consulting promotes customer success through value-added services targeted to improve business operations, by leveraging and integrating NICE solutions into the customer’scustomer's daily practices. This global consulting team consists of industry experts who have accumulated a broad portfolio of best practices and honed domain expertise, with extensive experience in implementing vertical market solutions for many industries. This helps our customers accelerate return on investment, increase revenue and minimize business costs.
Managed Analytics empowers organizations to meet short term objectives, such as lowering handle time or improving sales rates, along with achieving long term goals such as customer retention. Our team of experienced practitioners work with customers, guiding the process of collecting interactions, prioritizing subjects to study, conducting analysis and most importantly, developing plans that put the results of the analysis into action.
Customer Education Services provide users with the necessary knowledge and skills to operate NICE solutions and to leverage their capabilities to meet customer needs. These services are offered both before and after the deployment of NICE solutions.
Sustaining Value
Cloud Services ensure that solutions hosted in the NICE cloud run optimally, maximizing availability, performance and quality while ensuring the security of customer information. This includes: Hosting Operations, running our Hosting Centers; Development Operations, ensuring that our product development teams optimize our solutions for the cloud environment; and the Hosted Application Support team that operates the solutions, ensuring up-time, scalability and security.
Customer Support and Maintenance responds to customer requests for support on a 24/7 basis, using advanced tools and methodologies. NICE offers flexible service level agreements (“SLAs”) to meet our customers’customers' needs. Our solutions are generally sold with a warranty for repairs of hardware and software defects or malfunctions. Software maintenance includes an enhancement program with (in the majority of cases) an ongoing delivery of “like-for-like”"like-for-like" upgrade releases, service packs and hot fixes. NICE also offers Technical Account Management service or TAM. The TAM is a designated manager responsible for escalation management and overall customer care services.
| · | Proactive |
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| · | Advanced Services – Technical experts perform system-level audits to ensure ongoing compliance with operational |
| · | Network Operations Center – A 24/7 function that proactively monitors NICE-hosted and customer-premises environments with triage, resolution and escalation of system alarms. |
| · | Managed Technical Services – NICE offers a suite of managed technical services that enable the customer to fully outsource all necessary responsibilities & functions required in order to manage the NICE solutions. This service includes: dedicated onsite support engineers, system management, updates and upgrades. |
Manufacturing and Source of Supplies
There is a small portion of our products that have certain hardware elements in our productsthat are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house developed circuit cards and algorithms, and digital processing techniques and software. We also have “software only” solutions for use on standard commercial servers.These products are IT-grade compatible.
We manufacture those of our products that contain hardware elements through subcontractors, with the exception of our CSS product line (formerly CyberTech) which is partially manufactured by us.subcontractors. Our manufacturers provide us with turnkey manufacturing solutions including order receipt, purchasing, manufacturing, testing, configuration, inventory management and delivery to customers for all of our product lines. NICE is entitled to, and exercises, various control mechanisms and supervision over the entire production process. In addition, the manufacturer of a significant portion of oursuch products, which is a subsidiary of a global electronics manufacturing service provider, is obligated to ensure the readiness of a back-up site in the event that the main production site is unable to operate as required. We believe these outsourcing agreements provide us with a number of cost advantages due to such manufacturer's large-scale purchasing power, and greater supply chain flexibility.
Some of the components we use have a single approved manufacturer while others have two or more options for purchasing. In addition, we maintain an inventory for some of the components and subassemblies in order to limit the potential for interruption. We also maintain relationships directly with some of the more significant manufacturers of our components. Although certain components and subassemblies we use in our existing products are purchased from a limited number of suppliers, we believe that we can obtain alternative sources of supply in the event that such suppliers are unable to meet our requirements in a timely manner.
We have qualified for and received the ISO-9001:20002008 quality standardmanagement for all of our products, as well as the ISO 2700127001:2013 information security management and ISO 14001:2004 environmental management certifications.
Research and Development
We believe that the development of new products and the enhancement of existing products are essential to our future success. Therefore, we intend to continue to devote substantial resources to research and new product development, and to continuously improve our systems and design processes in order to reduce the cost of our products. Our research and development efforts have been financed through our internal funds and programs sponsored through the Government of Israel and the European community. We believe our research and development effort has been an important factor in establishing and maintaining our competitive position. Gross expenditures on research and development in 2012, 20132014, 2015 and 20142016 were approximately $126.6$126.0 million, $140.9$132.0 million, and $153.0$152.0 million respectively, of which approximately $4.1approximately $2.5 million, $3.3$2.2 million, and $3.5$1.7 million, respectively, were derived from third-party funding, and $1.1$0.4 million, $1.0$1.4 million, and $0.9$8.3 million, respectively, were capitalized software development costs.
In 2014,2016, we were qualified to participate in 14nine programs funded by the Office of the Chief Scientist of the Israeli Ministry of Economy ("OCS")NATI to develop generic technology relevant to the development of our products. Such programs are approved pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, or the Research and Development Law, and the regulations promulgated thereunder. We were eligible to receive grants constituting between 40% and 66% of certain research and development expenses relating to these programs. Some of these programs are members ofwere approved as programs approved for companies with large research and development activities and some of these programs are membersin the form of membership in certain Magnet consortiums. Accordingly, the grants under these programs are not required to be repaid by way of royalties. However, the restrictions of the Research and Development Law described below apply to these programs. In 2012, 2013,2014, 2015, and 20142016 we received a total of $2.5$2.2 million, $3.3$2.1 million, and $3.0$1.3 million from the OCSNATI programs, respectively, and we anticipate receiving approximately $0.6 million in 2017 from 2015 from 2013 and 20142016 approved programs.
The Research and Development Law generally requires that the product incorporating know-how developed under an OCS-fundedNATI-funded program be manufactured in Israel. However, upon the approval of the OCSNATI (or notification in the event set forth below, as the case may be), some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased, which increase might be up to 300% of the grant (depending on the portion of the total manufacturing volume that is performed outside of Israel). Following notification (rather than approval) to the OCSNATI (and provided the OCSNATI did not object), up to 10% of the grant recipient’srecipient's approved Israeli manufacturing volume, measured on an aggregate basis, may be transferred out of Israel, subject to payment of the increased royalties referenced above.
The Research and Development Law also provides that know-how developed under an approved research and development program may not be transferred to third parties without the approval of the OCS.NATI. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS,NATI, under special circumstances, may approve the transfer of OCS-fundedNATI-funded know-how outside Israel, including, in the event of a sale of the know how or sale of the grant recipient, provided that the grant recipient pays to the OCSNATI a portion of the sale price paid in consideration for such OCS-fundedNATI-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be, which portion will not exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer).
The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the OCSNATI of any change in control of the recipient, or a change in the holdings of the means of control of the recipient that results in becoming an interested party directly in the recipient, and if the interested party is non-Israeli, requires the party to undertake to the OCSNATI to comply with the Research and Development Law. In addition, the rules of the OCSNATI may require prior approval of the OCSNATI or additional information or representations in respect of certain of such events. Furthermore, the Research and Development Law imposes reporting requirements in the event that proceedings commence against the grant recipient, including under certain applicable liquidation, receivership or debtor's relief law or in the event that special officers, such as a receiver or liquidator, are appointed to the grant recipient.
Failure to satisfy the Research and Development Law’sLaw's requirements may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings. In addition, the Government of Israel may from time to time audit sales of products which it claims incorporates technology funded through OCSNATI programs which may lead to additional royalties being payable on additional products.
The funds available for OCSNATI grants out of the annual budget of the State of Israel were reduced in recent years, and the Israeli authorities have indicated in the past that the government may further reduce or abolish OCSNATI grants in the future. Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
We may participate from time to time in the European Community Framework ProgrammeProgram for Research, Technological Development and Demonstration, which funds and promotes research. There are no royalty obligations associated with receiving such funding. From time to time we may apply for new grants under the Framework Programme. During 2010 and 2011 we were selected to participate in four FP-7 programs. The programs are for three and a half years, with a total expected grant of approximately EUR 1.6 million. In addition, we were selected to coordinate one of these programs.
Intellectual Property
We currently rely on a combination of trade secret, patent, copyright and trademark law, together with non-disclosure and non-compete agreements, to establish and/or protect the technology used in our systems.
We currently hold 150202 U.S. patents and 6350 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 8977 patent applications pending in the United States and other countries. We believe that the improvement of existing products and the development of new products are important in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware continuing to be “trade secrets”"trade secrets" or subject to copyright or patent protection. We generally enter into non-disclosure and non-compete agreements with our employees and subcontractors. However, there can be no assurance that such measures will protect our technology, or that others will not develop a similar technology or use technology in products competitive with those offered by us. In most of the areas in which we operate, third parties also have patents which could be found applicable to our technology and products. Such third parties may include competitors, as well as large companies, which invest millions of dollars in their patent portfolios, regardless of their actual field of business. Although we believe that our products do not infringe upon the proprietary rights of third parties, there can be no assurance that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms. Any of these may have a material adverse impact on our business or financial condition.
We own the following trademarks and/or registered trademarks in different countries: ACTIMIZE,Actimize, Actimize logo, Alpha,NICE Adaptive WFO, NICE WFM, NICE Voice of the Customer, NICE Work Force Management, NICE Incentive Compensation, NICE Real Time Solutions, NICE Trading Recording, Customer Engagement Analytics, Decisive Moment, eGlue Interact, FAST, FAST alpha Silver, Fortent, FortentFizzback, IEX, inContact, inContact Logo, IEX, Insight from Interactions, Intent. Insight. Impact., Know More Risk Less, Last Message Replay, Mass Detection Center, Mirra, NICE, NICE Analyzer, NICE Engage, NICE Engage Platform, NICE Interaction Management, NICE Sentinel, NICE Inform, NICE Inform Lite, NICE Performance Compliance, NICE Sentinel, NICE Inform Media Player, NICE Inform Verify, NICE Logo, NICE Perform, NICE Incentive Compensation Management, NICE Real Time Solutions, NICE Trading Recording, NICE Proactive Compliance, NICE Seamless, NICE Security Recording, NICE Situator, NICE SmartCenter, NICE, Systems, NiceLog, NiceTrack, NiceTrack IP Probe, NiceTrack Location Tracking, NiceTrack Mass Detection Center, NiceTrack Monitoring Center, NiceTrack Pattern Analyzer, NiceTrack Traffic Analysis, NiceVision, NiceVision Alto, NiceVisionNexidia, Nexidia ((!)) Logo, Nexidia Interaction Analytics, NiceVision Control Center, NiceVision Digital, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Open Situation Management,Nexidia Advanced Interaction Analytics, Nexidia Search Grid, Neural Phonetic Speech Analytics, Own the Decisive Moment, Scenario Replay, Searchspace, Syfact, Syfact Investigator, TotalView, inContact Cloud Center Solutions, Supervisor on-the-go, VAAS, Voice as a Service, Personal Connection, InTouch, Echo and TotalView.inCloud.
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Seasonality
The larger portionmajority of our business operates as an enterprise software model, which is characterized, in part, by uneven business cycles throughout the year and under which a significant number of our licenses are entered into in the fourth quarter of each calendar year. We believe that seasonality in our business may become more prominent as the proportion of advanced software applications out of our overall sales mix continues to increase. We believe that these seasonal factors primarily reflect customer spending patterns and budget cycles. In addition, we charge for some of our cloud software based on actual consumption, which may also fluctuate seasonally. While seasonal factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, also have an impact on our business and financial results. See “Risk Factors”"Risk Factors" under Item 3, "Key Information" of this annual report for a more detailed discussion of factors which may affect our business and financial results.
Regulation
Export Restrictions
European Environmental Regulations
Our European activities require us to comply with Directive 2002/95/EC of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, (“RoHS 1”), and Directive 2011/65/EU of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (together with RoHS 1, “RoHS”"RoHS"). RoHS provides, among other things, that producers of electrical and electronic equipment may not place new equipment containing certain materials, in amounts exceeding certain maximum concentration values, on the market in the European Union. We are also required to comply with the European Community Regulation on chemicals and their safe use (EC 1907/2006) that deals with the Registration, Evaluation, Authorization and Restriction of Chemical substances (“REACH”)("REACH", SVHC-173), which requires producers to manage the risks from chemicals used in their products and to provide safety information on the substances found in their products.
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Our products meet the requirements of the RoHS and REACH directives and we are making every effort in order to maintain compliance, without adversely affecting the quality and functionalities of our products. If we fail to maintain compliance, including by reason of failure of our suppliers to comply, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
Our European activities also require us to comply with Directive 2002/96/EC of the European Parliament on Waste Electrical and Electronic Equipment (“WEEE”("WEEE"). The WEEE directive covers the labeling, recovery and recycling of IT/Telecommunications equipment, electrical and electronic tools, monitoring and control instruments and other types of equipment, devices and items, and we have set up the operational and financial infrastructure required for collection and recycling of WEEE, as stipulated in the WEEE directive, including product labeling, registration and the joining of compliance schemes. We are taking and will continue to take all requisite steps to ensure compliance with this directive. If we fail to maintain compliance, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
Similar regulations are being formulated in other parts of the world. We may be required to comply with other similar programs that might be enacted outside Europe in the future.
Competition
We believe that our solutions have several competitive advantages: their ability to serve large, multi-site, multi-channel, multi-touch-point organizations; their holistic integration and capture of various structured and unstructured data sources; their ability to analyze and extract insight in real-time within a multi-dimensional approach; and their ability to drive cross-departmental action to impact business results.
broader offerings.
Organizational Structure
The following is a list of our significant subsidiaries, including the name and country of incorporation or residence. Each of our significant subsidiaries is wholly-owned by us.
Name of Subsidiary | Country of Incorporation or Residence | |
| Nice Systems Australia PTY | Australia | |
| NICE Systems Technologies Brasil LTDA | Brazil | |
| NICE Systems Canada Ltd. | Canada | |
| Nice Systems China Ltd. | China | |
| Nice | France | |
| NICE Systems GmbH | Germany | |
| NICE APAC Ltd. | Hong Kong | |
| NICE Systems Kft | Hungary | |
| Nice Interactive Solutions India Private Ltd. | India | |
| Nice Technologies Ltd. | Ireland | |
| Actimize Ltd. | Israel | |
| Nice Japan Ltd. | Japan | |
| NICE Technologies Mexico S.R.L. | Mexico | |
| NICE | Netherlands | |
| Nice Systems (Singapore) Pte. Ltd. | Singapore | |
| Nice Switzerland AG | Switzerland | |
| Actimize UK Limited | United Kingdom | |
| NICE Systems Technologies UK Limited | United Kingdom | |
| NICE Systems UK Ltd. | United Kingdom | |
| Actimize Inc. | United States | |
| Nice Systems Inc. | United States | |
| Nice Systems Latin America, Inc. | United States | |
| Nice Systems Technologies Inc. | United States | |
| Nexidia Inc. | United States | |
| inContact Inc. | United States | |
| CallCopy Inc. | United States | |
| inContact Bolivia S.R.L. | Bolivia | |
| inContact Limited | United Kingdom | |
| inContact Philippines Inc. | Philippines |
Property, Plants and Equipment
Our executive offices and engineering, research and development operations are located in North Ra’anana,Ra'anana, Israel. The offices include three buildings, which occupy approximately 351,682330,000 square feet (which are partially sub-leased as detailed below), with an annual rent and maintenance fee of approximately $12.0$15.8 million, paid in NIS and linked to the Israeli consumer price index. The lease for these three buildingsoffices in our Northern Ra’ananaRa'anana facilities will expire in October 2022.
Due to the sale of our Cyber and Intelligence and Physical Security business units during 2015, some of our office space was sub-leased and our portion of the annual rent and maintenance fee is now approximately $7.0 million, paid in NIS and linked to the Israeli consumer price index.
We have leased various other offices and facilities in several other countries. Our headquarters in each region consist of the following facilities:
| · | Our North American headquarters in |
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| · | Our EMEA headquarters in London, occupies approximately 22,500 square feet, and includes |
| · | Our |
We also have additional material leased facilities, consisting of the following:
| · | Our |
Additional offices are located in Colorado, Texas, Ohio and California.
| · | Our office in |
We believe that our existing facilities are adequate to meet our current needs and substantially adequate to meet our foreseeable future needs.
Item 4A. Unresolved Staff Comments.
None.
Item 5. Operating and Financial Review and Prospects.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes and other financial information included elsewhere in this annual report. This discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under Item 3, “Key"Key Information - Risk Factors”Factors" and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements. For more information about forward-looking statements, see the Preliminary Note that precedes the Table of Contents of this annual report.
Overview
NICE Systems is a global leading software company enabling enterprisesleader in omnichannel analytics and security-sensitivecloud solutions for the Customer Engagement and Financial Crime & Compliance markets.
Our mission is to empower organizations to address three main aspects of people’s lives: preventing financial crimes and fraud, ensuring security and public safety and providing perfect customer experiences.make smart business decisions through deep human understanding.
We provide software solutions that help organizations understand their customers and employees and predict their intentions and their needs to create exceptional customer experiences, understand their workforce to drive greater efficiency, and identify suspicious behaviour to prevent financial crime and non-compliant activities.
We do this by providing customer engagement platforms, capturing vast amounts of various types of data (e.g., structured and unstructured, interactions, and transactions) from multiple sources (e.g., communication channels, operational systems, and more), and acting upon it through analysis that provides insight and decisioning in real time.
NICE is at the forefront of two industry transformations: the adoption of cloud-delivered fully-integrated customer engagement platforms and the shift of financial institutions to integrated risk management platforms for handling end-to-end financial crime prevention.
In both cases, deep integration of process automation and analytics enables customers to achieve much greater effectiveness and efficiency.
Our advanced technologies and core competencies around customer interaction platforms, data capture, process automation, advanced real-time analytics and cloud services were developed organically and through multiple acquisitions.
We rely on several key assets to drive our growth:
·Our loyal customer base. Today, more than 25,000 organizations in over 150 countries, including 85 of the Fortune 100 companies, are using NICE solutions.
·Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
·Our market-leading products and technologies for customer engagement, data capture, analytics, and cloud, which are protected by a broad array of patents.
·Our ability to quickly drive mainstream adoption for innovative solutions and new technologies, which we introduce to the market through our direct sales force and distribution network.
·Our skilled employees and domain expertise in our core markets allows us to bring our customers the right solutions to address key business challenges and build strong customer partnerships.
·Our services, customer support and operations, which enable our customers to quickly enjoy the benefits of our solutions, with multiple deployment models in the cloud or on-premises throughout the world and support for full value realization and customer success.
We have established a leadership position in many of our areas of operation by offering comprehensive and innovative enterprise-grade solutions and technologies. Our customers, across all sizes and verticals, including banking, telecommunications, healthcare, insurance, retail, travel, public safety, state and local government and more, are benefiting from the tangible and practical business value that our solutions provide.
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Recent Acquisitions
The following acquisitions were accounted for by the acquisition method of accounting, and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The results of operations related to each acquisition are included in our consolidated statement of income from the date of acquisition.
On August 12, 2013,November 14, 2016, we completed the acquisition of CausatainContact Inc. (“Causata”("inContact"), a leading provider of real-time Big Data analytics.cloud contact center software and agent optimization tools. We acquired CausatainContact for total consideration of approximately $22.7 million comprised of $21.4 million$1 billion in cash and $1.3 million representing the fair value of earn-out based on performance milestones, amounting to an additional maximum payment of $2 million.cash. The acquisition will allow NICEenables us to offer solutions whicha fully integrated and complete cloud contact center where companies can interact with customers. The acquisition enables the two market leaders to join forces and provide greater visibility into a customer’s activities on the Webindustry's first fully integrated and apply the insights from that data in real time, across other touch points such as thecomplete cloud contact center. Organizations will be better positioned to enhance the customer experience, increase revenues, and achieve greater operational efficiency. These solutions are further augmented by Causata’s Web-based predictive analytics and machine learning technologies, which, when applied to terabytes of information, allow organizations to improve real-time decisioning and guidance. NICE benefits from Causata’s real-time Hadoop-based interaction repository, real-time decisioning, dynamic customer profiles, and Web personalization.
center solution suite.
On OctoberMarch 22, 2012,2016, we completed the acquisition of RedKite Financial Markets Limited (“RedKite”Nexidia Inc. ("Nexidia"), an emerginga leading provider of real-time, cloud-based institutional trade surveillance solutions.advanced customer analytics. We acquired RedKiteNexidia for total consideration of approximately $11.6 million comprised of $9.0$135.0 million in cashcash. The acquisition allows us to offer a combined offering, featuring a best-in-class, analytics-based solution with accuracy, scalability and $2.6 million representing the fair value of potential earn-out based on performance, milestones, amountingenabling organizations to an additional maximum payment of $5.8 million. During 2014, we concluded that since none of the performance milestones were achieved or were expected to be achieved, and therefore, the earn-out liability's fair value was equal to $0. As a result, an adjustment of $2.6 million was recordedexpand their analytics usage in the statement of income. NICE Actimize benefited from the RedKite acquisition, with the addition of RedKite’s innovative, front-office based approach to real-time trade surveillance to the NICE Actimize trading compliance solutions suite.critical business use cases. .
On February 7, 2012,March 11, 2016, we completed the acquisition of Merced Systems, Inc.Voiceprint International, Inc ("Merced"VPI"), the leadinga provider of performance management solutions that drive business execution in salesworkforce optimization software and service functions.services for enterprises, contact centers, first responders and trading floors. We acquired MercedVPI for total consideration of approximately $185.9 million. Merced’s performance management solutions help drive sales effectiveness, superior customer experience and operating efficiency across a range of vertical industries. Merced’s products serve Global 2000 customers, and include advanced analytics and reporting, incentive compensation management, coaching, and other performance execution applications.$21.7 million in cash.
Discontinued Operations
In September 2015, we sold our Physical Security business unit to Battery Ventures for total consideration of $92.5 million, consisting of $74.6 million in cash, notes of $2.9 million and up to a $15.0 million earn out based on future performance. Through NICE's Physical Security business unit, we previously provided video surveillance technologies and capabilities to security-aware organizations. We previously accounted for the Physical Security unit under the Security Solution segment.
In July 2015, we sold our Cyber and Intelligence business unit to Elbit Systems and one of its subsidiaries (together, "Elbit") for total consideration of $151.6 million, consisting of $111.6 million in cash and $40.0 million earn out based on future performance. In 2016, Elbit made certain claims in relation to the transaction in accordance with the procedures set in the acquisition agreement between the parties, which the parties settled in December 2016. Pursuant to such settlement, we recorded additional expenses in 2016 and a final net working capital price adjustment. Under the settlement agreement, we also agreed to reduce the earnout by $4.0 million. We previously accounted for the Cyber and Intelligence unit under the Security Solution segment.
Following the sale of these two business units, we have classified their results of operations (including the gain on their disposal) and their assets and liabilities as discontinued operations in accordance with ASC 205-20, "Presentation of Financial Statements - Discontinued Operations".
The carrying amount used in determining the gain on disposal of the operations included goodwill in an amount calculated based on the relative fair values of the disposed operations and the portion of the operation that was retained within the segment.
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Off-Balance Sheet Transactions
We have not engaged in nor been a party to any off-balance sheet transactions, as defined in Item 5 of Form 20-F.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the significant accounting policies which affect its more significant judgments and estimates used in the preparation of the Consolidated Financial Statements and those that are the most critical to aid in fully understanding and evaluating our reported results include the following:
| · | Revenue recognition; |
| · | Allowance for doubtful accounts; |
| · | Impairment of long-lived assets; |
| · | Taxes on income; |
| · | Contingencies; |
| · | Business combination; |
| · | Stock-based |
| · | Marketable securities; and |
| · |
Revenue Recognition. We generate revenues from sales of software products and services, which include SaaS and network connectivity, hosting, support and maintenance, installation,implementation, configuration, project management, customization, consulting, training hosting and SaaS, as well as hardware sales. We sell our products directly through our sales force and indirectly through a global network of distributors, system integrators and strategic partners, all of whom are considered end-users.
The basis for our software revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, “Software-Revenue"Software-Revenue Recognition.”" Revenues from sales of our software products are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectability is probable. In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or as the acceptance provision has lapsed.
For multiple element arrangements within the scope of software revenue recognition guidance, revenues are allocated to the different elements in the arrangement under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, we defer revenue for the fair value of its undelivered elements and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement when the basic criteria in ASC 985-605 have been met. Any discount in the arrangement is allocated to the delivered element. Revenues from maintenance and professional services are recognized ratably over the contractual period and as services are performed, respectively.
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For arrangements that contain both software and non-software components that function together to deliver the products' essential functionality, we allocate revenue to each element based on its relative selling price. In such circumstances, the accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables. The selling price for a deliverable is based on its VSOE, if available, third party evidence (“TPE”("TPE") if VSOE is not available, or best estimated selling price (“BESP”("BESP") if neither VSOE nor TPE are available. We establish VSOE of fair value using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority.separately. When VSOE cannot be established, we attempt to establish fair value of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’products' selling prices are on a standalone basis. Therefore, we are typically not able to determine TPE. The BESP price is established considering several external and internal factors including, but not limited to, historical sales, pricing practices and geographies in which we offer our products. The determination of the BESP is subject to discretion.
Our policy for establishing VSOE of fair value of maintenance services is based on the price charged when the maintenance is renewed separately. Establishment of VSOE of fair value of professional services is based on the price charged when these services are sold separately.
Revenues from fixed price contracts that require significant customization, integration and installation are recognized based on ASC 605-35, “Construction-Type"Construction-Type and Production-Type Contracts,”" using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total fees under the arrangement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact.
Revenues for our SaaS offerings are recognized ratably over the contract term or based on actual usage, commencing with the date itsthe service is made available to customers and all other revenue recognition criteria have been satisfied. Revenue from the network connectivity usage is derived based on customer specific rate plans and call usage and is recognized in the period the call is initiated. Upfront fees related to professional services that are not considered to have standalone value, are deferred and recognized over the estimated life of the customer.
To assess the probability of collection for revenue recognition, we have established a credit policy that determines the credit limit that reflects an amount that is deemed probably collectible for each customer. To secure these limits, we use credit insurance. These credit limits are reviewed and revised periodically on the basis of new customer financial statements information, credit insurance data and payment performance.
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We maintain a provision for product returns which is estimated based on our past experience and is deducted from revenues. Actual returns could be different from our estimates.
Deferred revenues include advances and payments received from customers, for which revenue has not yet been recognized.
Allowance for Doubtful Accounts. We regularly review our allowance for doubtful accounts by considering factors such as historical experience, age of the account receivable and current economic conditions that may affect a customer’scustomer's ability to pay. We allocate a certain percentage for the provision based on the length of time the receivables are past due.
Impairment of Long-Lived Assets. Our long-lived assets include goodwill, property and equipment and identifiable other intangible assets that are subject to amortization. In assessing the recoverability of our goodwill, property and equipment and other identifiable intangible assets that are held and used, we make judgments regarding whether impairment indicators exist based on legal factors, market conditions and operating performances of our reporting units or asset groups. Future events could cause us to conclude that impairment indicators exist and that the carrying values of these long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350, “Intangible –"Intangible - Goodwill and Other,”" ("ASC 350") goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires that goodwill to be tested for impairment at the reporting unit level on an annual basisat least annually or between annual tests in certain circumstances, and written down when impaired. ApplicationGoodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. ASC 350 allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. The goodwill impairment test is performed according to the following principles:test.
