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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-29871
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RADVISION LTD.
(Exact name of registrant as specified in its charter)
Israel N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Raoul Wallenberg Street
Tel Aviv 69719, Israel
(Address of principal executive offices)
011-972-3-645-5220
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Ordinary Shares, NIS 0.1 par value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] (Not applicable. See Preliminary Notes on page
i.)
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
As of March 9, 2004, 19,344,849 ordinary shares of RADVISION Ltd. were
outstanding (not including treasury shares). The aggregate market value of the
ordinary shares held by non-affiliates was approximately $63.9 million.
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DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business...........................................................1
Item 2. Properties........................................................33
Item 3. Legal Proceedings.................................................33
Item 4. Submission of Matters to a Vote of Security Holders...............34
PART II.......................................................................35
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................35
Item 6. Selected Financial Data...........................................39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................40
Item 7A. Qualitative and Qualitative Disclosures About Market Risk.........52
Item 8. Financial Statements and Supplementary Data.......................53
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................53
Item 9A. Controls and Procedures...........................................53
PART III......................................................................54
Item 10. Directors and Executive Officers of the Registrant................54
Item 11. Executive Compensation............................................63
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................68
Item 13. Certain Relationships and Related Transactions....................70
Item 14. Principal Accountants Fees and Services...........................71
PART IV.......................................................................73
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................73
Preliminary Notes: RADVISION Ltd. is incorporated in Israel and is a
"foreign private issuer" as defined in Rule 3b-4 under the Securities Exchange
Act of 1934 (the "1934 Act") and in Rule 405 under the Securities Act of 1933.
As a result, it is eligible to file this annual report pursuant to Section 13 of
the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file its interim reports
on Form 6-K (in lieu of Forms 10-Q and 8-K). However, RADVISION Ltd. elected to
file its annual and interim reports on Forms 10-K, 10-Q and 8-K.
This annual report and the exhibits thereto and any other document we
file pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference room: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549, on the Securities and Exchange Commission Internet site
(http://www.sec.gov) and on our website www.radvision.com.
Pursuant to Rule 3a12-3 under the 1934 Act regarding foreign private
issuers, the proxy solicitations of RADVISION Ltd. are not subject to the
disclosure and procedural requirements of Regulation 14A under the 1934 Act, and
transactions in its equity securities by its officers and directors are exempt
from Section 16 of the 1934 Act. However, we distribute annually to our
shareholders an annual report containing financial statements that have been
examined and reported on, with an opinion expressed by, an independent public
accounting firm.
This Annual Report on Form 10-K contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs, "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "understands" and other verbs suggesting uncertainty. We remind
readers that forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known and
unknown risks that could cause the actual results, performance, levels of
activity, or our achievements, or industry results, to be materially different
from any future results, performance, levels of activity, or our achievements
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section
which appears in Item 1 - Business.
i
PART I
Item 1. Business
General
We were incorporated under the laws of the State of Israel in
January1992, commenced operations in October 1992 and commenced sales of our
products in the fourth quarter of 1994. Before that time, our operations
consisted primarily of research and development and recruiting personnel. We are
a public limited liability company under the Israeli Companies Law 1999 and
operate under this law and associated legislation. Our registered offices and
principal place of business are located at 24 Raoul Wallenberg Street, Tel Aviv
69719, Israel. Our address on the Internet is www.radvision.com. The information
on our website is not incorporated by reference into this annual report.
With over a decade in business, RADVISION is the industry's leading
provider of high quality, scalable and easy-to-use products and technologies for
videoconferencing, video telephony, and the development of converged voice,
video and data over IP and 3G networks. Hundreds of thousands of end-users
around the world today communicate over a wide variety of networks using
products and solutions based on or built around RADVISION's multimedia
communication platforms and software development solutions.
We have approximately 450 customers worldwide including Alcatel, Cisco,
FastWeb, NTT/DoCoMo, Philips, Panasonic, Samsung, Shanghai Bell, Siemens, Sony
and Tandberg.
In the beginning of 2001, we created two separate business units
corresponding to our two product lines to enable our product development and
product marketing teams to respond quickly to evolving market needs with new
product introductions.
Our Networking Business Unit, or NBU, offers one of the broadest and
most complete set of multimedia communication and videoconferencing network
solutions for IP, ISDN, SIP and 3G-based networks, supporting most end points in
the industry today. These products are sold primarily to resellers and OEMs who
use this infrastructure to develop and install advanced IP and ISDN-based
communication systems for enterprise customers. The NBU also provides service
providers, both 3G wireless and wireline, with integrated solutions that enable
the delivery of converged IP-based multimedia streaming and video telephony
applications to corporate customers as a managed service, residential broadband
customers, and 3G subscribers worldwide.
Our Technology Business Unit, or TBU, is a one-stop-shop of voice and
video over IP and 3G Development toolkits. The TBU provides protocol development
tools and platforms, as well as associated solutions such as testing platforms
and IP phone toolkits that enable equipment vendors and service providers to
develop and deploy new IP and 3G-based converged networks, services, and
technologies. Our TBU also provides professional services to our customers,
assisting them to integrate our technology into their products.
RADVISION's TBU
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solutions include developer toolkits for SIP, MEGACO/H.248, MGCP, H.323, and
3G-324M. It also includes RADVISION's ProLab(TM) Test Management Suite and IP
phone toolkit. Today you may find RADVISION toolkits implemented in a wide range
of environments from chipsets to simple user devices like IP phones, and from
integrated video systems through carrier class network devices like gateways,
switches, soft switches and 3G multimedia gateways.
