For the fiscal year ended |
Title of each class | Name of each exchange on which registered | ||
Ordinary Shares, NIS 0.05 par value per share | The Nasdaq Stock Market LLC |
Non-Accelerated Filer o Emerging growth company ☐ |
U.S. GAAP |
International Financial Reporting Standards as issued by the International Accounting Standards Board |
Other |
· | “we,” “us,” “our,” the “Company,” and “Radware” are to Radware Ltd. and its subsidiaries; |
· | “ordinary shares” are to our Ordinary Shares, par value NIS 0.05 per share; |
· | “Companies Law” or the “Israeli Companies Law” are to the Israeli Companies Law, 5759-1999, as amended; |
· | the “SEC” are to the U.S. Securities and Exchange Commission; |
· | the "U.S." are to the United States; |
· | “U.S. GAAP” are to generally accepted accounting principles in the United States; |
· | “NASDAQ” are to the NASDAQ Global Market (formerly, the Nasdaq National Market); |
· | “dollars”, “$” or “US$” are to U.S. dollars; and |
· | “NIS” or “shekels” are to New Israeli Shekels. |
9 | ||||
A. | Selected Financial Data | |||
B. | Capitalization and Indebtedness | |||
C. | Reasons for the Offer and Use of Proceeds | |||
D. | Risk Factors | |||
A. | History and Development of the Company | |||
B. | Business Overview | |||
C. | Organizational Structure | |||
D. | Property, Plants and Equipment | |||
A. | Operating Results | |||
B. | Liquidity and Capital Resources | |||
C. | Research and Development, Patents and Licenses, etc. | |||
D. | Trend Information | |||
E. | Off-Balance Sheet Arrangements | |||
F. | Tabular Disclosure of Contractual Obligations | |||
A. | Directors and Senior Management | |||
B. | Compensation | |||
C. | Board Practices | |||
D. | Employees | |||
E. | Share Ownership | |||
A. | Major Shareholders | |||
B. | Related Party Transactions | |||
C. | Interests of Experts and Counsel |
A. | Consolidated Statements and other Financial Information | |||
B. | Significant Changes | |||
A. | Offer and Listing Details | |||
B. | Plan of Distribution |
C. | Markets | |||
D. | Selling Shareholders | |||
E. | Dilution | |||
F. | Expenses of the Issue | |||
A. | Share Capital | |||
B. | Memorandum and Articles of Association | |||
C. | Material Contracts | |||
D. | Exchange Controls | |||
E. | Taxation | |||
F. | Dividends and Paying Agents | |||
G. | Statement by Experts | |||
H. | Documents on Display | |||
I. | Subsidiary Information | |||
136 | ||||
142 | ||||
Financial Statements | 142 | |||
Financial Statements | 142 | |||
Exhibits | 142 | |||
Year ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(U.S. dollars and share amounts in thousands, except per share data) | ||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Products | $ | 110,186 | $ | 136,793 | ** | $ | 143,466 | ** | $ | 118,727 | $ | 119,279 | ||||||||
Services | 86,399 | 79,773 | ** | 78,426 | ** | 74,270 | 69,892 | |||||||||||||
196,585 | 216,566 | 221,892 | 192,997 | 189,171 | ||||||||||||||||
Cost of revenues: | ||||||||||||||||||||
Products | 27,320 | 29,159 | 29,448 | 27,066 | 26,386 | |||||||||||||||
Services | 8,375 | 9,041 | 10,284 | 9,669 | 9,333 | |||||||||||||||
35,695 | 38,200 | 39,732 | 36,735 | 35,719 | ||||||||||||||||
Gross profit | 160,890 | 178,366 | 182,160 | 156,262 | 153,452 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development, net | 51,732 | 49,987 | 44,081 | 40,983 | 36,187 | |||||||||||||||
Sales and marketing | 103,774 | 93,347 | 93,203 | 82,815 | 76,646 | |||||||||||||||
General and administrative | 18,133 | 17,033 | 19,797 | 14,895 | 9,696 | |||||||||||||||
Total operating expenses | 173,639 | 160,367 | 157,081 | 138,693 | 122,529 | |||||||||||||||
Operating income (loss) | (12,749 | ) | 17,999 | 25,079 | 17,569 | 30,923 | ||||||||||||||
Financial income, net | 5,741 | 5,867 | 5,802 | 4,494 | 4,792 | |||||||||||||||
Income (loss) before taxes on income | (7,008 | ) | 23,866 | 30,881 | 22,063 | 35,715 | ||||||||||||||
Taxes on income | (1,651 | ) | (5,297 | ) | (5,931 | ) | (4,008 | ) | (3,958 | ) | ||||||||||
Net income (loss) | $ | (8,659 | ) | $ | 18,569 | $ | 24,950 | $ | 18,055 | $ | 31,757 | |||||||||
Basic net earnings (loss) per share* | $ | (0.20 | ) | $ | 0.40 | $ | 0.55 | $ | 0.40 | $ | 0.73 | |||||||||
Diluted net earnings (loss) per share* | $ | (0.20 | ) | $ | 0.40 | $ | 0.53 | $ | 0.39 | $ | 0.68 |
Year ended December 31, | ||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
(U.S. dollars in thousands except per share data) | ||||||||||||||||||||
Statements of Income Data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Products | $ | 103,285 | $ | 119,279 | $ | 118,727 | $ | 138,975 | $ | 130,123 | ||||||||||
Services | 63,735 | 69,892 | 74,270 | 82,917 | 86,443 | |||||||||||||||
167,020 | 189,171 | 192,997 | 221,892 | 216,566 | ||||||||||||||||
Cost of revenues: | ||||||||||||||||||||
Products | 24,231 | 26,386 | 27,066 | 29,448 | 29,159 | |||||||||||||||
Services | 9,126 | 9,333 | 9,669 | 10,284 | 9,041 | |||||||||||||||
33,357 | 35,719 | 36,735 | 39,732 | 38,200 | ||||||||||||||||
Gross profit | 133,663 | 153,452 | 156,262 | 182,160 | 178,366 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development, net | 36,064 | 36,187 | 40,983 | 44,081 | 49,987 | |||||||||||||||
Sales and marketing | 69,543 | 76,646 | 82,815 | 93,203 | 93,347 | |||||||||||||||
General and administrative | 9,629 | 9,696 | 14,895 | 19,797 | 17,033 | |||||||||||||||
Total operating expenses | 115,236 | 122,529 | 138,693 | 157,081 | 160,367 | |||||||||||||||
Operating income | 18,427 | 30,923 | 17,569 | 25,079 | 17,999 | |||||||||||||||
Financial income, net | 4,200 | 4,792 | 4,494 | 5,802 | 5,867 | |||||||||||||||
Income before income taxes | 22,627 | 35,715 | 22,063 | 30,881 | 23,866 | |||||||||||||||
Income taxes | (1,290 | ) | (3,958 | ) | (4,008 | ) | (5,931 | ) | (5,297 | ) | ||||||||||
Net income | $ | 21,337 | $ | 31,757 | $ | 18,055 | $ | 24,950 | $ | 18,569 | ||||||||||
Basic net earnings per share* | $ | 0.51 | $ | 0.73 | $ | 0.40 | $ | 0.55 | $ | 0.40 | ||||||||||
Diluted net earnings per share* | $ | 0.47 | $ | 0.68 | $ | 0.39 | $ | 0.53 | $ | 0.40 |
Year ended December 31, | ||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Weighted average number of ordinary shares used in computing basic net earnings per share | 41,906 | 43,709 | 44,760 | 45,309 | 45,895 | |||||||||||||||
Weighted average number of ordinary shares used in computing diluted net earnings per share | 45,776 | 46,589 | 46,717 | 46,895 | 46,739 |
Year ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Weighted average number of ordinary shares used in computing basic net earnings (loss) per share | 43,868 | 45,895 | 45,309 | 44,760 | 43,709 | |||||||||||||||
Weighted average number of ordinary shares used in computing diluted net earnings (loss) per share | 43,868 | 46,739 | 46,895 | 46,717 | 46,589 |
As of December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents, short-term bank deposits and marketable securities | $ | 226,086 | $ | 130,669 | $ | 104,416 | $ | 134,826 | $ | 88,207 | ||||||||||
Long-term bank deposits and marketable securities | 94,059 | 184,457 | 226,273 | 150,874 | 186,739 | |||||||||||||||
Working capital | 181,502 | 101,029 | 76,010 | 113,546 | 62,003 | |||||||||||||||
Total assets | 430,336 | 430,887 | 442,573 | 388,734 | 357,650 | |||||||||||||||
Shareholders’ equity | 299,763 | 319,123 | 333,697 | 294,120 | 271,230 | |||||||||||||||
Capital Stock | 326,001 | 313,445 | 294,738 | 263,420 | 250,338 |
As of December 31, | ||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents, short-term bank deposits and marketable securities | $ | 116,493 | $ | 88,207 | $ | 134,826 | $ | 104,416 | $ | 130,669 | ||||||||||
Long-term bank deposits and marketable securities | 102,644 | 186,739 | 150,874 | 226,273 | 184,457 | |||||||||||||||
Working capital | 89,076 | 62,003 | 113,546 | 76,010 | 101,029 | |||||||||||||||
Total assets | 295,191 | 357,650 | 388,734 | 442,573 | 430,887 | |||||||||||||||
Shareholders’ equity | 219,321 | 271,230 | 294,120 | 333,697 | 319,123 | |||||||||||||||
Capital Stock | 233,927 | 250,338 | 263,420 | 294,738 | 313,445 | |||||||||||||||
invest significantly in research and development; |
develop, introduce and support new products and enhancements on a timely basis; and |
gain market acceptance of our products. |
post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination of two or more operations into a new merged entity; |
diversion of management’s attention from our core business; |
substantial expenditures, which could divert funds from other corporate uses; |
entering markets in which we have little or no experience; |
loss of key employees of the acquired operations; and |
known or unknown contingent liabilities, including, but not limited to, tax and litigation costs. |
A portion of our international sales are denominated in currencies other than U.S. dollars, such as Euro, Chinese Yuan and Australian Dollar, thereby exposing us to currency fluctuations in such international sales transactions; |
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 of the court 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; |
· | On January 31, 2017, we announced the acquisition of Seculert, a company engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis “UEBA” solutions. |
· | On April 20, |
· | On March 16, 2016, we announced that we prevailed in our patent infringement lawsuit against F5 Networks, Inc. in the Northern District of California and were awarded $6.4 million in damages. See also “Item 8. Financial Information – Legal Proceedings”. |
· Distributed Denial of Service (DDoS) protection market; |
· Application Delivery Controllers (ADCs) market; and |
· Web application firewall (WAF) market. |
· | While large enterprises and service providers are focused on the technology advantage of the DDoS solutions, medium-sized organizations often balance such criteria with other considerations, like cost and ease of deployment and procurement. |
· | Increased adoption of cloud computing, by customers as well as attackers, is creating new types of opportunities and expectations for DDoS mitigation solution providers. |
· | Need for DDoS protection solutions provided as software as a service, or SaaS, is increasing. |
· | Although this market emerged from load balancing in the mid-1990s, most organizations now use advanced functionality, including WAF, global load balancing and acceleration. |
· | As the market evolves, ADCs are becoming less hardware-centric and the demand for software-based ADCs increases. However, we believe that, at this stage, hardware-based ADCs still provide the highest level of performance and scale. |
· | More organizations are relying on private or hybrid cloud-based ADC solutions, especially with cloud-based applications that require cloud-based ADC solutions. |
· | IT and data center managers are increasingly minded to the challenges posed by network and application attacks coupled with the need to maintain the availability and integrity of services by improved resistance to |
· | With the increase of encrypted web communication usage (such as the use of HTTPS, a protocol for secure communication over a computer network which is widely used on the Internet) on the Internet, cyber attackers have found a new channel through which they can gain access into an enterprise network and the sensitive information it contains without being spotted. Enterprises are expecting ADC solutions to offload Secure Sockets Layer (SSL) traffic and provide visibility into SSL-encrypted traffic to various network security tools. |
· |
· | WAF solutions continue to integrate with several other technologies, such as ADC, vulnerability scanners and DDoS mitigation solutions. |
· |
· | Global presence. We have more than 10,000 customers worldwide and have global sales, support and marketing capabilities. For example, we offer global cloud and service infrastructure based on multiple service centers dispersed globally through service data centers in Europe, Asia, North America, South America and Australia. We currently have local presence in 19 countries around the world. As such, our TAC support centers are located to provide 24/7 support service to our customers. |
· | Strategic relationships. We have global technology partner alliances with leading vendors such as Cisco Systems, Inc., Check Point |
· | Customers. |
· | Independence |
· | Focus on holistic solutions. Focus on developing and selling holistic |
· | Be technology leaders. We |
· | Expand and leverage our strategic relationships. We believe that a significant market opportunity exists to sell our solutions with the complementary products and services provided by other organizations with whom we wish to collaborate. To that end, we have already established strategic relationships with various third parties, including leading global-class partners, such as Check Point, and Cisco |
· | Pursue |
· | Application and Network Security - By protecting enterprises and carrier applications and data centers against known and emerging network and application threats in real-time, |
· | Application Delivery – |
Fully-owned products |
o | Cloud DDoS Protection Service. Our Cloud DDoS Protection Services provide a full range of enterprise-grade DDoS protection services in the cloud. Based on our DDoS protection technology, it provides organizations wide security coverage, accurate detection and short time to protect from today’s dynamic and evolving DDoS attacks. We offer a multi-vector DDoS attack detection and mitigation service, handling attacks at the network layer, server-based attacks, and application-layer DDoS attacks. The solution includes protection against volumetric and non-volumetric attacks, SYN flood attacks, "low & slow" attacks, HTTP floods, SSL-based attacks and more. Our Cloud DDoS Service is offered in multiple deployment options to meet an organization’s specific needs: |
· | Our Hybrid Cloud DDoS service –integrates with our on-premise DDoS protection device in its data center. |
· | Our Always-On Cloud DDoS Service (provides always-on protection where traffic is always routed through Radware's cloud security POPs (Points of Presence) with no on-premise device required for detection and mitigation. |
· | Our On-Demand Cloud DDoS Service - protects against Internet pipe saturation and is activated when the attack threatens to saturate the organization’s Internet pipe. |
· | Cloud WAF Service - Our Cloud WAF Service provides enterprise-grade, continuously adaptive web security protection and is based on our ICSA Labs certified web application firewall. Cloud WAF includes full coverage of OWASP Top-10 threats and automatically adapts the protections to evolving threats and protected assets. |
o | DefensePro Attack Mitigation Device. DefensePro® is a real-time network attack prevention device that protects the user’s application infrastructure against network and application downtime, application vulnerability exploitation, malware spread, network anomalies, information theft and other emerging network attacks at up to |
o | AppWall Web Application Firewall. AppWall® is a WAF appliance that secures web applications. It enables PCI compliance by mitigating web application security threats and vulnerabilities to prevent data theft and manipulation of sensitive corporate and customer information. AppWall incorporates Web application security filtering technologies to effectively detect threats, block attacks and report events. |
o | DefenseFlow Cyber Command and Control application. DefenseFlow® is a network-wide cyber command and control application that helps service providers to automate network security incidents response. DefenseFlow acts as a cyber-defense control-plane that collects and analyzes multiple sources of security telemetries and, based on this information, applies designated intelligent security actions. In order to handle multiple services, tenants or network elements with minimal effort and still maintain a reasonable TCO, DefenseFlow employs algorithmic capabilities that enable the automation of common NOC/SOC operations within cyber-attack mitigation workflows. These include new service provisioning, mitigation activation, traffic diversion and attack termination. This enables service providers to handle large amounts of customers efficiently and with minimal errors. |
o |
o | Security Updates Service (SUS) Subscription. Our SUS service consists of periodic updates, emergency updates, and custom filters, which are supported by our own security operations center for vulnerability and exploit detection; security risk assessment; and threat mitigation support services. The service provides immediate and ongoing security updates to protect customers against the latest threats. |
o | RSA Fraud Action Feed Subscription. This subscription-based service provides protection from fraud and phishing attacks based on RSA 24x7 Anti-Fraud Command Center (AFCC). This includes protecting network users from financial fraud, information theft, and zero-minute malware spread. By subscribing to this service, customers receive updates about malicious fraud and phishing sites that are downloaded automatically to DefensePro |
o | Cloud Web Acceleration Service. Our Cloud Web Acceleration Service speeds up web applications by up to 40% and eliminates the need to continuously invest development resources in code optimization per browser or device type. Based on our FastView technology, Cloud Web Acceleration Service continuously monitors the web application and automatically optimizes its content for faster delivery to the end user, according to device type and web browser. It provides acceleration for most web applications; ensuring end users get improved experience while browsing web sites. Using dozens of web performance optimization techniques per page and on the file, it helps save development resources required for manual code and content optimization. |
o | Alteon® NG Application Delivery Controller/Load |
o | LinkProof NG Multi-homing. LinkProof® NG is a next-generation multi-homing and enterprise gateway solution that allows service level availability and continuous connectivity of enterprise and cloud-based applications. It is an application-aware multi-homing and link load balancing module that delivers 24/7 continuous connectivity and service level assurance, improved performance and cost-effective scalability of bandwidth for corporate and cloud-based applications. |
FastView - Web Performance Optimization and |
o | FastView web performance optimization (WPO) module |
o | Application Performance Monitoring (APM) module |
o | AppWall web application firewall module |
o | APSolute Vision. APSolute Vision® is the end-to-end management and monitoring tool for our family of application delivery and application security solutions. It provides immediate visibility to health, real-time status, performance and security of enterprise-wide application delivery and network and application security infrastructures from one central, unified console (even for multiple data centers). APSolute Vision consolidates the monitoring, configuration and maintenance automation of up to 1,000 devices across multiple data centers. This eliminates the need for deploying management appliances in multiple data centers, which simplifies data center management. |
o | Application Performance Monitoring (APM). APM is our end-to-end monitoring solution that assures full application SLA. It provides complete visibility into our customers’ applications' performance with a breakdown by application, location or specific transaction. APM allows our customers to proactively maintain application performance and protect SLAs with real-time error detection and the ability to track real user transactions and response time. It provides historical reports with drilldown-able granular analysis based on user-defined SLA, while providing measurements of the delay per each application delivery chain segment, including data center time, network latency and browser rendering time. |
o | vDirect. vDirect is our service orchestration and automation engine, designed for software-defined data centers and clouds. With vDirect, customers can automate their data centers across all of Radware devices. In addition, vDirect integrates the During 2016, our key activities regarding our cloud services and We have launched a new carrier-grade Application Delivery Controllers platform - Alteon 8820. The 8820 platform provides up to 200Gbps of total throughput with up to 100 vADC instances and supports 100GE ports. It offers advanced capabilities such as ADC virtualization, integrated application acceleration and on-demand scalability needed to meet mobile carrier and large enterprise data center and network needs. We have launched a new mid-range Application Delivery Controllers platform - Alteon 6024 - designed for carriers, mobile operators and very large enterprises. The 6024 platform offers wide on-demand scalability of 30-80Gbps throughput with up to 32 vADC instances. We have launched SSL Inspect solution for scalable and highly-available security services infrastructure with Alteon NG. Alteon SSL Inspect Solution provides policy-based security services chaining for seamless traffic steering through multiple security solutions, while eliminating the SSL blind spot. - 45 - We have launched DefensePro VA, a virtual appliance form factor for our award winning DefensePro product line. DefensePro VA can run as software on x86 commercially off the shelf (COTS) hardware reaching network throughputs up to 20Gbps. DefensePro VA fits enterprises that deploy SDDC solutions or cloud service providers who need to deliver agile security services. We have launched a Cloud Content Delivery Network (CDN) Service that provides content to end-users from the nearest location to improve user experience, shorten website response times, and offload customer compute capacity. We are partnering with Verizon to deliver this Cloud CDN service. We have continued our cloud offering build-up by introducing the Always-On Cloud DDoS Protection services and On-Demand Cloud DDoS Protection Services. Both services are fully-managed, cloud-based DDoS protection services that are designated for enterprises with no on-premises solution. We have relaunch the DefensePipe service which is now called Hybrid Cloud DDoS Protection Service that augments customers who already have on-premises DefensePro solution by adding volumetric attacks mitigation in the cloud. We have introduced the Operator Toolbox, an automation mechanism in APSolute Vision Management console providing the benefit of streamlined execution of complex operations, automation of common recurring tasks, while reducing of manual errors and overhead associated with administrative tasks. It uses the integrated Radware vDirect technology to execute vDirect Configuration Templates based on a shared script repository. This mechanism allows the ADC and Security administrators to automate an array of ADC or security -related operations, thus substantially increasing the administrator’s productivity.