Our long-lived assets and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, “Property,"Property, Plant, and Equipment,”Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets and significant negative industry or economic trends.
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of the carrying amount over fair value. NoIn 2016 no impairment of long-lived asset has been recorded in 2014.charge was recognized.
Taxes on Income. We record income taxes using the asset and liability method. Management judgment is required in determining our provisionaccount for income taxes in eachaccordance with ASC 740, "Income Taxes". This topic prescribes the use of the jurisdictions in which we operate. The provision for incomeliability method whereby deferred tax is calculatedasset and liability account balances are determined based on our assumptions asdifferences 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 our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.reverse. We have considered future reversal of existing temporary differences, future taxable income, prudent and feasible tax planning strategies and other available evidence in determining the need forprovide a valuation allowance. Although we believeallowance, if necessary, to reduce deferred tax assets to the amount that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome willmore likely than not to be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.realized.
We implement a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (on a cumulative(cumulative basis) likely to be realized upon ultimate settlement.
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We classify interest and penalties on income taxes (which includes uncertain tax positions) as Taxestaxes on Income.income.
Contingencies. From time to time, weWe are a defendant or plaintiffcurrently involved in various claims and legal actions, which arise inproceedings. We review the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the accrual required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysisstatus of each individual action together with ourmatter and assess its potential financial exposure. If the potential loss from any claim or legal advisors. The required reserves may change inproceeding is considered probable and the future due to new developments in each matter or changes in circumstances, such asamount can be reasonably estimated, we accrue a change in settlement strategy. A change inliability for the required reserves would affect our earnings in the period the change is made.
estimated loss.
Business Combination. We apply the provisions of ASC 805, “Business"Business Combination,”" and accordingly we are required to allocate the fair value of purchase price of acquired companiesconsideration to the tangible and intangible assets acquired, liabilities assumed as well as in-process research and developmentintangible assets acquired based on their estimated fair values. In allocatingThe excess of the fair value of purchase priceconsideration over the fair values of acquired companies tothese identifiable assets and liabilities is recorded as goodwill. When determining the tangible and intangiblefair values of assets acquired and liabilities assumed, we developed the requiredmanagement makes significant estimates and assumptions, underlying the valuation work. Criticalespecially with respect to intangible assets. Significant estimates in valuing certain of the intangible assets include, but are not limited to:to future expected cash flows from customer contracts, customer lists, distribution agreementsrelationships, acquired technology and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flowstrademarks from the projects when completed; the acquired company’s brand awareness anda market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio;participant perspective, useful lives and discount rates. Management’sManagement's estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptionsunpredictable and, as a result, actual results may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach and cost approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.differ from estimates.
Stock-based Compensation. We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation"Compensation - Stock Compensation.” UnderCompensation" ("ASC 718"), which requires the measurement and recognition of compensation expense based on estimated fair value recognition provisions ofvalues for all share-based payment awards made to employees and directors. ASC 718 stock-based compensation cost is estimated at the grant date based onrequires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award andthat is ultimately expected to vest is recognized as an expense ratablyover the requisite service periods in our consolidated statement of income.
We recognize compensation expenses for the value of our awards, which have graded vesting, based on the accelerated attribution method over the requisite service period of each of the award. awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model, which requires a number of assumptions: the expected volatility is based upon actual historical stock price movements; the expected term of options granted is based upon historical experience and valuesrepresents the period of time that options granted are expected to be outstanding; the risk-free interest rate is based on the yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term; and the expected dividend rate (an annualized dividend yield) is based on the per share dividend declared by the our Board of Directors.
We measure the fair value of restricted stock based on the market value of the underlying shares at the date of grant. We recognize compensation costs using the graded vesting attribution method that results in an accelerated recognition of compensation costs.
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of an award is affected by our stock priceshareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on the date of grant and other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. Share-based compensation expense recognizeda specific identification basis, in our consolidated statements of income was reduced for estimated forfeitures.income.
Our securities are reviewed for impairment in accordance with ASC 320-10-65. If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that we intend to sell, or it is more likely than not that we will be required to sell before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized in other comprehensive income (loss).
Fair Value of Financial Instruments.We apply the provisions of ASC 820, “Fair"Fair Value Measurements and Disclosures.” Disclosures" ("ASC 820 clarifies that820"). Under this standard, fair value is an exitdefined as the price representing the amount that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants. As such,participants at the measurement date.
In determining fair value, iswe use various valuation approaches. ASC 820 establishes a market-based measurementhierarchy for inputs used in measuring fair value that shouldmaximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be determined based on assumptionsused when available. Observable inputs are inputs that market participants would use in pricing anthe asset or a liability. As a basis for considering suchliability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions ASC 820 establishes a three-tier valueabout the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy as set forth below, which prioritizesis broken down into three levels based on the inputs used in the valuation methodologies in measuring fair value:as follows:
| · | Level 1 |
| · | Level 2 |
| · | Level 3 |
The fair value hierarchy also requires an entity to maximize the useavailability of observable inputs can vary from investment to investment and minimizeis affected by a wide variety of factors, including, for example, the usetype of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable inputs when measuringin the market, the determination of fair value.value requires more judgment and the investments are categorized as Level 3.
Our marketable securities trade in markets thatand foreign currency derivative contracts are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized asclassified within Level 2.
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The actualcarrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables and trade payables, approximate their fair value at which such securities could actually be solddue to the immediate or settled withshort-term maturities of these financial instruments. The carrying amount of the long term loan approximates its fair value due to the fact the loan bears a willing buyer or seller may differ from such estimated fair values depending on a number of factors, including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
variable interest rate.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update No. 2014-09 “Revenue(ASU 2014-09) "Revenue from Contracts with Customers (Topic 606)” (“". ASU 2014-09”) which amended2014-09 supersedes the existing FASB Accounting Standards Codification. This standard establishes a principle for recognizing revenue upon the transfer ofrecognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the expected consideration receivedto which the entity expects to be entitled to in exchange for those goods or services. The standard also providesAs currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016.
In March 2016, the FASB issued "Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting revenue gross versus net)" (ASU 2016-08), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued "Identifying Performance Obligations and Licensing" (ASU 2016-10) which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. The new revenue standard may be applied using either of the recognitionfollowing transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The guidance in ASU 2016-08 and 2016-10 is effective upon the adoption of ASU 2014-09.
We will adopt the standard in the first quarter of 2018 and we have yet to select a transition method. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. While we are continuing to assess all potential impacts of the new standard, we believe the impacts relate to: arrangements that include term-based software licenses, allocation of transaction price to each performance obligation on a relative standalone selling price and capitalization of costs related to obtaining and fulfilling customer contracts.
In January 2016, the FASB issued ASU 2014-09No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of 2019. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" ("ASU 2016-05"), which clarifies that a change in the counterparty to a derivative instrument designated as a hedging instrument does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria are met. The guidance in ASU 2016-05 is effective for annual periods beginning after December 15, 2016; early adoption is permitted as of the beginning of an interim period on a modified retrospective basis. We expect no material impact of this guidance on our consolidated financial statements.
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In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for financial statements issued for the first quarter of 2017. We will apply this guidance using a modified retrospective transition method and expect to record a total cumulative-effect adjustment in retained earnings as of January 1, 2017 for the revision of the forfeiture fair value and for excess tax benefits that have not previously been recognized in an amount of approximately $6 million.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments." The guidance addresses the classification of cash flow related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact of this standard on our consolidated statement of cash flows.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. ASU 2016-16 will be effective for financial statements issued for the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" (ASU 2017-04). ASU 2017-04 eliminates step two of the goodwill impairment test, which requires the calculation of the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (ASU 2017-04), which provides a more robust framework to use in determining when a set of assets and activities constitute a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders previously indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. ASU 2017-04 provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This update is effective for annual and interim periods beginning after December 15, 2016, with2018. We expect no early adoption permitted. We are currently evaluating the adoption method to apply and thematerial impact that the update will haveof this guidance on our consolidated financial statements and related disclosures.statements.
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Results of Operations
The following table sets forth our selected consolidated statements of income for the years ended December 31, 2012, 2013,2014, 2015, and 2014,2016, expressed as a percentage of total revenues. Totals may not add up due to rounding.
| 2014 | 2015 | 2016 | ||||||||||
| Revenues | ||||||||||||
Products | 33.2 | % | 34.3 | % | 30.2 | % | ||||||
Services | 66.8 | 65.7 | 69.8 | |||||||||
| 100.0 | 100.0 | 100.0 | ||||||||||
| Cost of revenues | ||||||||||||
Products | 22.1 | 20.9 | 17.3 | |||||||||
Services | 41.1 | 38.9 | 40.1 | |||||||||
| 34.8 | 32.8 | 33.3 | ||||||||||
| Gross profit | 65.2 | 67.2 | 66.7 | |||||||||
| Operating expenses | ||||||||||||
| Research and development, net | 14.1 | 13.9 | 13.9 | |||||||||
Selling and marketing | 26.5 | 24.4 | 26.4 | |||||||||
General and administrative | 9.6 | 9.8 | 11.5 | |||||||||
| Amortization of acquired intangibles | 2.2 | 1.3 | 1.7 | |||||||||
| Restructuring expenses | 0.6 | 0.0 | 0.0 | |||||||||
Total operating expenses | 53.0 | 49.3 | 53.5 | |||||||||
Operating income | 12.2 | 17.9 | 13.2 | |||||||||
Financial income, net | 0.5 | 0.7 | 1.1 | |||||||||
Other expenses, net | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
Income before taxes | 12.6 | 18.5 | 14.2 | |||||||||
Taxes on income | 1.1 | 3.3 | 2.1 | |||||||||
| Net income from continuing operations | 11.5 | 15.2 | 12.1 | |||||||||
| 2012 | 2013 | 2014 | ||||||||||
| Revenues | ||||||||||||
Products | 42.0 | % | 39.8 | % | 38.4 | % | ||||||
Services | 58.0 | 60.2 | 61.6 | |||||||||
| 100.0 | 100.0 | 100.0 | ||||||||||
| Cost of revenues | ||||||||||||
Products* | 33.3 | 31.2 | 30.1 | |||||||||
Services* | 44.8 | 43.2 | 41.5 | |||||||||
| 40.0 | 38.4 | 37.1 | ||||||||||
| Gross profit | 60.0 | 61.6 | 62.9 | |||||||||
| Operating expenses | ||||||||||||
| Research and development, net | 13.8 | 14.4 | 14.7 | |||||||||
Selling and marketing | 26.2 | 26.2 | 26.1 | |||||||||
General and administrative | 10.9 | 9.3 | 8.5 | |||||||||
| Amortization of acquired intangibles | 3.7 | 3.2 | 2.0 | |||||||||
| Restructuring expenses | 0.2 | 0.1 | 0.5 | |||||||||
Total operating expenses | 54.8 | 53.2 | 51.8 | |||||||||
Operating income | 5.2 | 8.4 | 11.1 | |||||||||
Financial income, net | 0.7 | 0.4 | 0.4 | |||||||||
Equity in losses of affiliated company | - | - | (0.1 | ) | ||||||||
Other income (expenses), net | 0.2 | (0.0 | ) | (0.0 | ) | |||||||
Income before taxes | 6.1 | 8.8 | 11.4 | |||||||||
Taxes on income (Tax benefit) | (1.6 | ) | 3.0 | 1.2 | ||||||||
Net income | 7.7 | 5.8 | 10.2 | |||||||||
| Income (loss) from discontinued operations | 0.6 | 16.4 | (0.8 | ) | ||||||||
| Taxes on income (tax benefits) from discontinued operations | 0.2 | 3.7 | (0.2 | ) | ||||||||
| Net income (loss) from discontinued operations | 0.4 | 12.7 | (0.6 | ) | ||||||||
Net income | 11.9 | 27.9 | 11.5 |
Comparison of Years Ended December 31, 20132015 and 2016
Revenues
Our total revenues increased by approximately 9.6% to $1,015.5 million in 2016 from $926.9 million in 2015. Revenues from sales of Customer Engagement Solutions and Financial Crime and Compliance Solutions in 2016 were $754.4 million and $261.1 million, respectively, an increase of 9.6% and 9.4% from 2015, respectively.
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The growth in revenues from our Customer Engagement Solutions is mainly attributed to increased demand for our solutions delivered over the cloud and to our expanded analytics offerings, as these offerings enable organizations to improve operational efficiency and customer experience, enhance compliance and improve sales optimization.
The growth in revenues from Financial Crime and Compliance Solutions is primarily driven by increased demand of financial institutions across the globe for solutions that secure financial transactions and prevent fraud and complex financial crimes, magnified by the continued evolution of advancements in our technology.
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
| Product revenues | $ | 317.9 | $ | 306.2 | $ | (11.7 | ) | (3.7 | )% | |||||||
| Service revenues | 609.0 | 709.3 | 100.3 | 16.5 | ||||||||||||
| Total revenues | $ | 926.9 | $ | 1,015.5 | $ | 88.6 | 9.6 | % | ||||||||
The decrease of $27.1 million in product revenues is attributed to our Customer Engagement Solutions, offset by an increase of $15.4 million in revenues from our Financial Crime and Compliance Solutions. The decrease in product revenues is mainly the result of a transition to cloud based solutions in which SaaS revenues are recognized as service revenues and over a subscription period.
The growth in service revenues is mainly due to our solutions delivered over cloud, which constitute approximately 52% of such growth, maintenance services resulting primarily from an increase in install base from previous years' sales, which constitute approximately 29% of such growth, and professional services, which constitute approximately 19% of such growth.
Revenue by Region
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
United States, Canada and Central and South America ("Americas") | $ | 630.1 | $ | 720.5 | $ | 90.4 | 14.4 | % | ||||||||
| Europe, the Middle East and Africa ("EMEA") | 196.9 | 193.5 | (3.4 | ) | (1.7 | ) | ||||||||||
| Asia-Pacific ("APAC") | 99.9 | 101.5 | 1.6 | 1.6 | ||||||||||||
| Total revenues | $ | 926.9 | $ | 1,015.5 | $ | 88.6 | 9.6 | % | ||||||||
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The Americas revenue increased by 14.4% driven by our Customer Engagement Solutions, mainly due to increased demand for our solutions delivered over the cloud and to our analytics offerings.
The EMEA revenue decreased by 1.7%, driven mainly by unfavorable currency effects, partially offset by our Customer Engagement Solutions due to an increase in our analytics offerings.
The APAC revenue increased by 1.6% mainly due to increased demand for our Financial Crime and Compliance Solutions, offset by a decrease in Customer Engagement Solutions.
Cost of Revenues
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
| Cost of product revenues | $ | 66.4 | $ | 53.0 | $ | (13.4 | ) | (20.2 | )% | |||||||
| Cost of service revenues | 237.2 | 284.7 | 47.5 | 20.0 | ||||||||||||
| Total cost of revenues | $ | 303.6 | $ | 337.7 | $ | 34.1 | 11.2 | % | ||||||||
Cost of product revenues decreased both on a dollar basis and as a percentage of product revenues. The decrease is mostly a result of a decrease in royalties and third party product costs payable to vendors, partially offset by higher amortization of intangible assets arising from our recent acquisitions.
Cost of service revenues increased both on a dollar basis and as a percentage of service revenues. The increase is primarily due to increased personnel and amortization of intangible assets arising from our recent acquisitions.
Gross Profit
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
| Gross profit on product revenues | $ | 251.5 | $ | 253.2 | $ | 1.7 | 0.7 | % | ||||||||
as a percentage of product revenues | 79.1 | % | 82.7 | % | ||||||||||||
| Gross profit on service revenues | 371.8 | 424.6 | 52.8 | 14.2 | % | |||||||||||
as a percentage of service revenues | 61.0 | % | 59.9 | % | ||||||||||||
| Total gross profit | $ | 623.3 | $ | 677.8 | $ | 54.5 | 8.7 | % | ||||||||
as a percentage of total revenues | 67.2 | % | 66.7 | % | ||||||||||||
The increase in gross profit on product revenues is primarily a result of increased sales of software based solutions with higher margins and a decrease in royalties and third party product costs payable to vendors.
The increase in service gross profit is mainly attributed to the increase in service revenues. The decrease in service gross margin is primarily attributed to amortization of intangible assets as a result of our recent acquisitions, partially offset by higher margins on SaaS revenues.
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Operating Expenses
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
Research and development, net | $ | 128.5 | $ | 141.5 | $ | 13.0 | 10.2 | % | ||||||||
Selling and marketing | 225.8 | 268.3 | 42.5 | 18.8 | ||||||||||||
General and administrative | 90.4 | 116.6 | 26.2 | 29.0 | ||||||||||||
| Amortization of acquired intangible assets | 12.5 | 17.2 | 4.7 | 37.5 | % | |||||||||||
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased by $19.5 million to $151.5 million in 2016, as compared to $132.0 million in 2015, and represented 14.9% and 14.2% of revenues in 2016 and 2015, respectively. The increase in research and development is attributed primarily to additional personnel as a result of recent acquisitions. Research and development, net increased by $13.0 million following an increase in capitalized software development costs to $8.4 million in 2016, as compared to $1.4 million in 2015. The increase in capitalized software development is related to our cloud based solutions. Amortization of capitalized software development costs included in cost of product revenues were $0.5 million in 2016 and $0.4 million in 2015.
Selling and Marketing Expenses. Selling and marketing expenses increased to $268.3 million in 2016 as compared to $225.8 million in 2015, and represented 26.4% and 24.4% of total revenues in 2016 and in 2015, respectively. The increase in selling and marketing expenses is attributed primarily to additional personnel as a result of recent acquisitions, an increase in sales incentives and an increase in marketing expenses.
General and Administrative Expenses. General and administrative expenses increased to $116.6 million in 2016 as compared to $90.4 million in 2015, and represented 11.5% of total revenues in 2016 as compared to 9.8% of total revenues in 2015. The increase in general and administrative expenses is attributed primarily to recent acquisitions and integration related expenses, mainly related to the acquisition of inContact, an increase in rent costs following restructuring of our Americas offices and additional personnel as a result of recent acquisitions.
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represented 1.7% and 1.3% of our revenues in 2016 and 2015, respectively. The increase in amortization of acquired intangible assets is attributable to our recent acquisitions, mainly inContact and Nexidia.
Financial and Other Income
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2015 | 2016 | Dollar Change | Percentage Change | |||||||||||||
Financial income, net | $ | 5.7 | $ | 10.8 | $ | 5.1 | 89.5 | % | ||||||||
| Other expenses, net | 0.4 | 0.5 | 0.1 | 25 | % | |||||||||||
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Financial Income and Other, net. Financial income, net, was $10.8 million in 2016 compared to $5.7 million in 2015. The increase in financial income, net is attributable primarily to gain on realization of investments and gain on currency exchange, partially offset by credit facility expenses related to financing of the inContact acquisition. Other, net amounted to $0.5 million in 2016, compared to $0.4 million in 2015. The expenses comprised primarily of loss on disposal of assets.
Taxes on Income. In 2016, taxes on income amounted to $21.4 million, as compared to $30.8 million in 2015. Our provision for taxes during 2016 decreased as compared with 2015, primarily due to a proportionally significant realization of deferred tax liabilities recorded against the amortization of the newly acquired intangible assets of inContact and Nexidia, and which was partially offset by an increase in our provision for uncertain tax positions.
Our effective tax rate for 2016 was 14.8%, compared to 18.0% in 2015. Our effective tax rate in 2016 was lower due to the above realization of deferred tax liabilities being mainly realized at higher tax rates, as compared with 2015, thus increasing the offseting effect on the effective tax rate.
The majority of our income in Israel continues to benefit from lower tax rates, which were 16.0% in 2016 and 2015, pursuant to our Preferred Enterprise programs, which is discussed in Note 12 of our Consolidated Financial Statements under the caption "Taxes on Income".
Net Income. Net income was $123.1 million in 2016, as compared to $140.6 million in 2015. The decrease in 2016 resulted primarily from acquisition and integration related expenses, inclusion of inContact and Nexidia results with lower operating margin, amortization of intangible assets resulting from our recent acquisitions and increase in rent costs following restructuring of our Americas offices.
Discontinued operations. During 2015 we sold our Cyber and Intelligence and Physical Security business units for gains of $101.8 million and $45.5 million, respectively, which is presented as part of the net income on discontinued operations. During 2016 we recorded additional expenses following a settlement agreement and final net working capital price adjustment.
Comparison of Years Ended December 31, 2014 and 2015
Revenues
Our total revenues increased by approximately 6.6%6.3% to $1.01 billion in 2014, from $949.3$926.9 million in 2013.2015 from $872.0 million in 2014. Revenues from sales of Customer Interactions Solutions, SecurityEngagement Solutions and Financial Crime and Compliance Solutions in 20142015 were $612.1 million, $202.3$688.1 million and $197.2$238.8 million, respectively, an increase of 3.4%, 4.3%2.0% and 20.9%21.1% from 2013,2014, respectively. The growth in revenues from Customer InteractionsEngagement Solutions is attributed primarily to increased revenues from analytics solutions. This growth is driven by increasingincreased demand for theseour portfolio of solutions, as they enable organizations to improve operational efficiency and customer experience, enhance compliance and improve sales optimization. The increase in revenues from Security Solutions is attributable primarily to an increase in revenues from our intelligence solutions. The increase in revenues from Financial Crime and Compliance Solutions is primarily driven by the increased scrutiny by regulatory authorities to ensure that financial institutions across the globe have adequate controls in place to secure financial transactions and prevent fraud attempts and complex financial crimes, amplified by the continued evolution of advancements in technology.
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2013 | 2014 | Dollar Change | Percentage Change | |||||||||||||
| Product Revenues | $ | 377.6 | $ | 388.3 | $ | 10.7 | 2.8 | % | ||||||||
| Service Revenues | 571.7 | 623.3 | 51.6 | 9.0 | ||||||||||||
| Total Revenues | $ | 949.3 | $ | 1,011.6 | $ | 62.3 | 6.6 | % | ||||||||
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Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||
| Product revenues | $ | 289.6 | $ | 317.9 | $ | 28.3 | 9.8 | % | ||||||||
| Service revenues | 582.4 | 609.0 | 26.6 | 4.6 | ||||||||||||
| Total revenues | $ | 872.0 | $ | 926.9 | $ | 54.9 | 6.3 | % | ||||||||
The increase in product revenues is primarily dueattributable to growthan increase of $14.4 million in our revenues from Financial Crime and Compliance Solutions and an increase of $13.9 million in our Customer Interactions Solutions, partially offset by a decrease in revenues from SecurityEngagement Solutions.
Revenue by Region
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||
United States, Canada and Central and South America ("Americas") | $ | 591.1 | $ | 630.1 | $ | 39.0 | 6.6 | % | ||||||||
| Europe, the Middle East and Africa ("EMEA") | 189.2 | 196.9 | 7.7 | 4.1 | ||||||||||||
| Asia-Pacific ("APAC") | 91.7 | 99.9 | 8.2 | 8.9 | ||||||||||||
| Total revenues | $ | 872.0 | $ | 926.9 | $ | 54.9 | 6.3 | % | ||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2013 | 2014 | Dollar Change | Percentage Change | |||||||||||||
| United States, Canada and Central and South America (“Americas”) | $ | 596.7 | $ | 665.4 | $ | 68.7 | 11.5 | % | ||||||||
| Europe, the Middle East and Africa (“EMEA”) | 223.9 | 239.4 | 15.5 | 6.9 | ||||||||||||
| Asia-Pacific (“APAC”) | 128.7 | 106.8 | (21.9 | ) | (17.0 | ) | ||||||||||
| Total Revenues | $ | 949.3 | $ | 1,011.6 | $ | 62.3 | 6.6 | % | ||||||||
The Americas revenue increased by 11.5%6.6%, of which approximately 39%$23.1 million is attributed to growth in the Financial Crime and Compliance Solutions 37%and $15.9 million is attributable to growth in the Customer Interactions Solutions and 24% is attributed to growth in the SecurityEngagement Solutions.
The EMEA revenue increased by 6.9%4.1%. The increase is primarily attributable to growth in the Security Solutions and in the Financial Crime and Compliance Solutions of$15.9 million, partially offset by a decrease in the Customer Interactions Solutions.Engagement Solutions of $8.2 million.
The APAC revenue decreasedincreased by 17%8.9%. The decreaseincrease is primarily attributable primarily to a decreasegrowth in the SecurityCustomer Engagement and Financial Crime and Compliance Solutions.
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Cost of Revenues
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2013 | 2014 | Dollar Change | Percentage Change | |||||||||||||
| Cost of product revenues | $ | 117.8 | $ | 116.7 | $ | (1.1 | ) | (0.9 | )% | |||||||
| Cost of service revenues | 247.1 | 258.9 | 11.8 | 4.8 | ||||||||||||
| Total cost of revenues | $ | 364.9 | $ | 375.6 | $ | 10.7 | 2.9 | % | ||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||
| Cost of product revenues | $ | 63.9 | $ | 66.4 | $ | 2.5 | 3.9 | % | ||||||||
| Cost of service revenues | 239.6 | 237.2 | (2.4 | ) | (1.0 | ) | ||||||||||
| Total cost of revenues | $ | 303.5 | $ | 303.6 | $ | 0.1 | 0.0 | % | ||||||||
Cost of product revenues increased on a dollar basis, but decreased as a percentage of product revenues. The increase on a dollar basis is mostly a result of an increase in royalties payable to third party vendors, partially offset by lower amortization of intangible assets following previous years' acquisitions. The decrease in the percentage of cost of product from product revenue is mainly attributed to revenue increase from software based solutions.
Cost of productservice revenues decreased on a dollar basis and as a percentage of productservice revenues. The decrease on a dollar basis and as a percentage of product revenues is mostly a result of lower amortization of intangible assets, which is primarily due to the completion of amortization of intangible assets related to previous year’s acquisitions, partially offset by an increase in cost of wages and sub-contractors. Cost of service revenues increased on a dollar basis while decreasing as a percentage of service revenues. The increase on a dollar basis is primarily due to an increase ofa decrease in cost of wages and sub-contractors,travel expenses, partially offset by a decreasean increase in travel expensessub-contractors and lower amortization of intangible assets, which is primarily due to the completion of amortization of intangible assets related to previous year’s acquisitions.consultants. The decrease in the percentage of cost of service from service revenues is mainly attributed to increasing efficiency and better utilization of headcount.
service resources.