Our Strategy
Our goal is to be the leading provider of innovative products and
technologies that enable real-time multimedia collaboration (voice, video and
data) communication over packet networks. We provide solutions at every level -
protocol developer toolkits, professional services, network infrastructure, and
even integrated solutions that compliment the communication solutions of other
vendors such as those from Cisco and Microsoft. We believe that the combination
of offering IP-centric networking products and software toolkits uniquely
positions us as a key enabling vendor in the evolution of IP communication. Both
of our product lines are essential for building IP networks that support real
time voice and video communication with full interoperability with legacy
ISDN/PSTN networks and technologies. Key elements of our strategy include the
following:
o Maintain and Extend our Technology Leadership. We believe that we have
established ourselves as a technology leader in providing
core-enabling technology for a broad range of IP and 3G communication
products and services, such as our announcement in 2003 of support for
SIP in our infrastructure products - one of the first in the industry
to do so. We have accumulated extensive knowledge and expertise as
designers and developers of commercial products and technology for
real-time packet-based communication. We place considerable emphasis
on research and development to expand the capabilities of our existing
products, to develop new products and to improve our existing
technology and capabilities. We believe that our future success will
depend upon our ability to maintain our technological leadership, to
enhance our existing products and to introduce on a timely basis new
commercially viable products addressing the needs of our customers. We
intend to continue to devote a significant portion of our personnel
and financial resources to research and development.
o Enable the Migration of Visual Communication from the conference room
(videoconferencing) to the desk top, the home, and on the road over 3G
(video telephony and multimedia communication). We have been working
with leading technology vendors such as Cisco and Microsoft as well as
aggressively developing partnerships with broadband and wireless
service providers to transform videoconferencing from a meeting room
application to a new mode of personal communication.
o Strengthen and Expand our Relationships with OEM Customers. We have
established and continue to maintain collaborative working
relationships with many OEMs in the IP communication market, including
Cisco, Samsung, Siemens, Sony and Tandberg. We work closely with our
OEM customers to integrate our products and core technology into their
solutions. Our core technology and our system design expertise enable
us to assist these customers in the development of complete solutions
that contain enhanced features and functionality compared to
competitive alternatives. We strive to establish long-term
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relationships with our OEM customers by starting with a few products
and subsequently expanding these relationships by increasing the
number and range of products sold to these customers. We intend to
expand the depth and breadth of our existing OEM relationships while
initiating similar new relationships with leading OEMs focused on the
IP communication market.
o Become a Key Enabling Technology Solution for IP Communication. We
continue to strive to ensure that our infrastructure solutions are key
enabling components in larger solution vendors' portfolios. To that
end, in 2003, we announced that our viaIP multimedia communication
platform supports multipoint and multidevice functionality within
Microsoft's Office Live Communication Server 2003 platform for desktop
communication. Additionally, RADVISION is the key enabling technology
in a number of telecom equipment vendors' 3G communication platforms -
enabling real-time multimedia services.
o Continue to Offer New and Enhanced Products and Features. We believe
we have consistently been either first, or among the first, to market
products that support real-time voice, video and data communication
over packet networks. We were the first-to-market with IP gateways
that provide combined voice, video and data functionality, first to
market with software development kits for the development of
H.323-compliant IP communication products and applications, and this
year, the first to announce support for SIP (Session Initiation
Protocol) in our infrastructure platform. We intend to utilize our
technological expertise as a basis for market leadership by striving
to be first-to-market with new and enhanced products and features that
address the increasingly sophisticated needs of our customers and the
evolving markets they serve. In addition, we believe that our
participation in the drafting of industry standards gives us the
ability to quickly identify emerging trends enabling us to develop new
products and technologies that are at the forefront of technological
evolution in the IP communication industry.
In 2003, our TBU expanded its product offering to include a new
direction for our company with the first of our toolkits that not only provide
protocol developer suites but actual reference designs. The first product is an
IP Phone toolkit, which provides all the functionality and call control, as well
as supporting multiple signaling protocols, that enables developers to more
easily develop IP phones. Additionally, in 2003, we announced a number of
upgrades to our toolkits to maintain our lead in supporting the latest versions
of signaling standards. TBU also announced in 2003 that it had ported its
developer solutions to a number of new emerging platforms including Linux and an
embedded chip operating system. Finally, in 2003 we launched our Professional
Services division, which features a team of highly skilled developers who are
available to assist clients in developing products using RADVISION toolkits and
protocol stacks. These introductions have helped us maintain our position as the
premier, one-stop-shop for all voice and video technologies over IP and 3G. We
also believe that they reinforce RADVISION's leadership position as a protocol
toolkit technology expert.
In 2003, our NBU introduced a number of very significant new
technologies and platforms for videoconferencing and multimedia communication.