- Sales and Marketing Sales. We market and sell our products primarily through indirect sales channels that consist of distributors and resellers located in Marketing. Our marketing strategy is to enhance brand recognition and maintain our reputation as a provider of technologically advanced, quality Application Delivery and Application and Network Security solutions to help drive demand for our products. We seek to build upon our marketing and branding efforts globally to achieve greater worldwide sales. Our sales force and marketing efforts are principally directed at developing brand awareness, generating demand and providing support to our distributors/resellers to promote sales. We participate in major trade shows, regionally-based events/seminars and offer support to our distributors and resellers who participate in these events. We also invest in online and search engine advertising campaigns, global public relations and regionalized field marketing campaigns. In addition to our independent marketing efforts, we invest in joint marketing efforts with our distributors, value added resellers and other companies that have formed strategic alliances with us. We have entered into co-marketing arrangements with companies in other complementary sectors in order to broaden our customer base by selling joint solutions comprised of such complementary products. As an example, an applications vendor Strategic Alliances and OEM Agreements. We have entered into strategic alliances and OEM agreements with other software and hardware vendors, as well as mutual channel information sharing arrangements, where products can either be branded with our name or the vendor’s name. We believe that these companies have significant customer relationships and offer products which complement our products. - 47 - For example, in May 2012, we entered into an agreement with Check Point Software Technologies Ltd., We plan to further invest in the development of strategic alliances in order to provide greater access to our target markets and enhance our brand name. We have also entered into OEM agreements with several software vendors, in which we incorporate such vendors’ software into our products to create additional value to our customers. Customers and End-Users With the exception of our limited direct sales to selected customers, we sell our products through distributors or resellers who then sell our products to end users. We have a globally diversified end-user base, consisting of corporate enterprises, including banks, insurance companies, manufacturing and retail companies, government agencies and media companies, and service providers, such as telecommunication carriers, internet service providers, cloud service providers and application service providers. Customers in these different vertical markets deploy Radware products for availability, performance and security of their applications from headquarters to branch offices. In 2016, approximately 43% of our sales were in the Americas (principally in the United States), 27% were in Europe, Middle East and Africa (“EMEA”) and 30% in Asia-Pacific, compared to 41%, 29% and 30%, respectively, in 2015, and 42%, 25% and 33%, respectively, in 2014. Other than the United States, which accounted for 35% of our total revenues in 2016, no other single country accounted for more than 10% of our sales for 2016. In 2016, approximately 56% of our sales derived from product sales and 44% derived from service sales, compared to approximately 63% and 37%, respectively, in 2015 and 63% and 37%, respectively, in 2014. We believe that this reflects our strong product installed base that drives a demand for our support and managed services and maintenance as well as a decline in our product sales. In 2016, approximately 69% of our sales derived from the enterprise market and 31% derived from the carrier market, compared to approximately 71% and 29%, respectively, in 2015 and 68% and 32%, respectively, in 2014. For the years ended December 31, 2016, 2015 and 2014, no single customer accounted for more than 10% of our sales. As of December 31, 2016, 2015 and 2014, no single customer represented more than 10% of our trade receivables balance. For additional details regarding the breakdown of our revenues by geographical distribution and by activity, see “Item 5A – Operating and Financial Review and Prospects – Operating Results”. - 48 - Seasonality Our quarterly operating results have been, and are likely to continue to be, influenced by seasonal fluctuations in our sales and by seasonal purchasing patterns of some of our customers. Some of our customers plan their annual purchasing budget at the beginning of each year which causes operating results in our first quarter of the year to be typically lower than other quarters. In addition, our operating results in the fourth quarter tend to be higher than other quarters as some of our customers tend to make greater capital and operational expenditures as well as expenditures relating to service renewals towards the end of their own fiscal years, thereby increasing orders for our products, support and subscription services in the fourth quarter. Customer Support Services Our technical team, which consisted of Research and Development As of December 31, See also below under "Government Regulations – Israeli Innovation Authority.” - Manufacturing and Suppliers Our quality assurance testing, final integration, packaging and shipping operations as well as part of our final assembly activities are primarily performed at our facility in Jerusalem, Israel. All of our products are Underwriters Laboratories (UL) and ISO 9001:2008 compliant and some of them have also achieved significant industry We rely on third-party manufacturing vendors to provide our finished products. In this respect, these vendors primarily provide us with assembly services in order to deliver the finished goods while we perform the final integration of the products. All components and subassemblies included in our products are supplied to the manufacturing vendors by several suppliers and subcontractors. Each of the manufacturing vendors monitors each stage of the components production process, including the selection of components and subassembly suppliers. Thereafter, each of the manufacturing vendors makes the final assembly in their own facility. Our primary manufacturing vendors are ISO 9001 certified, indicating that each of their manufacturing processes adhere to established quality standards. In We conduct a BCP (business continuity plan) with all our vendors to ensure an immediate recovery in case of crisis that might jeopardize the supply of our products. However, if we are unable to continue to acquire those platforms or components from these platform manufacturers and vendors on acceptable terms, or should any of these suppliers cease to supply us with such platforms or components for any reason, we may not be able to identify and integrate an alternative source of supply in a timely fashion or at the same costs. Any transition to one or more alternate suppliers would likely result in delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time for such transition period, although we believe we have levels of inventory that will assist us to transition to alternate suppliers smoothly. - 50 - Proprietary Rights We rely on patent, trademark and trade secret laws, as well as confidentiality agreements and other contractual arrangements with our employees, distributors and others to protect our technology. We have a policy that requires our employees to execute employment agreements, including confidentiality and We have registered trademarks for, among others, We have registered patents in the United States for, among others, our triangle redirection method used for the global load balancing in our AppDirector product; our mechanism for efficient management and optimization of multiple links used in our LinkProof product; our method for load balancing by global proximity used in our AppDirector product; our method for controlling traffic on links between autonomous Border Gateway Protocol (BGP) systems; the stateful distribution of copied SSL traffic; the transparent inspection of encrypted client traffic; our passive monitoring and event detection mechanisms used for business event monitoring in our Inflight product; the activation of multiple virtual services on a switching platform; the behavioral analysis and detection of zero-day and DoS network attack patterns in our DefensePro product; our hypertext transfer protocol (HTTP) DoS attack mitigation behavioral mechanisms in our DefensePro; a geographically based traffic distribution; a generic proximity based site selection for global load balancing; an internal hardware connectivity plane architecture; and a specific proximity based site selection for global load balancing of HTTP transactions implemented in our Alteon products. In We have pending patent applications and provisional patents in connection with several methods and features used in our products or that we plan to implement in the future, such as advanced algorithms for cyber detection defending against new kinds of attacks (BurstIoT related attacks, detection of attacks within AWS etc.), patent applications around the cyber control and automation (DefenseFlow) and around ADC for SDDC adapted for containerized environments. In 2016, we have expanded our cyber domains by entering into a new domain of CTI (Cyber Threat Intelligence) and added provisional patents for proactive incidents response based on sequence matching algorithms and a new - 51 - The protective steps we have taken may be inadequate to deter misappropriation of our technology and information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Some of the countries in which we sell our products do not protect intellectual property to the same extent as the United States and Israel. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Any licenses for intellectual property that might be required for our services or products may not be available on reasonable terms. Competition The Application & Network Security and Application Delivery markets are highly competitive and we expect competition to intensify in the future. We may lose market share if we are unable to compete effectively with our competitors, which include equipment manufacturers and service providers. Our principal competitors are:
We expect to continue to face additional competition as new participants enter the market or extend their portfolios into related technologies. Larger companies with substantial resources, brand recognition and sales channels may also form alliances with or acquire competing providers of Application Delivery or Application and Network Security solutions and emerge as significant competitors. Competition may result in lower prices or reduced demand for our products and a corresponding reduction in our ability to recover our costs, which may impair our ability to - 52 - Government Regulations Environmental Regulations Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards. The “RoHs” and RoHs II Directives require products sold in Europe to meet certain design specifications, which exclude the use of hazardous substances. Directive 2002/96/EC on Waste Electrical and Electronic Equipment (known as the “WEEE” Directive) requires producers of electrical and electronic equipment to register in different European countries and to provide collection and recycling facilities for used products. We are currently in compliance with the RoHs and WEEE Israeli From time to time, eligible participants may receive grants under programs of the Under the R&D Law, research and development programs that meet specified criteria and are approved by the Research Committee of the The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the Research Committee. Such approval is not required for the export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to third parties outside Israel, except in certain special circumstances and subject to the - The R&D 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 foreign interested parties to notify the The Israeli authorities have indicated in the past that the government may further reduce or abolish the Since 2001, we have not had any liability to pay royalties to the - 54 - C. Organizational Structure We have a wholly-owned subsidiary in the United States, Radware Inc., which conducts the sales and marketing of our products in the United States. We also have subsidiaries in Australia, France, Germany, the United Kingdom, Italy, Japan, Singapore, Korea, Canada, India, Israel, China and Hong Kong, most of which typically conduct the sales and marketing of our products in their respective locations. We have also established
* We own 91% of this subsidiary. All other listed subsidiaries are wholly owned. - Yehuda Zisapel, one of our co-founders and shareholders, is the Chairman of our Board of Directors and the father of Roy Zisapel, our President, Chief Executive Officer and
The RAD-Bynet Group also includes several other holdings, real estate companies, biotech and pharmaceutical In addition to engaging in other businesses, members of the RAD-Bynet Group are actively engaged in designing, manufacturing, marketing and supporting data communications products, none of which currently compete with our products. Some of the products of members of the RAD-Bynet Group are complementary to, and may be used in connection with, our products. See also “Item 7B – Major Shareholders and Related Party Transactions - Related Party Transactions”. D. Property, Plants and Equipment General. We operate from leased premises mainly in Tel Aviv and Jerusalem in Israel and New Jersey and North Carolina in the United States. We also lease premises in several locations in Europe and Asia-Pacific for the activities of our subsidiaries, representative offices and branches. Our aggregate annual rent expenses under these leases were approximately We believe that the following offices and facilities are suitable and adequate for our operations as currently conducted and as currently foreseen. In the event that additional or substitute offices and facilities are required, we believe that we could obtain such offices and facilities at commercially reasonable rates. Israel. Our headquarters and principal administrative, finance, research and development and marketing operations are located in approximately 98,000 square feet of leased office space in Tel Aviv, Israel, in two buildings: one, consisting of approximately 38,000 square feet, with a lease expiring in June 2020; and the second consisting of 60,000 square feet, with a lease expiring in June 2020. These facilities are leased from companies owned by Yehuda, Nava and Zohar Zisapel. For more information see – “Item 7 - Major Shareholders and Related Parties Transactions.” In addition, we - 56 - Other locations. In the United States, we lease approximately We lease approximately 3,800 square feet of property for our research and development facilities in North Carolina, the lease for which will expire in September 2018. In addition, we lease approximately We lease facilities for the operation of our subsidiaries and representative offices in several locations in Europe and Asia-Pacific, all from unrelated third parties. None. Our discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. Our operating and financial review and prospects should be read in conjunction with our financial statements, accompanying notes thereto and other financial information appearing elsewhere in this annual report. A. Operating Results Overview We sell to a large extent through sales channels such as resellers and - 57 - Most of our revenues are generated in dollars or are dollar-linked and the majority of our expenses are incurred in dollars and, as such, the dollar is our functional currency. Our consolidated financial statements are prepared in dollars and in accordance with U.S. GAAP. We operate in In the Critical Accounting Policies In many cases, the accounting treatment of a particular transaction is specifically dictated in U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would produce a materially different result. Our management believes that the significant accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
- 58 - Revenue Recognition. We derive revenues mainly from sales of products, post-contract customer support or PCS and subscriptions. Our products are sold primarily through distributors and resellers, all of which are considered end-users. Revenues from product sales are recognized in accordance with Accounting Standards Codification (“ASC”) No. 605, "Revenue Recognition", when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, and collectability is reasonably assured. Revenues from PCS, which represents mainly software updates, help desk support, unit replacement or repair, and security update services, and revenues from subscriptions are recognized ratably over the term of the agreement, which is typically between one year and three years. Our products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. We determine the best estimated selling price ("BESP") in multiple-element arrangements as follows: VSOE for post-contract customer support is determined based on the price charged when such element is sold separately (renewals). The price may vary in the territories and vertical markets in which we conduct business. Price is determined by using a consistent percentage of our product price lists, in the same territories and markets. For the product and subscriptions, we determine the BESP based on management estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, and competition. The determination of estimated selling price ("ESP") is made through consultation with and approval of management, taking into consideration the pricing model and go-to-market strategy. We record a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $ Deferred revenues include unearned amounts received under post-contract customer support and subscription agreements, and are classified in short and long-term based on their contractual term. Deferred revenues amounts which represent uncollected amounts are offset against account receivables. - 59 - Investment in Marketable Securities. We account for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of our investments at the time of purchase and reevaluates such determinations at each balance sheet date. We classified all of our debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial income, net. We recognize an impairment charge when a decline in the fair value of our investments below the cost basis is judged to be other-than-temporary. The 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 that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. During the years Goodwill. 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 No. 350, "Intangibles – Goodwill and Other", goodwill is not amortized, but rather is subject to an annual impairment test. ASC No. 350 requires goodwill to be tested for impairment 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. ASC No. 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 No. 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. We operate in one operating segment, and this segment comprises its only reporting unit. We perform assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for - 60 - Impairment of long lived assets and intangible assets subject to amortization. Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from 5 to 7 years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis. During Stock-based compensation. We account for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation". ASC No. 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 our consolidated statement of income. We recognize compensation expenses for the value of our awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC No. 