Gross Profit
Years Ended December 31, (U.S. dollars in millions) | Years Ended December 31, (U.S. dollars in millions) | |||||||||||||||||||||||||||||||
| 2013 | 2014 | Dollar Change | Percentage Change | 2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||||||||||||||
| Gross profit on product revenues | $ | 259.7 | $ | 271.7 | $ | 12.0 | 4.6 | % | $ | 225.7 | $ | 251.5 | $ | 25.8 | 11.4 | % | ||||||||||||||||
| as a percentage of product revenues | 68.8 | % | 69.9 | % | 77.9 | % | 79.1 | % | ||||||||||||||||||||||||
| Gross profit on service revenues | 324.6 | 364.4 | 39.8 | 12.3 | % | 342.8 | 371.8 | 29.0 | 8.4 | % | ||||||||||||||||||||||
| as a percentage of service revenues | 56.8 | % | 58.5 | % | 58.9 | % | 61.0 | % | ||||||||||||||||||||||||
| Total gross profit | $ | 584.3 | $ | 636.1 | $ | 51.8 | 8.9 | % | $ | 568.5 | $ | 623.3 | $ | 54.8 | 9.6 | % | ||||||||||||||||
| as a percentage of total revenues | 61.6 | % | 62.9 | % | 65.2 | % | 67.2 | % | ||||||||||||||||||||||||
The increase in gross profit margin on product revenues is primarily a result of an increase in product revenues, continued increase in software based analytics solutions with higher margins and a lower amortization of intangible assets.
The increase in gross profit margin on service revenues is primarily attributed to an increase in service revenues and improved efficiency.
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Operating Expenses
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||
| Research and development, net | $ | 123.1 | $ | 128.5 | $ | 5.4 | 4.4 | % | ||||||||
Selling and marketing | 231.1 | 225.8 | (5.3 | ) | (2.3 | ) | ||||||||||
General and administrative | 83.4 | 90.4 | 7.0 | 8.4 | ||||||||||||
| Amortization of acquired intangible assets | 19.2 | 12.5 | (6.7 | ) | (34.9 | ) | ||||||||||
Restructuring expenses | 5.4 | 0.0 | (5.4 | ) | (100 | ) | ||||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
2013 | 2014 | Dollar. Change | Percentage Change | |||||||||||||
| Research and development, net | $ | 136.6 | $ | 148.6 | $ | 12.0 | 8.8 | % | ||||||||
| Selling and marketing | 248.6 | 264.2 | 15.6 | 6.3 | ||||||||||||
| General and administrative | 88.3 | 85.6 | (2.7 | ) | (3.1 | ) | ||||||||||
| Amortization of acquired intangible assets | 30.6 | 20.3 | (10.3 | ) | (33.7 | ) | ||||||||||
| Restructuring expenses | 0.5 | 5.6 | 5.1 | 1,020 | ||||||||||||
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased to $153.0$132.0 million in 2015, as compared to $125.9 million in 2014, as compared to $140.9 million in 2013, and represented 15.1%14.2% and 14.8%14.4% of revenues in 20142015 and 2013,2014, respectively. The increase in research and development, net is attributed primarily to an increase in cost of wages and subcontractors, partially resulting from increased headcount.
travel expenses. Capitalized software development costs were $0.9$1.4 million in 2014,2015, as compared to $1.0$0.4 million in 2013.2014. The increase is a result of capitalization of software development for internal use software that supports our SaaS business. Amortization of capitalized software development costs included in cost of product revenues were $1.3 million and $1.1$0.4 million in 2014each of 2015 and 2013, respectively.
2014.
Selling and Marketing Expenses. Selling and marketing expenses increaseddecreased to $264.2$225.8 million in 2015 as compared to $231.1 million in 2014, as compared to $248.6 million in 2013 and represented 26.1%24.4% and 26.2%26.5% of total revenues in 20142015 and in 2013,2014, respectively. The increasedecrease in selling and marketing expense is attributed primarily to an increasea decrease in cost of wages andfollowing a decrease in headcount, sales incentives resulting from high performance in our business,and travel, partially offset by a decreasean increase in traveladvertising and other marketing expenses.
General and Administrative Expenses. General and administrative expenses decreasedincreased to $85.6$90.4 million in 2015 as compared to $83.4 million in 2014, as compared to $88.3 million in 2013, and represented 8.5%9.8% of total revenues in 2014,2015 as compared to 9.3%9.6% of total revenues in 2013.2014. The decreaseincrease in general and administrative expense is due primarily to remeasurementan additional administrative cost incurred in 2015 partially offset by a decrease in rent and utilities expenses following a reorganization and operational efficiency of our facilities, while in 2014 we recorded an income due to re-measurement of earn-out liabilities that resulted from prior years acquisitions, partially offset by an increase in cost of wages.year's acquisitions.
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represent 2.0%represented 1.3% and 3.2%2.2% of our 2014revenues in 2015 and 2013 revenues,2014, respectively. The decrease in amortization of acquired intangible assets is primarily attributable to the completion of amortization of intangible assets related to previous year’syears' acquisitions.
Restructuring expenses. RestructuringWe did not incur restructuring expenses were $5.6 million in 2014,2015, as compared to $0.5$5.4 million in 2013.2014. The 2014 restructuring expenses in 2014 were attributed mainly to restructuring of our workforce in certain geographies in order to improve efficiency.
Financial and Other Income
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2014 | 2015 | Dollar Change | Percentage Change | |||||||||||||
| Financial income, net | $ | 3.8 | $ | 5.7 | $ | 1.9 | 50 | % | ||||||||
| Other expenses, net | 0.0 | 0.4 | 0.4 | 100 | % | |||||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2013 | 2014 | Dollar Change | Percentage Change | |||||||||||||
| Financial income, net | $ | 4.0 | $ | 3.8 | $ | (0.2 | ) | (5.0 | )% | |||||||
| Equity in losses of affiliated company | - | (0.6 | ) | (0.6 | ) | - | ||||||||||
Other income (expenses), net | (0.1 | ) | (0.0 | ) | 0.1 | (100 | )% | |||||||||
70
Financial Income, Netincome and other, net. .Financial income, net, was $5.7 million in 2015 compared to $3.8 million in 2014. The decreaseincrease in financial income, net is attributable primarily to a decline in interest rates in the global markets during 2014.
higher cash volume invested. Other, expenses, Net. Other expenses, net in a total amount of $0.6amounted to $0.4 million in 2014, as compared to $0.1 million in 2013, was2015, comprised primarily of amortizationloss on disposal of intangible assets related to investment in affiliated company, net of equity gains.assets.
Taxes on Income. In 2014,2015, taxes on income amounted to $12.0$30.8 million, as compared to $28.4$9.9 million in 2013.2014. Our provision for taxes during 2013 was abnormally high due to the inclusion2015 increased as compared with 2014, mainly as taxes on income for 2014 were favorably affected by certain releases of an expense of $19.2 million as a result of a settlement with the Israeli Tax Authorities during 2013 of a specific multi-year tax audit and our election to take advantage of a special limited time program initiated by the Israeli government that allowed us to release our previously tax-exempted profits at a discounted tax rate that would otherwise have been due upon actual distribution of these profits.provisions made in prior years.
Our effective tax rate for 2015 was 18.0% compared to 9.0% in 2014. Our tax rate in 2014 was 10.4% and was lower than expected due to being favorably affected by releases of tax provisions made in prior years upon a settlement during 2014 of a further multi-year tax audit.
Net Income. Net income was $103.1$140.6 million in 2014,2015, as compared to $55.3$100.2 million in 2013.2014. The increase in 20142015 resulted primarily from increase in revenues increase inand operating margin, and decreaseoffset by an increase in taxes on income in 2014.
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| Product Revenues | $ | 369.4 | $ | 377.6 | $ | 8.2 | 2.2 | % | ||||||||
| Service Revenues | 509.6 | 571.7 | 62.1 | 12.2 | ||||||||||||
| Total Revenues | $ | 879.0 | $ | 949.3 | $ | 70.3 | 8.0 | % | ||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| United States, Canada andCentral and South America (“Americas”) | $ | 549.6 | $ | 596.7 | $ | 47.1 | 8.6 | % | ||||||||
| Europe, the Middle East and Africa (“EMEA”) | 210.4 | 223.9 | 13.5 | 6.4 | ||||||||||||
| Asia-Pacific (“APAC”) | 119.0 | 128.7 | 9.7 | 8.2 | ||||||||||||
| Total Revenues | $ | 879.0 | $ | 949.3 | $ | 70.3 | 8.0 | % | ||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| Cost of product revenues | $ | 122.9 | $ | 117.8 | $ | (5.1 | ) | (4.1 | )% | |||||||
| Cost of service revenues | 228.3 | 247.1 | 18.8 | 8.2 | ||||||||||||
| Total cost of revenues | $ | 351.2 | $ | 364.9 | $ | 13.7 | 3.9 | % | ||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| Gross profit on product revenues | $ | 246.5 | $ | 259.7 | $ | 13.2 | 5.4 | % | ||||||||
| as a percentage of product revenues | 66.7 | % | 68.8 | % | ||||||||||||
| Gross profit on service revenues | 281.3 | 324.6 | 43.3 | 15.4 | % | |||||||||||
| as a percentage of service revenues | 55.2 | % | 56.8 | % | ||||||||||||
| Total gross profit | $ | 527.8 | $ | 584.3 | $ | 56.5 | 10.7 | % | ||||||||
| as a percentage of total revenues | 60.0 | % | 61.6 | % | ||||||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| Research and development, net | $ | 121.4 | $ | 136.6 | $ | 15.2 | 12.5 | % | ||||||||
| Selling and marketing | 230.2 | 248.6 | 18.4 | 8.0 | ||||||||||||
| General and administrative | 96.1 | 88.3 | (7.8 | ) | (8.0 | ) | ||||||||||
| Amortization of acquired intangible assets | 32.6 | 30.6 | (2.0 | ) | (6.1 | ) | ||||||||||
| Restructuring expenses | 1.9 | 0.5 | (1.4 | ) | (73.7 | ) | ||||||||||
Years Ended December 31, (U.S. dollars in millions) | ||||||||||||||||
| 2012 | 2013 | Dollar Change | Percentage Change | |||||||||||||
| Financial income, net | $ | 6.7 | $ | 4.0 | $ | (2.7 | ) | (40.3 | )% | |||||||
Other income (expenses), net | 1.5 | (0.1 | ) | (1.6 | ) | (106.7 | )% | |||||||||
Liquidity and Capital Resources
In recent years, the cash generated from our operating activities has financed our operations as well as the repurchase of our ordinary shares and payment of dividends. Generally, we invest our excess cash in highly liquid investment grade securities. As of December 31, 2014,2016, we had $500.0$286.0 million of cash and cash equivalents and short-term and long-term investments, as compared to $443.2$828.4 million at December 31, 20132015 and $444.7$500.0 million at December 31, 2012.2014.
Cash provided by operating activities was $220.3 million, $244.7 million, and $182.3 million $124.3in 2016, 2015, and 2014, respectively. Net cash from operations in 2016 consisted primarily of net income of $126.1 million (excluding loss on disposal of discontinued operations of $9.1 million), adjusted for non-cash activities such as depreciation and amortization of $77.8 million, stock-based compensation of $40.5 million as well as working capital changes derived from an increase in accrued expenses and other liabilities of $15.1 million, decrease in deferred taxes of $25.9 and decrease in trade receivables of $31.7 million. Net cash from operations in 2015 consisted primarily of net income of $111.5 million (excluding gain on disposal of discontinued operations of $147.3 million), adjusted for non-cash activities such as depreciation and amortization of $57.9 million, stock-based compensation of $28.4 million as well as working capital changes derived from an increase in accrued expenses and other liabilities of $38.5 million and $135.6increase in deferred revenues of $54.9 million, which were partially offset by a decrease in 2014, 2013, and 2012, respectively.trade receivables of $56.3 million. Net cash from operations in 2014 consisted primarily of net income of $103.1 million and adjustments for non-cash activities including depreciation and amortization of $73.3 million, stock-based compensation of $29.8 million and working capital changes derived from an increase in accrued expenses and other liabilities of $9.3 million, which were partially offset by deferred tax of $27.8 million and a decrease in trade payables of $13.8 million. Net cash from operations in 2013 consisted primarily of net income of $55.3 million and adjustments for non-cash activities including depreciation and amortization of $91.4 million, stock-based compensation of $26.3 million and an increase in trade payables of $5.1 million which were partially offset by an increase in trade receivables of $34.6 million, and deferred tax of $17.3 million. Net cash from operations in 2012 consisted primarily of net income of $67.9 million and adjustments for non-cash activities including depreciation and amortization of $95.5 million, stock-based compensation of $23.6 million, increase in accrued expenses and other liabilities of $9.2 million and a decrease in other receivables and prepaid expenses of $3.8$10.3 million, which were partially offset by a decrease in deferred revenues,taxes, net of $27.1$27.8 million deferred tax of $24.2 and an increase in trade receivablespayables of $11.9$13.8 million.
Net cash used in investing activities was $9.1$800.0 million, $33.4$28.3 million and $164.3$8.9 million in 2016, 2015 and 2014, 2013respectively. In 2016, net cash used in investing activities consisted primarily of payment for the acquisition of inContact, Nexidia and 2012, respectively.other acquisitions in an aggregate amount of $1,157 million, which were partially offset by net proceeds received from the sale of marketable securities of $403.0 million. In 2015, net cash used in investing activities consisted primarily of net investment in marketable securities and short term bank deposits of $195.0 million and purchase of property and equipment of $16.6 million, which were offset by proceeds from the sale of discontinued operations of $186.1 million. In 2014, net cash used in investing activities consisted primarily of net investment in marketable securities of $28.4 million and net purchase of property and equipment of $16.8 million, which were partially offset by net proceeds from short-term bank deposits of $37.8 million.
Net cash provided by (used in) financing activities was $413 million, $(71.8) million and $(101.8) million in 2016, 2015 and 2014, respectively. In 2013,2016, net cash used in investingprovided by financing activities consistedwas attributed primarily to the long term loan of payment for the acquisition$464.8 million and proceeds from issuance of Causatashares upon exercise of options and other acquisitions in an aggregate of $24.2 million, net purchase of property and equipmentshares under employee share purchase plans of $20.2 million and net investment in short-term deposits of $ 6.1$23.5 million, which were partially offset by net proceedpayment of marketable securitiesdividends of $17.4$38.2 million and repurchase of our ordinary shares of $43.6 million. In 2012, net cash used in investing activities consisted primarily of payment for the acquisition of Merced, RedKite and other acquisitions in an aggregate of $164.5 million and net purchase of property and equipment of $27.7 million, offset by net proceed of marketable securities and short-term deposits of $27.9 million.
We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months.
Research and Development and Intellectual Property
For information on our research and development policies and intellectual property, please see Item 4, “Information"Information on the Company”Company" in this annual report.
Trend Information
For more information on trends in our industry, please see Item 4, “Information"Information on the Company—Business Overview—Industry Background and Trends”Technology Trends" in this annual report.
For more information on trends, uncertainties, demands, commitments or events that may have a material effect on revenue, please see Item 3, “Key"Key Information—Risk Factors”Factors" in this annual report.
Contractual Obligations
Set forth below are our contractual obligations and other commercial commitments over the medium term as of December 31, 20142016 (in thousands of U.S. dollars).
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1- 3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating Leases | 89,027 | 17,169 | 26,122 | 21,662 | 24,074 | |||||||||||||||
| Unconditional Purchase Obligations | 18,590 | 12,779 | 4,955 | 856 | - | |||||||||||||||
| Severance Pay* | 24,134 | |||||||||||||||||||
| Total Contractual Cash Obligations | 131,751 | 29,948 | 31,077 | 22,518 | 24,074 | |||||||||||||||
| Uncertain Income Tax Positions ** | 18,561 | |||||||||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1- 3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating Leases | 140,633 | 22,886 | 38,940 | 31,967 | 46,840 | |||||||||||||||
| Unconditional Purchase Obligations | 22,700 | 17,318 | 5,382 | - | - | |||||||||||||||
| Severance Pay* | 16,885 | |||||||||||||||||||
| Total Contractual Cash Obligations | 180,218 | 40,204 | 44,322 | 31,967 | 46,840 | |||||||||||||||
| Uncertain Income Tax Positions ** | 26,659 | |||||||||||||||||||
| * | Severance pay relates to accrued obligations to employees as required under applicable labor laws. These obligations are payable only upon termination, retirement or death of the respective employees. | |||||||
| ** | Uncertain income tax positions under ASC 740 are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note | |||||||
| Amount of Commitment Expiration Per Period | ||||||||||||||||||||
| Other Commercial Commitments | Total Amounts Committed | Less than 1 year | 1- 3 years | 3-5 years | More than 5 years | |||||||||||||||
| Guarantees – Continuing operations | 4,377,987 | 3,932,011 | 360,879 | 85,097 | - | |||||||||||||||
| Guarantees – Discontinued operations* | 19,910,444 | 78,500 | 19,831,944 | - | - | |||||||||||||||
| Total Guarantees | 24,288,431 | 4,010,511 | 20,192,823 | 85,097 | - | |||||||||||||||
| Amount of Commitment Expiration Per Period | ||||||||||||||||||||
| Other Commercial Commitments | Total Amounts Committed | Less than 1 year | 1- 3 years | 3-5 years | More than 5 years | |||||||||||||||
| Guarantees – continuing operations | 38,008 | 14,283 | 8,646 | 14,147 | 932 | |||||||||||||||
* Represents guarantees which were not endorsed and remain in effect in relation to contracts assumed as part of the sale of the Cyber and Intelligence business for which we have a back to back contractual commitment and are entitled to indemnification to the extent that these guarantees are realized.
6.A. Directors and Senior Management
The following table setstables set forth, as of March 18, 2015,April 13, 2017, the name, age and position of each of our directors and executive officers:officers and, in regard to our directors, any of the committees of our board of directors on which they serve and whether any such director is an outside director:
Members of the Board of Directors
Name | Age | Audit Committee Member | Internal Audit Committee Member | Mergers and Acquisitions Member | Nominations Committee Member | Outside Director* | ||
David Kostman | 52 | Chairman of the Board of Directors | ||||||
X | X | |||||||
| Rimon Ben-Shaoul | 72 | Director | X | |||||
| Dan Falk | 72 | Director | X | X | X | X | X | X |
| Yocheved Dvir | 64 | Director | X | X | X | |||
| Yehoshua Ehrlich | 67 | Director | ||||||
| Leo Apotheker | 63 | Director | ||||||
X | ||||||||
| Joe Cowan | 68 | Director | ||||||
X | ||||||||
Zehava Simon | 58 | Director | X | X | X |
* See Item 6, "Directors, Senior Management and Employees—Board Practices— Outside Directors."
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Members of Management
| Name | Age | Position | ||
Barak Eilam | 42 | Chief Executive Officer | ||
Miki Migdal | 56 | President, Enterprise Product Group | ||
Joseph Friscia | 62 | |||
Paul Jarman | 47 | Chief Executive | ||
Beth Gaspich | 51 | |||
Chief Financial Officer | ||||
Yechiam Cohen | 60 | Corporate Vice President, General Counsel and Corporate Secretary | ||
Eran Porat | 54 | Corporate Vice President, Finance | ||
Eran Liron | 49 | Executive Vice President, Marketing and Corporate Development | ||
Barry Cooper | 46 | Chief Operating Officer | ||
Sigal Gill-More - Feferman | 47 | |||
Executive Vice President, Human Resources | ||||
In May 2016, Ms. Gruber will be retiringSarit Sagiv retired from her position as Chief Financial Officer, of our company, and Ms. Sarit Sagiv will assume the position following a transition period.
Set forth below is a biographical summary of each of the above-named directors and executive officers of NICE. Each of our directors qualifies as an independent director under applicable NASDAQ rules.
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David Kostman has served as one of our directors since 2001, with the exception of the period between June 2007 and July 2008, and as our Chairman of the Board since February 2013. Mr. Kostman is currently Executive Chairman of Nanoosh LLC. He recently served on the board of directors of publicly traded Retalix Ltd., which was acquired by NCR Corporation, and serves on the board of directors of Outbrain, Inc., ironSource Ltd. and ironSource Ltd.Tivit S.A. From 2006 until 2008, Mr. Kostman was a Managing Director in the investment banking division of Lehman Brothers, heading the Global Internet Group. From April 2003 until July 2006, Mr. Kostman was Chief Operating Officer and then Chief Executive Officer of Delta Galil USA, a subsidiary of publicly traded Delta Galil Industries Ltd. From 2000 until 2002, Mr. Kostman was President of the International Division and Chief Operating Officer of publicly traded VerticalNet Inc. Prior to that Mr. Kostman worked in the investment banking divisions of Lehman Brothers (1994-2000) focusing on the technology and Internet sectors and NM Rothschild & Sons (1992-1993), focusing on M&A and privatizations. Mr. Kostman holds a Bachelor’sBachelor's degree in Law from Tel Aviv University and a Master’sMaster's degree in Business Administration from INSEAD.
Rimon Ben-Shaoul has served as one of our directors since September 2001. Since 2001, Mr. Ben-Shaoul has served as Co-Chairman, President, and Chief Executive Officer of Koonras Technologies Ltd., a technology investment company controlled by LEADER Ltd., an Israeli holding company. Mr. Ben-Shaoul also serves as a director of MIND C.T.I. Ltd. and several private companies, and served as a director of BVR Systems Ltd. In addition, he served as the President and Chief Executive Officer of Polar Communications Ltd., which manages media and communications investments. Mr. Ben-Shaoul also served as the Chairman of T.A.T Technologies Ltd., a public company listed on NASDAQ and TASE. Between 1997 and 2001, Mr. Ben-Shaoul was the President and Chief Executive Officer of Clal Industries and Investments Ltd., one of the largest holding companies in Israel with substantial holdings in the high tech industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board of Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and various other companies within the Clal Group. Mr. Ben-Shaoul also served as a director of ECI Telecom Ltd., Fundtech Ltd., Creo Products, Inc. and Nova Measuring Instruments Ltd. From 1985 to 1997, Mr. Ben-Shaoul was President and Chief Executive Officer of Clal Insurance Company Ltd. and a director of the company and its various subsidiaries. Mr. Ben-Shaoul holds a Bachelor’sBachelor's degree in Economics and Statistics and a Master’sMaster's degree in Business Administration, both from Tel-Aviv University.
Dan Falk has served as one of our statutory outside directors since 2001. From 1999 to 2000, Mr. Falk was President and Chief Operating Officer of Sapiens International Corporation N.V. From 1985 to 1999, Mr. Falk served in various positions in Orbotech Ltd., the last of which were Chief Financial Officer and Executive Vice President. From 1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr. Falk also serves as the Chairman of AVT-Advanced Vision Technology Ltd., and serves on the board of directors of Orbotech Ltd., Ormat Technologies Inc. and Attunity Ltd. Mr. Falk holds a Bachelor’sBachelor's degree in Economics and Political Science and a Master’sMaster's degree in Business Administration, both from the Hebrew University, Jerusalem.
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Yocheved Dvir has served as one of our statutory outside directors since January 2008. Since 2000, Ms. Dvir has served as a strategic advisor in business development affairs to multiple companies and initiatives that were being founded. Ms. Dvir also serves on the board of directors of Menorah Insurance Company and its subsidiary, Alrov Real Estate Visa Cal,and Endey Med and Psagot Bituach.Med. She recently served on the boards of Visa Cal, Trendline Business Information & Communications Ltd., Menorah Insurance Company Ltd., Israel Corporation Ltd., ECI Telecom Ltd., Strauss Industries Ltd., Phoenix Holding and Phoenix Insurance Co. Between 1990 and 2000, Ms. Dvir served as a Senior Vice President of the Migdal Group. Ms. Dvir joined the Migdal Group in 1981 and, until late 2000, held a number of senior financial and managerial positions, including Head of the Group’sGroup's Economics Department (1986-1988), Head of the Group’sGroup's Corporate Office (1989-1992), Head of the Group’sGroup's General Insurance Division and Corporate Office (1993-1997), Group CFO (1997-1999), Head of the Group’sGroup's Strategic Development Division and Marketing Array and Risk Manager (2000). Ms. Dvir holds a Bachelor’sBachelor's degree in Economics and Statistics from the University of Haifa and completed studies towards a second degree in Statistics from the Hebrew University of Jerusalem.
Yehoshua (Shuki) Ehrlich has served as one of our directors since September 2012. Mr. Ehrlich is an active social investor, serving as Chairman of "Committed to Give", a group formed by Israeli social investors for promoting philanthropy in Israel and several other social organizations. Mr. Ehrlich also serves as a member of the executive board of Israel Venture Network and a board member of AfterDox, an angels' investment group. Between the years 2000 and 2010, Mr. Ehrlich served as Managing Director at Giza Venture Capital, where he focused on the communications, enterprise software and information technology sectors. Formerly, Mr. Ehrlich had a fifteen-year career with Amdocs, a public software company specializing in billing, CRM, order management systems for telecommunications and Internet service providers. In his last role at Amdocs, Mr. Ehrlich served as Senior Vice President of Business Development. Mr. Ehrlich holds a Bachelor of Science in Mathematics and Computer Science from the Tel Aviv University.
Leo Apothekerhas served as one of our directors since August 2013. Mr. Apotheker was the Managing Partner and co-founder of efficiency capital SAS, a growth capital advisory firm, from 2012 to 2014. From 2010 to 2011, Mr. Apotheker served as Chief Executive Officer of Hewlett Packard Company. From 2008 to 2010, he served as Chief Executive Officer of SAP AG. In addition, he is currently chairman of the board of each of KMD, one of Denmark’sDenmark's leading IT and software companies, as well asUnit4, a leading Dutch software company, and Signavio GmbH, Vice Chairman and Lead Director of Schneider SE, and a member of the boardsboard of several international companies including Schneider Electric SA and Steria.Taulia Inc. Mr. Apotheker holds a Bachelor’sBachelor's degree in Economics and International Relations from the Hebrew University of Jerusalem.
Joe Cowan has served as one of our directors since August 2013. Mr. Cowan has been the CEO and director of Epicor since October 2013.2013, and since Sept 2016 has been a director of ChannelAdvidsor, Inc. During 2013 Mr. Cowan served as President of DataDirect Networks, Inc., and from 2010 until 2013, Mr. Cowan served as the Chief Executive Officer and President of Online Resources Corp. SinceDuring 2009, he has served as an Operating Executive and Consultant at Vector Capital. From 2007 to 2009, Mr. Cowan served as the Chief Executive Officer of Interwoven Inc. From 2004 to 2006, Mr. Cowan served as the President and Chief Executive Officer of Manugistics Inc. and Manugistics Group Inc. Prior to that, Mr. Cowan served in various senior executive positions, including as the Chief ExecutiveOperating Officer of Baan Co. NV and Avantis GOB NV. He has been a Director of DataDirect Networks, Inc. between 2011 and February 2014.2013. Mr. Cowan has also served on the boards of various publicly traded companies, including ChannelAdvidsor Inc., Interwoven Inc., Online Resources Corporation, Manugistics Group Inc. and Blackboard Inc., as well as several private companies. Mr. Cowan holds a M.S. degree in Electrical Engineering from Arizona State University and holds a B.S. degree in Electrical Engineering from Auburn University.