These introductions included an MCU version 3.2 (Multipoint Conferencing Unit)
which broke ground in both
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price and performance as well as in its support of SIP and the new H.264
compression standard. We also introduced new versions of our INVISION platform
for enterprise communication as well as new scheduling and network management
tools. Finally, and perhaps most importantly, we announced full support of
Microsoft's Live Communication architecture, a powerful new desktop
communication architecture for converged voice, video, and data collaboration
We expect to continue to introduce new or enhanced products in 2004,
including upgrades to our software toolkits and improvements to our
videoconferencing and multimedia communication product lines that include added
functionality. In addition, we plan to:
o Deepen the Distribution Channels for our Products. We intend to
continue to focus our sales and marketing efforts on deepening the
relationship with our distribution channels. Channel partners provide
us feedback from their customers, the end-users of our products, which
gives us valuable insight into evolving industry trends and customer
requirements. OEMs, resellers and systems integrators are all
important channel partners for our products. They provide us with
increased market presence through their distributor relationships and
existing customer base. In addition, endorsements by key channel
partners strengthen our brand name awareness.
o Leverage Service Provider Opportunities. We are working closely with
telecom equipment provides, 3G mobile carriers, and wireline service
providers to enable multimedia communication in the home and on the
road. We are seeing initial success and expect to continue to help
grow that market - particularly in the 3G space where we are in
several active trials globally.
o Enable Desktop Conferencing and Communication Through Strategic
Partners. We will continue our efforts to maintain our position as a
key enabling solution provider for major vendors' activities to drive
visual communication beyond the meeting room and onto the desktop. We
intend to strengthen our relationship with Microsoft and its sales
channels. We also expect to leverage our close relationship with Cisco
and what they are doing in enterprise video telephony by virtue of our
AVVID certification announcement in early 2004.
o Continue our Active Involvement in Shaping Industry Standards for IP
Communication. We actively participate in and contribute to the
formulation of standards for IP communication. We intend to continue
our active involvement in the organizations that define the standards
for real-time communication over next generation packet networks. Our
knowledge and expertise gained in participating in the development of
these industry standards enable us to be among the first to market our
products and technology based on new standards adopted. We are
continually improving, enhancing and expanding our core competency in
real time IP communication protocols including H.323, SIP, MGCP and
MEGACO. Because of our involvement in defining these IP communication
standards, we believe that we are well-positioned to quickly develop
enhanced functionality and new products based on multiple protocols.
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The following discussion of our business is separated into two sections:
the first addresses our videoconferencing network infrastructure section, or
NBU, and the second addresses our software developer toolkit business, or TBU.
In each section we will provide an overview of our products, our competitive
advantage, and industry trends that are beneficial to our business.
Networking Business Unit
NBU Products
RADVISION's award-winning multimedia communication and videoconferencing
network infrastructure products provide both the platform and applications to
enable advanced conferencing and collaboration functionality between any
video-enabled device, such as a meeting room and desktop videoconferencing end
point, with other telephony and videoconferencing systems. Regardless of the
communication network used, from IP and SIP to ISDN and next generation 3G,
institutions, enterprises, and service providers can use the RADVISION solution
to create high quality, easy-to-use voice, video, and data communication and
collaboration environments.
RADVISION's core infrastructure solution is viaIP, a customizable,
scalable array of ports, management solutions, and custom functionality with
which customers can design and quickly deploy a highly configured, highly
scalable visual communication network ideal for each client's unique needs. With
the viaIP product line the customer simply chooses the ideal port configuration,
management solution and additional applications and the entire solution is
delivered in an integrated chassis.
Within the viaIP product line we offer INVISION, a plug-and-play line of
videoconferencing network appliances targeted at the enterprise. INVISION offers
an off-the-shelf, completely pre-configured solution with all the functionality
of a complete IP/ISDN videoconferencing infrastructure, from centralized
management and multipoint conferencing to gateway services and value-added
applications, in an integrated, easy-to-order and easy-to-install device.
To complement the viaIP product, we offer our iVIEW family of management
applications for every videoconferencing need, including robust network
management and intuitive conference scheduling.
The viaIP offers a customizable solution to layer video, voice, and data
collaboration onto a customer's network. Key components of the solution include:
o Gateways - Provide videoconferencing interoperability between IP,
circuit-switched ISDN and next generation 3G end points and networks.
o Gatekeepers - Control, manage, and monitor real-time voice, video and
data traffic over the visual communication networks.
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o Conferencing Bridges (or multipoint conferencing units/MCUs) - Enable
voice or multimedia conferencing over packet and ISDN networks among
three or more participants.
o Data Collaboration Servers - Enable conference participants to
collaborate and share applications. Allow users to view diagrams,
graphic presentations and slide lectures simultaneously with other
videoconferencing participants. The DCS also makes possible text
chats, whiteboard exchanges, and rapid file transfers during
multipoint videoconferences of three or more participants.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations for financial information relating to our NBU.
NBU Product Benefits
While our products thoroughly support ISDN, we believe that the
principal competitive advantage of our family of solutions is our IP expertise.
Our products are the leading visual communication infrastructure solutions in
the industry today by virtue of our unmatched technological innovation in five
key areas:
Native IP Routing. All competing solutions come from the legacy ISDN
world, with an ISDN-based switching fabric (TDM backplane). This means that for
an IP end point to IP end point session, every IP stream has to be translated to
"ISDN" in order to be switched by the system, and then translated back to IP to
be forwarded on. In contrast, we offer an IP backplane, meaning IP sessions are
routed natively, with no translation. RADVISION solutions all perform flawlessly
in supporting ISDN-only or hybrid IP/ISDN networks, providing an ideal platform
as a network migrates from ISDN to IP while preserving the customer's earlier
investment in legacy equipment.