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. ASC No. 718 requires the cash flows resulting from the tax deductions in excess of the compensation costs recognized for those stock options to be classified as financing cash flows. We selected the Black-Scholes-Merton option pricing model to account for the fair value of our stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. We have historically not paid dividends and have no foreseeable plans to pay dividends. - During 2016, we approved the repricing of 667,750 stock options for several employees and senior management, previously granted under the Stock Option Plans. As a result, the exercise price of the options was lowered to a price per share lower than the original grant exercise price, but a higher price than the known share’s closing price on NASDAQ on the modification date. There was no change in the number of shares subject to each option, vesting or other terms of the options. The incremental expense for the repricing of the options is approximately $1.2 million. For the year ended December 31, 2016, we recorded expenses totaling $360,000 associated with the repricing. Income Taxes. We account for income taxes in accordance with ASC No. 740, "Income Taxes". This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized. Deferred tax liabilities and assets are classified as non-current in accordance with Accounting Standard Update (“ASU”) No. 2015-17 (see also Note Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, While we believe that we have adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire. - 62 - Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 "Revenue from Contracts with Customers" (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition 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 consideration to which the entity expects to be entitled to in exchange for those goods or services. As 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. The guidance permits the use of either a retrospective or cumulative effect transition method. While we have not yet selected a transition method, we made progress toward completing our evaluation of the potential changes from adopting this new standard on our financial reporting and disclosures. We formed an implementation work group and expect to complete the evaluation of the impact of the accounting and disclosure changes on our business processes, controls and systems throughout 2017, design any changes to such business processes, controls and systems, and implement the changes before the end of 2017. Based on our current analysis, one of the potential effect, if any, will be related to incremental costs that are related to sales from contracts signed during the period would require capitalization. The FASB has issued, and may issue in the future, interpretive guidance, which may cause our evaluation to change. We continue to assess all potential impacts under the new revenues standard. Our management believes that we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018. In November 2015, the FASB issued ASU No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (ASU 2015-17). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We adopted this standard in the fourth quarter of 2015 on a retrospective basis. - 63 - In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be effective for us in the first quarter of 2019. We are evaluating the impact of the adoption of this update on our consolidated financial statements and related disclosures. In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU will be effective for us in the first quarter of 2017. Our adoption of ASU 2016-09 will not have a material impact on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be effective for us in the first quarter of 2018. We are currently evaluating the impact this ASU will have on our consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the standard on our future financial statements and disclosures. For information with respect to ASU No. 2014-09 and other recent accounting pronouncements, see Note 2(ab) to our consolidated financial statements included in this annual report. - 64 - Results of Operations The following discussion of our results of operations for the years ended December 31, 2016, 2015 and 2014, including the following tables, which present selected financial information data in dollars and as a percentage of total revenues, are based upon our statements of operations contained in our financial statements for those periods, and the related notes, included in this annual report. The following table sets forth, for the periods indicated, certain financial data concerning our operating results:
The breakdown between product and service revenues for 2015 and 2014 was reclassified to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues, which has resulted in a change to previously published figures for the periods ended December 31, 2015 and December 31, 2014, respectively. - 65 - The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of
Comparison of Years Ended December 31, 2016, 2015 Revenues. Our revenues are derived from sales of our products and services, from sales of post-contract customer support through our Certainty Support program, and from subscriptions. We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable. Subscriptions revenues and post-contract customer support, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the contract or subscription period. We operate in one reportable market segment and our revenues are attributed to geographic areas based on the location of the end-users. Our operating results in 2016 weakened compared to 2015, resulting in an operating loss of $12.7 million compared to operating income of $18.0 million in 2015. Sales in 2016 were $196.6 million compared with sales of $216.6 million in 2015 a decrease of 9%. Sales in 2015 were $216.6 million compared with sales of $221.9 million in 2014, a decrease of 2%. - The following table provides a breakdown of our revenues (dollars in thousands) by type of revenues both in dollars and as a percentage of total revenues for the past three fiscal years, as well as the percentage change between such periods:
*The breakdown between product and service revenues for 2015 and 2014 was reclassified to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues, which has resulted in a change to previously published figures for the periods ended December 31, 2015 and December 31, 2014, respectively. The following table shows a breakdown of our total revenues (dollars in thousands) by geographical distribution both in dollars and as a percentage of total revenues for the past three fiscal years, as well as the percentage change between such periods:
(*) For the years ended December 31, 2016, 2015 Other than the United States, no other single country accounted for more than 10% of our sales for the years ended December 31, 2016, 2015 In 2016, our product sales decreased by 19%, to $110.2 million, compared to $136.8 million in 2015. The decrease in our product sales is attributed to a gradual change in our sales model which is reflected by the shift to subscription sales format as well as challenging conditions in our international business. In 2016, our service sales increased by 8% to $86.4 million, compared to $79.8 million in 2015. This increase in service sales is attributed primarily to (1) the continued growth of our installed base and (2) an increase in our service offerings. During 2016, our revenues (excluding revenues derived from the Radyoos web-based e-commerce platform) from the enterprise market represented approximately 69%, whereas revenues from the carrier market represented approximately 31% of our revenues, compared to 71% and 29%, respectively, in 2015. - 67 - Our revenues in the Americas decreased by $4.0 million, or 4% year-over-year, mainly as a result of the shift to subscription sales format. The EMEA region experienced a decline of 14% compared to 2015. The decrease was primarily due to lower products revenue resulting from the shift to subscription sales as well as a result of overall soft market conditions. Revenues from the Asia-Pacific region decreased by $7.1 million, or 11% year- over-year, mainly due to challenging conditions in some of the major countries, mainly in China, Japan and Australia. The breakdown between product and service revenues for 2015 and 2014 was reclassified compared to the 2015 Form 20-F and 2014 Form 20-F filings, respectively, to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues. In 2015, our product sales decreased by During 2015, our revenues (excluding revenues derived from the Radyoos web-based e-commerce platform) from the enterprise market represented approximately 71% whereas revenues from the carrier market represented approximately 29% of our revenues, compared to 68% and 32%, respectively, in 2014. Our revenues in the Americas decreased by $4.8 million, or 5% year-over-year, mainly as a result of the decrease in revenues derived from the Radyoos web-based e-commerce platform, as explained above. The EMEA region improved compared to 2014, growing by 13% year-over-year. We believe this is a result of continuous recovery experienced in some of the European countries. Cost of Revenues. Cost of revenues refers to both products and service revenues and consists primarily of the cost of circuit boards and other components required for the assembly of our products, salaries and related personnel expenses for those engaged in the final assembly and in providing support and maintenance service of our products, amortization of acquired technology and other overhead costs. Most of our cost of revenues expenses are not fixed costs and are directly related to our revenues. - 68 - The following table sets forth a breakdown of our cost of revenues between products and services for the periods indicated, in absolute figures (dollars in thousands) and as a percentage of the relative product and services revenues:
Cost of products sales as a percentage of products sales increased year-over-year from 21.3% in 2015 to 24.8% in 2016. Cost of products sales in 2016 and 2015 included amortization of intangible assets in the amount of $1.0 and $1.1 million, respectively. Our cost of products sales as a percentage of products sales, excluding amortization of intangible assets, represented approximately 23.9% of products sales in 2016, compared to 20.5% in 2015. The increase in cost of products sales as a percentage of products sales is mainly due to different sales mix of our products coupled with stronger competition in some of the regions. Cost of products sales as a percentage of products sales increased year-over-year from Cost of sales related to services as a percentage of service revenues in 2015 was Operating Expenses. The following table sets forth a breakdown of our operating expenses (dollars in thousands) for the periods indicated as well as the percentage change between such periods:
Our operating expenses increased by 8% in 2016 to $173.6 million from $160.4 million in 2015. The increase is primarily attributed to (1) an increase of $10.1 million in operating expenses that are related to salaries and compensation due to (a) an expansion of our workforce (from an average of 913 employees and subcontractors in 2015 to an average of 951 employees and subcontractors in 2016); (b) salary increase awarded during 2016 in all regions; (c) higher sales commissions; (2) an increase of $2.2 million in stock based compensation expenses, (3) an increase in general and administrative expenses in an amount of $0.9 million related to litigation costs of the intellectual property matter, namely the patent litigation against F5 Networks, Inc., (4) an increase of $ 1.1 million in depreciation expenses, mainly due to investments in new modules to our ERP system and additional infrastructure to support our cloud based solutions. This increase was offset by a decrease of $ 0.9 million associated with grants received from the IIA. The increase in our operating expenses is also due to an increase in other expenses as more fully described below. - 69 - Research and Development Expenses. Research and development, or R&D, expenses consist primarily of salaries and related personnel expenses, costs of subcontractors and prototype expenses related to the design, development, quality assurance and enhancement of our products, and depreciation of equipment purchased for the development and testing processes. All R&D costs are expensed as incurred. We believe that continued investment in R&D is critical to attaining our strategic product objectives. R&D expenses were $51.7 million in 2016, an increase of $1.7 million, or 3% compared with R&D expenses of $50.0 million in 2015. This increase is primarily a result of the following: (1) an increase of $1.0 million due to a higher average number of R&D employees as well as salary raises awarded in mid-2016, (2) an increase of $0.7 million in depreciation expenses, (3) an increase of $ 0.9 million attributed to higher stock-based compensation expenses (see also “Stock based compensation expenses” below), and (4) an increase of $0.4 million related to the impact of the weakening of the dollar mainly against the NIS. Such increase was partially offset by the following: (1) grants received from the IIA in the amount of $0.9 million, and (2) a decrease in travel expenses in the amount of $0.4 million due to cost saving efficiency. R&D expenses were $50.0 million in 2015, an increase of $5.9 million, or 13% compared with research and development expenses of $44.1 million in 2014. This increase is primarily a result of the following: (1) an increase of $5.9 million due to a higher average number of R&D employees and subcontractors as well as salary raises awarded in mid-2015, (2) an increase of $1.1 million in depreciation, travel costs and overhead expenses primarily associated with the aforesaid increase in our headcount, and (3) an increase of $ 1.0 million attributed to higher stock-based compensation expenses. See also “Stock based compensation expenses” Excluding Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions and related personnel expenses for those engaged in the sales and marketing of our products, operational costs of our offices which are located outside Israel and are engaged in the promotion, marketing and support of our products, in addition to the related trade shows, advertising, promotions, web site maintenance and public relations expenses, and amortization of intangible assets. - 70 - Sales and marketing expenses were $103.8 million in 2016, an increase of $10.5 million, or 11%, compared with sales and marketing expenses of $93.3 million in 2015. This increase is primarily a result of the following: (1) a $6.5 million increase in sales and marketing expenses is attributable to increased salary costs as a result of increase in the average number of sales, technical support and marketing employees and salary raises awarded in the beginning of 2016 to some of our employees, (2) an increase of $2.4 million associated with higher sales commissions (3) an increase of $0.4 million is attributed to marketing promotions and initiatives, and (4) an increase of $1.6 million is attributed to higher stock-based compensation expenses (see also “Stock based compensation expenses” below). Such increase was partially offset due to a decrease of $0.4 million related to the strengthening of the dollar against other currencies. Sales and marketing expenses were $93.3 million in 2015, an increase of $0.1 million, or 0.2%, compared with sales and marketing expenses of $93.2 million in 2014. Intangible assets amortization expenses in 2015 decreased by $0.5 million from $0.6 million in 2014 to $0.1 million in 2015. Excluding these amortization expenses, sales and marketing expenses increased by $0.6 million, of which (1) $3.7 million increase in sales and marketing expenses was attributable to increased salary costs due to increase in the average number of sales, technical support and marketing employees, as well as recruiting expenses and salary raises awarded in the beginning of 2015 to some of our employees, (2) an increase of $2.2 million associated with travel costs and overhead associated mainly to the increase in the number of our employees, and (3) increase of $1.2 million is attributed to higher For a discussion of the impact of foreign currency fluctuations our business, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”. Excluding the effect of exchange rates and salaries increase, we expect our sales and marketing expenses in General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, accounting and administrative personnel, professional fees (which include legal, audit and additional consulting fees), bad debt expenses, acquisition related costs and other general corporate expenses. General and administrative expenses were $18.1 million in 2016, an increase of $1.1 million, compared with general and administrative expenses of $17.0 million in 2015. General and administrative expenses in 2016 included stock-based compensation expenses of $2.3 million, compared to stock-based compensation expenses of $2.6 million in 2015. Excluding stock based compensation expenses, general and administrative expenses increased in 2016 by $1.4 million, mainly due to an increase in litigation costs in connection with an intellectual property litigation matter and depreciation expenses of $0.1 million. - 71 - General and administrative expenses were $17.0 million in 2015, a decrease of $2.8 million, compared with general and administrative expenses of $19.8 million in 2014. General and administrative expenses in 2015 included stock-based compensation expenses of $2.6 million, compared to stock-based compensation expenses of $2.9 million in 2014. The decrease in stock based compensation expenses of $0.3 million is explained below under Excluding the possible effect of exchange rates, we expect our general and administrative expenses to continue to increase moderately in Stock based compensation expenses. Our expenses also include recognition of stock-based compensation, which is allocated among cost of sales, research and development expenses, marketing and selling expenses and general and administrative expenses, based on the division in which the recipient of the option grant is employed. The stock-based compensation is amortized to operating expenses over the requisite service period of the individual options. Our total amount of stock based compensation expenses in 2016 totaled to $11.5 million, an increase of $2.2 million compared with expenses of $9.3 million in 2015. During 2016, we granted stock options to purchase approximately 2.8 million shares at a weighted average grant-date fair value of $3.5 per option and 0.7 million restricted stock units, or RSUs, at a weighted average grant-date fair value of $12.8 per RSU, compared to 1.6 million options granted during 2015 at an average grant-date fair value of $5.3 per option and $0.5 million RSUs at a weighted average grant-date fair value of $18.4 per RSU. The reasons for the increase in our stock based compensation expenses in 2016, compared to 2015, are mainly attributed to the stock option repricing made during the year and the increase in the quantity of options and RSUs granted in 2016 compared to 2015 and the impact of the recognition of stock based compensation expenses in 2016, which relates to the options and RSUs granted in the end of 2015. Our total amount of stock based compensation expenses in 2015 totaled to $9.3 million, an increase of $1.9 million compared with expenses of $7.4 million in 2014. During 2015, we granted stock options to purchase 1.6 million shares at a weighted average grant-date fair value of $5.3 per option and 0.5 million - Financial IncomeNet. Financial income, net consists