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Zehava Simon has served as one of our statutory outside directors since July 2015. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until 2013, most recently as Vice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. Prior to that, Ms. Simon held various positions at Intel Israel, which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms. Simon is currently a board member of Audiocodes, a public company traded on NASDAQ and TASE, Nova Measurements, a publicly-traded company on NASDAQ and TASE, and Amiad Water Systems, a public company traded on the London Stock Exchange. Ms. Simon is a former member of the board of directors of Insightec Ltd., M-Systems Ltd. (acquired by SanDisk Corp.) and Tower Semiconductor Ltd. Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, a law degree (LL.B.) from the Interdisciplinary Center in Herzliya and an M.A. in Business and Management from Boston University.
Barak Eilam has served as Chief Executive Officer since April 2014. In his previous position with NICE, Mr. Eilam was President of our American division from July 2012 to March 2014. Prior to that, Mr. Eilam was the head of sales and the general manager of the Enterprise Group in the Americas. From 2007 to 2009, Mr. Eilam founded and served as the general manager of the NICE Interaction Analytics Global Business Unit. Mr. Eilam has also served in a variety of executive positions within NICE, managing different aspects of the business in product development, sales and product management. Before joining NICE in 1999, Mr. Eilam was an officer for an elite intelligence unit in the Israeli defense forces. Mr. Eilam holds a Bachelor's degree in Electrical and Electronics Engineering from Tel Aviv University.
Miki Migdal has served as President of the NICE Enterprise Product Group since July 2014. Prior to joining NICE, Mr. Migdal was the CEO of SAP Israel and held additional leadership roles at SAP including Senior Vice President of Development at SAP Global and President of SAP Labs Israel. He also served in executive positions at B.V.R Systems, Amdocs and Mercury Interactive (HP Software). Mr. Migdal holds a B.Sc. in Math and Computer Science from Tel Aviv University.
Joseph Friscia has served as President of NICE Actimize since April 2014. Prior to joining NICE, Mr. Friscia served as President of BAE Systems’Systems' Applied Intelligence Americas business. He joined BAE when BAE Systems acquired Norkom Technologies, where he had served as General Manager and Executive Vice President of the Americas. Prior to Norkom, Mr. Friscia was a co-founder of Pegasystems, Inc., the leading Business Process Management software company, from its origin and through taking it public in 1996. Mr. Friscia holds an MBA degree from Adelphi University and a B.A. from Long Island University.
Paul Jarman has served as NICE inContact CEO since November 2016, and served as inContact CEO since January 2005 until we acquired inContact. Prior to becoming CEO, Mr. Jarman served as inContact's President from December 2002. Prior to December 2002, he served as inContact's Executive Vice President. Mr. Jarman was instrumental in guiding inContact from its roots in telecommunications to its strategic offering of cloud-based contact center solutions and has been a part of every major enhancement the company has made since 1997. Mr. Jarman led inContact's listing on NASDAQ. Prior to joining inContact, he was an executive with HealthRider, Inc. Mr. Jarman holds a Bachelor of Science degree in Accounting from the University of Utah.
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Yechiam Cohen has served as our Corporate Vice President, General Counsel and Corporate Secretary since 2005. From 1996 to 2004, he served as General Counsel of Amdocs, a publicly traded company and a leading provider of billing and CRM software solutions to the telecommunications industry. Before joining Amdocs, Mr. Cohen was a partner in the Tel Aviv law firm of Dan Cohen, Spigelman & Company. From 1987 to 1990, he was an associate with the New York law firm of Dornbush, Mensch, Mandelstam and Schaeffer. Mr. Cohen served as a law clerk to Justice Beijski of the Supreme Court of Israel in Jerusalem. He holds a Bachelor’sBachelor's degree from the Hebrew University School of Law and is admitted to practice law in Israel and New York.
Eran Porat has served as our Corporate Vice President, Finance since 2004. From March 2000 to 2004, he served as our Corporate Controller. From 1997 to February 2000, Mr. Porat served as Corporate Controller of Tecnomatix Technologies Ltd. From 1996 to 1997, he served as Corporate Controller of Nechushtan Elevators Ltd. Mr. Porat is a certified public accountant and holds a Bachelor’sBachelor's degree in economics and accounting from Tel Aviv University.
Eran Liron has served as our Executive Vice President, Marketing and Corporate Development since October 2013, and as Executive Vice President, Corporate Development since February 2006. From 2004 to 2006, he served as Director of Corporate Development at Mercury Interactive Corporation, a software company, and prior thereto he held several business development positions at Mercury Interactive. Before joining Mercury, Mr. Liron served in several marketing roles at software startups and at Tower Semiconductor. Mr. Liron holds a Bachelor of Science degree from the Technion – Israel Institute of Technology and a Doctorate in Business from the Stanford Graduate School of Business in California.
Sigal Gill-More-Feferman has served as Executive Vice President, Human Resources since September 2009. From 1996 until 2009, Ms. Gill-more-Feferman held several field, regional and corporate roles at Microsoft. In her most recent role at Microsoft, Ms. Gill-more-Feferman led the staffing function across all international regions (EMEA, Asia, Latin America) overseeing both Sales and R&D sites. Ms. Gill-more-Feferman holds a Master's degree in organizational behavior from Tel Aviv University.
There are no family relationships between any of the directors or executive officers named above.
6.B. Compensation
(a) Aggregate Executive Compensation
The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group of 2619 persons during 20142016 consisted of approximately $10.7$7.3 million in salary, fees, bonus, commissions and directors’directors' fees and approximately $0.4$0.8 million in amounts set aside or accrued to provide pension, retirement or similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
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We have a performance-based bonus plan for our executive management team. The plan is based on our overall performance, the particular unit performance, individual performance and the results of the customer satisfaction survey conducted annually. The measurements can change year over year, and are a combination of financial parameters, including revenues, booking and operating income and collection.income. The plan is reviewed and approved by our Board of Directors annually, as is any bonus payment under the plan.
During 2014,2016, our officers and directors received, in the aggregate, (i) options to purchase 720,033211,674 ordinary shares, that include 198,63391,700 options with an exercise price equal to the par value of the ordinary shares (the “par value options”), and (ii) 53,333163,535 restricted share units, under our equity based compensation plans. The options (other than the par value options) have a weighted average price of $40.03$52.64 and all options will expire six years after the date of grant. The restricted shares units are granted at par value of the ordinary shares. For information regarding our option exchange program, see "Share Ownership–Option Exchanges and Price Adjustment" below.
Pursuant to the requirements of the Israeli Companies Law, 5759–1999, or the Israeli Companies Law, remuneration of our directors requires shareholder approval. Compensation and reimbursement for outside directors (as described below) is statutorilystatuto-rily determined pursuant to the Israeli Companies Law. Effective as of OctoberJuly 1, 2013,2015, our shareholders approved the payment to each of our non-executive directors, including outside directors, of an annual fee of NIS 120,000 (equivalent to approximately $30,856)$40,000 and a meeting attendance fee of $1,500 for each Board meeting attended (whether in person or through media), and $1,000 for each Board committee meeting attended (whether in person or through media) (in each case paid in U.S. dollars or in NIS 3,250 (equivalent to approximately $836), including for meetings of committeesbased on the exchange rate on the date of the Board of Directors. The cash amounts set forth above areapproval by shareholders), subject to adjustment for changes in the Israeli consumer price index.additional value added tax, as applicable.
On August 27, 2013,July 9, 2015, at our 20132015 annual general meeting of shareholders, following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved a newan amended compensation policy for directors and officers. In addition, our shareholders approved a supplemental annual cash fee for the Chairman of the Board in the amount of NIS 450,000 (equivalent to approximately $115,711), effective retroactively from the date of his appointment as Chairman of the Board on February 13, 2013.$115,652). The supplemental annual fee is subject to adjustment for changes in the Israeli consumer price index after September 2012.
(b) Individual Compensation of Covered Executives
The following describes the compensation of our five most highly compensated executive officers in 2014,2016, based on the total of salary costs, bonus cost and equity grantedcosts expensed in 20142016 ("Covered Executives").
The Compensationcompensation specified below is broken down into the following components (all amounts specified below are in terms of cost to the Company, as recorded in our financial statements). U.S. dollar amounts indicated for Salary, Bonus and Equity Costs are in thousands of dollars and for Covered Executives in Israel are based on the Shekel exchange rate of 3.54,3.82, which represents the average rate for the year, and for the Covered Executive in Singapore are based on the Singapore dollar exchange rate of 1.27,1.42, which represents the average rate for that year.
| (1) | Salary Costs. Salary Costs include gross salary, benefits and perquisites, including those mandated by applicable law which may include, to the extent applicable to each Covered Executive, payments, contributions and/or allocations for pension, severance, vacation, travel and accommodation, car or car allowance, medical insurances and risk insurances (e.g., life, disability, accidents), phone, convalescence pay, relocation, payments for social security, and other benefits consistent with the Company's guidelines. |
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| (2) | Bonus Costs. Bonus Costs represent bonuses granted to the Covered Executive with respect to the year ended December 31, |
| (3) | Equity Costs. Represents the expense recorded in our financial statements for the year ended December 31, |
| i. | Barak Eilam – CEO. Salary Costs - |
| ii. |
| iii. |
| iv. |
Joseph Friscia – President, NICE Actimize. Salary Costs - |
Raghav Sahgal – former President, NICE APAC. Salary Costs - $419; Bonus Costs - $356; Equity Costs - $432 expense recorded in |
Board Practices
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, relating to such matters as outside directors, the internal audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of the NASDAQ and other relevant provisions of U.S. securities laws. Under applicable NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of comparable NASDAQ requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further information see Item 16G, “Corporate Governance”"Corporate Governance" of this annual report.
General Board Practices
Our articles of association provide that the number of directors serving on the Board shall be not less than three but shall not exceed thirteen. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The Board may appoint additional directors (whether to fill a vacancy or create new directorships) to serve until the next annual shareholders meeting, provided, however, that the Board shall have no obligation to fill any vacancy unless the number of directors is less than three.
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The Board may, subject to the provisions of the Israeli Companies Law, appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate. Notwithstanding the foregoing and subject to the provisions of the Israeli Companies law, the Board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The Board has appointed an internal audit committee under the Israeli Companies Law that has three members, an audit committee that has fourfive members, a compensation committee that has fourfive members, a nominations committee that has threetwo members and a mergers and acquisitions committee that has fivesix members. We do not have, nor do our subsidiaries have, any directors’directors' service contracts granting to the directors any benefits upon termination of their employment. In addition, from time to time the Board may appoint an ad hoc committee for certain purposes, such as the review, negotiation and recommendation of approval of M&A transactions.
Outside Directors
Outside directors are required to possess professional qualifications as set out in regulations promulgated under the Israeli Companies Law. The Israeli Companies Law provides that a person may not be appointed as an outside director if (i) such person or person’sperson's relative or affiliate has, at the date of appointment, or had at any time during the two years preceding such date, any affiliation with the company, a controlling shareholder thereof or their respective affiliates; or (ii) in a company that does not have a 25% shareholder, such person has an affiliation with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company. In general, the term “affiliation”"affiliation" includes:
No person may serve as an outside director if the person’sperson's position or other activities create, or may create a conflict of interest with the person’sperson's responsibilities as an outside director or may otherwise interfere with the person’sperson's ability to serve as an outside director. Until the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to the former outside director.
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Outside directors are to be elected by a majority vote at a shareholders’shareholders' meeting, provided that either:
| · | the majority of shares voted at the meeting shall include at least a majority of the shares of non-controlling shareholders present at the meeting and voting on the matter (without taking into account the votes of the abstaining shareholders); or |
| · | the total number of shares of non-controlling shareholders voted against the election of the outside directors does not exceed two percent of the aggregate voting rights in the company. |
The initial term of an outside director is three years and may be extended for up to two additional three-year terms. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the internal audit committee and the Board of Directors confirm that, in light of the outside director’sdirector's expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial to the company. Reelection of an outside director may be effected through one of the following mechanisms: (1) the Board of Directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term; or (2) a shareholderone or more shareholders holding one percent or more of a company’scompany's voting rights or the outside director proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than two percent of the voting rights in the company. An outside director may be removed only in a general meeting, by the same percentage of shareholders as is required for electing an outside director, or by a court, and in both cases only if the outside director ceases to meet the statutory qualifications for appointment or if he or she has violated the duty of loyalty to us. EachUnless we actually adopt the applicable relief provided under the 2016 Relief Amendments, each committee of a company’scompany's Board of Directors which is empowered to exercise any of the Board’sBoard's powers is required to include at least one outside director, provided that each of the internal audit committee and compensation committee must include all of the outside directors.
An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, our shareholders approved that our outside directors are to receive compensation equal to that paid to the other members of the Board of Directors. For further information, please see Item 6, “Directors,"Directors, Senior Management and Employees—Compensation”Compensation" in this annual report.
Financial and Accounting Expertise
Pursuant to the Israeli Companies Law, our Board of Directors has determined that at least one member of our Board of Directors must be an “accounting"accounting and financial expert.”" The Israeli Companies Law requires that all outside directors must be “professionally"professionally qualified.”" Under applicable NASDAQ rules, each member of our audit committee must be financially literate and at least one of the members must have experience or background that results in such member’smember's financial sophistication. Our Board of Directors has determined that each of Dan Falk and Yocheved Dvir is an “accounting"accounting and financial expert”expert" for purposes of the Israeli Companies Law and is financially sophisticated for purposes of applicable NASDAQ rules. See also Item 16A, “Audit"Audit Committee Financial Expert”Expert" in this annual report.
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Independent Directors
Under the rules of the NASDAQ, a majority of our directors are required to be “independent”"independent" as defined in applicable NASDAQ rules. All of our directors satisfy the respective independence requirements of NASDAQ.
In addition, our Articles of Association provide that, if we do not have a shareholder that holds 25% or more of our issued and outstanding share capital, then a majority of the directors shallmust be "independent" as defined in the Israeli Companies Law and the regulations promulgated thereunder. If we have a shareholder that holds 25% or more of our issued and outstanding share capital, then at least one third of the directors shallmust be "independent." All of our directors satisfy the respective independence requirements of the Israeli Companies Law. The qualifications for independent directors under the Israeli Companies Law are similar to those for outside directors, as described above under “—"—Outside Directors”Directors", including the nine-year term limit and the ability to extend such term beyond nine years upon the approval of our internal audit committee and Board of Directors.
Internal Audit Committee
The Israeli Companies Law requires public companies to appoint an internal audit committee. The role of the internal audit committee under the Israeli Companies Law is to examine flaws in the management of the company’scompany's business in consultation with the internal auditors and the independent accountants, and to propose remedial measures to the board. The internal audit committee also reviews interested party transactions for approval as required by law, including approval of the remuneration of a director in any capacity, which also requires Board, Compensation Committee and shareholder approval. The internal audit committee also assesses our internal audit system and the performance of our internal auditor, and oversees the implementation and enforcement of our compliance program. Under the Israeli Companies Law, an internal audit committee must consist of at least three directors, including all of the outside directors. The members of the internal audit committee must satisfy certain independence standards under the Israeli Companies Law, and the chairman of the internal audit committee must be an outside director. The chairman of the Board of Directors, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder, any director who derives most of its income from the controlling shareholder and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the internal audit committee. Pursuant to the 2016 Relief Amendments, the Company may elect to opt out of the composition and attendance rules set with respect to the internal audit committee under the Israeli Companies Law, so long as the company complies with the SEC regulations and Nasdaq listing rules regarding the composition and attendance rules in that respect.
All of the current members of our internal audit committee (presently comprised of Yocheved Dvir (Chairman), Joseph AtsmonDan Falk and Dan Falk)Zehava Simon) meet these qualifications.
Internal Auditor
Under the Israeli Companies Law, the Board of Directors must appoint an internal auditor, proposed by the internal audit committee. The role of the internal auditor is to examine, among other matters, whether the company’scompany's activities comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’scompany's independent accounting firm or its representative. We have appointed an internal auditor in accordance with the requirements of the Israeli Companies Law.
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Audit Committee
The NASDAQ rules also require that the audit committee of a listed company must be composed of at least three directors, each of whom is (i) independent; (ii) does not receive any compensation (except for board fees) from the company; (iii) is not an affiliated person of the company or any subsidiary; and (iv) has not participated in the preparation of the company’scompany's (or a current subsidiary’s)subsidiary's) financial statements during the past three years. All of the current members of our audit committee (presently comprised of Joseph AtsmonRimon Ben-Shaoul (Chairman), David Kostman, Dan Falk, Yocheved Dvir and Yocheved Dvir)Zehava Simon) meet the NASDAQ standards described above.
Our audit committee has adopted a charter specifying the committee’scommittee's purpose and outlining its duties and responsibilities which include, among other things, (i) appointing, retaining and compensating the company’scompany's independent auditor, subject to shareholder approval, (ii) pre-approving all services of the independent auditor, (iii) reviewing the annual audited financial statements and quarterly financial statements and the content of our earnings press releases, as well as financial information and earnings guidance, and (iv) overseeing our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is also authorized to act as our “qualified"qualified legal compliance committee.”" As such, our audit committee will be responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us, of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar material violations of U.S. law by us or any of our agents.
We believe we currently meet the applicable NASDAQ requirements with respect to our Audit Committee and we intend to continue to take all actions as may be necessary for us to maintain our compliance with applicable NASDAQ requirements.requirements with respect to our Audit Committee.
Compensation Committee
As required by NASDAQ rules, our compensation committee approves the compensation of our executive officers. The compensation committee is also authorized to approve the grant of stock options and other securities to eligible grantees under our benefit plans pursuant to guidelines adopted by our Board of Directors. However, grants of stock options and other securities to our executive officers also require approval of our Board of Directors. Under a recent amendment to the Israeli Companies Law, the Board of Directors of a public company must establish a compensation committee. ThePursuant to the 2016 Relief Amendments, the Company may elect to opt out of the relevant composition and attendance rules set under the Israeli Companies Law, and to comply with the SEC regulations and Nasdaq listing rules that apply to the composition and attendance rules of a compensation committee. To date, the Company has continued to also follow the Israeli Companies Law with respect to the composition and attendance rules of a compensation committee, must consistas it consists of at least three directors who satisfy certainthe independence qualifications as further detailed above in relation to Internal Audit Committeeinternal audit committee members, and the chairman of the compensation committee is required to be an outside director.
Under the Israeli Companies Law, the role of the compensation committee is to recommend to the Board of Directors, for ultimate shareholder approval by a special majority, a policy governing the compensation of office holders based on specified criteria, to review modifications to the compensation policy from time to time, to review its implementation and to approve the actual compensation terms of office holders prior to the approval thereof by the Board of Directors.
We do not believe that there are any existing conflicts between the compensation committee charter and either of the Israeli Companies Law or the Compensation Policy. However, if any such conflict should develop, such that we are no longer in compliance with the requirements of the NASDAQ rules, we intend to utilize the foreign private issuer exemption described above with respect to such requirement, and in accordance with the NASDAQ Rulesrules we will disclose the practice that we follow in lieu of the applicable NASDAQ requirement in our future annual reports.
Nominations Committee
As required by NASDAQ rules, our nominations committee recommends candidates for election to our Board of Directors pursuant to a written charter. TheBoth of the current members of this committee, all of whomDavid Kostman and Dan Falk, are independent directors, are David Kostman, Joseph Atsmon and Dan Falk.directors.
Mergers and Acquisitions Committee
Our Board of Directors has delegated powers with respect to the review and recommendation of mergers and acquisitions and related investments and transactions, which are then subject to approval by the Board of Directors. The committee also has limited authority to approve mergers and acquisitions for consideration up to a certain amount. TheAll of the current members of this committee, all of whom are independent directors, are David Kostman (chairman), Dan Falk, Rimon Ben Shaoul, Yehoshua Ehrlich, Leo Apotheker and Leo Apotheker.
Joe Cowan, are independent directors.
Employees
As of December 31, 2014,2016, we had 3,5134,930 employees worldwide, which represented a decreasean increase of approximately 1.8%48.6% from year-end 2013.December 31, 2015.
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The following table sets forth the number of our full-time employees at the end of each of the last three fiscal years as well as the main category of activity and geographic location of such employees:
| At December 31, | ||||||||||||
| Category of Activity | 2014* | 2015 | 2016** | |||||||||
Operations | 108 | 86 | 66 | |||||||||
Customer Support | 1,300 | 1,374 | 1,928 | |||||||||
Sales & Marketing | 691 | 682 | 1069 | |||||||||
Research & Development | 687 | 801 | 1,294 | |||||||||
General & Administrative | 378 | 352 | 573 | |||||||||
Total | 3,164 | 3,316 | 4,930 | |||||||||
| At December 31, | ||||||||||||||||||||||||
Category of Activity | 2012 | 2013 | 2014 | |||||||||||||||||||||
Operations | 110 | 110 | 108 | |||||||||||||||||||||
Customer Support | 1,291 | 1,393 | 1,343 | |||||||||||||||||||||
Sales & Marketing | 809 | 840 | 811 | |||||||||||||||||||||
Research & Development | 803 | 865 | 890 | |||||||||||||||||||||
General & Administrative | 387 | 368 | 361 | |||||||||||||||||||||
Total | 3,400 | 3,576 | 3,513 | |||||||||||||||||||||
Geographic Location | ||||||||||||||||||||||||
Israel | 1,206 | 1,285 | 1,256 | 991 | 946 | 944 | ||||||||||||||||||
Americas | 1,298 | 1,365 | 1,344 | 1,298 | 1,263 | 2,544 | ||||||||||||||||||
Europe | 607 | 631 | 607 | 590 | 564 | 530 | ||||||||||||||||||
Asia Pacific | 289 | 295 | 306 | 285 | 543 | 912 | ||||||||||||||||||
Total | 3,400 | 3,576 | 3,513 | 3,164 | 3,316 | 4,930 | ||||||||||||||||||
* The 2014 numbers exclude 349 employees of the Physical Security and Cyber and Intelligence business units sold by NICE in 2015 (for more information, please see Item 5, "Operating and Financial Review and Prospects—Discontinued Operations" in this annual report).
** The substantial increase in number of employees in 2016 resulted mainly from acquisitions and an increase in personnel in certain locations (for more information, please see Item 5, "Operating and Financial Review and Prospects—Recent Acquisitions" in this annual report).
We also utilize temporary employees in various activities. On average, we employed 7050 temporary employees and obtained services from 833918 consultants (not included in the numbers set forth above) during 2014.2016.
Our future success will depend in part upon our ability to attract and retain highly skilled and qualified personnel. Although competition for such personnel is generally intense, we believe that adequate personnel resources are currently available in Israel to meet our requirements.
We are not a party to any collective bargaining agreement with our employees or with any labor organization. However, we are subject to certain labor related statutes, and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including(includ-ing the Industrialists’Industrialists' Association of Israel) that are applicable to our Israeli employeesemploy-ees by order of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the work day and the work week, minimum wages for workers, insurance for work-related accidents, determination of severance pay and other conditions of employment. Israeli law generally requires the payment by employers in Israel of severance pay upon the death of an employee, his retirement or upon termination of employment by the employer without due cause. We currently fund our ongoing severance obligations in Israel by making monthly payments to approved severance funds or insurance policies. For more information, please see Note 2q2p to our Consolidated Financial Statements. In addition, according to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, an organization similar to the U.S. Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service and bankruptcy or winding-up of the employer. Since January 1, 1995, such amount also includes payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 17%17.85% of an employee’semployee's wages (up to a certain cap as determined from time to time by law), of which the employee contributes approximately 66%62% and the employer contributes approximately 34%38%.
In addition to our severance obligations for employees located in Israel, we pay severance benefits to our employees located elsewhere in accordance with the local laws and practices of the countries in which they are employed. Moreover, we are subject to Dutch labor laws and practices for our employees in Alkmaar.
Employment Agreements
We have employment agreements with our officers. Pursuant to these employmentemploy-ment agreements, each party may terminate the employment for nowithout cause by giving a 30, 60 or 90 day prior written notice (six to twelve months in the case of certain senior officers). In addition, we may terminate such agreement for cause with no prior notice. The agreements generally include non-competition and non-disclosure provisions, although the enforceability of non-competition provisions in employment agreements under Israeli law is very limited.
Share Ownership
As of March 15, 2015,April 13, 2017, our directors and executive officers beneficially owned an aggregate of 378,457483,280 options to purchase ordinary shares that were vested on such date or that are scheduled to vest within 60 days thereafter, or approximately 0.63%0.80% of our outstanding ordinary shares. The options have an average exercise price of $33.32$41.26 per share and expire between 20152017 and 2021.2026. No individual director or executive officer beneficially owns 1% or more of our outstanding ordinary shares.
The following is a description of each of our option equity plans, under which awards were outstanding during 2016.
2016 Share Incentive Plan
In February 2016, we adopted the NICE-Systems Ltd. 2016 Share Incentive Plan, or 2016 Plan, to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve our profitability. Under the 2016 Plan, our employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire our ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the Plan, including any such equity related award that is a performance based award (each an "Award"). We have registered, through the filing of registration statements on Form S-8 with the SEC under the U.S. Securities Act of 1933 (the "Securities Act"), 2,000,000 ADSs for issuance under the 2016 Plan.
Generally, under the terms of the 2016 Plan, and unless determined otherwise by the Board of Directors, 25% of the restricted share units and par value options granted become vested on each of the four consecutive annual anniversaries following the date of grant. Specifically with respect to options (other than options granted at an exercise price equal to their nominal value), unless determined otherwise by the Administrator, 25% of an Award granted becomes exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Certain executive officers are entitled to acceleration of vesting of awards in the event of a change of control, subject to certain conditions. Awards with a vesting period expire six years after the date of grant. Options that are performance-based shall expire seven years following the date of grant. Awards are non-transferable except by will or the laws of descent and distribution.
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Options would be granted at an exercise price equal to the average of the closing prices of one American Depositary Receipts or ADR, as quoted on the NASDAQ market, during the 30 consecutive calendar days preceding the date of grant, unless determined otherwise by the administrator of the 2016 Plan (including in some cases options granted with an exercise price equal to the nominal value of an ordinary share).
Our Board of Directors also adopted an addendum to the 2016 Plan for Awards granted to grantees who are residents of Israel (the "Addendum") and resolved to elect the "Capital Gains Route" (as defined in Section 102(b)(2) of the Tax Ordinance for the grant of Awards to Israeli grantees. The U.S. addendum of the 2015 Plan provides only for non-qualified stock options for purposes of U.S. tax laws.
The 2016 Plan provides that the number of shares that may be subject to Awards granted under the 2016 Plan shall be an amount per calendar year, equal to 3.5% of our issued and outstanding share capital as of December 31 of the preceding calendar year. Out of such quantity, options currentlythat are not granted in a particular calendar year will not be allocated during the next calendar years. By setting these terms, our Board of Directors took into account the need for current employee retention and retention of future employees, including, specifically, the need to retain in certain years employees that join through acquisitions. During 2016, we granted 1,141,488 options and restricted share units under the 2016 Plan (which constituted 1.58% of our issued and outstanding share capital as of December 31, 2016).