Distributed Architecture. The capacity of the viaIP400 is unmatched in
the industry. Because of its unique architecture, the viaIP system is not
limited to a single chassis. As a result, a single MCU (multiconferencing unit)
can support up to six gateway boards, achieving a capacity of up to 600 hundred
simultaneous calls on the same chassis and limitless calls on a stacked
multi-chassis system. Additionally, due to the system's IP architecture, the
entire infrastructure does not need to be mounted in a single integrated rack
but can be distributed throughout a network. By distributing intelligence
throughout the network, the enterprise benefits with increased redundancy,
network traffic optimization, resource management, and high scalability.
Full Protocol Support. In addition to supporting both ISDN and H.323,
our solution also supports SIP and 3G-324M - two emerging protocols for desktop
and mobile communication.
Specialized Network Architecture Provides Unparalleled Redundancy.
RADVISION has taken advantage of advanced chipsets to put an entire voice and
video processing matrix, with multiple chips, on a single board. Each board
supports a portion of the total calls. The boards are wired in parallel over a
shared backplane. In the event of a board failure, the system would
6
shift ongoing calls to another board, thereby reducing the overall capacity of
the device but not dropping any calls.
Advanced Chips Provide Superior Performance and Functionality at a Lower
Cost. As an IP-centric platform with ISDN interworking, the RADVISION solution
is able to take advantage of the advances in integrated IP multifunction chip
technology. The system's on-board CPU is a PPC 400Mhz. We also use Texas
Instrument's revolutionary C6x programmable 100Mhz chipset for call
functionality.
IP Protocol Expertise. RADVISION is a leader in developing and
delivering advanced voice and video protocols over IP networks, primarily H.323
and SIP. As a result, our solutions support the most recent versions of each of
the signal protocols with the associated features they enable. Also, as most IP
videoconferencing endpoints in the market use RADVISION protocol stacks, our
solutions are completely interoperable with virtually every standards-based end
point on the market today.
Specific Breakdown of Features and Functionality
o Greater port density for IP video and voice calls - The RADVISION
platform supports 48 IP video calls at 384Kbps and 150 voice calls on
a single MCU card.
o Powerful Price/Performance - RADVISION doubled the port capacity of
768 Kbps calls in its MCU without any associated increase in product
list price. The new list price for a 768 Kbps call now starts at
$1,354 per port - a new benchmark in the industry.
o Number of conferences - A conference with RADVISION is a logic entity.
As such, there can be as many conferences as the number of calls to
the MCU.
o Multiple layouts - RADVISION supports a maximum of 23 layouts.
o In addition to ISDN (H.320) and IP (H.323, SIP), RADVISION's platform
also supports a wide variety of additional voice and video protocols,
including MEGACO and 3G-324M (for 3G wireless videoconferencing).
Visual Communication Market Trends
Evolution in the Way People Communicate. With the need for greater
efficiency and the importance of accurate communication, companies are turning
to new ways of communicating to enable remote parties to interact as if they
were in the same room. Conference calls and e-mail usage have increased
dramatically and Instant Messaging (IM) is being adopted increasingly in the
enterprise and home. This trend to new forms of communication has also sparked
enterprises to explore multimedia applications that provide advanced voice,
video and data experiences to maximize information flow, whether in a group
meeting or person to person.
Major Vendors Providing Video Telephony and Desktop Multimedia
Communications. 2003 saw the entry of Microsoft into the desktop multimedia
communications space with the
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launch of its Live Communications server and Windows Messenger. It also saw
Cisco's acquisition of Latitude and its flagship product MeetingPlace. Both of
these architectures are for personal (desktop) multimedia conferencing and
communications. RADVISION - due to its unique IP-based architecture and support
of standards such as SIP - is in a strong position to provide complementary
solutions and/or capitalize on the strong marketing and solution trends that
these two large companies, as well as others in the industry, including Nortel
with its own desktop solution, are offering to the IT manager and CEO/CIO/CTO.
The Spread of Video Telephony Beyond the Enterprise and into the Home
and on the Road. End users are beginning to use multimedia applications for
their communication not only in the enterprise through meeting rooms and
desktops, but also at home and on the road. RADVISION is experiencing this trend
and is realizing sales from service providers as they are beginning to use our
technology to deliver video telephony services to residential homes as just
another broadband application like Internet access and video-on-demand.
Additionally, 3G wireless providers are increasingly looking to deliver
real-time multimedia content to their mobile subscribers. RADVISION is well
suited to play a role in this market with its 3G-324M architecture and
multimedia services support.
The Evolution from ISDN to IP. Traditional (legacy) videoconferencing
systems are ISDN-based. This means expensive technology, a separate high-speed
line into the office for video only, and a separation between video running over
ISDN and data running over IP. However, IP-based videoconferencing recently has
been gaining greater acceptance. As companies put voice over their IP networks
(VoIP), they are also beginning to put video over their IP networks. RADVISION
is the pioneer in videoconferencing over IP. Because its technology is sited in
the core of the IP network, RADVISION's solutions enable network managers to
leverage their installed high speed data networks, merge video with voice and
data applications (running over the same IP connection) and centrally manage a
host of video end points, from meeting room to desktop to PC based systems, and
eventually to wireless video phones.
Technology Business Unit
RADVISION's TBU provides standards-based toolkits and testing systems
for the development of real-time voice, video and data communication solutions
over packet networks and 3G networks.