primarily of interest earned on short-term and long-term bank deposits, amortization of premiums, accretion of discounts, interest and dividends earned on investments in marketable securities, gain from sale of marketable securities and from income and expenses from the translation of monetary balance sheet items denominated in non-dollar currencies. Financial income, net was $5.7 million in 2016, compared with $5.9 million in 2015. The net decrease of $0.2 million is attributed to a decrease of $0.7 million in gain from sale of marketable securities, offset by changes in impact of foreign currency translation differences in an amount of $0.5 million. Financial income, net was $5.9 million in 2015, compared with $5.8 million in 2014. The net increase of $0.1 million is attributed to (1) an increase of $2.0 million in gain from sale of marketable securities, (2) set off by changes in impact of foreign currency translation differences in an amount of $1.3 million, and (3) a decline in interest from marketable securities and deposits in an amount of $0.6 million. The decrease in interest from marketable securities and deposits is attributed mainly to the decline in the average yield of our investments portfolio, primarily as a result of the global decline in interest rates in the past few years, and despite the fact that our average investments portfolio balance in 2015 was higher by $16.0 million, than our portfolio balance in 2014. Income Taxes. Israeli companies are generally subject to corporate tax on their taxable income at the rate of We operate our business in various countries and attempt to utilize an efficient operating model to optimize our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in different parts of the world. Tax expense for 2016 and 2015 amounted to $1.7 million and $5.3 million, respectively. The decrease in the tax expenses is derived primarily from a decrease in our taxable income in Israel as we have not generated profits in 2016 unlike 2015 which was profitable. Tax expense for 2015 and 2014 amounted to $5.3 million and $5.9 million, respectively; however our effective tax rate in 2015 increased to 22% from 19% in 2014. The increase in the effective tax rate was mainly due to the increase in our taxable income in the US, which is subject to a relatively higher tax rate. For additional disclosure and explanations regarding our income taxes, see note 12 to our financial statements. See also “Item 10E – Taxation – Israeli Tax Considerations.” - 73 - Impact of Currency Fluctuations and Inflation Our financial results may be negatively impacted by foreign currency fluctuations and inflation. Information required by this section is set forth in “Item 11 – Quantitative and Qualitative Disclosures about Market Risk” and in “Item – 3D – “Risk Factors” –Currency exchange rates and fluctuations of exchange rates could have a material adverse effect on our results of operations”, each of which are incorporated herein by reference. Impact of Governmental Policies For information on the impact of governmental policies on our operations, see “Item 4B – Related Parties We have entered into a number of agreements with certain companies, of which Yehuda, Zohar Zisapel and/or Nava Zisapel are co-founders, directors and/or principal shareholders, collectively known as the RAD-Bynet Chief Executive Officer and a director, also holds a minority stake.In addition, we purchase different services and fixed assets from third parties at special rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance communication and Managed Security Service Providers (MSSP) scrubbing centers services. If we cease to be a member of the RAD-Bynet Group, we may not be able to obtain the current rates for such services. We believe that the terms of the transactions in which we have entered with members of the RAD-Bynet Group are not different in any material respect from terms we could obtain from unaffiliated third parties and are beneficial to us and no less favorable to us than terms, which might be available to us from unaffiliated third parties. The pricing of the transactions was arrived at based on negotiations between the parties. Members of our management reviewed the pricing of the agreements and confirmed that they were not different in any material respect than that which could have been obtained from unaffiliated third parties. See also below under “Item 7B – Major Shareholders and Related Party Transactions - Related Party Transactions”. - 74 - B. Liquidity and Capital Resources The Company’s equity as a percentage of its total assets was 70% at December 31, 2016, compared with 74% at December 31, 2015 and 75% at December 31, 2014. Cash and cash equivalents, short-term and long term bank deposits and short and long term marketable securities were $320.1 million at December 31, 2016, compared with $315.1 million and $330.7 million at December 31, 2015 and 2014, respectively. Principal Capital Expenditures and Divestitures Capital expenditures were $9.4 million, $13.8 million and $9.5 We expect to engage in additional capital spending to support possible growth in our operations, infrastructure and personnel. In We did not affect any principal divestitures in the past three years. Working Capital and Cash Flows The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented (dollars in
Net cash provided by operating activities for 2016, 2015 and 2014 - 75 - Net cash provided by operating activities in 2016 consisted of net loss adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible asset and Net cash provided by operating activities in 2015 consisted primarily of net income adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible asset and amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, plus an increase in other payables and accrued expenses and other long-term liabilities and deferred revenues partially offset by accrued interest on bank deposits, gain from sales of available for sale marketable securities, increase in trade receivables, other current assets and prepaid expenses and a decrease in trade payables. Net cash provided by operating activities in 2014 consisted primarily of net income adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible assets, amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities and accrued interest on bank deposits plus an increase in trade payables, other payables and accrued expenses and deferred revenues, partially offset by a decrease in other current assets and prepaid expenses and an increase in inventories and deferred income taxes. Net cash provided Net cash used in investing activity in 2015 and 2014 Net cash used in financing activities in Net cash used in financing activities in 2016 was attributed primarily to the repurchase of Net cash used in financing activities in 2015 was attributed primarily to the repurchase of ordinary shares, which was offset by proceeds from issuance of shares upon exercise of stock options by our employees Net cash provided by financing activities in 2014 was generated from issuance of shares upon exercise of stock options by our employees - 76 - Cash and As of December 31, Our marketable securities portfolio includes investments in foreign banks and government debentures and in There are no material legal restrictions, taxes or other costs associated with transferring our funds held in U.S. financial institutions to Israeli financial institutions, and we have access to all of our cash as needed for our operations. Although we have various subsidiaries throughout the world, there are no material legal, tax or other cost impediments to our transferring cash to these subsidiaries for operations as and when needed or to such subsidiaries transferring cash to Radware to meet its own cash obligations. Further, Radware generates sufficient cash from its Israeli operations to fund its operating and capital requirements and, therefore, does not need or intend to repatriate any of the earnings of its foreign subsidiaries. Days-Sales-Outstanding The days-sales-outstanding (DSO) for a given period is calculated by dividing the end-of-period balance of accounts receivable by the average daily sales in the period. Our average quarterly DSO (computed over the four quarters of the year) was 44 days for 2016, compared with 43 days - 77 - DSO increased in 2015, compared to 2014, mainly due to the changes in linearity of our revenues throughout 2015. In average, the total amount of invoices issued in the last month of each of the quarters in 2015 was 53% of total amount of invoices issued in each of the quarters of 2015, compared to an average of 40% of total amount of invoices issued in the last month of that respective quarter in 2014, out of total invoices issued in that respective quarter of 2014. Due to the fact that most of these invoices are not collected within the month of issuance, but only in the following months, our DSO increased in 2015 compared to 2014. Outlook Our capital requirements depend on numerous factors, including market acceptance of our products and the resources we allocate to our operating expenses. Since our inception, we have experienced substantial increases in our expenditures consistent with growth in our operations and personnel, and we may increase our expenditures in the foreseeable future in order to execute our strategy. We anticipate that operating activities as well as capital expenditures will demand the use of our cash resources. We believe that our cash balances will provide sufficient cash resources to finance our operations and the projected marketing and sales activities and research and development efforts for a period of no less than the next twelve months. Market Risk We are exposed to market risk, including fluctuations in interest rates and foreign currency exchange rates. Our primary market risk exposure occurs because we generate a portion of our revenues in and incur a portion of our expenses in foreign currencies, mainly in NIS, but also in Euro and other foreign currencies. We generally do not C. Research and Development, Patents and Licenses, etc. In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing product lines, develop new product lines and customize our products to meet our customers’ needs. As of December 31, For a discussion regarding the benefits provided under programs of the - 78 - D. Trend Information Gartner, a leading market research firm, estimates in its report from December 2016 that the Application Delivery Controllers sector (applicable to our application delivery solutions) has increased in 2016 by 4.3% compared to 2015, and is expected to increase by 3.4%, to $2.19 billion in 2017. We identified the following key trends that we believe will continue to influence our markets and the demand for our solutions:
We believe that our business, comprised of application security and delivery products and services, is positioned to benefit from the above-mentioned industry dynamics due to the following key factors:
- 79 - We believe that the advantages of our offering, coupled with the above mentioned industry dynamics and trends, place us in a good position to meet our business plans. Nevertheless, meeting our business plans may not convert into revenues growth, due to the shift of our business towards an increased proportion of subscription-based product sales, which are recognized throughout the subscription period. As more fully described under Item 4.B. "Business Overview – Our Growth Strategy" above, our growth strategy is based on several key elements: enhancing and leveraging the integration of our application security and delivery solutions; continuing to innovate industry leading solutions to maintain our technological advantages and differentiations; expand and leverage our market footprint, through internal resources as well as relationships with resellers, service providers, and other partners, and; pursue acquisitions. In addition, we operate in a highly competitive environment, and some of our competitors have larger internal resources than we do, and a larger installed base. Moreover, while we believe that the shift towards a subscription-based business model is a strategic transition towards higher growth and profitability in the long term, we may not be successful in its execution and specifically, in maintaining a high subscription renewal rate. In addition, our customers purchasing decisions are related to the conditions in our industry and in the various regions and geographical markets in which we operate and are tied to the overall IT spending climate. Uncertainty about current global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to such uncertainties. For E. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined under Item 5E of the instructions to Form 20-F, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. - 80 - F. Tabular Disclosure of Contractual Obligations The following table summarizes our contractual obligations as of December 31,
(1) Consists of outstanding operating leases for the Company’s facilities. The lease agreements expire in the years (2) Payments for uncertain income tax positions of (3) Severance payments of $2.3 million are payable only upon termination, retirement or death of the respective employee and there is no obligation for benefits accrued prior to 2007 if the employee voluntarily resigns. Since we are unable to reasonably estimate the timing of settlement, such payments are not included in the table. See also Note 2(u) of our * Following the Seculert Acquisition, which occurred in January 2017, earn-out payments of up to a total of $10.0 million will be paid, upon achievement of certain milestones. As of January 30, 2017, the fair value of these contingent payments is $1.7 million. -
A. Directors and Senior Management The following table lists our current directors and senior management:
(1) Term as director expires at the annual meeting of shareholders to be held in 2018. (2) Term as director expires at the annual meeting of shareholders to be held in (3) External Director, as defined in the Israeli Companies Law. (4) Qualified as an independent director, as determined under the NASDAQ rules. (5) Serves on the Audit and Compensation Committees of the Board of Directors. (6) Term as director expires at the annual meeting of shareholders to be held in 2017. ^ Meir Moshe’s service expired in January 2016. - 82 - Yehuda Zisapel, co-founder of our Company, has served as a member of our Board of Directors since our inception in May 1996 and served as Chairman of our Board of Directors from May 1996 until August 2006 and again since November 2009. In addition, Mr. Zisapel serves as a director of Radware Inc. and other subsidiaries. Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., a worldwide data communications company headquartered in Israel, and BYNET Data Communications Ltd., a distributor of data communications products in Israel and serves as a director of other companies in the RAD-Bynet Group. See “Item 4C – Organizational Structure.” Mr. Zisapel has a B.Sc. and a M.Sc. degree in electrical engineering as well as an Award of Honorary Doctorate (DHC-Doctor Honoris Causa) from the Technion, Israel Institute of Technology and an M.B.A. degree from Tel Aviv University, Israel. Yehuda Zisapel is the father of Roy Zisapel, Prof. Yair Tauman has served as a member of David Rubner has served as a member of Yael Langer has served as a member of Avraham Asheri has served as a member of - 83 - Joel Maryles, has served as a member of Roy Zisapel, co-founder of our Company, has served as our President and Chief Executive Officer and a director since our inception in May 1996. Mr. Zisapel also serves as a director of Radware Inc. and other subsidiaries. From Doron Abramovitch has served as our Chief Financial Officer since September 2015. Gabi Malka has served as our Chief Operating Officer since March 2014. From May 2005 to February 2014, Mr. Malka served as Vice President of Research and Development at HP Software (formerly Mercury). Prior to HP, from - 84 - Sharon Trachtman has served as our Chief Business Operation Officer since December 2016 and served as our Global Marketing Vice President since Yoav Gazelle has served as our Vice President, EMEA & CALA since June, 2013. Prior to joining Radware, between Terence Ying has served as our Vice President, APAC since April 2002. Prior to joining Radware, between 1998 to 2002, Mr. Ying held a series of senior positions with Nortel Networks’ APAC division, including as Marketing Director for the Intelligent Internet Business Unit, Managing Director of Greater China for Alteon WebSystems (acquired by Nortel in 2000) and the Enterprise Director for Nortel in Hong Kong. Mr. Ying holds a M.S. degree in IT management from the Macquarie University of Australia. David Aviv has served as our Chief Technology Officer since 2016 and as our Vice President, Advanced Services, since 2004. Prior to joining Radware, he was the VP Engineering of Ofek, an Israel based ILEC and a senior consultant. Prior to that, until 2000, Mr. Aviv served in the Anna Convery-Pelletier has served as our Chief Marketing Officer since December 2016. As a member of the executive leadership team, she leads the global marketing organization, which consists of the corporate, product, field and channel marketing teams. Ms. Convery is responsible for the marketing strategy that shapes the future of the Radware brand while directly increasing the marketing contribution to drive revenue and increase market share Prior to joining Radware, Ms. Convery held the position of Chief Marketing Officer and Executive Vice President of Strategy for OpenSpan Inc. (now Pega Systems Inc.) for five years. Ms. Convery has more than 25 years’ experience in enterprise technology, helping FORTUNE 500 companies drive operational and financial excellence, leveraging technology innovation to deliver digital transformation and world-class customer experience. At OpenSpan, Ms. Convery’s responsibilities included global go-to-market strategy and strategic enterprise growth for the company. Prior to OpenSpan, Ms. Convery held senior executive roles at NICE Systems Ltd., ClickFox, Inc., and Nexidia Inc., as well as global marketing and business development roles at IBM Corporation, Jacada Ltd. and Unibol Inc. Named a “Woman of the Year in Technology” by Women in Technology (WIT), Ms. Convery has received numerous industry awards and is a respected customer experience and enterprise transformation thought leader. - 85 - Additional Information Under NASDAQ requirements, a majority of the members of our Board of Directors are required to be “independent” as defined under NASDAQ Marketplace In July 2015 we announced that Mr. Meir Moshe, who served as our Chief Financial Officer since 1999, has decided to step down from his Yehuda Zisapel, the Chairman of the Board of Directors, co-founder of the Company, and a principal shareholder of our company, is the father of Roy Zisapel, We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which (1) any person referred to above was selected as a director or member of senior management or (2) any director will receive compensation by a third party in connection with his or her candidacy or board service in the Company. B. Compensation General Our objective is to attract, motivate and retain highly skilled personnel who will assist Radware to reach its business objectives, performance and the creation of shareholder value and otherwise contribute to our long-term success. In October 2013, our shareholders approved the compensation policy for our executive officers and directors, or - 86 - The following table sets forth all compensation we paid or accrued with respect to all of our directors and officers as a group for the periods indicated. The table does not include any amounts we paid to reimburse any of our affiliates for costs incurred in providing us with services during such period.