The 2016 Plan is generally administered by our Board of Directors and compensation committee, which determines the grantees under the 2016 Plan and the number of Awards to be granted. As of April 13, 2017, options and restricted share units to purchase 1,303,109 ordinary shares were outstanding under the 2016 Plan at a weighted average exercise price.price of $4.37.
2008 Share Incentive Plan
In June 2008, we adopted the NICE-Systems Ltd. 2008 Share Incentive Plan, or 2008 Plan, to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve our profitability. Under the 2008 Plan, our employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire our ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the Plan (each an “Award”"Award"). We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act, of 1933, 6,000,0008,000,000 ADSs for issuance under the 2008 Plan.
Generally, under the terms of the 2008 Plan, 25% of an Award granted becomes exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Specifically with respect to restricted share units and par value options, unless determined otherwise by the Board of Directors, 25% of the restricted share units and par value options granted become vested on each of the four consecutive annual anniversaries following the date of grant. Certain executive officers are entitled to acceleration of vesting of awards in the event of a change of control, subject to certain conditions. Awards with a vesting period expire six years after the date of grant. Pursuant to an amendment of the 2008 Plan approved by our Board of Directors on February 4, 2014, options that are performance-based and are granted during calendar year 2014 and thereafter shall expire seven years following the date of grant. Awards are non-transferable except by will or the laws of descent and distribution.
In December 2010, the 2008 Plan was amended to provide that options would be granted at an exercise price equal to the average of the closing prices of one American Depositary Receipts or ADR, as quoted on the NASDAQ market, during the 30 consecutive calendar days preceding the date of grant, unless determined otherwise by the administrator of the 2008 Plan (including in some cases options granted with an exercise price equal to the nominal value of an ordinary share). Prior to the amendment of the 2008 Plan that occurred in 2010, options to acquire ordinary shares were granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which could be determined by the Company's Board of Directors, including in some cases the granting of par value options.
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Our Board of Directors adopted an addendum to the 2008 Plan for Awards granted to grantees who are residents of Israel (the “Addendum”"Addendum"). On June 16, 2008, our Board of Directors resolved to elect the “Capital"Capital Gains Route”Route" (as defined in Section 102(b)(2) of the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”))Ordinance) for the grant of Awards to Israeli grantees, which is described below under “2003"2003 Stock Option Plan.”" The U.S. addendum of the 2008 Plan provides only for non-qualified stock options for purposes of U.S. tax laws.
The 2008 Plan provides that the number of shares that may be subject to Awards granted under the 2008 Plan shall be an amount per calendar year, equal to 3.5% of our issued and outstanding share capital as of December 31 of the preceding calendar year. Out of such quantity, options that are not granted in a particular calendar year will not be allocated during the next calendar years. By setting these terms, our Board of Directors took into account the need for current employee retention and retention of future employees, including, specifically, the need to retain in certain years employees that join through acquisitions. During 2014,2016, we granted 1,544,32618,460 options and restricted share units under the 2008 Plan (which constituted 2.2%0.03% of our issued and outstanding share capital as of December 31, 2014)2016).
The 2008 Plan is generally administered by our Board of Directors and compensation committee, which determines the grantees under the 2008 Plan and the number of Awards to be granted. As of March 15, 2015,April 13, 2017, options and restricted share units to purchase 4,155,9891,664,790 ordinary shares were outstanding under the 2008 Plan at a weighted average exercise price of $20.67. On November 6, 2014,$19.23.
Nexidia Inc. 2005 Stock Incentive Plan
In 2005, Nexidia adopted the Nexidia Inc. 2005 Stock Incentive Plan (the "Nexidia Plan"), to attract and retain Nexidia's employees, directors, consultants and advisors and to align the interests of such recipients with the interests of Nexidia's shareholders. Under the Nexidia Plan, the grantees can receive incentive and non-qualified options to acquire shares of Nexidia's common stock, restricted stock awards, restricted stock units and stock appreciation rights.
Pursuant to the terms of the Nexidia acquisition agreement, we assumed and converted Nexidia's stock options and restricted stock units originally granted under the Nexidia Plan into stock options and restricted stock units of NICE, respectively.
As of April 13, 2017, assumed Nexidia options to purchase 16,661 shares of NICE and 129,500 assumed restricted share units were outstanding under the inContact Plan, at a weighted average exercise price of $0.74. We have registered, through the filing of a registration statementsstatement on Form S-8 with the SEC under the Securities Act, 173,860 ordinary shares for issuance under the Nexidia Plan.
inContact, Inc. 2008 Equity Incentive Plan
In 2008, inContact adopted the inContact, Inc. 2008 Equity Incentive Plan, as subsequently amended in June 14, 2012 (as amended, the "inContact Plan") to enhance inContact's ability to attract and retain those employees, officers, directors and consultants who are expected to make important contributions to inContact and any of 1933, an additional 1,000,000 ADSs, issuableits subsidiaries and to participants inalign the 2008 Plan.interests of such recipients with the interests of inContact's shareholders. Under the inContact Plan, the grantees can receive incentive and non-qualified options to acquire shares of inContact's common stock and can receive stock appreciation rights.
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Pursuant to the terms of the inContact Merger Agreement, we assumed and converted inContact's stock options, restricted stock awards and restricted stock units originally granted under the inContact Plan into stock options, restricted stock awards and restricted stock units of NICE, respectively.
As of April 13, 2017, assumed inContact options to purchase 220,767 shares of NICE and 172,828 assumed restricted share units and restricted shares were outstanding under the inContact Plan, at a weighted average exercise price of $23.37. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, 476,114 ordinary shares for issuance under the inContact Plan.
Actimize Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan
Pursuant to the terms of the acquisition of Actimize Ltd. in August 2007, we assumed and replaced the stock options and restricted shares granted by Actimize.
In 2003, Actimize adopted the 2003 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2003 Actimize Plan, to afford an incentive to employees, officers, office holders, directors, subcontractors and consultants of Actimize or any subsidiary of Actimize, to acquire a proprietary interest in Actimize, to increase their efforts on behalf of Actimize and to provide the success of Actimize’sActimize's business. Under the 2003 Actimize Plan, the grantees could be granted options to acquire Actimize’sActimize's ordinary shares, restricted shares and shares. Incentive stock options to acquire ordinary shares of Actimize were granted at an exercise price not less than the fair market value of the ordinary shares of Actimize on the date of grant or as determined by Actimize’sActimize's Board of Directors or by a committee thereof. In addition, the options were granted at an exercise price of not less than the par value of the ordinary shares of Actimize.
In September 2007, we registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, an aggregate of 987,104 ADSs, which are comprised of (i) 564,225 ADSs subject to issuance upon the exercise of stock options outstanding under the 2003 Actimize Plan and (ii) 422,879 ADSs representing restricted ordinary shares issued in lieu of restricted shares issued under the 2003 Actimize Plan.
Generally, under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable following the lapse of every consecutive quarter thereafter during the subsequent three years. Options generally expire ten years after the date of grant. Options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Tax Ordinance.
As of March 15, 2015,April 13, 2017, assumed Actimize options to purchase 13,1694,191 ordinary shares of NICE were outstanding at a weighted average exercise price of $10.91.$14.60. No additional grants are being made under this plan following the acquisition of Actimize.
e-Glue Software Technologies Inc., 2004 Stock Option Plan
In 2004, e-Glue adopted the 2004 Stock Option Plan that was further amended by e-Glue on June 9, 2010 (the “2004"2004 e-Glue Plan”Plan"), for the grant of awards to employees, directors and service providers of e-Glue and its subsidiaries. The 2004 e-Glue Plan provides for the grant of options to acquire e-Glue’se-Glue's stock, for the grant of restricted stock and for the grant of restricted share units.
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Pursuant to the terms of the e-Glue acquisition agreement, we assumed the outstanding stock options and restricted share units granted by e-Glue under the 2004 e-Glue Plan that did not expire upon closing of the e-Glue acquisition. Following such assumption, the options represent rights to purchase ordinary shares of NICE or restricted share units of NICE, pursuant to a set formula (such options and restricted share units, together the “Assumed"Assumed e-Glue Options”Options"). Some of the Assumed e-Glue Options have a three year vesting period, with a third becoming vested and exercisable one year from their date of grant and the remainder vesting and become exercisable in equal installments on an annual basis over the following two years. The remaining portion of the Assumed e-Glue Options vest as follows: 25% vest and become exercisable one year from their date of grant, and the remaining 75% vested and became exercisable on December 31, 2011. Certain Assumed e-Glue Options are subject to acceleration rights if employment is terminated within a limited time period and under certain circumstances. If the grantee ceases to be an employee or service provider of us or one of our subsidiaries, for any reason, the optionee may exercise or be entitled to the Assumed e-Glue Options to the extent they were vested and exercisable on the date of termination of employment or service, as the case may be, but only during the period ending on the earlier of (a) 10 years from the date of grant (unless sooner terminated as provided in a specific award agreement) or (b) three months after the date of termination of employment or service, as the case may be. However, if the optionee dies or becomes disabled prior to the expiration date of his or her Assumed e-Glue Options while still in the employ or service of us or one of our subsidiaries, or during the three month period described in the preceding sentence, or in the event of the retirement of the optionee for reasons of disability (within the meaning of Section 22(e)(3) of the U.S. Internal Revenue Code, 1986), the Assumed e-Glue Options shall remain exercisable until the earlier of their expiration date in accordance with the award agreement or one year from the date of such death or retirement. When applicable, the Assumed e-Glue Options shall be held by, and registered in the name of, a trustee, according to Section 102(b) of the Tax Ordinance.
As of March 15, 2015,April 13, 2017, Assumed e-Glue Options and restricted share unit to purchase 1,660420 ordinary shares of NICE were outstanding under the 2004 e-Glue Plan. The exercise price per share underlying the options and restricted share units is equal to the nominal value of an ordinary share.share. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, of 1933, 76,035 ADRs for issuance under the 2004 e-Glue Plan.Plan.
Fizzback Group (Holdings) Limited Employee Share Option Scheme
In July 2010, Fizzback adopted the Fizzback Group (Holdings) Limited Employee Share Option Scheme, as amended (the "Fizzback Plan"), to grant options to employees, directors and consultants, as applicable, of Fizzback. Under the Fizzback Plan, the grantees could be granted options which are deemed "qualifying options" for the purposes of the EMI Code (as that term is defined in the United Kingdom’sKingdom's Income Tax (Earnings and Pensions) Act 1993) to acquire Fizzback’sFizzback's ordinary shares, restricted share units and unapproved options.
Pursuant to the terms of the Fizzback share purchase agreement, we replaced the options and restricted share units originally granted under the Fizzback Plan with stock options to purchase ordinary shares of NICE and restricted share units of NICE, respectively.
Under the Fizzback Plan, the exercise price per option shall be determined by the Board of Directors in its sole and absolute discretion provided that such price shall not be less than the nominal value per option, or (when applicable) such price as from time to time adjusted pursuant to the Fizzback Plan. If a grantee ceases to be an employee, all options which have not become exercisable or which, having become exercisable, have not been exercised, shall lapse.
Options generally expire, inter alia, ten years after the date of grant, upon an insolvent liquidation of Fizzback or upon the grantee being adjudged bankrupt.
As of March 15, 2015,April 13, 2017, assumed Fizzback options and restricted share units to purchase 12,5514,288 ordinary shares of NICE were outstanding under the Fizzback Plan, at a weighted average exercise price of $0.49.$0.48. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, of 1933, 165,695 ordinary shares for issuance under the Fizzback Plan.Plan.
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Merced Plans
Merced Systems, Inc. 2001 Stock Plan
In 2001, Merced adopted the Merced Systems, Inc. 2001 Stock Plan, as amended (the "2001 Merced Plan"), to afford an incentive to employees and consultants of Merced and to promote the success of Merced’sMerced's business. Under the 2001 Merced Plan, the grantees could be granted options to acquire Merced’sMerced's ordinary shares and restricted shares.
Pursuant to the terms of the Merced acquisition agreement, we assumed and converted Merced's options and replaced Merced’sMerced's restricted shares that were originally granted under the 2001 Merced Plan into stock options to purchase ordinary shares of NICE, and with restricted shares of NICE, respectively.
Under the 2001 Merced Plan, the exercise price per share of incentive stock options granted to an employee shall be no less than 100% of the fair market value per share on the date of grant, or 110% of the fair market value if the employee was a 10% shareholder of Merced at the date of grant. The exercise price per share of non-statutory stock options granted shall be no less than 85% of the fair market value per share on the date of grant, or 110% of the fair market value if the person was a 10% shareholder of Merced at the date of grant, if required by applicable law and, if not so required, the exercise price per share shall be determined by the plan administrator. Notwithstanding the foregoing, options may be granted with an exercise price per share other than as required above pursuant to a merger or other corporate transaction.
An option granted under the 2001 Merced Plan is exercisable at the rate of at least 20% per year over five years from the date the option was granted. granted. Options generally expire ten years after the date of grant.
Merced Systems, Inc. 2011 Stock Plan
In 2011, Merced adopted the Merced Systems, Inc. 2011 Stock Plan (the "2011 Merced Plan"), to afford an incentive to employees and consultants of Merced and to promote the success of Merced’sMerced's business. Under the 2011 Merced Plan, the grantees could be granted options to acquire Merced’sMerced's ordinary shares and restricted share units.
Pursuant to the terms of the Merced acquisition agreement, we assumed and converted Merced's options and restricted share units originally granted under the 2011 Merced Plan into stock options to purchase ordinary shares of NICE and restricted share units of NICE, respectively.
Under the 2011 Merced Plan, the exercise price per share of incentive stock options granted to an employee shall be no less than 100% of the fair market value per share on the date of grant, or 110% of the fair market value if the employee was a 10% shareholder of Merced at the date of grant. The exercise price per share of non-statutory stock options shall be no less than 85% of the fair market value per share on the date of grant, or 110% of the fair market value if the person was a 10% shareholder of Merced at the date of grant, if required by applicable law and, if not so required, the exercise price per share shall be determined by the plan administrator. Notwithstanding the foregoing, options may be granted with an exercise price per share other than as required above pursuant to a merger or other corporate transaction.
An option granted under the 2011 Merced Plan is exercisable at the rate of at least 20% per year over five years from the date the option was granted. granted. Options generally expire ten years after the date of grant.
As of March 15, 2015,April 13, 2017, assumed Merced options, restricted share units and restricted shares to purchase 22,6677,370 ordinary shares of NICE were outstanding under the 2001 Merced Plan and the 2011 Merced Plan, at a weighted average exercise price of $14.57.$13.74. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, of 1933, 343,288 ordinary shares for issuance under the 2001 Merced Plan and the 2011 Merced Plan.Plan.
Major Shareholders
The following table sets forth certain information with respect to the beneficial ownership of our ordinary shares, with respect to each person known to us to be the beneficial owner of 5% or more of our outstanding ordinary shares, reported as of March 15, 2015.April 13, 2017. None of our shareholders has any different voting rights than any other shareholder.
| Name and Address | Number of Shares | Percent of Shares Beneficially Owned (1) | ||||||
Psagot Investment House Ltd. 14 Ahad Ha’am Street Tel Aviv 65142, Israel | 4,329,691 | (2) | 7.3 | % | ||||
Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199 | 4,162,819 | (3) | 7.0 | % | ||||
Migdal Insurance & Financial Holdings Ltd. 4 Efal Street; P.O. Box 3063 Petach Tikva 49512, Israel | 3,729,783 | (4) | 6.3 | % | ||||
Harel Insurance Investments & Financial Services Ltd. Harel House 3 Abba Hillel Street Ramat Gan 52118, Israel | 3,446,287 | (5) | 5.8 | % | ||||
| Name and Address | Number of Shares | Percent of Shares Beneficially Owned (1) | ||||||
Janus Capital Management LLC 151 Detroit Street Denver, Colorado 80206, USA | 4,559,401 | (2) | 7.6 | % | ||||
Massachusetts Financial Services Company 111 Huntington Avenue Boston, Massachusetts 02199 | 4,077,833 | (3) | 6.8 | % | ||||
Psagot Investment House Ltd. 14 Ahad Ha'am Street Tel Aviv 65142, Israel | 3,390,434 | (4) | 5.6 | % | ||||
Migdal Insurance & Financial Holdings Ltd. 4 Efal Street; P.O. Box 3063 Petach Tikva 49512, Israel | 3,143,558 | (5) | 5.2 | % | ||||
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(1)Based upon 59,549,52360,039,322 ordinary shares issued and outstanding as of March 15, 2015. April 13, 2017.
(2)This information is based upon a Schedule 13G/A filed by Janus Capital Management LLC with the SEC on February 14, 2017.
(4)These securities are held for members of the public through, among others, portfolio accounts managed by Psagot Securities Ltd., Psagot Exchange Traded Notes Ltd., mutual funds managed by Psagot Mutual Funds Ltd., provident funds managed by Psagot Provident Funds and Pension Ltd., and pension funds managed by Psagot Pension (Haal) Ltd., according to the following segmentation: 1,573,5431,556,434 ordinary shares are held by portfolio accounts managed by Psagot Securities Ltd., 1,342,3111,046,023 ordinary shares are held by Psagot Exchange Traded Notes Ltd., 1,177,341699,431 ordinary shares are held by provident funds managed by Psagot Provident Funds and Pension Ltd., and 236,49680,138 ordinary shares are held by mutual funds managed by Psagot Mutual Funds Ltd. (of this amount, 30,4009,500 shares may also be considered beneficially owned by Psagot Securities Ltd., but are not included in the shares beneficially owned by Psagot Securities Ltd., as indicated above) and .8,408 ordinary shares are held by Psagot Insurance Company Ltd. Each of the foregoing companies is a wholly-owned subsidiary of Psagot Investment House Ltd. This information is based upon a Schedule 13G/A filed by Psagot Investment House Ltd. with the SEC on February 18, 2015.15, 2017.
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As of April 13, 2017, we had approximately 46 registered ADS holders of record in the United States, with our ADS holders holding in total approximately 46% of our outstanding ordinary shares, as reported by JPMorgan Chase Bank, N.A., the depositary for our ADSs.
As of December 31, 2016, Harel Insurance Investments and Financial Services Ltd. ("Harel") held 2,909,357 or 4.9% of our ordinary shares. This information is based upon a Schedule 13G/A filed by Harel with the SEC on January 31, 2017. Of these securities,ordinary shares (i) 3,275,459 ordinary2,792,803 shares are held for members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or insurance policies, which are managed by subsidiaries of Harel, Insurance Investments & Financial Services Ltd. ("Harel"), each of which subsidiaries operates under independent management and makes independent voting and investment decisions; (ii) 92,370 ordinary shares are held by third-party client accounts managed by a subsidiary of Harel as portfolio managers, which subsidiary operates under independent management and makes independent investment decisions and has no voting power in the securities held in such client accounts and (iii) 78,458 ordinary shares are beneficially held for its own account. This information is based upon a Schedule 13G filed by Harel with the SEC on February 12, 2015.
As of December 31, 2013, Massachusetts Financial Services Company (“MFS”2016, IDB Development Corporation Ltd. ("IDB") held 3,230,824,2,288,700 or 4.7%,3.8% of our ordinary shares. This information is based upon a Schedule 13G13G/A filed by MFSIDB and Clal Insurance Enterprise Holdings Ltd. with the SEC on February 10, 2014.
To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government and there are no arrangements that might result in a change in control of our company.
Related Party Transactions
Consolidated Statements and Other Financial Information
See Item 18, “Financial Statements”"Financial Statements" in this annual report.
Legal Proceedings
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
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We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operation, except as noted below.
On August 27, 2015, we initiated a lawsuit in the United States District Court for the District of Delaware by filing a complaint against ClickFox for infringement of NICE's U.S. Patent No. 8,976,955 ("the '955 patent") entitled "System and method for tracking web interactions with real time analytics". ClickFox moved to dismiss the complaint on October 26, 2015. Subsequently, we filed an amended complaint alleging infringement of additional claims of the 955 patent, and ClickFox filed a renewed motion to dismiss. A motion hearing was held on April 22, 2016, and on September 15, 2016, the court granted ClickFox's motion to dismiss for lack of patent-eligible subject matter. We filed a Notice of Appeal to the Court of Appeals for the Federal Circuit on January 11, 2017. The hearing of the appeal is expected to take place towards the end of 2017 or in early 2018.
Dispute under Sale Agreement
Disputes and litigations inherited following the acquisition of $937,264.82 for such services. Nice Systems Latin America,inContact:
In May 2009, inContact was served in a lawsuit titled California College, Inc. responded, et al., v. UCN, Inc., et al. In the lawsuit, California College alleges that (1) inContact made fraudulent and/or negligent misrepresentations in December 2014connection with the sale of its services with those of Insidesales.com, Inc., another defendant in the lawsuit, (2) inContact breached its service contract with California College and denied Mr. Gordon’s entitlementan alleged oral contract between the parties by failing to such payment. To date, no claimdeliver contracted services and product and failing to abide by implied covenants of good faith and fair dealing, and (3) inContact's conduct interfered with prospective economic business relations of California College with respect to enrolling students. California College filed an amended complaint that has been answered by Insidesales.com and inContact. California College originally sought damages in excess of $20.0 million. Insidesales.com and inContact filed cross-claims against Nice Systems Latin America, Inc.one another, which they subsequently agreed to dismiss with prejudice. In October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been disclosed and remain confidential. In June of 2013, California College amended its damages claim to $14.4 million, of which approximately $5.0 million was alleged to be pre-judgment interest. On September 10, 2013, the court issued an order on inContact's Motion for Partial Summary Judgment. The court determined that factual disputes exist as to several of the claims, but dismissed California College's cause of action for intentional interference with prospective economic relations and the claim for prejudgment interest. Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9.2 million. At this preliminary stage we are unable to evaluate the probability of a favorable or unfavorable outcome in this dispute.
On November 7, 2012,June 10, 2016, a former employee of Actimizecomplaint captioned Natalie Gordon v. inContact, Inc., et al., was filed a suit in the United StatesThird Judicial District Court of Salt Lake County, State of Utah (the "Court") naming as defendants inContact and its Board of Directors (the "Gordon Action"). The plaintiff filed an amended complaint on July 1, 2016. On July 5, 2016, a complaint captioned David Stern v. inContact, Inc., et al., was filed in the same court naming as defendants inContact and its Board of Directors. On July 8, 2016, a complaint captioned Andre Davis v. inContact. Inc., et al., was filed in the same court naming as defendants inContact, its Board of Directors, Nice and Victory Merger Sub Inc., a wholly owned subsidiary of ours. On July 14, 2016 the Court ordered the three actions consolidated and designated the amended complaint in the Gordon action as the operative complaint. The consolidated action purported to be a class action brought by shareholders alleging that the members of inContact's Board of Directors breached their fiduciary duties by approving the Merger Agreement with NICE pursuant to which inContact was acquired as a wholly owned indirect subsidiary of ours. On August 4, 2016 the parties entered into a Memorandum of Understanding for the Southern Districtsettlement of New York claiming discrimination on the basis of disability. The suit includes a claim for reinstatement as well as compensatory damages and other relief.three actions. The parties engaged in mediation, buthave recently completed the mediation did not result in a resolutionnegotiation of the case. A settlement conference was held on February 10, 2014, but no settlement was reached. Actimize Inc. filed a motion for partial summary judgment, seeking dismissal ofagreement, and we expect that this action will be formally dismissed in the statutory discrimination claims. The briefing on the motion has been completed and the parties await the Court’s decision. We are unable to evaluate the probability of a favorable or unfavorable outcome in this dispute.near future.
Dividends
On January 6, 2017, our Board of Directors approved the Company has never declared or paid cash dividends on its ordinary shares.termination of this dividend plan, and we do not have any plans at this time to make any future dividend payments. Payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend on various factors, such as our statutory profits, financial condition, operating results and current and anticipated cash needs. In the event cash dividends are declared by us, we may decide to pay such dividends in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with non-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of exchange prevailing at the time of conversion. For more information regarding the taxation implications of the dividend plan, see “Item"Item 10 - Additional Information - Taxation”Taxation" of this annual report.
Significant Changes
On February 5, 2015,January 18, 2017, we announced that Dafna Gruber will be retiring from her position as Chief Financial Officerissued $287.5 million aggregate principal amount of the Notes. The Notes bear interest at a fixed rate of 1.25% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2017. Subject to satisfaction of certain conditions and during certain periods, at the option of the holders the notes are exchangeable for (at our election) (i) cash, (ii) ADSs or (iii) a combination thereof. The exchange rate was initially set at 12.0260 ADSs per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $83.15 per ADS), subject to future adjustment.
In connection with the issuing of the Notes, we entered into privately negotiated exchangeable note hedge transactions with some of the initial purchasers (and/or their respective affiliates) (the "option counterparties"). Subject to customary anti-dilution adjustments substantially similar to those applicable to the Notes, the exchangeable note hedge transactions cover the same number of our company. As approved byADSs that initially underlie the Notes. The hedge transactions are expected generally to reduce potential dilution to our BoardADSs and/or offset potential cash payments we are required to make in excess of Directors on February 4, 2015, Ms. Sarit Sagiv will assume the positionprincipal amount, in each case, upon any exchange of Chief Financial Officerthe Notes. Concurrently with the entry into the exchangeable note hedge transactions, we entered into warrant transactions with the option counterparties relating to the same number of NICE followingADSs, with a transition period.strike price of $101.8200 per ADS, subject to customary anti-dilution adjustments.