TBU Products
As a driving force behind evolving technologies of real-time IP
communication, RADVISION is in the advantageous position of offering one of the
most complete sets of Ensemble Development toolkits. RADVISION sells the core
enabling technology for real-time IP and 3G-based communication in the form of
software development kits. Communication equipment providers and developers
seeking to create and market industry standard compliant IP telephony and
multimedia products, systems and applications need core IP communication
protocol software to develop their IP-centric solutions. The same holds true for
developers of 3G-based multimedia solutions. Rather than dedicate in-house
resources to developing this core technology, these providers seek to build upon
RADVISION's proven enabling technologies.
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RADVISION toolkits enable customers to focus on their core competencies and
dramatically reduce the time to market of industry standard compliant IP
communication products, systems and applications.
RADVISION SIP Development Toolkit
SIP is a relatively new signaling protocol for initiating, managing and
terminating voice and video sessions across packet networks. SIP was designed,
from conception, for building high performance user agents. The "SIP toolkit"
enables the development of products that require full user/agent functionality.
The SIP Toolkit is designed to provide high scalability and extensibility for
both small and large-scale projects. It enables the implementation of all types
of feature rich SIP entities such as application servers, softswitches, IP-PBXs,
gateways and conferencing bridges. RADVISION has developed a SIP Server toolkit
to target the specific needs of customers developing infra-structure devices
based on the SIP protocol.
RADVISION H.323 Development Toolkit
H.323 is currently the most widely deployed standard for real-time IP
communication. All components of an H.323-compliant network, including
terminals, gateways, gatekeepers and conferencing bridges, use the H.323
protocol to communicate. RADVISION's H.323 software development kits provide
developers with the core software building blocks needed to develop
H.323-compliant products, systems and applications. The RADVISION H.323 software
development kit is an integrated set of software programs that execute the H.323
protocol and perform the functions necessary to establish and maintain real-time
voice, video and data communication over packet-based networks. The RADVISION
H.323 software development kits can be used to develop a broad spectrum of
products, including gateways, gatekeepers, conferencing bridges, IP telephones
and other H.323-compliant products.
RADVISION MGCP Development Toolkit
Media gateway control protocol, commonly referred to as MGCP, provides
functions that complement H.323 and has been developed for large packet networks
operated by telecommunication carriers and service providers that require
gateways that can support a high number of calls. MGCP is the protocol by which
a centralized gateway controller communicates with and controls the numerous
gateways throughout a packet network and manages the network traffic through
those gateways. MGCP has been adopted by large telecommunication companies and
Internet service providers as well as by cable television companies building IP
communication solutions over their networks. The RADVISION MGCP software
development kit is used to build MGCP compliant media gateways controllers and
media gateways.
RADVISION MEGACO Development Toolkit
MEGACO/H.248 is the official industry standard media gateway control
protocol for large-scale IP-centric communication networks. Like MGCP, it is an
internal protocol used between "intelligent" centralized gateway controllers and
numerous "dumb" media gateways that handle voice and video media streams. The
standard is the result of a unique collaborative effort between the IETF and ITU
standards organizations. Derived from MGCP, MEGACO/H.248 offers several key
enhancements including support for multimedia and conferencing calls,
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improved handling of protocol messages and a formal process for creating
extensions to support advanced functionality. RADVISION's MEGACO/H.248 Toolkit
includes a unique Media Device Manager to greatly simplify application
development and reduce development time by eliminating the need for developers
to write code for interpreting MEGACO/H.248 messages.
3G-324M Developer Toolkit
There is a newly approved standard, called 3G-324M, which supports the
real-time streaming of multimedia broadband wireless communication over 3G by
routing traffic over the circuit switched network. Because it is
circuit-switched based, the standard is well suited for streaming real-time
multimedia. 3G-324M enables the development, deployment and support of a wide
variety of delay-sensitive applications immediately. These include multimedia
conferencing with other 3G mobile end points and wire lined H.323 or SIP
terminals, video streaming, cell phone TV, video-on-demand (news, sports, etc.),
and multimedia, multi-participant gaming, to name a few. RADVISION was one of
the first companies to introduce a toolkit for the development of 3G-324M-based
products.
IP Phone Toolkit
RADVISION recently introduced a product for the manufacture of IP
Phones. The toolkit bundles TBU toolkits along with call control and endpoint
management software to provide an IP Phone application for any IP protocol (such
as H.323 and SIP). RADVISION is working with key silicon manufacturers in the
industry, including Texas Instruments, to provide pre-integrated packages
including the IP Phone Toolkit running on the OEM's chipset platform.
RADVISION ProLab Test Manager
RADVISION's ProLab is designed for debugging and simulating numerous
testing scenarios. Based on RADVISION's award-winning SIP and H.323 Protocol
Toolkit, this testing tool simulates a full VoIP network with a professional
quality assurance laboratory, enabling developers or QA specialists to test SIP
and H.323 version compliance, version upgrade compliance, stress and load. The
ProLab(TM) Test Manager is a highly scalable tool designed to be aware of any
changes to the SIP and H.323 standards. It provides the:
o capability to run the same tests on the application each time the
underlying protocol version is upgraded;
o flexibility to mix and match scenarios to develop a broad range of
testing possibilities; and
o ability to define numerous scripts and scale up the test scenario by
linking them as the test plan progresses.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations for financial information relating to our TBU
business.
