Effects of Government Regulations and Location on the Company’s Business
For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see “Information on the Company – Business Overview – Conditions in Israel” in Item 4 and the “Risks Relating to Israel in Item 3, above.
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B. Liquidity and Capital Resources
Since our initial public offering in August 2000, we have financed our operations primarily through the proceeds of that initial public offering and a follow-on offering and through royalty-bearing grants from the OCS. In the initial public offering, we raised $97.8 million; and through December 31, 2006, we received a total of $18.5 million from the OCS. In a follow-on public offering completed in December 2007, we raised a net amount of $88.3 million.
In January 2011, we entered into the Loan Agreement in the principal amount of $35 million in order to help finance the Nera Acquisition. The Loan Agreement provides that the principal amount of $35 million bears interest at a rate of Libor + 3.15%, which Libor is updated every three months. As of December 31, 2011 the accrued interest was $141,000 and was recorded as part of our accrued expenses. The principal amount is to be repaid in 17 quarterly installments from February 19, 2012, through February 19, 2016 and the interest is to be paid in quarterly payments starting as of February 19, 2011.
The loan is secured by a floating charge over all Company assets as well as several customary fixed charges on specific assets. Repayment of the loan may be accelerated by the bank in certain events of default including insolvency events, failure to comply with financial covenants and an event whereby we will no longer be a traded company.
As of December 31, 2011, we had approximately $49.5 million in cash and cash equivalents, short term bank deposits, and short- and long-term marketable securities.
As of December 31, 2011, our cash investments were comprised of the following: 59% consisted of short-term, highly liquid investments with original maturities of up to three months, and 34% consisted of short-term deposits and marketable securities with original maturities of up to one year, with a minimum credit rating of A/A1. The remaining balance of our liquid assets is invested in corporate and government debt securities, carrying a minimum rating of A/A1. Most of these investments are in US dollars.
Net cash used in operating activities was $20.1 million for the year ended December 31, 2011 and $10.7 million for the year ended December 31, 2010. Net cash provided by operating activities was $16.8 million for the year ended December 31, 2009.
In 2011, our cash used by operating activities was affected by the following principal factors:
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our net loss of $53.7 million;
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a $13.8 million decrease in other accounts payable and accrued liabilities, primarily attributed to a decrease in subcontractors accruals, a decrease in provision for collection fee, a decrease in provision for warranty and a decrease in provision for tax; and
a $11.9 million decrease in deferred revenues paid in advance.
These factors were offset by:
a $6.8 million decrease in other accounts receivable and prepaid expenses; and
a $40.6 million decrease in inventories, net of write-off.
In 2010, our cash used by operating activities was affected by the following principal factors:
our net income of $14.1 million;
a $3.3 million increase in other accounts payable and accrued expenses, primarily attributed to an increase in employees accruals, an increase in warranty provision and an unrealized loss in open forward foreign exchange contracts;
a $2.1 million increase in deferred revenues paid in advance;
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These factors were partially offset by:
a $19.6 million increase in trade receivables, which was primarily attributable to our increased revenues;
a $11.7 million decrease in trade payables which was primarily attributable to advances paid to our contract manufacturers; and
a $7.7 million increase in other accounts receivable and prepaid expenses which was primarily attributable to an increase of $5.6 million in advances paid to our contract manufacturers and an increase of $1.1 million in prepaid expenses mainly subcontractors expenses for installation services for our turnkey projects for which revenues have not yet recognized.
In 2009, our cash provided by operating activities was affected by the following principal factors:
our net income of $3.7 million;
a $12.8 million increase in trade payables, which was mostly attributable to increased purchases of products from our contract manufacturers primarily for turnkey projects for which revenues have not yet been recognized;
a $12.7 million increase in deferred revenues paid in advance; and
a $2.4 million decrease in trade receivables, which was primarily attributable to the decrease in our revenues.
These factors were partially offset by a $25.4 million increase in inventories, primarily resulting from an increase in turn key projects in which revenues are often recognized after products are installed and accepted by the customer.
Net cash used in investing activities was approximately $28 million for the year ended December 31, 2011, as compared to net cash provided by investing activities of approximately $5.1 million for the year ended December 31, 2010 and net cash provided by investing activities of approximately $2.5 million for the year ended December 31, 2009. In the year ended December 31, 2011, our investment in short-term bank deposits of $7.3 million, purchase of property and equipment of $14.4 million and payment related to the Nera Acquisition of $42.5 million, were offset partially by proceeds from maturity of short-term bank deposits of $25.7 million and by proceeds from maturities of marketable securities of $10.5 million. In the year ended December 31, 2010, our proceeds from maturity of short-term bank deposits of $31.7 million and from maturities of marketable securities of $16.6 million were offset partially by investment in short and long-term bank deposits of $13.8 million and in marketable securities of $18.3 million. In the year ended December 31, 2009, our proceeds from maturity of short-term bank deposits of $46.2 million and from maturities of held-to-maturity marketable securities of $11.8 million were offset partially by investment in short and long-term bank deposits of $44.0 million and in held-to-maturity marketable securities of $4.7 million.
Net cash provided by financing activities was approximately $39.5 million for the year ended December 31, 2011 as compared to net cash provided by financing activities of $4.9 million for the year ended December 31, 2010 and net cash used in financing activities of $9.2 million for the year ended December 31, 2009. The balance of the cash as of December 31, 2011, 2010 and 2009 consisted of proceeds from exercises of share options by employees of $4.5 million, $4.9 million and $3.0 million, respectively. For the year ended December 31, 2009, the Company used an amount of $12.2 million to purchase treasury shares as part of the Company’s share repurchase program. For the year ended December 31, 2011, the Company entered into the Loan Agreement in the amount of $35 million to finance the consideration of the Nera Acquisition.
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As of December 31, 2011, our principal commitments consisted of $12.9 million for obligations outstanding under non-cancelable operating leases.
In October 2008, we announced the adoption a share repurchase program under which the total amount to be paid for the repurchase of shares would not exceed $20 million. The share repurchase program was completed in 2009. As of December 31, 2011, we purchased 3,481,523 shares at a weighted average price per share of approximately $5.74 per share (excluding commission and broker fees).
Our capital requirements are dependent on many factors, including working capital requirements to finance the growth of the Company, and the allocation of resources to our research and development efforts, as well as our marketing and sales activities. We anticipate continuing to engage in capital spending consistent with anticipated growth in our operations as a result, in part, from our increased participation in turnkey projects. We anticipate that our capital expenditures during 2012 and 2013 will be primarily for a new enterprise resource planning, or ERP, system to be implemented at our offices worldwide.
We believe that current cash and cash equivalent balances, short-term bank deposits and short-term marketable securities will be sufficient for our requirements through at least the next 12 months.
C. Research and Development
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products, with particular emphasis on equipment for emerging IP-based networks, and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and, in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.
Our research and development activities are conducted at our facilities in Tel Aviv, Israel, Bergen, Norway and Greece. As of December 31, 2011, our research, development and engineering staff consisted of 280 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter wave design, modem and signal processing, data communications, system management and networking solutions.
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both ASICs and RFICs, to full system integration. Our research and development projects currently in process include extensions to our emerging IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.
Our research and development expenses were approximately $50.5 million or 11.3% of revenues in 2011, $25.1 million or 10% of revenues in 2010, and $19.0 million or 10% of sales in 2009.
Intellectual Property
See: “Item 4. History and Development of the Company–Intellectual Property” for a description of our intellectual property.