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Trading in the ADSs
Our American Depositary Shares, or ADSs have been quoted on the NASDAQ Stock Market under the symbol “NICEV”"NICEV" from our initial public offering in January 1996 until April 7, 1999, and thereafter under the symbol “NICE.”"NICE." Prior to that time, there was no public market for our ordinary shares in the United States. Each ADS represents one ordinary share. The following table sets forth, for the periods indicated, the high and low reported market (sale) prices for our ADSs.
| ADSs | ||||
| High | Low | |||
| Annual | ||||
| 2010 | 35.20 | 25.10 | ||
| 2011 | 38.49 | 27.17 | ||
| 2012 | 40.04 | 29.51 | ||
| 2013 | 42.12 | 33.63 | ||
| 2014 | 51.75 | 37.08 | ||
| Quarterly | ||||
| Quarterly 2013 | ||||
| First Quarter | $38.28 | $34.02 | ||
| Second Quarter | 37.96 | 33.63 | ||
| Third Quarter | 42.12 | 36.31 | ||
| Fourth Quarter | 42.06 | 37.44 | ||
| Quarterly 2014 | ||||
| First Quarter | $45.00 | $37.79 | ||
| Second Quarter | 46.07 | 37.08 | ||
| Third Quarter | 41.55 | 37.84 | ||
| Fourth Quarter | 51.75 | 38.60 | ||
| Quarterly 2015 | ||||
| First Quarter | $61.92 | $47.95 | ||
| Monthly | ||||
| September 2014 | $41.55 | $38.62 | ||
| October 2014 | 41.80 | 38.60 | ||
| November 2014 | 50.09 | 40.26 | ||
| December 2014 | 51.75 | 47.23 | ||
| January 2015 | 51.20 | 47.95 | ||
| February 2015 | 59.64 | 48.21 | ||
| March 2015 | 61.92 | 57.99 | ||
| ADSs | ||||||||
| High | Low | |||||||
| Annual | ||||||||
| 2012 | 40.04 | 29.51 | ||||||
| 2013 | 42.12 | 33.63 | ||||||
| 2014 | 51.75 | 37.08 | ||||||
| 2015 | 68.38 | 47.95 | ||||||
| 2016 | 69.79 | 54.12 | ||||||
| Quarterly | ||||||||
| Quarterly 2016 | ||||||||
| First Quarter | $ | 66.28 | $ | 54.12 | ||||
| Second Quarter | 67.25 | 59.07 | ||||||
| Third Quarter | 69.46 | 62.98 | ||||||
| Fourth Quarter | 69.79 | 63.72 | ||||||
| Quarterly 2017 | ||||||||
| First Quarter | 70.84 | 65.59 | ||||||
| Second Quarter (through April 20, 2017) | 68.66 | 66.57 | ||||||
| Monthly | ||||||||
| September 2016 | $ | 68.83 | $ | 64.01 | ||||
| October 2016 | 67.67 | 65.92 | ||||||
| November 2016 | 69.79 | 64.18 | ||||||
| December 2016 | 68.94 | 63.72 | ||||||
| January 2017 | 70.49 | 65.59 | ||||||
| February 2017 | 70.84 | 67.18 | ||||||
| March 2017 | 69.52 | 65.72 | ||||||
| April 2017 (through April 20, 2017) | 68.66 | 66.57 | ||||||
On April 1, 2015,20, 2017, the last reported price of our ADSs was $60.50$68.31 per ADS.
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Trading in the Ordinary Shares
Our ordinary shares have been listed on the Tel-Aviv Stock Exchange, or TASE, since 1991. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside Israel (other than through ADSs as noted above). The table below sets forth the high and low reported market (sale) prices of our ordinary shares (in NIS and dollars) on the TASE. The translation into dollars is based on the daily representative rate of exchange published by the Bank of Israel.
Ordinary Shares | |||||||||||||||||
| High | Low | ||||||||||||||||
| NIS | $ | NIS | $ | ||||||||||||||
| Annual | |||||||||||||||||
| 2012 | 150.00 | 38.82 | 117.80 | 30.29 | |||||||||||||
| 2013 | 149.10 | 42.21 | 122.10 | 33.27 | |||||||||||||
| 2014 | 203.30 | 51.94 | 130.60 | 36.90 | |||||||||||||
| 2015 | 262.6 | 68.76 | 189.4 | 47.95 | |||||||||||||
| 2016 | 268.0 | 69.76 | 207.2 | 53.29 | |||||||||||||
Quarterly 2016 | |||||||||||||||||
| First Quarter | 251.9 | 66.33 | 207.2 | 53.29 | |||||||||||||
| Second Quarter | 255.9 | 66.33 | 229.2 | 58.77 | |||||||||||||
| Third Quarter | 263.6 | 69.26 | 242.3 | 62.65 | |||||||||||||
| Fourth Quarter | 268.0 | 69.76 | 244.9 | 64.19 | |||||||||||||
Quarterly 2017 | |||||||||||||||||
| First Quarter | 269.50 | 71.19 | 239.30 | 65.58 | |||||||||||||
| Second Quarter (through April 20, 2017) | 250.70 | 69.07 | 243.50 | 66.66 | |||||||||||||
Monthly | |||||||||||||||||
| September 2016 | 259.4 | 68.95 | 242.3 | 64.00 | |||||||||||||
| October 2016 | 259.0 | 67.80 | 249.4 | 65.81 | |||||||||||||
| November 2016 | 268.0 | 69.76 | 244.9 | 64.19 | |||||||||||||
| December 2016 | 265.6 | 68.90 | 247.5 | 64.83 | |||||||||||||
| January 2017 | 269.5 | 71.19 | 252.6 | 65.58 | |||||||||||||
| February 2017 | 267.7 | 71.05 | 251.2 | 67.00 | |||||||||||||
| March 2017 | 256.9 | 69.67 | 239.3 | 65.89 | |||||||||||||
| April 2017 (through April 20, 2017) | 250.7 | 69.07 | 243.5 | 66.66 | |||||||||||||
| Ordinary Shares | ||||||||||||||||
| High | Low | |||||||||||||||
| NIS | $ | NIS | $ | |||||||||||||
| Annual | ||||||||||||||||
| 2010 | 129.70 | 34.66 | 97.20 | 25.08 | ||||||||||||
| 2011 | 139.00 | 37.45 | 97.25 | 27.12 | ||||||||||||
| 2012 | 150.00 | 38.82 | 117.80 | 30.29 | ||||||||||||
| 2013 | 149.10 | 42.21 | 122.10 | 33.27 | ||||||||||||
| 2014 | 203.30 | 51.94 | 130.60 | 36.90 | ||||||||||||
| Quarterly 2013 | ||||||||||||||||
| First Quarter | 144.00 | 38.69 | 124.20 | 33.27 | ||||||||||||
| Second Quarter | 137.90 | 37.20 | 122.10 | 33.74 | ||||||||||||
| Third Quarter | 147.80 | 42.05 | 130.50 | 36.76 | ||||||||||||
| Fourth Quarter | 149.10 | 42.21 | 132.60 | 37.49 | ||||||||||||
| Quarterly 2014 | ||||||||||||||||
| First Quarter | 155.00 | 44.45 | 133.70 | 36.90 | ||||||||||||
| Second Quarter | 158.70 | 45.71 | 130.60 | 37.73 | ||||||||||||
| Third Quarter | 152.30 | 41.74 | 132.70 | 37.70 | ||||||||||||
| Fourth Quarter | 203.30 | 51.94 | 145.20 | 38.85 | ||||||||||||
| Quarterly 2015 | ||||||||||||||||
| First Quarter | 246.70 | 61.58 | 189.40 | 47.95 | ||||||||||||
| Monthly | ||||||||||||||||
| September 2014 | 152.30 | 41.74 | 139.90 | 38.99 | ||||||||||||
| October 2014 | 154.10 | 42.12 | 145.20 | 38.85 | ||||||||||||
| November 2014 | 184.90 | 47.84 | 152.90 | 40.35 | ||||||||||||
| December 2014 | 203.30 | 51.94 | 183.70 | 46.93 | ||||||||||||
| January 2015 | 201.60 | 51.40 | 189.90 | 47.95 | ||||||||||||
| February 2015 | 236.10 | 59.74 | 189.40 | 48.11 | ||||||||||||
| March 2015 | 246.70 | 61.58 | 228.80 | 58.28 | ||||||||||||
As of April 1, 2015,20, 2017, the last reported price of our ordinary shares on the TASE was NIS 241.50248.1 (or $60.77)$67.71) per share.
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Memorandum and Articles of Association
Organization and Register
We are a company limited by shares organized in the State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel and have been assignedthe company number 52-0036872.
Objectives and Purposes
Our objectives and purposes include a wide variety of business purposes, including all kinds of research, development, manufacture, distribution, service and maintenance of products in all fields of technology and engineering and to engage in any other kind of business or commercial activity. Our objectives and purposes are set forth in detail in Section 2 of our memorandum of association.
Directors
Our articles of association provide that the number of directors serving on the Board shall be not less than three but shall not exceed thirteen, including at least twothirteen. As discussed above in Item 6, "Directors, Senior Management and Employees – Board Practices – Outside Directors", in December 2016, our shareholders approved amendments to our articles of association, pursuant to which our Board of Directors may elect to opt out of such requirements and we would not be required to have outside directors.directors serve on our Board of Directors. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The Board may appoint additional directors (whether to fill a vacancy or create new directorship) to serve until the next annual shareholders meeting, provided, however, that the Board shall have no obligation to fill any vacancy unless the number of directors is less than three. Our officers serve at the discretion of the Board.
The Board of Directors may meet and adjourn its meetings according to the Company’sCompany's needs but must meet at least once every three months. A meeting of the Board may be called at the request of any two directors. The quorum required for a meeting of the Board consists of a majority of directors who are lawfully entitled to participate in the meeting and vote thereon. The adoption of a resolution by the Board requires approval by a simple majority of the directors present at a meeting in which such resolution is proposed. In lieu of a Board meeting, a resolution may be adopted if all of the directors lawfully entitled to vote thereon consent not to convene a meeting.
Subject to the Israeli Companies law, the Board may appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate. Under the Israeli Companies Law the Board of Directors must appoint an internal audit committee, comprised of at least three directors and including both of the outside directors. The function of the internal audit committee is to review irregularities in the management of the Company’sCompany's business and recommend remedial measures. The committee is also required, under the Israeli Companies Law, to approve certain related party transactions and to assess our internal audit system and the performance of our internal auditor. Notwithstanding the foregoing, the Board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The Board has appointed an internal audit committee which has three members, an audit committee which has fourfive members, a compensation committee which has fourfive members, a nominations committee which has two members and a mergers and acquisitions committee which has fivesix members. For more information on the Company’sCompany's committees, please see Item 6, “Directors,"Directors, Senior Management and Employees—Board Practices”Practices" in this annual report.
Fiduciary Duties of Officers
The Israeli Companies Law codifies the fiduciary duties that “office"office holders,”" including directors and executive officers, owe to a company. An office holder’sholder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder’sholder's position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’scompany's affairs which the office holder has received due to his position as an office holder.
Approval of Certain Transactions
The Israeli Companies Law requires that an office holder of thea 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. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’sholder's spouse, siblings, parents, grandparents,grandpar-ents, descendants, spouse’sspouse's descendants and the spouses of any of the foregoing. In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company’scompany's profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only Board approval is required unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company’scompany's interest. Furthermore, 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’scompany's internal audit committee and then by the Board of Directors, and, under certain circumstances, by a meeting of the shareholders of the company. An office holder who has a personal interest in a transaction that is considered at a meeting of the Board of Directors or the internal audit committee generally may not be present at the deliberations or vote on this matter, unless the chairman of the Board or chairman of the internal audit committee, as the case may be, determined that the presence of such person is necessary to present the transaction to the meeting. If a majority of the directors have a personal interest in an extraordinary transaction with the Company,company, shareholder approval of the transaction is required.
It is the responsibility of the audit committee to determine whether or not a transaction should be deemed an extraordinary transaction. In addition, as a result of a recent amendment to the Israeli Companies Law, the audit committee must also establish (i) procedures for the consideration of any transaction with a controlling shareholder, even if it is not extraordinary, such as a competitive process with third parties or negotiation by independent directors, and (ii) approval requirements for controlling shareholder transactions that are not negligible.
The Israeli Companies Law applies the same disclosure requirements to a controlling shareholdershare-holder of a public company, which includes 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. ExtraordinaryExtraor-dinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of management fees of a controlling shareholder or compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the Board of Directors and the shareholders of the company by simple majority, provided that either such majority vote must include at least a simple majority of the shareholders who have no personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest in the transaction who vote against the transaction represent no more than two percent of the voting rights in the company. Any such extraordinary transaction whose term is longer than three years requires further shareholder approval every three years, unless (with respect to transactions not involving management fees or employment terms) the internal audit committee approves that a longer term is reasonable under the circumstances.
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In addition, under the Israeli Companies Law, a private placement of securities requires approval by the Board of Directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
| · | the securities issued amount to 20% or more of the |
| · | some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and |
| · | the transaction will increase the relative holdings of a shareholder that holds five percent or more of the |
According to the Company’sCompany's articles of association, certain resolutions, such as resolutions regarding mergers and windings up, require approval of the holders of 75% of the shares represented at the meeting and voting thereon.
Approval of Office Holder Compensation
Under the Israeli Companies Law, we are required to adopt a compensation policy, recommended by the compensation committee, and approved by the Board of Directors and the shareholders, in that order, at least once every three years. Following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved such compensation policy at our 2013 annual general meeting of shareholders held on August 27, 2013.2013, and an amended compensation policy at our 2015 annual general meeting of shareholders held on July 9, 2015. At the Company's special general meeting held on December 21, 2016, following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved certain amendments to the current compensation policy. The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling shareholder and those who have a personal interest in the matter (similar to the threshold described above). In general, all office holders’holders' terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability - must comply with the company's compensation policy. Although NASDAQ rules generally require shareholder approval when an equity based compensation plan is established or materially amended, as a foreign company we follow the aforementioned requirements of the Israeli Companies Law.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation committee, the Board of Directors and the shareholders of the company, in that order. Notwithstanding, a company's compensation committee and board of directors are permitted to approve the compensation terms of a chief executive officer or of a director, without convening a general meeting of shareholders, provided however, that such terms: (1) are not more beneficial than such officer's former terms or than the terms of his predecessor, or are essentially the same in their effect; (2) are in line with the compensation policy; and (3) are brought for shareholder approval at the next general meeting of shareholders.
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The compensation terms of other officers require the approval of the compensation committee and the Board of Directors. An amendment of existing compensation terms of an office holder who is not a director, if the compensation committee determines that the amendment is not material, requires the approval of the compensation committee only. Pursuant to a recent amendment to regulations promulgated under the Israeli Companies Law governing the relaxation in transactions with interested parties - an amendment of the existing compensation terms of office holders who are subordinate to the chief executive officer, if the amendment is not material and the changes are in line with the existing compensation policy, requires only the chief executive officer's approval (in accordance to such amendment, on December 21, 2016, our shareholders approved an amendment to the compensation policy, which provided our chief executive officer the authority to approve non-material changes to the compensation terms of office holders subordinated to him, without seeking the approval of the compensation committee).
Duties of Shareholders
Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the Companycompany and other shareholders and to refrain from abusing his or her power in the company including, among other things, voting in a general meeting of shareholders on the following matters:
| · | any amendment to the articles of association; |
| · | an increase of the |
| · | a merger; or |
| · | approval of interested party transactions which require shareholder approval. |
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company’scompany's articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Israeli Companies Law does not describe the substance of this duty but provides that a breach of his duty is tantamount to a breach of fiduciary duty of an officer of the Company.company.
Exemption, Insurance and Indemnification of Directors and Officers
We provide our directors with indemnification letters whereby we agree to indemnify them to the fullest extent permitted by law. On September 19, 2011, at our 2011 annual general meeting of shareholders, after the approval of the audit committee and the Board, our shareholders approved a modified form of indemnification letter to ensure that our directors are afforded protection to the fullest extent permitted by law.
Exemption of Office Holders
Under the Israeli Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so. Our articles of association do not allow us to do so.
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Office Holder Insurance
Our articles of association provide that, subject to the provisions of the Israeli Companies Law, including the receipt of all approvals as required therein or under any applicable law, we may enter into an agreement to insure an office holder for any responsibility or liability that may be imposed on such office holder in connection with an act performed by such office holder in such office holder's capacity as an office holder of us with respect to each of the following:
| · | a violation of his duty of care to us or to another person, |
| · | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his act would not prejudice our interests, |
| · | a financial obligation imposed upon him for the benefit of another person, |
| · | a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 5728-1968, as amended (the "Securities Law") and Litigation Expenses (as defined below) that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, and |
| · | any other event, occurrence or circumstance in respect of which we may lawfully insure an office holder. |
Indemnification of Office Holders
Our articles of association provide that, subject to the provisions of the Israeli Companies Law, including the receipt of all approvals as required therein or under any applicable law we may indemnify an office holder with respect to any liability or expense for which indemnification may be provided under the Companies Law, including the following liabilities and expenses, provided that such liabilities or expenses were imposed upon or incurred by such office holder in such office holder's capacity as an office holder of us:
| · | a monetary liability imposed on or incurred by an office holder pursuant to a judgment in favor of another person, including a judgment imposed on such office holder in a settlement or in an arbitration decision that was approved by a court of law; |
| · | reasonable Litigation Expenses, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent |
| · |
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| · | reasonable Litigation Expenses, which the office holder incurred or with which the office holder was charged by a court of law, in a proceeding brought against the office holder, by the Company, on its behalf or by another person, or in a criminal prosecution in which the office holder was acquitted, or in a criminal prosecution in which the office holder was convicted of an offense that does not require proof of criminal intent |
| · | a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Securities Law, and Litigation Expenses that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law; and |
| · | any other event, occurrence or circumstance in respect of which we may lawfully indemnify an office holder. |
The foregoing indemnification may be procured by us (a) retroactively and (b) as a commitment in advance to indemnify an office holder, provided that, in respect of the first bullet above, such commitment shall be limited to (A) such events that in the opinion of the Board of Directors are foreseeable in light of our actual operations at the time the undertaking to indemnify is provided, and (B) to the amounts or criterion that the Board of Directors deems reasonable under the circumstances, and further provided that such events and amounts or criterion are set forth in the undertaking to indemnify, and which shall in no event exceed, in the aggregate, the greater of: (i) 25% of our shareholder’sshareholder's equity at the time of the indemnification, or (ii) 25% of our shareholder’sshareholder's equity at the end of fiscal year of 2010.
We have undertaken to indemnify our directors and officers pursuant to applicable law. We have obtained directors' and officers' liability insurance for the benefit of our directors and officers. The Company currently has a directors and officers liability insurance policy limited to $100 million (the “Policy”"Policy"), at an annual premium of approximately $432,473.$386,888. Our internal audit committee, Board of Directors, and shareholders have approved the Company’s “Side A”Company's "Side A" Difference in Conditions extension of the Policy, limited to an additional $25 million, which provides the directors and officers with personal asset protection in situations when other sources of insurance or indemnification fail or are not available (the “Extended Policy”"Extended Policy"). The Extended Policy portion is at an additional annual premium of approximately $58,500.$54,112.
Limitations on Exemption, Insurance and Indemnification
The Israeli Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
| · | a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| · | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly (other than if solely done in negligence); |
| · | any act or omission done with the intent to derive an illegal personal benefit; or |
| · | a fine, civil fine or ransom levied on an Office Holder, or a financial sanction imposed upon an Office Holder under Israeli Law. |
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Required Approvals
In addition, under the Israeli Companies Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit committee and our Board of Directors and, if the beneficiary is a director, by our shareholders. We have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors.
Rights of Ordinary Shares
Our ordinary shares confer upon our shareholders the right to receive notices of, and to attend, shareholder meetings, the right to one vote per ordinary share at all shareholders’shareholders' meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Board of Directors; and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company. All ordinary shares rank pari passu in all respects with each other. Our Board of Directors may, from time to time, make such calls as it may think fit upon a shareholder in respect of any sum unpaid in respect of shares held by such shareholder which is not payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments).
Meetings of Shareholders
An annual general meeting of our shareholders shall be held once in every calendar year at such time and at such place either within or without the State of Israel as may be determined by our Board of Directors.
Our Board of Directors may, whenever it thinks fit, convene a special general meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors. Special general meetings may also be convened upon shareholder request in accordance with the Israeli Companies Law and our articles of association.
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. Although NASDAQ generally requires a quorum of 33-1/3%, we have an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel, which have a quorum requirement of 25%. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and voting on the matter adjourned. At such reconvened meeting the required quorum consists of any two members present in person or by proxy.
Mergers and Acquisitions
A merger of the Company shall require the approval of the holders of a majority of 75% of the voting power represented at the annual or special general meeting in person or by proxy or by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Israeli Companies Law. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
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The Israeli Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company. These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’scompany's outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’scompany's outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’scompany's outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer is entitled to stipulate that tendering shareholders forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares. Shareholders may request an appraisal in connection with a tender offer for a period of six months following the consummation of the tender offer, but the purchaser is entitled to stipulate as a condition of such tender offer that any tendering shareholder renounce its appraisal rights.
Material Contracts
On January 11, 2016, we entered into an Agreement and Plan of Merger to acquire Nexidia, a leading provider of advanced customer analytics. We acquired Nexidia for total consideration of approximately $135.0 million in cash. The acquisition allows us to offer a combined offering, featuring analytics capabilities with accuracy, scalability and performance, enabling organizations to expand their analytics usage in critical business use cases. Organizations will benefit from the combined offering, which features a best-in-class, analytics-based solution.
inContact Acquisition Agreement
On May 17, 2016, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with inContact Inc. and Victory Merger Sub Inc., a wholly owned subsidiary of ours (the "Merger Sub"). On November 14, 2016, pursuant to the terms of the Merger Agreement, Merger Sub merged with and into inContact, with inContact surviving the merger as a wholly owned subsidiary of ours. At the effective time of the merger, each outstanding share of inContact common stock (the "inContact Shares") (other than (i) shares owned by inContact or us, (ii) for which inContact stockholders exercised appraisal rights under Delaware law, or (iii) outstanding restricted stock) was cancelled and converted into the right to receive $14.00, without interest. Also at the effective time of the merger, outstanding vested inContact RSUs and stock options were cancelled in exchange for the right to receive in cash, (a) in the case of RSUs, $14.00 for each inContact share subject to such vested RSU, less any required tax withholding, and (b) in the case of stock options, the excess, if any, of $14.00 over the applicable per share exercise price for each inContact share underlying a vested stock option, less any required tax withholding. Additionally, outstanding unvested inContact RSUs, stock options and restricted stock at the effective time of the merger were cancelled and converted into RSUs with ADSs to be received upon settlement, options to acquire ADSs and restricted ADSs, respectively, in each case with the number of ADSs subject to such award (and in the case of options, the exercise price) adjusted pursuant to an exchange ratio determined based upon the average closing price of ADSs for the ten trading days immediately preceding the closing date for the transaction. Other than the number of ADSs subject to such unvested equity awards (and in the case of options) the adjusted exercise price, the unvested equity awards remain subject to the same terms and conditions that the cancelled equity awards were subject to, including as to vesting and settlement.
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Credit Agreement
On November 14, 2016, in connection with the consummation of the inContact acquisition, we and Nice Systems entered into a secured Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement provides for a term loan facility of $475 million and a revolving facility of $75 million. The Credit Agreement is guaranteed by most of our Israeli and U.S. material subsidiaries, including NICE Systems, and secured by substantially all assets of our and the guarantors assets, subject to certain customary exceptions.
Unless terminated earlier, loans outstanding under the term loan facility mature and commitments under the revolving facility expire on November 14, 2021. The term loan amortizes in equal quarterly installments in annual amounts (expressed as percentages of the loans made under the term loan facility on November 14, 2016 (the initial funding date of the term loan facility)) at the repayment rate of 1.25% during the period from March 2017 to December 2019 and 2.50% during the period from March 2020 to September 2021, with the remaining balance due on the final maturity date of the term loan facility.
We have the right to prepay borrowings under the Credit Agreement and to reduce the unutilized portion of the revolving credit facility, in each case, at any time without premium or penalty (except for Eurodollar breakage fees, if any). In January 2017, we used the net proceeds of the Notes offering described below to repay a principal amount of $260 million, which resulted in $5.3 million amortization of debt issuance costs. In addition, the contractual principal payments for the long term loan have changed and we will pay the entire remaining principal of $215 million on the final maturity date of the term loan facility. We are required to prepay borrowings under the term loan facility with all of the net cash proceeds of sales or dispositions of assets or other property, subject to certain reinvestment rights and other exceptions. The interest rates under the Credit Agreement are variable based on LIBOR or an alternate base rate at the time of the borrowing, plus a margin to be determined based on our leverage as measured by a ratio of consolidated total net indebtedness to consolidated EBITDA (the "Consolidated Total Net Leverage Ratio") and ranging from 1.25% to 2.00%, in the case of LIBOR rate loans, or 0.25% to 1.00%, in the case of base rate loans. A commitment fee will accrue on the average daily unused portion of the revolving facility at the rate ranging from 0.25% to 0.50%, depending on the Consolidated Total Net Leverage Ratio, and is initially set at 0.375% per annum.
The Credit Agreement contains customary covenants, which include, among others, limitations or restrictions on the incurrence of indebtedness, the incurrence of liens and entry into sales and leaseback transactions, mergers, transfers, leases, licenses, sublicenses or dispositions of any asset, including any Equity Interest (as defined in the Credit Agreement) owned by us or any of our subsidiaries, transactions with affiliates and certain transactions limiting the ability of subsidiaries to pay dividends, in each case, subject to certain exceptions. The Credit Agreement also includes a requirement, to be tested quarterly, that we maintain a Consolidated Total Net Leverage Ratio, as of the last day of any fiscal quarter ending on or after March 31, 2017 and on or prior to December 31, 2018, that does not exceed 3.00 to 1.00 and as of the last day of any fiscal quarter ending thereafter, does not exceed 2.50 to 1.00. For these ratios, consolidated EBITDA and consolidated interest expense are calculated in a manner defined in the Credit Agreement. The Credit Agreement also includes customary events of defaults.
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Notes and Indenture
On January 18, 2017, NICE Systems issued $287.5 million aggregate principal amount of the Notes. The Notes are the general unsecured obligations of NICE Systems, guaranteed by us. The sale of the Notes generated net proceeds of approximately $260.1 million. The Notes were issued pursuant to an indenture (the "Indenture") among us, NICE Systems and U. S. Bank National Association, as trustee (the "trustee").
The Notes bear interest at a fixed rate of 1.25% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2017. The Notes will mature on January 15, 2024, unless earlier prepaid, redeemed or exchanged, and are not redeemable at NICE Systems' option prior to their maturity date, except in the event of certain tax law changes.
Subject to satisfaction of certain conditions and during certain periods, at the option of the holders the Notes are exchangeable for (at our election) (i) cash, (ii) ADSs or (iii) a combination thereof. The exchange rate was initially set at 12.0260 ADSs per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $83.15 per ADS). The exchange rate is subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date or NICE Systems' delivery of a notice of tax redemption, in certain circumstances NICE Systems will increase the exchange rate for a holder who elects to exchange its Notes in connection with such a corporate event or tax redemption, as the case may be.
If we or NICE Systems undergo a fundamental change (as defined in the Indenture), holders may require NICE Systems to prepay for cash all or part of their Notes at a prepayment price equal to 100% of the principal amount of the Notes to be prepaid, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change prepayment date.
The Indenture contains customary events of default. In the case of an event of default arising from certain events of bankruptcy, insolvency or reorganization, with respect to us, NICE Systems or any of our subsidiaries that is a significant subsidiary (as defined in the Indenture), all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default, other than for the failure to file reports described below, occurs and is continuing, then the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare the Notes to be due and payable. The Indenture further provides that with respect to an event of default arising from the Company's failure to comply with the obligations to timely file any document or report that it is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as applicable, we may elect to pay additional interest on the Notes as the sole remedy for such event of default during the period indicated below. Additional interest will accrue on the Notes at a rate equal to (i) 0.25% per annum of the principal amount of the Notes outstanding for each day during the period beginning on, and including, the date on which such event of default first occurred and ending on the earlier of (x) the date on which such event of default is cured or validly waived and (y) the 90th day immediately following, and including, the date on which such event of default first occurred and (ii) if such event of default has not been cured or validly waived prior to the 91st day immediately following, and including, the date on which such event of default first occurred, 0.50% per annum of the principal amount of notes outstanding for each day during the period beginning on, and including, the 91st day immediately following, and including, the date on which such event of default first occurred and ending on the earlier of (x) the date on which the event of default is cured or validly waived and (y) the 180th day immediately following, and including, the date on which such event of default first occurred.