10
Professional Services
Responding to requests from customers for assistance in developing
specialized telecommunications products based on the RADVISION developer toolkit
and reference design solution RADVISION initiated its Professional Services
Division. This division offers a full range of consulting, engineering and
software development services to support our customers in bringing innovative
voice and video products to market on time using the RADVISION ENSEMBLE suite of
developer toolkits and RADVISION's protocol and development expertise. Our
Professional Services team handles the complete project life-cycle from design,
throughout the product development, and even on-site deployment.
TBU Product Benefits
Market Leading Technology for Standards - Based Real-time IP
Communication. We were one of the original five members of the ITU-T committee
responsible for defining the H.323 standard, which has been adopted worldwide
for real-time packet-based communication. We believe our technology is
recognized as the market-leading implementation of the H.323 industry standard
for real-time voice, video and data communication over packet networks. We also
believe that our technology is recognized as one of the market-leading
implementations of the Session Initiation Protocol, or SIP, and other protocols
such as MGCP and MEGACO/ H.248. We have been actively involved in the
development of protocols for real-time communication since the inception of the
industry in 1994 and believe that we were the first-to-market with enabling
products and technology for voice, video and data communication over IP
networks. We continue to be actively involved in the specification of evolving
IP communication protocols and offer a complete suite of IP communication
software toolkits to developers of IP-centric products, applications and
services. We believe that our technology has become the technology of choice
among developers of standards-compliant IP communication systems. Because we
believe we were first to market and have achieved broad market penetration, our
customers benefit from our ability to develop and provide them market-tested,
proven products and technology. Using our products and technology, our customers
can develop unique capabilities with increased functionality that will
differentiate their IP communication solutions in the market. We believe that
the accumulated knowledge that we have gained participating in the development
of industry standards provides us with a competitive advantage, and positions us
to be among the first to market products and technology based on the latest
technological advances.
Interoperability. We provide our customers with products and technology
that are interoperable across a broad range of IP communication systems. Our
products and technology have been integrated into IP communication systems
developed by hundreds of communication equipment providers. Because our products
and technology are broadly deployed across various segments of the IP
communication industry, we believe that the interoperability of our products and
technology with products from different vendors is virtually assured. We believe
that our long-standing involvement in the definition of standards and
accumulated experience with product development across our broad customer base
provides us with a competitive advantage in addressing interoperability needs.
We continue to participate actively in defining industry standards by working
closely with industry consortia on a broad spectrum of IP communication
11
protocols to ensure continued interoperability of our products and technology
across multiple protocols.
Real-time Voice, Video and Data Communication Functionality. We are one
of the few companies that offer IP communication products which support both
voice-only, as well as combined voice, video and data communication. We believe
that this dual functionality is attractive to enterprises and service providers
that seek a flexible IP communication solution, which can provide enhanced
multimedia functionality in addition to IP telephony capabilities. We believe
our products enable developers of IP communication solutions to offer features
and functions generally unavailable in competitive solutions.
Improved Time to Market. Our customers rely on our accumulated expertise
with communication standards and core technology to significantly reduce their
development cycle and improve time to market. Communication equipment providers
seeking to market standards-compliant systems for real-time voice and video
communication over packet and 3G networks require standards-compliant building
blocks to develop their products. Implementing standards as deployable products
and technology is a complex task that requires significant technical knowledge
and expertise as well as substantial investments of time and resources. Our
products and technology enable our customers to shorten their own development
time by integrating our proven enabling products and technology into their
solutions. Rather than dedicate in-house resources to implementing industry
standards, these developers can use our products and technology and focus their
core competencies on building enhanced systems, products and applications.
Broad Range of Product Environments. Our products and technology provide
our customers with flexibility to design individual products and applications or
complete systems. Our customers can build a complete network solution for
real-time IP communication using our full suite of products or integrate
RADVISION products with their own products or other vendor products into their
real-time IP communication solution. Similarly, our technology has been designed
to enable the development of a broad range of products and applications, from
those that can service single users, including hand held devices and residential
IP phones, to multi-user products, like highly complex, powerful carrier class
gateways. Taken together, our products and technology provide all of the key
network components necessary to build a real-time IP communication solutions.
Industry Trends That Benefit RADVISION's Developer Toolkits:
Growth in Communication
In the 1990's communication networks experienced dramatic growth in
traffic. After a decline in growth in the last three years due to what we
perceive as an industry trend, we believe this growth will resume within a few
years due to a number of factors, including:
o an increasing need for enterprises to expand their networks to enable
them to send, access and receive information quickly, economically and
globally;
12
o an increasing use of the Internet and other packet networks for
communicating and engaging in commercial transactions;
o an increase in available bandwidth at declining prices; and
o the introduction of new voice, video and data communication services
and applications.
Limitations of Traditional Networks
Traditionally, circuit-switched networks have been the principal medium
for the transmission of communication. Circuit-switched technology dedicates a
circuit with a fixed amount of bandwidth for the duration of the connection,
regardless of a user's actual bandwidth usage. The growth in data communication
traffic, particularly the growth in the number of Internet users, has placed
significant strains on the capacity of traditional circuit-switched networks.
Circuit-switched networks were initially deployed to handle only voice
communication. These networks were not designed to handle data efficiently and
cannot scale cost-effectively to accommodate the growth in data traffic.
Moreover, circuit-switched networks were built based on proprietary, complex
technologies, which have historically limited the entrance of new competitors
and hindered the development and introduction of new services.