** All directors and executive officers as a group, consisting of 15 persons for the year ended December 31, 2016. These being the 15 individuals listed in the table in ITEM 6A above and one additional executive officer whose service expired in January 2016. During For a discussion of the compensation granted to our five most highly compensated executive officers during Compensation of Executive Officers The table and summary below outline the compensation granted to our five most highly compensated executive officers during or with respect to the year ended December 31, - For purposes of the table and the summary below, “compensation” includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31,
* All or part of the base salary is denominated in NIS whereas our functional currency is dollars and therefore fluctuations in dollar amounts may be attributed to - 88 - Compensation of Directors An external director is entitled to consideration and reimbursement of expenses only as provided in regulations promulgated under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with his service as an external director. Our non-employee directors, including external directors, are entitled to the following compensation: (i) annual compensation in the amount of NIS 120,800 (currently equivalent to approximately In addition, our non-employee directors, including external directors, are entitled to a grant of options under our stock option plans to purchase 20,000 ordinary shares for each year in which such non-employee director holds office. The options are granted for three years in advance, and therefore every director receives an initial grant of options to purchase 60,000 ordinary shares which vest over a period of three years, with a third (20,000) to vest upon each anniversary of service, provided that the director still serves on the Company’s Board of Directors on the date of vesting. The grant is made on the date of the director’s election (or the date of commencement of office, if different), and thereafter, every three years, if reelected, an additional grant of options to purchase an additional 60,000 ordinary shares will be made on the date of each annual meeting in which such director is reelected. The exercise price of all options shall be equal to the fair market value of the ordinary shares on the date of the grant (i.e., an exercise price equal to the market price of our ordinary shares on the date of the annual meeting approving the election or reelection of a director or the date of commencement of office, if different). - 89 - C. Board Practices Introduction Since we are incorporated as an Israeli company, we are subject to the provisions of the Companies Law and the regulations adopted thereunder. In addition, we are subject to the rules of the NASDAQ applicable to listed companies since our ordinary shares are listed on the NASDAQ Global Select Market. According to the Companies Law and our Articles of Association, the oversight of the management of our business is vested in our Board of Directors. Our Articles of Association provide for a Board of Directors of not less than five and not more than nine directors. Currently, our Board of Directors consists of seven directors, including the external directors (as described below). In accordance with current NASDAQ requirements, nominees for election as directors are approved and recommended to the Board of Directors by a decision of a majority of our independent directors. Under the Companies Law, our Board of Directors is required to determine the minimum number of directors having accounting and financial expertise, as defined in regulations promulgated under the Companies Law, that our Board of Directors should have. In determining the number of directors required to have such expertise, the Board of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our Board of Directors has determined that we require at least one director with the requisite financial and accounting expertise and that Mr. Avraham Asheri has such expertise. Staggered Board In accordance with the terms of our Articles of Association, our Board of Directors (other than our external directors, as described below) is divided into three classes with each class of directors serving until the third annual meeting following their election as follows:
- 90 - At each annual meeting of shareholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following such election. Directors, other than external directors, are elected by a simple majority of the votes cast by our shareholders at an annual general meeting, whereas a director’s removal from office requires the vote of at least seventy-five percent (75%) of the voting power represented at the general meeting. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, to the nearest extent possible, each class will consist of one-third of the directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control or management of our company. The above classification does not apply to Mr. David Rubner and Prof. Yair Tauman, who were appointed as external directors and whose term of appointment ends in 2018 and For a description of how long our directors and officers have served in their current positions, please see “Item 6A - Directors, Senior Management and Employees – Directors and Senior Management”. External Directors Qualifications of External Directors Under the Companies Law, companies incorporated under the laws of Israel whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel, such as Radware, are required to appoint at least two external directors. Under the Companies Law, external directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law. To qualify as an external director, an individual (or the individual’s relative, partner, employer or any entity under the individual’s control) may not have, and may not have had at any time during the previous two years, any “affiliation” with:
- 91 - The term affiliation includes:
The Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the chief financial officer, a vice president and any officer of the company that reports directly to the chief executive officer. No person can serve as an external director if the person’s position or other business creates, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. Until the lapse of two years from termination of office as an external director, a company and its controlling shareholder may not provide compensation to an external director or his or her spouse and children or engage such persons to serve as an office holder and cannot employ or receive services from such persons, either directly or indirectly, including through a corporation controlled by that person. The same restriction applies to other family members of the external director but until the lapse of one year from termination of office as an external director. Election of External Directors External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
The initial term of an external director is three years and may be extended for up to two additional three-year - External directors may be removed from office only by the vote of the same percentage of shareholders as is required for their election or by a court but, in both cases, only if they cease to meet the statutory qualifications for appointment or if they violate their duty of loyalty to the Company. Each committee of the Company’s board of directors is required to include at least one external director, except for the Audit and Compensation Committees which are required to be comprised of all the external directors. Currently, Mr. David Rubner and Prof. Yair Tauman qualify as external directors under the Companies Law and were elected by the general shareholders meetings held in November 2015 and October Under the Companies Law and regulations promulgated thereunder, (1) an external director must have either “accounting and financial expertise” or “professional qualifications” (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the external directors must have “accounting and financial expertise.” However, companies whose shares are registered for trade outside of Israel, such as us, are in compliance with such requirements if all of their external directors have “professional qualifications” and one of their other independent directors has “accounting and financial expertise”. Our Board of Directors has determined that Mr. Avraham Asheri, one of our other independent directors, has “accounting and financial expertise” and that Mr. David Rubner and Prof. Yair Tauman, our external directors, have “professional qualifications”, and, therefore, we believe we satisfy these requirements. Our Committees The Board of Directors appoints committees to help carry out its duties. Each committee reports the results of its meetings to the full Board of Directors. The Board of Directors established - 93 - Audit Committee NASDAQ Requirements Our ordinary shares are listed on the NASDAQ Global Select Market, and we are subject to the NASDAQ rules Our Board has determined that all directors serving on our Audit Committee In accordance with the NASDAQ Israeli Companies Law Requirements Under the Companies Law, our Audit Committee must be comprised of at least three directors, include all of the external directors, a majority of its members must satisfy the independence standards under the Companies Law, and the chairman thereof is required to be an external director. In accordance with the Companies Law, the duties of our Audit Committee, in addition to the requirements imposed by the NASDAQ rules, include, among other things, to (1) identify irregularities in the business management of the Company, including in consultation with the internal auditor and/or the Company’s independent accountants, and to recommend remedial measures to the Board of Directors, (2) review, and, where appropriate, approve certain interested party transactions specified under the Companies Law, as more fully described below under the heading “Approval of Specified Related Party Transactions under Israeli Law”, and (3) examine and monitor the work of our internal auditor. - 94 - Compensation Committee Pursuant to applicable NASDAQ rules, the compensation payable to a company’s chief executive officer and other executive officers must generally be approved by a compensation committee comprised solely of independent directors. Under the Companies Law, our Board of Directors is required to appoint a compensation committee comprised of at least three directors and which shall include all of the company’s external directors. The other members of the compensation committee must satisfy certain independence standards under the Companies Law, and the chairman is required to be an external director. Under the Companies Law, the role of the compensation committee includes recommending 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; reviewing, from time to time, modifications to the compensation policy and examining its implementation; approving the actual compensation terms of office holders prior to approval thereof by the Board of Directors; and resolving whether to exempt the compensation terms of a candidate for chief executive officer from shareholder Nomination of Directors Our independent directors consider and vote upon nominations to our Board of Directors. Board and Committee Meetings
Each director attended at least - 95 - Directors’ Service Contracts Except as described in Item 6B above, we do not, as of the date of filing of this Annual Report, have service or employment contracts with our directors providing for benefits upon termination of employment. Internal Auditor Under the Companies Law, the board of directors of a public company must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, among other things, whether the company’s conduct complies with applicable law and orderly business procedure. The internal auditor may participate in all audit committee meetings and has the right to demand that the chairman of the audit committee convene a meeting. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party, an office holder or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. Ms. Dana Gottesman – Erlich, CPA, CIA, Partner in BDO Ziv Haft, CPAs is our internal auditor. Approval of Specified Related Party Transactions under Israeli Law Fiduciary Duties of Office Holders The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain:
The duty of loyalty of an office holder includes a duty to:
- 96 - Disclosure of Personal Interest of an Office Holder The Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed. If the transaction is an extraordinary transaction, the office holder’s duty to disclose also applies to a personal interest of a relative of the office holder. Under the Companies Law, an extraordinary transaction is a transaction:
Once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest unless the articles of association provide otherwise. Nevertheless, a transaction that is adverse to the company’s interest may not be approved. If the transaction is an extraordinary transaction, approval is required of both the audit committee and the board of directors, in that order. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at this meeting or vote on this matter, unless a majority of the members of the board of directors or the audit committee, as the case may be, has a personal interest in the matter. If a majority of members of the board of directors have a personal interest therein, shareholder approval is generally also required. Approval of Office Holder Compensation Under the Companies Law, every Israeli public company, such as Radware, must adopt a compensation policy, recommended by the compensation committee, and approved by the board of directors and the shareholders, in that order. 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. In general, all office 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. In October 2013, our shareholders approved the Compensation Policy and in November 2015 they approved several amendments thereto. In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder must be approved separately by the compensation committee, the board of directors and the shareholders of the company (by the same majority noted above), in that order. The compensation terms of other officers require the approval of the compensation committee and the board of directors. - 97 - Disclosure of Personal Interests of a Controlling Shareholder Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting power in the company, if no other shareholder owns more than 50% of the voting power in the company, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions of a public company with a controlling shareholder or with a third party in which a controlling shareholder has a personal interest, and the terms of engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders of the company in that order. The shareholder approval must be by a majority of the shares voted on the matter, provided that either:
In addition, any such extraordinary transaction whose term is longer than three years may require further shareholder approval every three years, unless, where permissible under the Companies Law, the audit committee approves that a longer term is reasonable under the circumstances. General Duties of Shareholders Under the Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the company and other shareholders and to refrain from abusing his power in the company, such as shareholder votes. Furthermore, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he/it possesses the power to determine the outcome of a shareholder vote, and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder or any other power toward the company. - 98 - D. Employees At the time of commencement of employment, our employees in North America generally sign offer letters specifying basic terms and conditions of employment, The following table details certain data on our workforce (including temporary employees and subcontractors) as at the period indicated:
(*) Include 71, 82 (**) Include 14, 16 and 18 employees, as of December 31, 2016, 2015 and 2014, respectively, in Radyoos, our Israeli-based subsidiary which is engaged in developing and operating a web-based e-commerce platform, and not in our core business. We are subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Furthermore, our Israeli employees and we are subject to provisions of the collective bargaining agreements between the “Histadrut”, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Association, by governmental order. These provisions principally concern social benefits, cost of living increases, recreation pay and other conditions of employment. We generally provide our employees with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. The employees of our subsidiaries are subject to local labor laws, regulations and/or collective bargaining agreements that vary from country to country. We consider our relations with our employees to be good, and we have never experienced a strike or work stoppage. - 99 - E. Share Ownership The following table sets forth certain information regarding the beneficial ownership of our ordinary shares by our directors and officers as of April
(1) Of the ordinary shares beneficially owned by Mr. Yehuda Zisapel (i) 2,289,777 are held directly by Yehuda Zisapel; (ii) 522,466 are held of record by Carm-AD Ltd., an Israeli company wholly-owned in equal shares by Yehuda Zisapel and Nava Zisapel; (2) Consists of (3) Owns less than 1% of our outstanding ordinary shares (including options held by each such party, which are vested or shall become vested within 60 days of the date of this annual report) and have therefore not been separately disclosed. - (4) Consists of ^ Meir Moshe’s service with Radware expired in January 2016. Key Employee Share Incentive Plan In August 1997, we adopted our Key Employee Share Incentive Plan (1997), as amended, or the Share Incentive Plan. Under the plan, stock options as well as restricted stock units, or RSUs, may be granted to employees employed by us or by our affiliates. The Share Incentive Plan is administered by the Compensation Committee subject to the provisions of the Companies Law. Pursuant to the plan, the Compensation Committee has the authority to determine (subject to applicable law), or advise the Board of Directors, in its discretion:
In addition, the Share Incentive Plan provides that, unless otherwise determined otherwise by our Board of Directors (or a committee thereof), in the event of a “Hostile Takeover”, which is defined to include, among others, an unsolicited acquisition of more than 20% of our outstanding shares (other than a purchase by Mr. Yehuda Zisapel), the vesting of all or a portion of our outstanding equity awards, will accelerate. As a result, an acquisition of our Company that triggers the said acceleration will be more costly to a potential acquirer. - 101 - Options granted pursuant to the Share Incentive Plan are typically granted for a term of sixty-two months from the date of the grant of the option. As of December 31, The Share Incentive Plan allows the allocation of short term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing sales price for the shares on the NASDAQ on the date of grant of a respective option award. As of December 31, Directors and Consultants Option Plan In February 2000, we adopted a Directors and Consultants Option Plan, which is administered by our Compensation Committee. Options granted pursuant to our Directors and Consultants Options Plan are for a term of sixty-two months from the date of the grant of the option. The terms of the Directors and Consultants Option Plan are similar to the terms of the Share Incentive Plan. The Directors and Consultants Option Plan relies on the 26,301,748 ordinary shares reserved for option grants shares under the Share Incentive Plan which can be rolled over between such plans. The Compensation Committee may not grant options to members of the Committee or to a shareholder of over 10% of our issued and outstanding shares. Employee Share Purchase Plan In February 2010, our Board of Directors adopted the 2010 Employee Share Purchase Plan (“ESPP”), which provides for the issuance of a maximum of 2,000,000 ordinary shares. Pursuant to the ESPP, eligible employees (including only Israeli and United States residents) could have up to 10% of their net income withheld, up to certain maximums, to be used to purchase our ordinary shares. The ESPP is implemented with overlapping one year offering periods, each one consisting of two purchases, once in every six-month period. The price of each ordinary share purchased under the ESPP is equal to 90% of the closing price for the shares on the respective offering date. As of December 31, -
A. Major Shareholders The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of April
(1) Shares are beneficially owned by Senvest Management, LLC (2) This information is based on information provided in the Amendment No. 1 to Statement on Schedule 13G filed with the SEC by Cadian Capital Management, LP , Cadian Capital Management GP, LLC and Mr. Eric Bannasch (collectively, “Cadian”) on February (3) Of the ordinary shares beneficially owned by Ms. Nava Zisapel, (i) (4) Of the ordinary shares beneficially owned by Mr. Yehuda Zisapel (i) 2,289,777 are held directly by Yehuda Zisapel; (ii) 522,466 are held of record by Carm-AD Ltd., an Israeli company (5) Consists of - To the best of our knowledge, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly. There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. Significant Changes in the Ownership of Major Shareholders During the past three years, the significant changes in the percentage ownership of our major shareholders were as follows:
Major Shareholders Voting Rights Our major shareholders do not have different voting rights from those of other shareholders. Record Holders Based on a review of the information provided to us by our transfer agent, as of April - 104 - B. Related Party Transactions General We have entered into a number of agreements with certain companies, of which Yehuda, Nava and Zohar Zisapel are co-founders, directors and/or principal stockholders, collectively known as the RAD-Bynet 10%. In addition, The RAD-Bynet Group consists of high-tech manufacturers of hardware and software solutions and data communication providers, distributors and integrators as well as service providers. The RAD-Bynet Group includes approximately 15 different companies dealing in advanced communication technology, Managed Security Service Providers (MSSP) scrubbing centers services, networks, and integration. Companies within the RAD-Bynet Group provide a variety of solutions and services to their customers, including: engineering, purchasing and sub-contracting, production and final testing, planning and control, and support for end users. The RAD-Bynet Group also includes a few companies which provide services which support the activities of the other RAD-Bynet Group members, such as real estate leasing and administrative services. Some of the products of members of the RAD-Bynet Group are complementary to, and may be used in connection with, our products. Each company in the RAD-Bynet Group is independent from the others. The ownership and Board of Directors structure of each RAD-Bynet Group member is different and certain of the RAD-Bynet Group members are publicly traded companies. See Item 4C – Organizational Structure.” for additional details about the group. - 105 - We believe that the terms of the transactions to which we have entered with members of the RAD-Bynet Group are not different in any material respect from terms we could obtain from unaffiliated third parties. The pricing of the transactions was based on negotiations between the parties and members of our management reviewed the pricing of these agreements, as well as, in some cases, used a third-party consulting firm, and confirmed that they were not different in any material respect than that which could have been obtained from unaffiliated third parties. In the event that we cease to be a member of the RAD-Bynet Group, we may not be able to obtain the current rates for such services. We believe, however, that due to the affiliation between us and the RAD-Bynet Group, we have greater flexibility in obtaining certain terms and conditions that may not be available from unaffiliated third parties on similar products and services. Lease of Property We lease the office space for our headquarters and principal R&D, administrative, finance and marketing and sales operations from private companies within the RAD-Bynet Group that are owned by Zohar Zisapel, Nava Zisapel and Yehuda Zisapel: We entered into an agreement with RAD Data Communications, Inc., a company controlled by Yehuda, Nava and Zohar Zisapel, pursuant to which we lease approximately Distribution Agreement Bynet Data Communications Ltd. (“Bynet”), a member of the RAD-Bynet Group, distributes our products in Israel on a non-exclusive basis. We have a written distributor agreement with Bynet under which we provide Bynet Data Communications with discounts on our products and services similar to the discounts provided to third-party distributors in the region in the ordinary course of business. The total sales to Bynet (and other companies in the RAD-Bynet Group) under such distributor agreement amounted to approximately $1.7 million in 2016, compared to $2.3 million in - 106 - Managed Security Service Provider (“MSSP”) Agreement SecurityDAM Ltd., or SecurityDam, a member of the RAD-Bynet Group, provides some of our DefensePipe’s pipe saturation defense services and protection against high-volume network floods. SecurityDam offers these MSSP services through a global network of scrubbing centers. Total cost of services received from SecurityDam amounted to approximately $3.1 million in 2016, compared to $1.7 million in 2015. Additional RAD-Bynet Group Services A portion of the above services, such as electricity charges, are “pass through” services for which we are charged on a “back-to-back” basis according to our actual usage (i.e., we are charged pro ratably based on the actual charge of the third party electricity company) due to the fact that we lease part of our facilities from a number of other RAD-Bynet Group members. Other services mentioned above, such as vehicles and human resource administration, are performed by one of the RAD-Bynet Group companies and are provided to all members of the RAD-Bynet Group, in order to achieve lower prices for these services based on economies of scale. In addition, since the RAD-Bynet Group is comprised of a number of companies which are engaged in our industry, the RAD-Bynet Group initiates marketing events from time to time, which we participate in, to promote the RAD-Bynet Group members’ products. The charges for these services are based on actual costs incurred and are allocated to the Company according to its relative part in such services (e.g., vehicles administration – according to the number of the Company’s vehicles out of the total vehicles of the RAD-Bynet Group; marketing events – according to the number of participants of the Company’s customers out of the total participants in the events). All other services, such as communication and distribution services are provided to Compensation of Chief Executive Officer See discussion in Item 6A “Directors, Senior Management and Employees – Directors and Senior Management”. C. Interests of Experts and Counsel Not applicable. - A. Consolidated Statements and other Financial Information Financial Statements See “Item 18 - Financial Statements”. Export Sales For the year ended December 31, Legal Proceedings We are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, except for the matters described below, we are currently not, and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or F5 Intellectual Property Claim On April 4, 2016, F5 Networks, Inc. (“F5”) filed a lawsuit against us in the United States District Court for the Western District of Washington, alleging infringement of three U.S. patents of F5 relating to our ADC and WAF products. We deny that any of our products infringe any valid claims of the asserted F5 patents and we intend to continue to vigorously oppose F5’s claims. On December 16, 2016, we filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing However, since discovery and litigation is still in a preliminary stage, we cannot estimate what impact, if any, the litigation may have on our results of operations, financial condition or cash flows. Inter Partes Reviews Inter Partes review is a U.S. Patent and Trademark Office post-grant procedure to challenge the validity of a patent claim based on patents and printed publications. On October 18, 2016, F5 filed a petition for Inter Partes review of our U.S. Patent No. 9,231,853. We submitted our preliminary response on February 1, 2017 and, if an Inter Partes review is instituted, we intend to vigorously defend the patentability of our patent before the U.S. Patent Trial and Appeal Board. On January 11, 2017, we filed two petitions for Inter Partes review of U.S. Patent No. 7,472,413, which is one of the three patents F5 asserts in the Western District of Washington litigation. - 108 - On March 29, 2017, we filed a petition for Inter Partes review of U.S. Patent No. 8,676,955, which is one of the three patents F5 asserts in the Western District of Washington litigation. On April 6, 2017, we filed a petition for Inter Partes review of U.S. Patent No. 6,311,278, which is one of the three patents F5 asserts in the Western District of Washington litigation. F5 Intellectual Property Counterclaim On August 29, 2013, F5 On Dividend Distribution Policy We have never paid and do not intend to pay cash dividends on our ordinary shares in the foreseeable future. While we may engage from time to time in “buy-back” programs of our shares, our policy is to retain earnings and other cash resources to continue the development and expansion of our business. Any future dividend policy will be determined by our Board of Directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions. See also Item 10B “- Dividend and Liquidation Rights.” B. Significant Changes Except as otherwise disclosed in this annual report, we are not aware of any significant changes that have occurred since -
A. Offer and Listing Details Our ordinary shares have been listed for quotation on the NASDAQ Global Select Market since September 30, 1999 under the symbol “RDWR”. From May 12, 2004 to March 8, 2009, our ordinary shares were also listed on the Tel Aviv Stock Exchange, or TASE. We voluntarily delisted our ordinary shares from the TASE primarily due to low trading volume. The following table sets forth the high and low sale price for our ordinary shares as reported by the NASDAQ Global Select Market for the periods indicated:
*Through April On April - 110 - B. Plan of Distribution Not applicable. C. Markets Our ordinary shares are listed for quotation on the NASDAQ Global Select Market under the symbol “RDWR”. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. -
A. Share Capital Not applicable. B. Memorandum and Articles of Association Set out below is a description of certain provisions of our Memorandum of Association and Articles of Association, and of the Companies Law related to such provisions. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Memorandum and Articles which are incorporated by reference to exhibits to this annual report and by Israeli law. We were first registered under Israeli law on May 16, 1996 as a private company, and on November 18, 1999 became a public company. Our registration number with the Israeli registrar of companies is 52-004437-1. Objects and Purposes Pursuant to our Articles of Association, our objective is to engage, directly or indirectly, in any lawful undertaking or business whatsoever, including, without limitation, as stipulated in our Memorandum of Association, which was filed with the Israeli Registrar of Companies. Shares; Transfer of Shares Our registered capital is divided into 60,000,000 ordinary shares of nominal (par) value NIS 0.05 each. There are no other classes of shares. All of our outstanding shares are fully paid and non-assessable. The shares do not entitle their holders to preemptive rights and fully paid ordinary shares may be freely transferred pursuant to our Articles of Association unless such transfer is restricted or prohibited by another instrument. Dividend and Liquidation Rights According to the Israeli Companies Law, a company may distribute dividends only out of its “profits,” as such term is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our Board of Directors is authorized to declare dividends, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due, and provided further that our shareholders approve the final dividend declared by the Board of Directors, in an amount not to exceed the Board of Directors’ recommendation. Notwithstanding the foregoing, even where there are no sufficient profits, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surplus, as evidenced by financial statements prepared no more than six months prior to the date of distribution. - 112 - In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. This liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. Voting, Shareholders’ Meetings and Resolutions We have two types of general shareholder meetings: the annual general meeting and the extraordinary general meeting. An annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting. The Board of Directors may convene an extraordinary general meeting whenever it deems fit, and is obliged to do so upon the request of any of: (i) two directors or one fourth of the then serving directors; (ii) one or more shareholders who hold at least 5% of the issued share capital and at least 1% of the voting rights; or (iii) one or more shareholders who hold at least 5% of the voting rights. In accordance with our Articles of Association, unless a longer period for notice is prescribed by the Israeli Companies Law, at least seven days and not more than forty-five days’ notice of any general meeting of shareholders must be given. Under the Companies Law, shareholder meetings generally require prior notice of not less than 21 days or, with respect to certain matters, such as election of directors and affiliated party transactions, not less than 35 days. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. A shareholder may only vote the shares for which all calls have been paid, except in separate general meetings of a particular class. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 35% of the outstanding voting shares unless otherwise required by applicable rules. A meeting adjourned for lack of a quorum, if convened upon requisition under the provisions of the Companies Law, shall be dissolved, but in any other case 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. Under the Companies Law, unless otherwise provided in the Articles of Association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of at least 75% of the shares present and voting to increase our share capital or to change its structure, grant any special rights to the holders of a class of shares with preferential rights or change such rights previously granted or remove directors from office. Subject to the Companies Law, a resolution in writing signed by the holders of all of our ordinary shares entitled to vote at a meeting of shareholders or to which all such shareholders have given their written consent is required to adopt the resolution in lieu of a meeting. - 113 - General Duties of Shareholders Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other shareholders and refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on the following matters:
In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders. Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards the company. These various shareholder duties may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests. Restrictions on Non-Israeli Residents The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our Memorandum of Association or Articles of Association or by the laws of the State of Israel. Mergers and Acquisitions under Israeli Law There are no specific provisions of our Memorandum or Articles of Association that would have an effect of delaying, deferring or preventing a change in control of us or that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries), except those relating to the staggered board as described in Item 6 above and certain provisions of the Companies Law described below, which may have such effect. The Israeli Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power of the right to appoint 25% or more of the directors of the other party), vote against the merger. 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 a proposal of the merger has been filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company. - 114 - In addition, provisions of the Companies Law that deal with “arrangements” between a company and its shareholders may be used to effect squeeze-out transactions in which the target company becomes a wholly-owned subsidiary of the acquirer. These provisions generally require that the merger be approved by a majority of the participating shareholders holding at least 75% of the shares voted on the matter. In addition to shareholder approval, court approval of the transaction is required, which entails further delay. The Companies Law also provides for a merger between Israeli companies, after completion of the above procedure for an “arrangement” transaction and court approval of the merger. The Companies Law also provides that an acquisition of shares of a public company must be made by means of a “special” tender offer if as a result of the acquisition (1) the purchaser would become a 25% or greater shareholder of the company and there is no 25% or greater shareholder in the company, or (2) the purchaser would become a 45% or greater shareholder of the company and there is no 45% or greater shareholder in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. A “special” tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders. In general, the tender offer may be consummated only if (i) at least 5% of the company’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’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. In general, if less than 5% of the outstanding shares are not tendered in the tender offer and more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be transferred to it. Shareholders may request appraisal rights in connection with a full tender offer for a period of six months following the consummation of the tender offer, but the acquirer is entitled to stipulate that tendering shareholders will forfeit such appraisal rights. In addition, our Board of Directors may decide to adopt a shareholder rights plan without further shareholder approval. Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation to taxation on half the shareholder’s shares two years following the exchange and on the balance four years thereafter even if the shareholder has not yet sold the new shares. - 115 - Modification of Class Rights Our Articles of Association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by written consent of holders of seventy-five percent of the issued shares of that class, or by adoption by the holders of seventy-five percent of the shares of that class at a separate class meeting. Subject thereto, the conditions imposed by our Articles of Association governing changes in the rights of any class of shares, are no more stringent than is required by Israeli law. Board of Directors According to the Companies Law and our Articles of Association, the management of our business is vested in our Board of Directors. Our Articles of Association provide that the Board of Directors shall consist of not less than five and not more than nine directors as shall be determined by our shareholders (in October 2006 our shareholders fixed the maximum size of our Board of Directors at nine members). In accordance with our Articles of Association, our Board of Directors (other than our external directors) is divided into three classes with each class serving until the third annual meeting following their election, as more fully described in “Item 6– Directors, Senior Management and Employees – Board Practices – Staggered Board.” There is no requirement under our Articles of Association or under Israeli law for directors to retire on attaining a specific age. Our Articles of Association do not require directors to hold our ordinary shares to qualify for election. The Board of Directors may exercise all such powers and may take all such actions that are not specifically granted to our shareholders. As part of its powers, our Board of Directors may cause the Company to borrow or secure payment of any sum or sums of money for the purposes of the Company, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the Company. In addition, the Companies Law requires that transactions between a company and its office holders (which term includes directors) or that benefit its office holders, including arrangements as to the compensation of office holders, be approved as provided for in the Companies Law and the company’s Articles of Association, as more fully described in Item 6C under “Approval of Specified Related Party Transactions Under Israeli Law”. A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter. Exculpation, Insurance and Indemnification Exculpation of Office Holders Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided that the articles of association of the company allow it to do so. Our Articles of Association allow us to exempt our office holders to the maximum extent permitted by law. - Insurance of Office Holders As permitted by the Companies Law, our Articles of Association provide that we may enter into a contract for the insurance of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:
Indemnification of Office Holders As permitted by the Companies Law, our Articles of Association provide that we may indemnify any of our office holders against the following obligations and expenses imposed on the office holder with respect to an act performed in the capacity of an office holder:
Limitations on Insurance and Indemnification The Companies Law provides that a company may not 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:
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our Audit Committee and our Board of Directors and, if the beneficiary is a director, by our shareholders. We currently hold directors and officers liability insurance for the benefit of our office holders with an aggregate coverage limit of $25 million. In addition, we provide our directors and officers indemnification pursuant to the terms of a Letter of Indemnification substantially in the form approved by our shareholders.
See the summary of the terms of the Headquarters Lease in “Item 7B – Major Shareholders and Related Party Transactions – Related Party Transactions – Lease of Property.