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Exchange Controls
Holders of ADSs are able to convert dividends and liquidation distributions into freely repatriable non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, pursuant to regulations issued under the Currency Control Law, 5738–1978, provided that Israeli income tax has been withheld by us with respect to amounts that are being repatriated to the extent applicable or an exemption has been obtained.
Our ADSs may be freely held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, are not restricted in any way by the our memorandum of association or articles of association or by the laws of the State of Israel.
Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders. 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 ADSs should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ADSs, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares or ADSs. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on taxable income currently at the rate of 26.5%. Following for the 2015 tax year and 25% for the 2016 tax year. Under an amendment enacted in December 2016 to the IsraeliIsrael Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2014,of 5721-1961, or the Tax Ordinance, the corporate tax rate is scheduledwill decrease to remain at a rate of 26.5%24% for future tax years.2017 and 23% for 2018 and thereafter. Israeli companies are generally subject to capital gains tax at the corporate tax rate. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise (see below), may be considerably less.
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We are permitted to measure our Israeli taxable income in U.S. dollars pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for doing so. We believe that we meet and will continue to meet, the necessary conditions and as such, we measure our results for tax purposes based on the U.S. dollar/NIS exchange rate.rate on December 31 of the relevant tax year.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959, as amended.
We derive and expect to continue to derive significant tax benefits in Israel relating to our “Preferred Enterprise”"Preferred Enterprise" programs, pursuant to the Law for Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for these tax benefits, we must continue to meet certain conditions. In the event of a failure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, including interest and certain inflation adjustments. As of December 31, 2014,2016, we believe that we are in compliance with all the conditions required by the law.
Income from sources other than the “Preferred Enterprises” will be"Preferred Enterprises" are taxable at regular corporate tax rates.
Benefits under the Preferred Enterprise regime include:
| · | A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their annual income |
| · | The reduced tax rates |
| · | A definition of |
| · | A reduced dividend withholding tax rate of 15% for the tax year 2013, and 20% for the tax year 2014 and thereafter applies to dividends paid from preferred income to both Israeli and non-Israeli investors, with an exemption from such withholding tax applying to dividends paid to an Israeli company. |
In December 2016, the Israeli Knesset passed a number of changes to the Investments Law regimes. These changes were scheduled to come into effect beginning January 1, 2017, provided that regulations are promulgated by the Finance Ministry to implement the "Nexus Principles" based on OECD guidelines recently published as part of the Base Erosion and Profit Shifting (BEPS) project. The regulations were set to be finalized by March 31, 2017 and have been delayed. Accordingly, these changes have not come into effect yet and it is not clear when the new regulations will be finalized. Applicable benefits under the new regime will include:
| · | Introduction of a benefit regime for "Preferred Technology Enterprises", granting a 12% tax rate on income deriving from Intellectual Property, subject to a number of conditions being fulfilled, including a minimal amount or ratio of annual R&D expenditure and R&D employees, as well as having at least 25% of annual income derived from exports. |
| · | A |
| · | A withholding tax rate of |
Full details regarding our Preferred Enterprises may be found in Note 13(a)(2)12(a)(1) of our Consolidated Financial Statements.
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Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be for the promotion of the company and carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-yearthree‑year period.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry"Industry Encouragement Law”Law"), Industrial Companies (as defined below) are entitled to the following tax benefits, among others:
| · | deductions over an |
| · | deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market; |
| · | the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and |
| · | accelerated depreciation rates on equipment and buildings. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “industrial company”"industrial company" is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise”"Industrial Enterprise" owned by it. An “Industrial Enterprise”"Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an industrial company or that the benefits described above will be available in the future.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’sshareholder's country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’sasset's purchase price which is attributable to thean increase in the Israeli consumer price index, or a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
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The following discussion refers to the sale of our ordinary shares. However, the same tax treatment would apply to the sale of our ADSs.
Taxation of Israeli Residents
As of January 1, 2012, the tax rate generally applicable to the capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder is considered a “significant shareholder”"significant shareholder" at any time during the 12-month period preceding such sale (i.e., such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) in which case the tax rate will be 30%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares. However, different tax rates may apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each year) (NIS 811,560803,520 in 2014)2016), will be subject to an additional tax, referred to as Income Surtax, at the rate of 2% on their taxable income for such tax year which is in excess of such threshold. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions. Under an amendment enacted in December 2016 to the Tax Ordinance, for the tax year 2017 and thereafter the rate of High Income Tax will increase to 3% and will be applicable to annual income exceeding NIS 640,000 (linked to the CPI each year).
Taxation of Non-Israeli Residents
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE provided such gains did not derive from a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel, provided such shareholders did not acquire their shares prior to the issuer’sissuer's initial public offering (in which case a partial exemption may be available), that the gains did not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) and who holds ordinary shares as a capital asset is also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. If the above conditions are not met, the U.S. resident would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the gain would be treated as foreign source income for United States foreign tax credit purposes and such U.S. resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed on such sale, exchange or disposition, subject to the limitations under the United States federal income tax laws applicable to foreign tax credits.
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Taxation of Dividends Paid on our Ordinary Shares
The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on our ADSs.
Taxation of Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock dividends. As of January 1, 2012, the tax rate applicable to such dividends is 25% or 30% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution. Dividends paid out of profits sourced from ordinary income are subject to withholding tax at the rate of 25% or 30%. Dividends paid from income derived from our Approved and Privileged Enterprises are subject to withholding at the rate of 15%. Dividends paid fromas of January 1, 2014 from income derived from our Preferred Enterprises (as well as future earnings from our Preferred Technology Enterprises, if and as applicable) will be subject to withholding at the rate of 20%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’shareholders' tax liability.
All dividend distributions to Israeli resident corporations are not subject to a withholding tax.
For information with respect to the applicability of Income Surtax on distribution of dividends, please see "Capital Gains Tax on Sales of Our Ordinary Shares" and "Taxation of Israeli Residents" above in this Item 10.
Taxation of Non-Israeli Residents
Non-residents of Israel, both companies and individuals, are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, at the aforementioned rates applicable to Israeli residents, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’sshareholder's country of residence.
Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on dividends paid by us is 25%. Dividends of an Israeli company distributed from income of an Approved Enterprise (or Privileged Enterprise or Preferred Enterprise) are subject to a 15% withholding tax under the U.S.-Israel Tax Treaty. The U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding tax on dividends paid by an Israeli company to a United States corporation owning at least 10% or more of such Israeli company’scompany's issued voting power for, in general, the part of the tax year which precedes the date of payment of the dividend and the entire preceding tax year. The lower 12.5% rate applies only to dividends from income not derived from an Approved Enterprise (or Privileged Enterprise or Preferred Enterprise) in the applicable period and does not apply if the company has more than 25% of its gross income derived from certain types of passive income.income (if the conditions mentioned above are met, dividends from income of an Approved Enterprise (or Privileged Enterprise or Preferred Enterprise) are subject to a 15% withholding tax under the U.S.-Israel Tax Treaty). Residents of the United States generally will have withholding tax in Israel deducted at source. They may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer.
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U.S. Federal Income Tax Considerations
The following is a summary of the material U.S. Federal income tax consequences that apply to U.S. holders (defined below) who hold ADSs as capital assets for tax purposes. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”"Code"), existing final, temporary and proposed regulations thereunder, judicial decisions and published positions of the Internal Revenue Service and the U.S.-Israel income tax treaty in effect as of the date of this annual report, all of which are subject to change at any time (including changes in interpretation), possibly with retroactive effect. It is also based in part on representations by TheJPMorgan Chase Bank, of New York Mellon,N.A., the depositary for our ADSs, and assumes that each obligation under the Deposit Agreement between us and TheJPMorgan Chase Bank, of New York MellonN.A. and any related agreement will be performed in accordance with its terms. This summary does not address all U.S. Federal income tax matters that may be relevant to a particular prospective holder or all tax considerations that may be relevant with respect to an investment in ADSs.
This summary does not address tax considerations applicable to a holder of an ADS that may be subject to special tax rules including, without limitation, the following:
| · | dealers or traders in securities, currencies or notional principal contracts; |
| · | financial institutions; |
| · | insurance companies; |
| · | real estate investment trusts; |
| · | banks; |
| · | investors subject to the alternative minimum tax; |
| · | tax-exempt organizations; |
| · | regulated investment companies; |
| · | investors that actually or constructively own 10 percent or more of our voting shares; |
| · | investors that will hold the ADSs as part of a hedging or conversion transaction or as a position in a straddle or a part of a synthetic security or other integrated transaction for U.S. Federal income tax purposes; |
| · | investors that are treated as partnerships or other pass through entities for U.S. Federal income tax purposes and persons who hold the ADSs through partnerships or other pass through entities; |
| · | investors whose functional currency is not the U.S. dollar; and |
| · | expatriates or former long-term residents of the United States. |
This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation or the indirect effects on the holders of equity interests in a holder of an ADS.
You are urged to consult your own tax advisor regarding the foreign and U.S. Federal, state and local and other tax consequences of an investment in ADSs.
For purposes of this summary, a “U.S. holder”"U.S. holder" is a beneficial owner of ADSs that is, for U.S. Federal income tax purposes:
| · | an individual who is a citizen or a resident of the United States; |
| · | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof; |
| · | an estate whose income is subject to U.S. Federal income tax regardless of its source; or |
| · | a trust if: |
| (a) | a court within the United States is able to exercise primary supervision over administration of the trust; and |
| (b) | one or more United States persons have the authority to control all substantial decisions of the trust. |
If an entity that is classified as a partnership for U.S. federal tax purposes holds ADSs, the U.S. federal income tax treatment of its partners will generally depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships for U.S. federal tax purposes and persons holding ADSs through such entities should consult their own tax advisors.
In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. Federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
U.S. Taxation of ADSs
Distributions
Subject to the discussion under “Passive"Passive Foreign Investment Companies”Companies" below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from these distributions (see “Israeli"Israeli Tax Considerations”Considerations"), actually or constructively received by a U.S. holder with respect to ADSs will be taxable to the U.S. holder as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. Federal income tax principles. Distributions in excess of earnings and profits will be non-taxable to the U.S. holder to the extent of, and will be applied against and reduce, the U.S. holder’sholder's adjusted tax basis in the ADSs. Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the U.S. holder as capital gain from the sale or exchange of property. We do not maintain calculations of our earnings and profits under U.S. Federal income tax principles. If we do not report to a U.S. holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution. The U.S. holder will not, except as provided by Section 245 of the Code, be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations.
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Under the Code, certain dividends received by non-corporate U.S. holders will be subject to a maximum income tax rate of 20%. This reduced income tax rate is only applicable to dividends paid by a “qualified"qualified foreign corporation”corporation" that is not a “passive"passive foreign investment company”company" and only with respect to shares held by a qualified U.S. holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which includes an exchange of information program, and (ii) the ADSs are readily tradable on an established securities market in the U.S. In addition, based on our current business plans, we do not expect to be classified as a “passive"passive foreign investment company”company" (see “Passive"Passive Foreign Investment Companies”Companies" below). Accordingly, dividends paid by us to individual U.S. holders on shares held for the minimum holding period should be eligible for the reduced income tax rate. In addition to the income tax on dividends discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on dividends as discussed below under “Medicare"Medicare Tax on Unearned Income”Income".
The amount of any distribution paid in a currency other than U.S. dollars (a “foreign currency”"foreign currency") including the amount of any withholding tax thereon, will be included in the gross income of a U.S. holder in an amount equal to the U.S. dollar value of the foreign currencies calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the foreign currencies are converted into U.S. dollars. If the foreign currencies are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend. If the foreign currencies received in the distribution are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the foreign currencies equal to its U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the foreign currencies will be treated as ordinary income or loss.
Dividends received by a U.S. holder with respect to ADSs generally will be treated as foreign source income for the purposes of calculating that holder’sholder's foreign tax credit limitation. Subject to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. holder’sholder's U.S. Federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to “passive”"passive" income and “general”"general" income. The rules relating to foreign tax credits and the timing thereof are complex. U.S. holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particular situation.
Sale or Other Disposition of ADSs
If a U.S. holder sells or otherwise disposes of its ADSs, gain or loss will be recognized for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and such holder’sholder's adjusted tax basis in the ADSs. Subject to the discussion below under the heading “Passive"Passive Foreign Investment Companies,”" such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the holder had held the ADSs for more than one year at the time of the sale or other disposition. Long-term capital gains realized by individual U.S. holders generally are subject to a lower marginal U.S. Federal income tax rate (currently up to 20%) than the marginal tax rate on ordinary income. In addition to the income tax on gains discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on net gains as discussed below under “Medicare"Medicare Tax on Unearned Income.”" Under most circumstances, any gain that a holder recognizes on the sale or other disposition of ADSs will be U.S. source for purposes of the foreign tax credit limitation and any recognized losses will be allocated against U.S. source income.
If a U.S. holder receives foreign currency upon a sale or exchange of ADSs, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such foreign currency will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. holder, the U.S. holder generally should not be required to recognize any gain or loss on such conversion.
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A U.S. Holder who holds shares through an Israeli stockbroker or other Israeli intermediary may be subject to Israeli withholding tax on any capital gains recognized if the U.S. Holder does not obtain approval of an exemption from the Israeli Tax Authorities or claim any allowable refunds or reductions. U.S. Holders are advised that any Israeli tax paid under circumstances in which an exemption from (or a refund of or a reduction in) such tax was available will not give rise to a deduction or credit for foreign taxes paid for U.S. federal income tax purposes. If applicable, U.S. Holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures for obtaining an exemption or reduction.
Medicare Tax on Unearned Income
Certain U.S. holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on all or a portion of their “net"net investment income,”" which includes dividends and net gains from the sale or other dispositions of ADSs (other than ADSs held in a trade or business).
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”("PFIC") for any taxable year in which either 75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gain over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. holders owning ADSs.
Based on our estimated gross income, the average value of our gross assets and the nature of our business, we do not believe that we will be classified as a PFIC in the current taxable year. Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will not be considered a PFIC for any future taxable year. If we were treated as a PFIC in any year during which a U.S. holder owns ADSs, certain adverse tax consequences could apply, as described below.apply. Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.
You are urged to consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising from the ownership and disposition (directly or indirectly) of an interest in a PFIC.
Backup Withholding and Information Reporting
Payments of dividends with respect to ADSs and the proceeds from the sale, retirement, or other disposition of ADSs made by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. holder as may be required under applicable U.S. Treasury regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax (backup withholding), currently at the rate of 28%, if a non-corporate U.S. holder that is not otherwise exempt fails to provide an accurate taxpayer identification number and comply with other IRS requirements concerning information reporting. Certain U.S. holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding. Any amount of backup withholding withheld may be used as a credit against your U.S. Federal income tax liability provided that the required information is timely furnished to the IRS. U.S. holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
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Foreign Asset Reporting
Certain U.S. Holders who are individuals are required to report information relating to an interest in our ADSs on IRS Form 8938, subject to certain exceptions (including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are encouraged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ADSs.
Documents on Display
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended. As a “foreign"foreign private issuer”issuer" we are exempt from the rules and regulations under the Securities 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”"short-swing" profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. NASDAQ rules generally require that companies send an annual report to shareholders prior to the annual general meeting, however we rely upon an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website. We also furnish to the SEC quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters.
You may read and copy any document we file with the SEC at its public reference facilities at, 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’sSEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. In addition, our ADSs are quoted on the NASDAQ Global Select Market, so our reports and other information can be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
Item 11. Quantitative and Qualitative Disclosures About Market Risk. |
General
Market risks relating to our operations result primarily from weak economic conditions in the markets in which we sell our products and changes in interest rates and exchange rates. To manage the volatility related to the latter exposure, we may enter into various derivative transactions. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in currency exchange rates. It is our policy and practice to use derivative financial instruments only to manage exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivative.
Foreign Currency Risk
We conduct our business primarily in U.S. dollars but also in the currencies of the United Kingdom, the European Union, India and Israel as well as other currencies. Thus, we are exposed to foreign exchange movements, primarily in GBP, EUR, INR and NIS. We monitor foreign currency exposure and, from time to time, may use various instruments to preserve the value of sales transactions and commitments; however, this cannot assure our protection against risks of currency fluctuations. For more information regarding foreign currency related risks, please refer to Item 3, “Key"Key Information—General Risks Relating to Our Business”Business" of this annual report. We use currency forward contracts and option contracts in order to protect against the increase in value of forecasted non-dollar currency cash flows and to hedge future anticipated payments.
As of December 31, 2014,2016, we had outstanding currency option and forward contracts to hedge payroll and facilities expenses, denominated in NIS and INR, in the total amount of approximately $108.3$110 million. The fair value of those contracts was approximately $4.1$0.1 million. These transactions were for a period of up to one year.
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The following table details the balance sheet exposure (i.e,(i.e., the difference between assets and liabilities) in our main foreign currencies, as of December 31, 2014,2016, against the relevant functional currency.
| Functional currencies | ||||||||||||||||||||||||||||||||
| (In U.S. dollars in millions) | ||||||||||||||||||||||||||||||||
| USD | GBP | EUR | CAD | MXN | AUD | BRL | Other currencies | |||||||||||||||||||||||||
| Foreign currencies | ||||||||||||||||||||||||||||||||
| USD | - | 20.1 | (0.3 | ) | 2.8 | 1.7 | 1.4 | (1.8 | ) | - | ||||||||||||||||||||||
| GBP | 26.6 | - | (0.0 | ) | - | - | - | - | - | |||||||||||||||||||||||
| EUR | 4.5 | 18.6 | - | - | - | - | - | - | ||||||||||||||||||||||||
| CAD | 4.1 | 0.2 | - | - | - | - | - | - | ||||||||||||||||||||||||
| AUD | 1.9 | 0.1 | - | - | - | - | - | - | ||||||||||||||||||||||||
| MXN | 2.1 | 0.0 | - | - | - | - | - | - | ||||||||||||||||||||||||
| CHF | 0.0 | 0.3 | - | - | - | - | - | - | ||||||||||||||||||||||||
| JPY | (0.2 | ) | (0.0 | ) | - | - | - | - | - | - | ||||||||||||||||||||||
| INR | (1.4 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| SGD | (4.8 | ) | 0.2 | - | - | - | (0.0 | ) | - | - | ||||||||||||||||||||||
| HKD | (3.3 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| ILS | (2.8 | ) | (0.0 | ) | - | - | - | - | - | - | ||||||||||||||||||||||
| Other currencies | (0.1 | ) | 0.1 | - | - | - | 0.0 | - | (2.0 | ) | ||||||||||||||||||||||
| Functional currencies | ||||||||||||||||||||||||||||||||
| (In U.S. dollars in millions) | ||||||||||||||||||||||||||||||||
| USD | GBP | EUR | CAD | MXN | CHF | AUD | Other currencies | |||||||||||||||||||||||||
| Foreign currencies | ||||||||||||||||||||||||||||||||
| USD | - | 22.02 | 6.94 | 2.30 | 0.55 | 0.81 | 1.84 | (0.87 | ) | |||||||||||||||||||||||
| GBP | 8.58 | - | 5.18 | - | - | - | - | - | ||||||||||||||||||||||||
| EUR | 1.28 | 14.69 | - | - | - | - | - | - | ||||||||||||||||||||||||
| CAD | 5.18 | 0.55 | - | - | - | - | - | - | ||||||||||||||||||||||||
| AUD | 0.64 | - | 0.69 | - | - | - | - | - | ||||||||||||||||||||||||
| MXN | 1.68 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| CHF | 0.83 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| HKD | (2.70 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| ILS | (18.78 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| Other currencies | - | - | - | - | - | - | - | 0.62 | ||||||||||||||||||||||||
The table below presents the fair value of firmly committed transactions for lease obligations denominated in currencies other than the functional currency:
| New Israeli Shekel | Other currencies | Total | ||||||||||
| (In U.S. dollars in millions) | ||||||||||||
Less than 1 year | 7.07 | 0.04 | 7.11 | |||||||||
1-3 years | 13.52 | - | 13.52 | |||||||||
3-5 years | 13.52 | - | 13.52 | |||||||||
Over 5 years | 6.76 | - | 6.76 | |||||||||
Total | 40.87 | 0.04 | 40.91 | |||||||||
| New Israeli Shekel | Other currencies | Total | ||||||||||
| (In U.S. dollars in millions) | ||||||||||||
| less than 1 year | 7.67 | 0.24 | 7.91 | |||||||||
| 1-3 years | 12.71 | 0.06 | 12.77 | |||||||||
| 3-5 years | 12.71 | 0.04 | 12.75 | |||||||||
| Over 5 years | 18.01 | - | 18.01 | |||||||||
| Total | 51.10 | 0.34 | 51.44 | |||||||||
Interest Rate Risk
In November 2016 we completed the acquisition of inContact, and utilized $475 million in debt financing with a variable interest rate toward payment of the consideration in the transaction.
As of December 31, 2016, the outstanding principal amount of the term debt was $475 million.
Our exposureinvestments are exposed to market risk for changesdue to fluctuations in interest rates, relates primarily towhich may affect our investment ininterest income, interest expense and the fair market value of our marketable securities and deposits. portfolio.
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Our marketable securities portfolio consists of investment-grade corporate debentures, U.S. Government agencies and U.S. treasuries. As of December 31, 2014, 91%2016, 98% of our portfolio was in such securities.
We invest in dollar deposits with U.S. banks, European banks, Israeli banks and money market funds. As of December 31, 2014, 9%2016, 2% of our portfolio was in such deposits. Since these investments are for short periods, interest income is sensitive to changes in interest rates.
The decline in interest rates in the global markets has a direct effect on our interest income and our ability to maintain our portfolio’s yield level in line with prior years. In a market environment of declining interest rates, we are likely to reinvest the redeemed proceeds from our called or matured marketable securities in lower yielding investments. Conversely, an increase in market interest rates could also have an adverse effect on the value of our investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
The table below presents the fair value of marketable securities which are subject to risk of changes in interest rate, segregated by maturity dates:
| Amortized Cost | Estimated fair value | Amortized Cost | Estimated fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Up to 1 year | 1-3 years | 4-5 years | 6-10 years | Total | Up to 1 year | 1-3 years | 4-5 years | 6-10 years | Total | Up to 1 year | 1-3 years | 4-5 years | 6-10 years | Total | Up to 1 year | 1-3 years | 4-5 years | 6-10 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debentures | 65.3 | 109.7 | 123.1 | 7.0 | 305.1 | 65.8 | 110.2 | 122.6 | 7.1 | 305.7 | 30.3 | 83.0 | 9.0 | - | 122.3 | 30.3 | 83 | 8.9 | - | 122.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S treasuries | - | - | - | 7.0 | 7.0 | - | - | - | 6.8 | 6.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. treasuries | - | - | - | 7.0 | 7.0 | - | - | - | 6.8 | 6.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 65.3 | 109.7 | 123.1 | 14.0 | 312.1 | 65.8 | 110.2 | 122.6 | 13.9 | 312.5 | 30.3 | 83.0 | 9.0 | 7.0 | 129.3 | 30.3 | 83 | 8.9 | 6.8 | 129.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other risks and uncertainties that could affect actual results and outcomes are described in Item 3, “Key"Key Information—Risk Factors”Factors" in this annual report.
American Depositary Shares and Receipts
Set forth below is a summary of certain provisions in relation to charges and other payments under the Deposit Agreement, as amended, among NICE, TheJPMorgan Chase Bank, of New York MellonN.A. as depositary (the "Depositary"), and the owners and holders from time to time of ADRs issued thereunder (the “Deposit Agreement”"Deposit Agreement"). This summary is not complete and is qualified in its entirety by the Deposit Agreement, a form of which has been filed as Exhibit 1 to the Post-Effective Amendment No. 3 to the Registration Statement on Form F-6 (Registration No. 333- 157371)333-203623) filed with the SEC on April 17, 2014.24, 2015.
Charges of the Depositary
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The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing ordinary shares or by any party surrendering ADRsADSs or to whom ADRsADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRsADSs or the deposited ordinary sharessecurities or a distribution of ADRs pursuant to the terms of the Deposit Agreement):ADSs), whichever is applicable:
| a fee of |
| a fee of up to $0.05 |
| · | a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision); |
| a fee for the |
| · | stock transfer or other taxes and other governmental charges; |
| · | cable, telex and facsimile transmission and delivery charges incurred at the request of an ADR holder in connection with the deposit or delivery of shares; |
| · | transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; |
| · | in connection with the conversion of foreign currency into U.S. dollars, the fees, expenses and other charges charged by JPMorgan Chase Bank, N.A. or its agent (which may be a division, branch or affiliate) so appointed in connection with such conversion; and |
| · | fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage or execute any public or private sale of securities under the deposit agreement. |
The Depositarydepositary may owngenerally refuse to provide services until it is reimbursed applicable amounts, including stock transfer or other taxes and dealother governmental charges, and is paid its fees for applicable services.
The fees and charges an ADR holder may be required to pay may vary over time and may be changed by us and by the depositary. Our ADR holders will receive prior notice of the increase in NICE securitiesany such fees and in NICE ADRs.charges.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
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Fees paid by the Depositary
From January 1, 20142016 to December 31, 2014,2016, NICE received from the depositary $153,958$411,154 as reimbursement for its expenses incurred in relation to the maintenance and administration of the ADR program.
PART II
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
None.
Item 15. Controls and Procedures.
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of NICE’sNICE's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of NICE’sNICE's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NICE’sNICE's disclosure controls and procedures were effective as of such date.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 15d-15(f) under the Securities Exchange Act. Our internal control over our financial reporting system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can only provide reasonable assurance with respect to financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014.2016. Our management based its assessment on criteria established in Internal Control—IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). Based on this assessment, our management has concluded that, as of December 31, 2014,2016, our internal control over financial reporting is effective. Our assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of inContact, which we acquired in November 2016, and which is included in our 2016 consolidated financial statements. InContact Inc. constituted approximately 4.2% of our consolidated total assets as of December 31, 2016, and 1.2% attributed to the period from the date of acquisition, of our consolidated net income (excluding amortization of related acquired intangible assets) for the year then ended.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global independently assessed the effectiveness of our internal control over financial reporting and has issued an attestation report, which is included under Item 18 on page F-3 of this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Our Board of Directors has determined that each of Dan Falk and Yocheved Dvir meets the definition of an audit committee financial expert, as defined in Item 407 of Regulation S-K, and is independent under the applicable regulations.
Item 16B. Code of Ethics.
We have adopted a Code of Ethics that applies to our principal executive and financial officers, and that also applies to all of our employees. The Code of Ethics is publicly available on our website at www.nice.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will either disclose the nature of such amendment or waiver on our website or in our annual report on Form 20-F.