Advantages of Packet-based Networks
While circuit-switched networks were principally designed to handle
analog voice traffic, packet-based networks were principally designed for
transmitting digital information. Packet-based networks, including IP networks,
transmit voice, video and data information in the form of small digital packages
called packets. Voice, video and data packets are sent over a single network
simultaneously and reassembled at the destination. Packet switching enables more
efficient utilization of available network bandwidth than circuit-switching,
allowing more calls to travel through a packet network at the same time.
Moreover, packet networks allow for the cost-efficient expansion of capacity as
communication traffic increases. In addition, packet networks are built using
open standards, like IP, which promote competition by allowing different vendors
to build products and applications that can interoperate with one another. By
using packet technologies based on open standards, new services can be deployed
rapidly and economically.
The Need for Products that Deliver Industry Standards for Real-time IP
Communication
Originally, enterprises and communication service providers deployed
packet networks primarily for handling data traffic and not for real-time IP
communication. Technical barriers initially hampered the use of packet networks
for real-time communication. For example, packet networks were not designed to
guarantee the sequential delivery of packets and packets could be lost. In
addition, the time of delivery of packets was dependent upon the amount of
packet traffic being transmitted over the network. For real-time communication,
it is critical that the packets associated with a specific voice or video
communication be transmitted in the correct sequence and in a timely manner.
Early attempts at real-time IP communication solved these technical problems by
using proprietary solutions developed by individual vendors. However,
proprietary
13
solutions from different vendors meant that different vendor products could not
interoperate with one another.
To enable the global deployment of real-time IP communication networks,
industry standards and protocols were developed to promote interoperability of
real-time communication over packet networks. H.323 is currently the most widely
deployed protocol for real-time IP communication. H.323 was developed by a team
of computing, telephony and networking experts under the auspices of the
International Telecommunication Union, or ITU-T, a United Nations organization,
with the goal of specifying a universal real-time standard that would ensure
interoperability of rich-media communication on packet-based networks. H.323
provides the technical framework for developing standards-compliant products and
systems for real-time voice and video communication over packet networks. All
components of an H.323 compliant network, including terminals, gateways,
gatekeepers and conferencing bridges, use the H.323 protocol to communicate.
Additionally, many companies are beginning to develop SIP-based
products. RADVISION is one of the leading vendors in this space, providing
solutions for the development of SIP phones and devices, SIP servers and
registrars, IP-PBX's and a wide variety of other SIP-based communication
devices.
Our leadership position stems from the pioneering work we began in 1993.
We were the first to develop and demonstrate commercially viable technology for
establishing real-time voice, video, and data on IP networks. Since our
inception, we have been helping to develop the industry standards that are
driving the emergence and growth of the use of packet networks for real-time
communication. RADVISION was an original member of the ITU (International
Telecommunication Union) team that defined the H.323 standard, and we continue
to work closely with the ITU, the IETF, IMTC, and other industry consortia to
define a broad spectrum of IP telephony protocols for voice and video
communication including, Session Initiation Protocol (SIP), Media Gateway
Control Protocol (MGCP) and MEGACO/H.248.
Our protocol toolkits provide the underpinning technology required for
the rapid development of next generation products and applications for real-time
VoIP. Industry giants and emerging technology companies use our family of IP
communication protocol toolkits to reduce their time to market for developing
interoperable, standards-compliant V2oIP products, applications and services.
Today you will find RADVISION protocols implemented in a wide range of
environments from chipsets to simple user devices like IP phones and video
systems through carrier class network devices like gateways, switches and
softswitches.
Growth in Real-time Voice and Video IP Communication
Due to the inherent benefits of packet networks and the advent of new
technologies and standards that have enabled real-time communication over these
networks, the use of packet networks for real-time voice, video and data
communication is expected to grow dramatically. This anticipated growth in
real-time IP communication is expected to be driven primarily by enterprises and
communication service providers migrating to packet networks. As enterprises
move from centralized organizations to distributed networks of employees,
customers, suppliers and business partners, they require more effective
communication capabilities to support their
14
operations and remain competitive in a global and rapidly changing market.
Packet networks are well suited for enterprises because they provide enterprises
with the following advantages:
o cost-effective increases in capacity to meet increasing communication
traffic demands;
o support for new communication applications, like video conferencing
and data collaboration, for improved workforce productivity;
o interoperability with different network configurations of their
customers, suppliers and partners; and
o cost savings associated with simplified network management resulting
from creating a single network that handles all communication, rather
than having to maintain separate telephone and computer networks.
Communication service providers have also begun to deploy packet
networks in an effort to compete more effectively in a deregulated market.
Global deregulation and rapid technological advances have resulted in the
emergence of many new communication service providers, increased competition
among traditional telecommunication carriers, lower prices, innovative new
product and service offerings and accelerated customer turnover. To remain
competitive, communication service providers must be able to develop and
introduce new services to differentiate themselves in the market and attract and
maintain customers. Packet networks are well suited to accomplish these
objectives because they enable the rapid deployment of new and differentiated
solutions. In addition, packet-based technology allows new competitors to enter
the market quickly without substantial investment in infrastructure.
Broadband Wireless
There has been a tremendous rush to acquire and roll out 3G broadband
wireless services in key markets. While these efforts have slowed significantly
in North America, Asia has already rolled out its first WCDMA network and Europe
is close behind.