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes. Israeli Tax Considerations The following is a summary of the material current tax structure applicable to companies incorporated in Israel and some Israeli Government programs benefiting us, with special reference to its effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us. 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 Israel tax authorities or courts. 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. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. 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 their taxable - Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959 The 2005 Amendment to the Investments Law An amendment to the Investments Law, which was published on April 1, 2005 (the “Amendment”), changed certain provisions of the Investments Law. As a result of the Amendment, a company is no longer obliged to obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore generally there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking grants). Rather, the Company may claim the tax benefits offered by the Investments Law directly in its tax returns by notifying the ITA within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. The Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The Amendment provides that terms and benefits included in any certificate of approval that was granted before the Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 12 million (following an amendment which became effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Privileged Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Privileged Enterprise, which meets all of the conditions, including exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion. The extent of the tax benefits available under the Amendment to qualifying income of a Privileged Enterprise depend on, among other things, the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Privileged Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits under the Amendment which pays a dividend out of income derived by its Privileged Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a Privileged Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty. - 120 - The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the commencement year, or 12 years from the first day of the Year of Election. The benefits available to a Privileged Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, We elected 2009 and 2012 as Preferred Enterprise – The 2011 Amendment On December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime under such law. The amendment generally abolishes the previous tax benefit routes that were afforded under the Investment Law, specifically the tax-exemption periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following: A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their annual income is derived from export, which will apply to the enterprise's entire preferred income so that in the tax years 2011 and 2012 the reduced tax rate was 10% for preferred income derived from industrial facilities located in development area A and 15% for those located elsewhere in Israel, in the tax year 2013 the reduced tax rate was 7% for development area A and 12.5% for the rest of Israel, and as of the tax year 2014 and onwards the reduced tax rate is 9% for development area A and 16% for the rest of Israel. The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive assets. A definition of “preferred income” was introduced into the Investments Law to include certain types of income that are generated by the Israeli production activity of a preferred enterprise. A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income to both Israeli and non-Israeli investors, which tax rate was increased to 20% for dividends paid from preferred income which was accumulated from 2014 and onwards, and with an exemption from such withholding tax applying to dividends paid to an Israeli company. - A “Preferred Company” (as defined in the Investments Law) may generally elect to apply the provisions of the amendment to preferred income produced or generated by it commencing on January 1, 2011. The amendment provides various transition provisions which allow, under certain circumstances, to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form. Under the transition provisions of the new legislation, we decided to irrevocably implement the new law, effective January 1, 2014. A substantial portion of our taxable operating income is derived from our Preferred Enterprise programs and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such programs. In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law ("Amendment 73") was published. According to Amendment 73, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%). The new tax tracks under the Amendment 73 are as follows: Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%). Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location. The Amendment 73 also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017. Since as of December 31, 2016 definitive criteria to determine the tax benefits had not yet been established, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date. Accordingly, the above changes in the tax rates relating to technological enterprises were not considered in the computation of deferred taxes as of December 31, 2016. From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities. - 122 - Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969 Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies are entitled to the following preferred corporate tax benefits, among others:
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” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise, located in Israel, owned by an Industrial Company, 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 non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’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’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, 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. Generally, as of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 30%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of listed shares. - 123 - 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, which equated to NIS The tax basis of our ordinary shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price. Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source. Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes. - Taxation of Dividends paid to Non-Resident Holders of Shares Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable at the rate of 25%, or 30% for a shareholder that is considered a “significant shareholder” at any time during the 12-month period preceding such distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right. However, Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident is 25%. However, if the income out of which the dividend is paid is not generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, and not more than 25% of our gross income consists of interest or dividends, dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%. Dividends generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, are taxed at the rate of 15% under the U.S.-Israel Tax Treaty. United States Federal Income Tax Considerations Subject to the limitations described herein, the following discussion summarizes certain United States federal income tax consequences to a U.S. Holder of our ordinary shares. A “U.S. Holder” means a holder of our ordinary shares who is:
This discussion considers only U.S. Holders that will own their ordinary shares as capital assets (generally, for investment) and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase our ordinary shares. Certain aspects of U.S. federal income taxation relevant to a holder of our ordinary shares that is not a U.S. Holder and not a partnership or other pass-through entity (a “Non-U.S. Holder”) are also discussed below. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. Holder in light of such holder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to U.S. Holders that are subject to special treatment, including U.S. Holders that:
Are grantor trusts; Are S corporations; Are financial institutions or “financial services entities” ; Hold their ordinary shares as part of a straddle, “hedge” or “conversion transaction” with other investments; Are certain former citizens or long-term residents of the United States; Acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation; Are real estate investment trusts or regulated investment companies; Own directly, indirectly or by attribution at least 10% of our voting power; or Have a functional currency that is not the U.S. dollar. - If an entity treated as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of the entity and an equity owner in such entity will generally depend on the status of the equity owner and the activities of the entity. Such an equity owner or entity should consult its own tax advisor as to its tax consequences. In addition, this discussion does not address any aspect of state, local or non-United States tax laws or the possible application of United States federal gift or estate taxes. Each holder of our ordinary shares is advised to consult such holder’s own tax advisor with respect to the specific tax consequences to such holder of purchasing, holding or disposing of our ordinary shares, including the applicability and effect of federal, state, local and foreign laws in such holder’s particular circumstances. Taxation of Ordinary Shares Taxation of Dividends Paid On Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status”, a U.S. Holder will be required to include in gross income as dividend income the amount of any distribution paid on our ordinary shares, including any non-U.S. taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of our ordinary shares. The dividend portion of such distributions generally will not qualify for the dividends received deduction available to corporations. Dividends that are received by non-corporate U.S. Holders will generally be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 20%), provided that such dividends meet the requirements of “qualified dividend income.” Such income may also be subject to a 3.8% Net Investment Income Tax (NIIT) on individuals. Dividends that fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received by a U.S. Holder will be a qualified dividend (1) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities); or (2) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid. If we were to be a - Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom) will generally be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received regardless of whether the foreign currency is converted into U.S. dollars. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars after the date of receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss. U.S. Holders may have the option of claiming the amount of any non-U.S. income taxes withheld on a dividend distribution either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but such amount may be claimed as a credit against the individual’s U.S. federal income tax liability. The amount of non-U.S. income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each U.S. Holder. These limitations include, among others, rules which limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal income taxes otherwise payable with respect to each such class of income. The total amount of allowable foreign tax credits in any year generally cannot exceed the pre-credit U.S. tax liability for the year attributed to non-U.S. source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income tax withheld from a dividend received on the ordinary shares if such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend, or to the extent such U.S. Holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period. Distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes. Taxation of the Disposition of Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status,” upon the sale, exchange or other disposition of our ordinary shares (other than with respect to certain non-recognition transactions), a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such ordinary shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the “trade date,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale. Capital gain from the sale, exchange or other disposition of our ordinary shares held more than one year is long-term capital gain, and may be eligible for a reduced rate of taxation for individuals, estates or trusts (currently taxable at a maximum of 20%). Gains or losses recognized by a U.S. Holder on a sale, exchange or other disposition of our ordinary shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of our ordinary shares may be subject to limitations. A U.S. Holder that receives foreign currency upon disposition of our ordinary shares and subsequently converts the foreign currency into U.S. dollars or disposes of such foreign currency, may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss. - 128 - Net Investment Income. Certain non-corporate U.S. holders may be subject to an additional 3.8% surtax on all or a portion of their “net investment income,” which may include dividends on, or capital gains recognized from the disposition of, our ordinary shares subject to certain limitations and exceptions. U.S. holders are urged to consult their own tax advisors regarding the implications of the additional net investment income on their investment in our ordinary shares. Passive Foreign Investment Company Status. We will be a As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a “qualified electing fund” (“QEF”), in which case the U.S. Holder would be required to include in income, for each taxable year that we are a PFIC, its pro rata share of our ordinary earnings as ordinary income and its pro rata share of our net capital gain as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. Any income inclusion will be required whether or not such U.S. Holder owns our ordinary shares for an entire taxable year or at the end of our taxable year. The amount so includable will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us. Special rules apply if a U.S. Holder makes a QEF election after the first year in its holding period in which we are a PFIC. We will supply U.S. Holders with the information needed to report income and gain under a QEF election if we are a PFIC. A U.S. Holder’s basis in its ordinary shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S. Holder’s QEF election is in effect beginning with the first taxable year in which we were a PFIC during the U.S. Holder’s holding period for its ordinary shares, any gain or loss realized by such holder on the disposition of its ordinary shares held as a capital asset ordinarily would be a capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. Holder had held such ordinary shares for more than one year at the time of the disposition. The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. Holder and can be revoked only with the consent of the IRS. - 129 - As an alternative to making a QEF election, a U.S. Holder of PFIC stock which is “marketable stock” (e.g., “regularly traded” on the NASDAQ Global Select Market) may in certain circumstances avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. Holder’s holding period for the ordinary shares. As a result of such election, in any taxable year that we are a PFIC, a U.S. Holder would generally be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares at the end of the taxable year and such U.S. Holder’s tax basis in its ordinary shares at that time. Any gain under this computation, and any gain on an actual disposition of the ordinary shares in a taxable year in which we are a PFIC, would be treated as ordinary income. Any loss under this computation, and any loss on an actual disposition of the ordinary shares in a taxable year in which we are a PFIC, generally would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking ordinary shares to market will not be allowed, and any remaining loss from an actual disposition of ordinary shares generally would be capital loss. A U.S. Holder’s tax basis in its ordinary shares is adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to our ordinary shares for the ordinary shares to be considered “regularly traded” or that our ordinary shares will continue to trade on the NASDAQ Global Select Market. Accordingly, there are no assurances that the ordinary shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. Holder and can only be revoked with consent of the IRS (except to the extent the ordinary shares no longer constitute “marketable stock”). As indicated above, we will be a PFIC for any taxable year if the average percentage (by fair market value determined on a quarterly basis) of our assets held for the production of, or that produce, passive income is at least 50 percent. The Code does not specify how a corporation must determine the fair market value of its assets for this purpose and the issue has not been definitively determined by the IRS or the courts. The market capitalization approach has generally been used to determine the fair market value of the assets of a publicly traded corporation. The IRS and the courts, however, have accepted other valuation methods besides the market capitalization approach in certain other valuation contexts. For our - 130 - U.S. Holders are urged to consult their tax advisors about the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to market election. Tax Consequences for Non-U.S. Holders of Ordinary Shares Except as described in “Information Reporting and Backup Withholding” below, a Non-U.S. Holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless, in the case of U.S. federal income taxes:
Information Reporting and Backup Withholding U.S. Holders (other than certain exempt recipients, such as corporations) generally are subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares. Under the Code, a U.S. Holder may be subject, under certain circumstances, to backup withholding (currently at a rate of up to 28%) with respect to dividends paid on our ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares unless such holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. A U.S. Holder of ordinary shares who Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or the proceeds from the disposition of, ordinary shares, provided that such Non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in “specified foreign financial assets” (as defined in Section 6038D of the Code) are generally required to file an IRS Form 8938 as part of their U.S. federal income tax returns to report their ownership of such specified foreign financial assets, which may include our ordinary shares, if the total value of those assets exceed certain thresholds. Substantial penalties may apply to any failure to timely file IRS Form 8938. In addition, in the event a holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed. Holders should consult their own tax advisors regarding their tax reporting obligations. - 131 - F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports and other information with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Such materials are also available free of charge at the website of the SEC at As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Notwithstanding the foregoing, we furnish reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and we solicit proxies and furnish proxy statements for all meetings of shareholders, a copy of which proxy statement is furnished promptly thereafter with the SEC under the cover of a Current Report on Form 6-K. We also post our Annual Report on Form 20-F on our web site (www.radware.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC. The documents concerning our Company which are referred to in this annual report may also be inspected at our offices located at 22 Raoul Wallenberg Street, Tel Aviv 6971917, Israel. I. Subsidiary Information Not applicable. - We are exposed to market risk, including fluctuations in interest rates and foreign currency exchange rates. Our primary market risk exposure occurs because we generate a portion of our revenues in foreign currencies, mainly in Chinese Yuan, but also in Australian Dollar and Euro and incur a portion of our expenses in foreign currencies, mainly in NIS, but also in Euro and other foreign In addition, as of December 31, The majority of our cash and cash equivalents, and short-term and long-term bank deposits are invested in banks in Israel and, to a smaller extent, in banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not otherwise insured. If one or more of these financial institutions were to become insolvent, the loss of these investments would have a material adverse effect on our financial condition. Exposure to Interest Rate Fluctuations We do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk, with the exception of the following: Approximately half of our cash throughout the world is invested in fixed-income securities and is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These securities are readily available for sale and are treated as such in our financial statements. A decline in market interest rates, such as the significant global decline in 2008 and 2009, that continued through Our investments consist primarily of government and corporate debentures and bank deposits. As of December 31, - 133 - Any significant decline in our investment income or the value of our investments as a result of falling interest rates, deterioration in the credit of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and financial condition. We currently have no debt. Exposure to Currency Fluctuations Approximately Our revenues and expenses may be affected by fluctuations in the value of the dollar as it relates to foreign currencies, mainly the NIS, Euro, Chinese Yuan and Australia Dollar. For example, if there were no changes in the average exchange rates of the dollar relative to the NIS, Euro, Chinese Yuan and Australia Dollar during the year in The following table presents information about the changes in the exchange rates of the U.S. dollar relative to the NIS, Euro, Chinese Yuan and Australian Dollar:
(1) January 1, - ITEMS 12A, 12B AND 12C Not applicable. ITEM 12D The Company does not have any outstanding American Depositary Shares or American Depositary Receipts. Not applicable. ITEMS 14A, 14B, 14C, 14D AND 14E Not applicable. ITEM 14E The effective date of the registration statement (Commission File Number 333-10752) for our initial public offering of our ordinary shares was September 29, 1999. The offering commenced on October 5, 1999, and terminated after the sale of all the securities registered. The managing underwriter of the offering was Salomon Smith Barney. We registered 8,050,000 ordinary shares in the offering, including shares issued pursuant to the exercise of the underwriters’ over-allotment option. Of such shares, we sold 7,000,000 ordinary shares at an aggregate offering price of $63.0 million ($9.00 per share) and certain selling shareholders sold an aggregate of 1,050,000 ordinary shares at an aggregate offering price of $9.45 million ($9.00 per share). Under the terms of the offering, we incurred underwriting discounts of $4.41 million. We also incurred estimated expenses of $1.82 million in connection with the offering. None of the expenses consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates. The net proceeds that we received as a result of the offering were approximately $56.8 million. None of the use of proceeds consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates. In January 2000, we raised net proceeds of approximately $60.0 million in a public offering of our ordinary shares. The net proceeds of the two offerings are kept in short-term and long-term bank deposits and in marketable securities. · Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, - · Management’s Annual Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for us. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection 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, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, The effectiveness of our internal control over financial reporting as of December 31, - 137 - · Attestation Report of the Registered Public Accounting Firm This annual report includes an attestation report of our registered public accounting firm regarding internal control over financial reporting on page F-3 of our audited consolidated financial statements set forth in “Item 18 – Financial Statements”, and incorporated herein by reference. · Changes In Internal Control Over Financial Reporting During the Our Board of Directors has determined that Mr. Avraham Asheri, a member of our Audit Committee, is a financial expert as defined in the applicable regulations, and has determined that such member is “independent” as such term is defined in the NASDAQ listing standards. The education and experience of the Audit Committee financial expert is presented in “Item 6 – Directors, Senior Management and Employees – Directors and Senior Management” and is incorporated herein by reference. We have adopted a Code of Conduct and Ethics which applies to all directors, officers and employees of the Company, including our President and Chief Executive Officer, Fees Paid to Independent Public Accountants In the annual meeting held in - 138 - The following table sets forth, for
(1) Audit Fees include fees associated with the annual audit, including the audit of internal control over financial reporting, the reviews of the Company’s quarterly financial statements, statutory audits required internationally, consents and assistance with and review of documents filed with the SEC. (2) Tax Fees included tax compliance, including the preparation of tax returns, tax planning and tax advice, including assistance with tax audits and appeals, advice related to acquisitions, transfer pricing and assistance with respect to requests for rulings from tax authorities. (3) Other Fees include fees for consultation with Company management about accounting or disclosure treatment of transactions or events and consulting services such as obtaining grants from the Government of Israel for approved research and development projects. Audit Committee’s pre-approval policies and procedures Our Audit Committee oversees our independent auditors. See also the description in “Item 6C- Directors, Senior Management and Employee - Board Practices.” Our Audit Committee has adopted a policy requiring management to obtain the Committee’s approval before engaging our independent auditors to provide any other audit or permitted non-audit services to us or our subsidiaries. Pursuant to this policy, which is designed to assure you that such engagements do not impair the independence of our auditors, and which is discussed and approved at the end of each calendar year, the Audit Committee pre-approves annually a catalog of specific audit and non-audit services in the categories Audit Service, Audit-Related Service and Tax Consulting Services that may be performed by our auditors. In addition, the Audit Committee limited the aggregate amount in fees our auditors may receive during fiscal year for non-audit services in certain categories, unless pre-approved. Our Director of Finance reviews all individual management requests to engage our independent auditors as a service provider in accordance with this catalog and, if the requested services are permitted pursuant to the catalog, approve the request accordingly. We inform the Audit Committee about these approvals on a quarterly basis. Services that are not included in the catalog require pre-approval by the Audit Committee on a case-by-case basis. Our Audit Committee is not permitted to approve any engagement of our auditors if the services to be performed either fall into a category of services that are not permitted by applicable law or the services would be inconsistent with maintaining the auditors’ independence. None. - During
(1) (2) In February 2016 the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan was announced in a press release dated February 3, 2016 and will expire on February 2, 2017. - 140 - None. We are a foreign private issuer whose ordinary shares are listed on the NASDAQ Global Select Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQ rules, including the NASDAQ corporate governance requirements. The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies: The NASDAQ rules The NASDAQ rules require shareholder approval of stock option plans available to officers, directors or employees. We have decided to follow home country practice in lieu of obtaining shareholder approval for our stock option plans. However, subject to exceptions permitted under the Companies Law, we are required to seek shareholder approval of any grants of options to directors and controlling shareholders or plans that require shareholder approval for other reasons. Additionally, we have chosen to follow our home country practice in lieu of the requirements of NASDAQ Rule 5250(d)(1), relating to an issuer’s furnishing of its annual report to shareholders. 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. Not applicable. We have responded to Item 18 in lieu of this item. The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1. The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below.