Fees Paid to Independent Auditors
Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, and other members of Ernst & Young Global for professional services for each of the last two fiscal years were as follows:
| Services Rendered | 2013 Fees | 2014 Fees | 2015 Fees | 2016 Fees | ||||||||||||
| Audit (1) | $ | 675,000 | $ | 691,000 | $ | 676,865 | $ | 799,489 | ||||||||
| Audit-related (2) | $ | 79,000 | $ | 72,000 | $ | 76,787 | $ | 560,123 | ||||||||
| Tax (3) | $ | 469,000 | $ | 399,000 | $ | 146,645 | $ | 190,761 | ||||||||
| Total | $ | 1,223,000 | $ | 1,162,000 | $ | 900,297 | $ | 1,550,373 | ||||||||
(1) | Audit fees are for audit services for each of the years shown in this table, including fees associated with the annual audit for |
| (2) | Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: due diligence investigations and audit services provided in connection with other statutory or regulatory |
| (3) | Tax fees are for professional services rendered by our auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and global mobility of employees. |
Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our external auditors, Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The policy, which is designed to ensure that such services do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. If a type of service, that is to be provided by our auditors, has not received such general pre-approval, it will require specific pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by our audit committee. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
Not applicable.
126
During 2014,2016, we repurchased our ordinary shares as described in the table below.
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Maximum number (or approximately dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||||
| (In U.S. dollars, except share amounts) | ||||||||||||||||
| January 1 – January 31 | 175,541 | 56.95 | 175,541 | 45,206,380 | ||||||||||||
| February 1 - February 28 | 68,023 | 60.17 | 68,023 | 41,113,126 | ||||||||||||
| March 1 - March 31 | 156,128 | 62.42 | 156,128 | 31,367,278 | ||||||||||||
| April 1 - April 30 | 129,646 | 63.61 | 129,646 | 23,120,291 | ||||||||||||
| May 1 - May 31 | - | - | - | 23,120,291 | ||||||||||||
| June 1 - June 30 | - | - | - | 23,120,291 | ||||||||||||
| July 1 - July 31 | - | - | - | 23,120,291 | ||||||||||||
| August 1 - August 31 | - | - | - | 23,120,291 | ||||||||||||
| September 1 - September 30 | 54,851 | 66.22 | 54,851 | 19,488,236 | ||||||||||||
| October 1 - October 31 | 62,964 | 66.78 | 62,964 | 15,283,796 | ||||||||||||
| November 1 - November 30 | 20,269 | 66.04 | 20,269 | 13,945,268 | ||||||||||||
| December 1 - December 31 | 35,868 | 65.76 | 35,868 | 11,586,653 | ||||||||||||
| Total | 703,290 | 62.02 | 703,290 | |||||||||||||
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Maximum number (or approximately dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||||
| (In U.S. dollars, except share amounts) | ||||||||||||||||
| January 1 – January 31 | 299,312 | 40.07 | 299,312 | 4,313,307 | ||||||||||||
| February 1 - February 28 | 219,477 | 39.67 | 219,477 | 95,607,212 | ||||||||||||
| March 1 - March 31 | 104,919 | 40.87 | 104,919 | 91,319,477 | ||||||||||||
| April 1 - April 30 | - | - | - | 91,319,477 | ||||||||||||
| May 1 - May 31 | 230,916 | 38.81 | 230,916 | 82,357,524 | ||||||||||||
| June 1 - June 30 | 401,036 | 40.27 | 401,036 | 66,206,014 | ||||||||||||
| July 1 - July 31 | 370,898 | 40.35 | 370,898 | 51,241,212 | ||||||||||||
| August 1 - August 31 | 299,867 | 38.80 | 299,867 | 39,606,267 | ||||||||||||
| September 1 - September 30 | 84,860 | 39.57 | 84,860 | 36,248,537 | ||||||||||||
| October 1 - October 31 | 250,810 | 39.85 | 250,810 | 26,253,295 | ||||||||||||
| November 1 - November 30 | 40,000 | 47.41 | 40,000 | 24,356,784 | ||||||||||||
| December 1 - December 31 | 16,587 | 47.70 | 16,587 | 23,565,528 | ||||||||||||
| Total | 2,318,682 | 40.00 | 2,318,682 | |||||||||||||
On each of February 15, 2011,5, 2014 and May 7, 2015, we announced that our Board of Directors authorized a program to repurchase up to $100 million of our issued and outstanding ordinary shares and ADRs. On January 15, 2017, the Company's Board of Directors authorized a program to repurchase up to $150 million of the Company's issued and outstanding ordinary shares and ADRs. Repurchases may be made from time to time in the open market or in privately negotiated transactions and will be in accordance with applicable securities laws and regulations. The timing and amount of the repurchase transactions will be determined by management and may depend on a variety of factors, including market conditions, alternative investment opportunities and other considerations. The program does
These programs do not obligate us to acquire any particular amount of ordinary shares and ADRs and the program may be modified or discontinued at any time without prior notice.
Item 16F. Change in Registrant’sRegistrant's Certifying Accountant.
None.
We follow the Israeli Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the NASDAQ requirements relating to: (i) the quorum for shareholder meetings (see Item 10, “Additional"Additional Information – Memorandum and Articles of Association – Meetings of Shareholders”Shareholders" in this annual report); (ii) shareholder approval with respect to issuance of securities under equity based compensation plans (see Item 10, “Additional"Additional Information – Memorandum and Articles of Association – Approval of Certain Transactions”Transactions" and “Approval"Approval of Office Holder Compensation”Compensation" in this annual report); and (iii) sending annual reports to shareholders (see Item 10, “Additional"Additional Information – Documents on Display”Display" in this annual report).
Item 16H. Mine Safety Disclosure.
Not Applicable.
128
PART III
Not Applicable.
Item 17. 18. Financial Statements.
See pages F-1 through F-53F-57 of this annual report attached hereto.
Exhibit No. | Description | ||
| 1.1 | Amended and Restated Memorandum of Association, as approved on December 21, 2006 (English translation) (filed as Exhibit 1.1 to | ||
| 1.2 | Amended and Restated Articles of Association, as amended on | ||
| 2.1 | Form of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to | ||
| 2.2 | Form of Deposit Agreement including Form of ADR Certificate (filed as Exhibit 1 to | ||
| 4.1 | NICE | ||
| 4.2 | Actimize Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan (filed as Exhibit 4.4 to | ||
| 4.3 | NICE | ||
| 4.4 | NICE Ltd. 2008 Share Incentive Plan, as amended (filed as Exhibit 99.1 to NICE's Immediate Report on Form 6-K filed with the SEC on May 28, 2015, and incorporated herein by reference). | ||
| 4.5 | e-Glue Software Technologies, Inc. 2004 Stock Option Plan, as amended (filed as Exhibit 4.4 to | ||
| 4.6 | Fizzback Group (Holdings) Limited Employee Share Option Scheme (filed as Exhibit 4.4 to | ||
| 4.7 | Merced Systems, Inc. 2001 Stock Plan (filed as Exhibit 4.4 to | ||
| 4.8 | Merced Systems, Inc. 2011 Stock Plan (filed as Exhibit 4.5 to | ||
| 4.9 | The Causata Inc. Executive Share Option Scheme (filed as Exhibit 4.4 to | ||
| 4.10 | Causata Inc. 2010 Stock Plan (filed as Exhibit 4.5 to | ||
| 4.11 | NICE | ||
130
| 4.12 | InContact, Inc. 2008 Equity Incentive Plan (filed as Exhibit 4.4 to NICE Ltd.'s Registration Statement on Form S-8 (Registration No. 333-191176) filed with the SEC on November 15, 2016, and incorporated herein by reference). | |
| 4.13 | Nexidia Inc. 2005 Stock Incentive Plan (filed as Exhibit 4.4 to NICE-Systems Ltd.'s Registration Statement on Form S-8 (Registration No. 333-191176) filed with the SEC on March 23, 2016, and incorporated herein by reference). | |
| 4.14 | Nexidia Agreement and Plan of Merger, dated January 10, 2016. | |
| 4.15 | Credit Agreement, dated November 14, 2016. | |
| 4.16 | Indenture, dated January 18, 2017. | |
| 4.17 | inContact Agreement and Plan of Merger, dated May 17, 2016. | |
| 8.1 | List of significant subsidiaries. | |
| 12.1 | Certification by the Chief Executive Officer of | |
| 12.2 | Certification by the Chief Financial Officer of | |
| 13.1 | Certification by the Chief Executive Officer of | |
| 13.2 | Certification by the Chief Financial Officer of | |
| 15.1 | Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. |
| 101 | The following financial information from |
131
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2014
2016
2016
IN U.S. DOLLARS
Page | |
| F-2 - F-4 | |
| F-5 - F-6 | |
| F-7 | |
| F-8 | |
| F-9 - F-10 | |
| F-11 - F-12 | |
| F-13 - |
  | Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
To the Shareholders and Board of Directors of
NICE SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of NICE Systems Ltd. and its subsidiaries ("the Company") and its subsidiaries as of December 31, 20142016 and 2013,2015, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014.2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial 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, 20142016 and 2013,2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 2, 201521, 2017 expressed an unqualified opinion thereon.
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of NICE We have audited NICE We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. F - 3
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has excluded from its assessment of internal control over financial reporting as of December 31, 2016 the internal controls of inContact Inc., because its acquisition closed on November 14, 2016, which constituted approximately 4.2% of the Company’s consolidated total assets as of December 31, 2016, and 1.2% for the period from the date of acquisition out of the Company’s consolidated net income for the year then ended. Accordingly, our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of inContact Inc. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company
F - 4 NICE
U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - NICE CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements. F - NICE U.S. dollars in thousands (except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements. F - NICE LTD. AND ITS SUBSIDIARIES U.S. dollars in thousands (except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements. F - 8 NICE U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 9 NICE LTD. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 10 NICE U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 11 NICE CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 12 NICE U.S. dollars in thousands (except share and per share data)
NICE The Company’s mission is to empower organizations to The Company The Company does this by providing customer engagement platforms, capturing uncover intent. The Company helps its customers improve their service and security by applying machine learning to cross-industry data and offering customers collective insights.The Company’s solutions
On Upon acquisition, inContact became a wholly-owned subsidiary of The following table summarizes the components of the purchase consideration transferred:
(*) Includes cash consideration for the redemption of inContact’s convertible bonds in an amount of $139,438 and (**) Pursuant to the merger agreement, all outstanding unvested inContact RSUs, options and restricted shares were cancelled and replaced with RSUs with ADSs to be received upon settlement, options to acquire ADSs and restricted ADSs, respectively with the same terms and conditions. Of the total estimated fair value of the F - 13 NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The following table summarizes the fair values of the assets acquired and liabilities assumed:
The following table presents details of the identified intangible assets acquired as of the date of the acquisition:
Goodwill generated from this business combination is primarily attributable to synergies between the Company's and inContact's respective products and services. The goodwill is not deductible for income tax purposes. inContact Inc. constituted approximately 4.2% of the Company’s consolidated total assets as of December 31, 2016, and 1.2% attributed to the period from the date of acquisition of the Company’s consolidated net income (excluding amortization of related acquired intangible assets) for the year then ended,. The following table presents the unaudited pro forma financial information for the years ended December 31, 2016 and 2015, as if the acquisition occurred on January 1, 2015:
F - 14 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 has been calculated after adjusting the Company’s results and those of inContact to reflect the business combination accounting effects resulting from this acquisition as if the acquisition occurred as of January 1, 2015, including: (i) acquisition related transaction costs; (ii) amortization expense from acquired intangible assets; (iii) post acquisition share-based compensation expense; (iv) debt financing costs incurred for the issuance of a loan received as part of the acquisition financing; and (v) the associated tax effect of these unaudited pro forma adjustments. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2015. The fair value of assets acquired and liabilities assumed from the acquisition of inContact was based on a preliminary valuation and the Company's estimates and assumptions are subject to changes within the measurement period. In accordance with ASU 2015-16, measurement period adjustments determined to be material will be recognized in the period in which the Company determines the amounts, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date.
On March 22, 2016, the Company completed the acquisition of Nexidia Inc. ("Nexidia"), a provider of advanced customer analytics. The Company acquired Nexidia for a total consideration of $135,150. The acquisition of Nexidia will allow the Company to offer a combined offering, featuring analytics capabilities with accuracy, scalability and performance, enabling organizations to expand their analytics usage in critical business use cases. Upon acquisition, Nexidia became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed in the business combination be recognized at their fair values as of the acquisition date. The following table summarizes the components of the purchase consideration transferred:
F - 15 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The following table summarizes the fair values of the assets acquired and liabilities assumed:
The following table presents details of the identified intangible assets acquired as of the date of the acquisition:
Goodwill generated from this business combination is primarily attributable to synergies between the Company's and Nexidia's respective products and services. The goodwill is not deductible for income tax purposes. The results of Nexidia operations have been included in the consolidated statements of income since March 22, 2016. Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company's consolidated statements of income. F - 16 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
On March 11, 2016, the Company completed the acquisition of Voiceprint International, Inc. ("VPI"), a provider of workforce optimization software and services for enterprises, contact centers, first responders and trading floors. The Company acquired VPI for total consideration of $21,720 in cash. Upon acquisition, VPI became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The Company recorded customer relationships and goodwill in amount of $8,500 and $16,873, respectively. The estimated useful life of the customer relationships is 6 years. Goodwill generated from this business combination is attributed to synergies between the Company's and VPI's respective products and services. The goodwill is not deductible for income tax purposes. The results of VPI operations have been included in the consolidated financial statements since March 11, 2016. Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company`s consolidated statement of income.
During 2016 acquisition related costs amounted to $9,348 and were included in general and administrative expenses. During 2015 and 2014, the Company did not record any acquisition related costs.
During 2015, the Company divested its Physical Security as well as its Cyber and Intelligence operations, which were a major part of the Security Solutions segment, to allow it to focus on its core markets as part of the execution of its long-term strategy. In July 2015 the Companycompleted the sale of the Cyber and Intelligence operation to Elbit Systems for a total consideration of $151,583, comprised of $111,583 in cash and $40,000 earn out based on future business performance. The Cyber and Intelligence operation offers solutions which provide law enforcement agencies, intelligence organizations and signal intelligence agencies with tools for generating intelligence from communications. The sale resulted in a capital gain of $101,847, which was presented as part of the net income on discontinued operations in the consolidated statements of income for the year ended December 31, 2015. On September 18, 2015, the Company completed the sale of the Physical Security operation to Battery Ventures for a total consideration of $92,475, comprised of $74,551 in cash, note receivable of $2,924 and up to $15,000 earn out based on future business performance. The Physical Security operation provides video surveillance technologies and capabilities to security-aware organizations. F - 17 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Following the divestiture of one of the discontinued operations, the buyer made certain demands and allegations, claiming indemnification pursuant to the sale agreement with the Company. The Company Following the sale, Physical Security's and Intelligence's results of operations and statement of
(*) Represent the results of the discontinued operations until their disposal. Depreciation expense totaled $0, $724 and $1,058 for the years 2016, 2015 and 2014, respectively. Amortization expense totaled $0, $4,362 and $1,804 for the years 2016, 2015 and 2014, respectively. F - 18 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The major classes of assets and liabilities that were classified as discontinued operations were:
The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The currency of the primary economic environment in which the operations of NICE and certain subsidiaries are conducted is the U.S. dollar ("dollar"); thus, the dollar is the functional currency of NICE and certain subsidiaries. NICE and certain subsidiaries' transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured to dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of income as financial income or expenses, as appropriate. For those subsidiaries whose functional currency has been determined to be a non-dollar currency, assets and liabilities are translated at year-end exchange rates and statement of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in shareholders' equity. F - 19 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Intercompany transactions and balances have been eliminated upon consolidation.
Cash equivalents are short-term unrestricted highly liquid investments that are readily convertible into cash, with original maturities of three months or less at acquisition.
The Company accounts for investments in debt securities in accordance with ASC 320, "Investments - Debt and Equity Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date. Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of income. The Company's securities are reviewed for impairment in accordance with ASC
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:
Leasehold improvements are amortized by the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever is shorter. F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Intangible assets are amortized over their estimated useful lives using the straight-line method, at the following weighted average annual rates:
The Company's long-lived assets and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant, and Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include any significant changes in the manner of the Company's use of the assets and significant negative industry or economic trends. Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of the carrying amount over fair value. In
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350, "Intangible - Goodwill and Other," ("ASC 350") goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at the reporting unit level at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. F - 21 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
The Company generates revenues from sales of software products and services, which include SaaS and network connectivity, hosting, support and maintenance, The basis for the Company's software revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, "Software-Revenue For multiple element arrangements within the scope of software revenue recognition guidance, revenues are allocated to the different elements in the arrangement under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, the Company defers revenue for the fair value of its undelivered elements and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement when the basic criteria in ASC 985-605 have been met. Any discount in the arrangement is allocated to the delivered element. Revenues from maintenance and professional services are recognized ratably over the contractual period and as services are performed, respectively. For arrangements that contain both software and non-software components that function together to deliver the products' essential functionality, the Company allocates revenue to each element based on its relative selling price. In such circumstances, the accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables. The selling price for a deliverable is based on its VSOE, if available, third party evidence ("TPE"), if VSOE is not available, or best estimated selling price ("BESP"), if neither VSOE nor TPE are available. The Company establishes VSOE of fair value using the price charged for a deliverable when sold separately F - 22 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company's policy for establishing VSOE of fair value of maintenance services is based on the price charged when the maintenance is renewed separately. Establishment of VSOE of fair value of professional services is based on the price charged when these services are sold separately. Revenues from fixed price contracts that require significant customization, integration and installation are recognized based on ASC 605-35, "Construction-Type and Production-Type Contracts", using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total fees under the arrangement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact. The Revenues for To assess the probability of collection for revenue recognition, the Company has The Company maintains a provision for product returns which is estimated based on the Company's past experience and is deducted from revenues. Deferred revenues and advances from customers include F - 23 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Research and development costs (net of grants) incurred in the process of software production
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This topic 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 the amount that is more likely than not to be realized. The Company implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. The Company classifies interest and penalties on income taxes (which includes uncertain tax positions) as taxes on income. The deferred tax assets and liabilities are classified to non-current assets and liabilities, respectively.
Non-royalty bearing grants from the Government of Israel and the European Union for funding research and development projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a deduction from research and development expenses.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables, marketable securities and foreign currency derivative contracts. The Company's cash and cash equivalents are invested in deposits mainly in dollars with major international banks. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk. The Company's trade receivables are derived from sales to customers located primarily in North America, EMEA and APAC. The Company performs ongoing credit evaluations of its customers and F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company's marketable securities include investment in corporate debentures and U.S. The Company entered into forward contracts, and option contracts intended to protect cash flows resulting from payroll and facilities related expenses against the volatility in value of forecasted non-dollar
The Company's liability for severance pay for its Israeli employees is calculated pursuant to Israel's Severance Pay Law based on the most recent monthly salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. The Company's liability is fully provided by monthly deposits with insurance policies and severance pay funds and by an accrual. The deposited funds include profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies. The Company's agreements with employees in Israel, The Company also has other liabilities for severance pay in other jurisdictions. Severance pay expense for The Company has a 401(K) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 6%-8% of their eligible compensation, but generally not greater than annual payment of $18 in 2016 and 2015, and $17.5 F - 25 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Basic net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year plus dilutive potential equivalent ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings per Share". The weighted average number of shares related to outstanding anti-dilutive options excluded from the calculations of diluted net earnings per share was
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"), which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income. The Company recognizes compensation expenses for the value of its awards, which have graded vesting, based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model, which requires a number of assumptions: the expected volatility is based upon actual historical stock price movements; the expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding; the risk-free interest rate is based on the yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term; and the expected dividend rate (an annualized dividend yield) is based on the per share dividend declared by the Company's Board of Directors. For information on the Company's dividend payments, see Note The Company measures the fair value of restricted stock based on the market value of the underlying shares at the date of grant. F - 26 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company applies ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"). Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3. The Company's marketable securities and foreign currency derivative contracts are classified within Level 2 (see Notes 3 and The carrying amounts of F - 27 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.
Advertising expenses are charged to expense as incurred. Advertising expenses for the years 2016, 2015 and 2014
The Company repurchases its ordinary shares from time to time on the open market or in other transactions and holds such shares as treasury shares. The Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity. The Company reissues treasury shares under the stock purchase plan, upon exercise of options and upon vesting of restricted stock units. Reissuance of treasury shares is accounted for in accordance with ASC No. 505-30 whereby gains are credited to additional paid-in capital and losses are charged to additional paid-in capital to the extent that previous net gains are included therein; otherwise to retained earnings.
The Company applies the provisions of ASC 805, “Business Combination” and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to future expected cash flows from customer relationships, acquired technology and acquired trademarks from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
The Company accounts for comprehensive income in accordance with ASC No. 220, "Comprehensive Income". Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income relate to gains and losses on hedging derivative instruments and unrealized gains and losses on available for sale marketable securities and changes in foreign currency translation adjustments. F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The following tables show the components of accumulated other comprehensive income, net of taxes, as of December 31,
F - 29 NICE LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands (except share and per share data)
In May 2014, the Financial Accounting Standards Board In March 2016, the FASB issued “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting revenue gross versus net)” (ASU 2016-08), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued “Identifying Performance Obligations and Licensing” (ASU 2016-10) which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. The new revenue standard may be applied using either of the The Company will adopt the standard in the first quarter of 2018 and has not yet selected a transition method The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures. While the Company is continuing to assess all potential impacts of the new standard, the Company currently believes the impacts relate to arrangements that include term-based software licenses, allocation of transaction price to each performance obligation on a relative standalone selling price and capitalization of costs related to obtaining In January 2016, the FASB issued ASU In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements. F - 30 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), which clarifies that a change in the counter party to a derivative instrument designated as a hedging instrument does not require designation of that hedging relationship, provided that all other hedge accounting criteria are met. The guidance in ASU 2016-05 is effective for annual periods beginning after December 15, 2016; early adoption is permitted as of the beginning of an interim period on a modified retrospective basis. The Company expects no material impact on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for the Company in the first quarter of 2017. The Company will apply this guidance using a modified retrospective transition method and expect to record a total cumulative-effect adjustment in retained earnings as of January 1, 2017 for the revision of the forfeiture fair value and excess tax benefits that have not previously been recognized in an amount of approximately $6 million. In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments." The guidance addresses the classification of cash flow related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. Early application is permitted. The Company is currently evaluating the impact of this standard on its consolidated statement of cash flows. In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. ASU 2016-16 will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which requires the calculation of the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements. F - 31 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (ASU 2017-04), which provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. ASU 2017-04 provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This update is effective for annual and interim periods beginning after December 15,
Short-term and long-term investments include marketable securities in the amount of The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of available-for-sale marketable securities as of December 31,
The scheduled maturities of available-for-sale marketable securities as of December 31,
F - 32 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values as of December 31,
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Depreciation expense totaled The Company recorded a reduction of F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
(*) including a goodwill balance of $559,372 related to the acquisition of inContact.
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company's risk management strategy includes the use of derivative financial instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. ASC 815, "Derivatives and Hedging" ("ASC 815"), requires the Company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments that are designated and qualify as a 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 accumulated other comprehensive income (loss) and reclassified into earnings in the line item associated with the hedged transaction in the 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 representing the ineffective portion of the derivative, if any, is recognized in financial income (expense) in the period of change. The Company entered into option and forward contracts to hedge a portion of anticipated New Israeli Shekel ("NIS") and Indian Rupee (INR) payroll and benefit payments as well as facilities related payments. These derivative instruments are designated as cash flow hedges, as defined by ASC 815 and accordingly are measured in fair value. These transactions are effective and, as a result, gain or loss on the derivative instruments are reported as a component of accumulated other comprehensive income (loss) and reclassified as payroll expenses or finance expenses, respectively, at the time that the hedged income/expense is recorded.
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company currently hedges its exposure to the variability in future cash flows for a maximum period of one year. As of December 31, The fair value of the Company's outstanding derivative instruments at December 31,
The effect of derivative instruments in cash flow hedging relationship on income and other comprehensive income for the years ended December 31,
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Derivatives in foreign exchange cash flow hedging relationships:
The Company leases office space, office equipment and various motor vehicles under operating leases.
Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, were as follows:
Rent expenses for the years On October 30, 2015, the Company entered into an agreement to rent new office space in Hoboken NJ, USA. Consequently, in November 2016, the Company ceased using its offices in Paramus, NJ and Manhattan, NY, USA prior to their original contractual termination date. The Company intends to sub-lease its two former facilities in New Jersey and New York during the remainder of the respective lease terms. As a result, the Company recorded an exit activity liability as of December 31, 2016 and recognized rent expenses in the year then ended in the amount of $6,457, which are included in the disclosed information above. F - 39 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The minimum payment under these operating leases, upon cancellation of these lease agreements was Lease expenses for motor vehicles for the years 2016, 2015 and 2014
The Company is obligated under certain agreements with its suppliers to purchase
Following the divestiture of one of the Company business units, the buyer of such business unit made certain demands and allegations, claiming indemnification pursuant to the sale agreement between the Company and such buyer. The Company has denied all demands and allegations made by the buyer. The parties have reached and executed a settlement agreement on December 25, 2016 in accordance with the mechanism set in the sale agreement regarding such matters, which its outcome is recorded within discontinued operations. This dispute is no longer pending.
In May 2009, inContact was served in a lawsuit titled California College, Inc., et al., v. UCN, Inc., et al. In the lawsuit, California College alleges that (1) inContact made fraudulent and/or negligent misrepresentations in connection with the sale of its services with those of Insidesales.com, Inc., another defendant in the lawsuit, (2) inContact breached its service contract with California College and an alleged oral contract between the parties by failing to deliver contracted services and product and failing to abide by implied covenants of good faith and fair dealing, and (3) inContact’s conduct interfered with prospective economic business relations of California College with respect to enrolling students. California College filed an amended complaint that has been answered by Insidesales.com and inContact. California College originally sought damages in excess of $20.0 million. Insidesales.com and inContact filed cross- claims against one another, which they subsequently agreed to dismiss with prejudice. In October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been disclosed and remain confidential. In June of 2013, California College amended its damages claim to $14.4 million, of which approximately $5.0 million was alleged to be pre- judgment interest. On September 10, 2013, the court issued an order on inContact's Motion for Partial Summary Judgment. The court determined that factual disputes exist as to several of the claims, but dismissed California College's cause of action for intentional interference with prospective economic relations and the claim for prejudgment interest. Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9.2 million. At this stage we are unable to evaluate the probability of a favorable or unfavorable outcome in this litigation. F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
Income not eligible for Pursuant to a temporary tax relief initiated by the F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
In
Under the
NICE
Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. F - 42 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
As of December 31, 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 increasing taxes before utilization.
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recorded for tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
The Company has provided valuation allowances in respect of certain deferred tax assets resulting from tax loss carry forwards and other reserves and allowances due to uncertainty concerning
F - NICE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
g. Taxes on income are comprised as follows:
Of which:
F - 45 NICE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
All the Company's unrecognized tax benefits would, if recognized, reduce the Company's annual effective tax rate. The Company has During
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