¶ Translated from Hebrew - 142 - * Filed herewith. ** Furnished herewith. (A) Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013. (B) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013. (C) Incorporated by reference to Annex B to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on July 28, 2011. (D) Incorporated by reference to Exhibit 4.3 to the Annual Report on Form 20-F for the year ended December 31, 2001, filed with the SEC on April 5, 2002. (E) Incorporated by reference to Exhibit 4.7 to the Annual Report on Form 20-F for the year ended December 31, 2008, filed with the SEC on March 25, 2009. (F) Incorporated by reference to Exhibit (G) Incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010. (H) Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010. (I) Incorporated by reference to Appendix A to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on September 30, 2015. - The registrant hereby certifies that it meets all of the requirements for filing on Form
Date: April - 144 - RADWARE LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2016 U.S. DOLLARS IN THOUSANDS INDEX
To the Board of Directors and Shareholders of RADWARE LTD. We have audited the accompanying consolidated balance sheets of Radware Ltd. 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 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
F - 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Shareholders of RADWARE LTD. We have audited Radware Ltd. 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 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. 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 and subsidiaries as of December 31,
U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 4 RADWARE LTD. AND ITS SUBSIDIARIES 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 - 5 U.S. dollars in thousands, except per share data
The accompanying notes are an integral part of the consolidated financial statements. F - 6 U.S. dollars in thousands, except per share data
The accompanying notes are an integral part of the consolidated financial statements. U.S. dollars in thousands, except share data
The accompanying notes are an integral part of the consolidated financial statements. U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 9 RADWARE LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F - 10
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP").
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 these estimates 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. F - 11 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
On an ongoing basis, the Company's management evaluates estimates, including those related to fair values and useful lives of intangible assets, tax assets and liabilities, fair values of stock-based awards, as well as in estimates used in applying the revenue recognition policy related to separation of multiple elements. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
A majority of the revenues of the
The consolidated financial statements include the accounts of the
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at acquisition.
Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Such short-term deposits are stated at cost which approximates market values. Bank deposits with maturities of more than one year are included in long-term deposits. Deposits as of December 31, F - 12 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The Company accounts for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date. The Company classified all of its debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial income, net. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The 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 the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income (loss) is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive The Company’s unrealized loss on debt securities in corporate bonds relates to several bonds. Because the Company has the ability to hold these debt securities until a recovery of fair value, which may be the maturity date of such bonds, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2016.
Inventories are stated at the lower of cost or market value. Inventory write-off is provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories and discontinued products. Inventory write-offs totaled $ F - 13 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Cost is determined as follows: Raw materials and components - using the "first-in, first-out" method. Work-in-progress and finished products - raw materials as above with the addition of subcontracting costs - calculated on the basis of direct subcontractors costs and with direct overhead costs. The Company assesses the carrying value of its inventory for each reporting period to ensure inventory is reported at the lower of cost or market in accordance with ASC 330-10-35. Charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. These assessments consider various factors, including historical usage rate, technological obsolescence, estimated current and future market values and new product introduction. In cases when there is evidence that the anticipated utility of goods, in their disposal in the ordinary course of business, will be less than the historical cost of the inventory, the Company recognizes the difference as a current period charge to earnings and carries the inventory at the reduced cost basis until it is sold or disposed of.
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:
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. F - 14 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from 5 to 7 years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis. During
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 "Intangibles – 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 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. ASC The Company operates in one operating segment, and this segment comprises its only reporting unit. The Company performs assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for 2014, 2015 and F - 15 RADWARE 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.
The Revenues from product sales are recognized in accordance with ASC No. 605, "Revenue Recognition" ("ASC 605"), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, and collectability is reasonably assured. Revenues from PCS, which represents mainly software updates, help desk support, unit replacement or repair, and security update services, and revenues from subscriptions are recognized ratably over the term of the agreement, which is typically between one year and three years. The timing for revenue recognition of the various products and customers is dependent upon satisfaction of such criteria and generally varies from shipment to delivery to the customer depending on the specific shipping terms of a given transaction, as stipulated in the agreement with each customer. The Company's products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. The Company determines For the product and subscriptions, the Company determines the F - 16 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The Company records a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $ Deferred revenues include unearned amounts
Shipping and handling fees charged to the Company's customers are recognized as product revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenues.
Cost of products is comprised of cost of software and hardware production, manuals, packaging, license fees paid to third parties, inventory write-offs and amortization of acquired technology. Cost of services is comprised of cost of post-sale customer support.
The Company generally provides a one year warranty for all of its products. A provision is recorded for estimated warranty costs at the time revenues are recognized based on the Company's experience. Warranty expenses for the years ended December 31,
Research and development Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release, have been insignificant. Therefore, all research and development costs are expensed as incurred. F - 17 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
During 2012-2014 and 2016 the Company received non-royalty-bearing grants from the Government of Israel for approved research and development projects. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred as provided by the relevant agreement and included as a deduction from research and development expenses. Research and development grants deducted from research and development expenses amounted to $
The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation" ("ASC 718"). ASC The Company recognizes compensation expenses for the value of its awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC ASC The Company selected the Black-Scholes-Merton option pricing model to account for the fair value of its stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. F - 18 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances. The fair value of the Company's stock options granted to employees and directors for the years ended December 31, Employees' stock option plan:
The Company accounts for income taxes in accordance with ASC No. 740, "Income Taxes" ("ASC 740"). This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Deferred tax liabilities and assets are classified as non-current in accordance with ASU 2015-17 (see also Note 2ab). F - 19 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
ASC 740 contains a two-step approach to recognizing and measuring a liability for 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 only addressed if the first step has been satisfied (i.e. the position is more likely than not to be sustained) otherwise a full liability in respect of a tax position not meeting the more likely than not criteria is recognized. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalty, if any related to unrecognized tax benefits in its taxes on income.
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, available-for-sale marketable securities and trade receivables. The majority of the As of December 31, The F - 20 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
As of December 31, From geographic prospective, The trade receivables of the
Severance pay: The The carrying value of the deposited funds for the F - 21 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Effective as of the Transition Date, the Severance pay expenses for the years ended December 31,
The Company measures its cash equivalents, deposits and marketable securities at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
The Company accounts for comprehensive income (loss) in accordance with ASC No. 220, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in F - 22 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The Company repurchases its
Basic net income (loss) per share is computed based on the weighted average number of The total number of
The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations" ("ASC 805"). ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.
Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. The reclassification had no effect on previously reported net income or shareholders' equity. The reclassification was adjusted the revenues from services to revenues from products in order to align the 2016 presentation. F - 23 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has early adopted this standard in the fourth quarter of 2015 on a retrospective basis. F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
In February 2016, the FASB issued ASU No. 2016-02, In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU will be effective for the Company in the first quarter of 2017. The Company’s adoption of ASU 2016-09 will not have a material impact on its consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be effective for The Company in the first quarter of 2018. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements. In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the standard on its future financial statements and disclosures but it is not expected to have a material impact. F - 25 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Marketable securities with contractual maturities of less than one year are as follows:
Marketable securities with contractual maturities from one to three years are as follows:
Marketable securities with contractual maturities of more than three years are as follows:
F - 26 RADWARE 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, 2016 and 2015 were as follows:
As of December 31, As of December 31, F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
In accordance with ASC 820, "Fair Value Measurements and Disclosures", the Company measures its cash equivalents and The Company's financial assets measured at fair value on a recurring basis, including interest receivable components consisted of the following types of instruments as of December 31,
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Inventories are comprised of the following:
NOTE 6:- PROPERTY AND EQUIPMENT, NET
Depreciation expenses for the years ended December 31, 2014, 2015 and 2016 were $ 6,413, $ 8,163 and $ 9,253, respectively. In 2016, the Company commenced a project for a global roll-out of its Enterprise Resource Planning systems ("ERP"). The Company capitalizes costs incurred related to the system according to ASC 350-40 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". As of December 31, 2016, the Company capitalized an amount of $2,721, which is included in "Computer, peripheral equipment and software". F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Amortization expenses for the years ended December 31, Future estimated amortization expenses for the years ending:
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The facilities of the
Total rent expenses for the years ended December 31,
F - 31 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
In June 2015, in response to the Company’s Summary Judgment Motion, F5 conceded that the current version of Alteon does not infringe any of the F5 patents-in-suit and that its allegations are limited to a previous version of Alteon. On January 7, 2016, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s trade libel and unfair competition counterclaims. On May 9, 2016, F5 accepted the Company offer for judgment of $40 for all of F5’s remaining claims and on September 7, 2016 the Court entered judgment in the same amount. After judgment, both Radware and F5 appealed other portions of the judgment to the Federal Circuit. F5 appealed the judgment for Radware, while Radware appealed orders that limited the amount of damages and the scope of the permanent injunction. Accordingly the awarded amount was not recorded as of December 31, 2016. Oral hearing on the appeal has not yet been scheduled. F5 has posted a bond with the Court for the entire judgment amount in favor of Radware.
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:- SHAREHOLDERS' EQUITY The Company's shares are listed for trade on the NASDAQ
Ordinary Shares: The
Dividends, if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be converted to U.S. dollars on the basis of the exchange rate prevailing at the date of the conversion. The Company does not intend to pay cash dividends in the foreseeable future.
The Company has two stock option plans, the Company's Key Employee Share Incentive Plan (1997) as amended and restated (the "1997 Plan") and the Directors and Consultants Option Plan F - 33 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:-SHAREHOLDERS' EQUITY (Cont.) Pursuant to the Stock Option Plans, the Company reserved for issuance On February 1, 2010, the Company's Board of Directors adopted an additional addendum to the share option plan allowing the allocation of short-term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing market price of the shares on the NASDAQ on the date of grant of a respective option award. As of December 31, Restricted Shares Units ("RSUs"): In addition to granting stock options, since 2013, the Company started to routinely grant Restricted Stock Units ("RSUs") under the 1997 Plan. RSUs vest primarily over a four years period of employment. RSUs that are cancelled or forfeited become available for future grants. Employee Stock Purchase Plan ("ESPP"): On February 1, 2010 the Company's Board of Directors adopted the 2010 Employee Share Purchase Plan ("ESPP"), which provides for the issuance of a maximum of 2,000,000 As of December 31, Modification of Stock Options: During 2016, the Board of Directors of the Company approved the repricing of 667,750 stock options for several employees and senior management, previously granted under the Stock Option Plans. As a result, the exercise price of the options was lowered to the price per share of the stock at the free market. There was no change in the number of shares subject to each option, vesting or other terms of the options. The incremental expense for the repricing of the options is approximately $1,187. For the year ended December 31, 2016, the Company recorded expenses totaling $359 associated with the repricing. F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:- SHAREHOLDERS' EQUITY (Cont.) A summary of employees and directors option activity under the Company's Stock Option Plans as of December 31, 2016, 2015 and 2014 is as follows:
F - 35 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)
The aggregate intrinsic value of options outstanding at December 31, The aggregate intrinsic value of options exercisable at December 31, The weighted-average grant-date fair value of options granted during the years ended December 31, As of December 31, 2016, there was approximately $ As of December 31, 2015, there was approximately $ 9,866 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company's stock option plans. That cost F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:- SHAREHOLDERS' EQUITY (Cont.) As of December 31, 2014, there was approximately $ 10,643 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 1.53 years. Total grant-date fair value of vested options for the year ended December 31, 2014 was approximately $ 6,841. The options outstanding under the Company's Stock Option Plans as of December 31, 2016, 2015 and 2014 have been separated into ranges of exercise price as follows:
F - 37 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 10:- SHAREHOLDERS' EQUITY (Cont.) The following table summarizes information relating to RSUs, as well as changes to such awards during
As of December 31, The weighted-average grant date fair value of RSUs granted during the year ended December 31, 2016, 2015 Stock-based compensation was recorded in the following items within the consolidated statements of
F - 38 RADWARE LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands, except share and per share data
The following table sets forth the computation of basic and diluted net earnings per share:
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The Company's Israeli tax returns have been examined for all years including and prior to fiscal 2008, and the Company is no longer subject to audit for these periods. During As of December 31, During the years ended December 31, 2016, 2015 and 2014 Exchange rate differences are recorded within financial income, net, while interest is recorded within taxes on income expense. The Company's U.S subsidiary files income tax return in the U.S federal jurisdiction. Tax returns have been examined for all years prior to fiscal 2010, and the Company's U.S subsidiary is no longer subject to audit for these periods. The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company's income tax provisions and accruals. Such differences could have a material effect on the Company's income tax provision and net income in the period in which such determination is made. F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Commencing in taxable year 2003, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations. Under the Foreign Exchange Regulations the Israeli company is calculating its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of December 31st of each year.
The Israeli corporate tax rate in In August 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of taxation of revaluation gains effective from August 1, 2013 but contingent on the publication of regulations that define what should be considered as "retained earnings not subject to corporate tax" and regulations that set forth provisions for avoiding double taxation of foreign assets. As of the date of approval of these financial statements, no such regulations were issued. In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
Under the amended Law, as amended in April 2005 a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authorities for a pre-ruling regarding their eligibility for benefits under the Amendment. The Company's income derived from the Privileged Enterprise will be entitled to a tax exemption for a period of two years and to an additional period of five to eight years with reduced tax rates of 10%-25% (based on percentage of foreign ownership). F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of the Company's business income from export. In order to be eligible for the tax benefits, the Amendment states that a company must make an investment in the Privileged Enterprise exceeding a minimum amount specified in the law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise ("the Year of Election"). Where a company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company's effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage of the company's production assets before the expansion. The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the commencement year, or 12 years from the first day of the year of election. The Company elected 2009 and 2012 as years of election according to the Law prior to the reform mentioned below. In the event of distribution of dividends from tax-exempt income generated under Privileged or Approved Enterprise, the amount distributed will be subject to the same reduced corporate tax rate that would have been applied to the Approved Enterprise's and Privileged Enterprise's income. In addition, as a result of the amendment, tax-exempt income attributed to Privileged Enterprise, will subject the Company to taxes upon distribution in any manner including complete liquidation. Out of the Company's retained earnings as of December 31, The Company's F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
In 2012, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law as amended in July 2013, and starting January 1, 2014 the uniform tax rate will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. Under the transition provisions of the new legislation, the Company decided to irrevocably implement the new law, effective January 1, 2014. Income from sources other than the "Preferred Enterprise" will be subject to the tax at the regular rate. In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%). The Amendment also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017. The new tax tracks under the Amendment are as follows: Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%). Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location. Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%. F - 43 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Since as of December 31, 2016 definitive criteria to determine the tax benefits had not yet been established, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date. Accordingly, the above changes in the tax rates relating to technological enterprises were not taken into account in the computation of deferred taxes as of December 31, 2016.
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's and its subsidiaries' deferred tax liabilities and assets are as follows:
The net change in the total valuation allowance for the year ended December 31,
Non-current deferred tax asset, net is included within other long-term assets in the balance sheets. Deferred taxes are carried directly to equity if the tax relates to equity items (see also Note 2ab). F - 45 RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The Company's subsidiaries in the U.S. have provided valuation allowance in respect of deferred tax assets resulting from carry forward of net operating loss relating to excess tax deduction from stock options prior to the adoption of ASC 718 on January 1, 2007. ASC No. 718 prohibits recognition of a deferred tax asset for excess tax benefits due to stock option exercises that have not yet been realized through a reduction in income tax payable. Such unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in-capital, if and when realized. Through 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 before utilization. F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands
Summary information about geographic areas: The Company operates in one reportable segment (see Note 1 for a brief description of the Company's business). The total revenues are attributed to geographic areas based on the location of the end-users. The following table presents total revenues for the years ended December 31,
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data
The following table presents long-lived assets as of December 31,
Financial income, net:
F - RADWARE LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 15:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES Represents transactions and balances with other entities in which certain members of the Company's Board of Directors, management or shareholders have interest:
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