Both 3G standards bodies, 3GPP and 3GPP2, envision 3G as running
entirely over an IP-based communication network (the Internet). However, the
prevailing business environment has pushed this vision out by quite a few years.
The current telecom downturn may further extend the length of time until 3G is
entirely IP-based.
The main problem is that today's IP network (the Internet) is not
sufficiently robust for delay sensitive applications and, in fact, will not be
so until service providers move to IPv6 and SIP-based IP communication. IP, with
its variant transmission delays (many hops routing and congestion effects) and
packet overheads, is ill equipped at this time to provide high quality, real
time multimedia delivery over 3G (WCDMA and CDMA2000) networks.
While the vision of a true IP-based 3G network has been delayed, the
promise of a feature-rich, multimedia wireless experience has not. This is due
to the emergence of a standard, called 3G-324M, which addresses and supports the
real-time streaming of multimedia broadband wireless communication by routing
traffic over the circuit switched network. Being circuit-switched based, the
standard has all the hallmarks of a protocol ideal for streaming real-time
15
multimedia, including a fixed delay, low overhead of CODECS, and no IP/UDP/RTP
header overheads.
3G-324M, based on ITU H.324M and specified in detail by 3GPP (3GPP TS
26.112 and 3GPP TS 26.111 Working Groups), enables the development, deployment
and support of a wide variety of delay-sensitive applications immediately.
Enabled applications include multimedia conferencing with other 3G mobile end
points, and wire lined H.323 or SIP terminals, video streaming, cell phone TV,
video-on-demand (news, sports, etc.) and multimedia, multi-participant gaming.
RADVISION has taken a pioneering role in providing 3G-324 developer
toolkits that enable equipment developers to develop products, ranging from 3G
handsets to gateways and media servers, that will deliver real time multimedia
services over 3G.
Products and Technology Under Development
We intend to capitalize upon our technological leadership in real-time
IP communication and visual communication network appliance and functionality to
develop new products and technology that meet the evolving needs of the IP, 3G,
and visual communication market. Our future product and technology offerings are
expected to include platforms and tools needed for creating value-added
IP-centric enhanced services.
Customers
We sell our NBU products to OEMs, systems integrators and value added
resellers, or VARs. Our OEM customers purchase our products to integrate with
products that they developed in-house to build complete IP communication
solutions. Our systems integrator customers either purchase our full suite of
products or integrate our individual products with products of other
manufacturers to build complete IP communication solutions. Our VAR customers
purchase our products to resell to end-users as separate units, or as part of a
family of related product offerings, either under our RADVISION label or under
their private label.
We sell our TBU products in the form of software development kits
directly to developers of IP communication products, systems and applications
for developing their own IP communication solutions based on our core enabling
technology.
The following is a representative list of our customers who purchased
more than $250,000 of our products or technology during the year 2003:
16
Networking Products
ADL NTT - ME Corp.
Aethera Ltd. Macnica
Alcatel Ltd. Orient
Broadreach ReView Video
Cisco Systems Shanghai Foreign
Computer Assets Shanghai New Long
Comverse Ltd. Shanghai Zijiang
Control Tech T2 Supply
Ericsson Target Sales
GBH Telesat
H.S. Digital Teletron
HP Tandberg
IT Telecom VTEL Inc.
Kasturi VCON Ltd.
MVC Mobile Video Wire One
Technology Products
Cisco Systems NTT - ME Corp
E-soft Pannaway Tech
Iwatsu Nortel Siemens Ltd.
Nortel
Sales and Marketing
Sales organization. We market and sell our products through multiple
channels in North and South America, Europe, the Middle East and the Far East.
Our networking products are sold to end-users principally through indirect
channels by OEMs, system integrators and value added resellers. We market and
sell our technology products, primarily in the form of software development
kits, directly to developers of IP and 3G communication products and
applications. In several countries in the Far East we sell our software
development kits indirectly through local sales representatives.
We currently have sales offices in the United States in New Jersey,
California, Maryland and Texas. We also have sales offices in Tel Aviv, Israel,
and marketing or representative/liaison offices in Hong Kong, China, the United
Kingdom, Brazil, Japan and India. The geographic breakdown of our total sales
for the year ended December 31, 2003 was 47.6% in North America, 27.7% in Europe
and the Middle East and 24.7% in the Far East.
We have dedicated sales teams to support our large strategic accounts as
well as to identify potential strategic customers who would deploy our products
on large scales and generate significant revenues for us.
Marketing organization. Our marketing organization develops strategies
and implements programs to support the sale of our products and technology and
to sustain and enhance our market position as an industry leader. Our current
marketing efforts include various sales and channel support programs designed to
drive sales, and marketing communication programs
17
designed to increase industry visibility, including press/analyst tours, trade
shows and events, speaking engagements and ongoing interaction with analysts and
the media as well as targeted marketing programs. Additional programs include
technical seminars where customers and other industry participants are educated
in real-time IP communication technology and the benefits of our products and
technology. We also view our web site as an important marketing tool for lead
generation, customer relations and to support our market position as the
communication experts through quality content including providing information
related to issues relevant to the communication industry, as well as important
product and market trends.
To reinforce and further strengthen our market position as a technology
leader in the field of real-time IP, 3G and visual communication, we actively
participate in key industry consortia and standards bodies. We are also active
in defining and reviewing evolving IP communication standards that are being
developed by international standards bodies including:
o the ITU-T, which has published the H.323 and MEGACO standards;
o the Internet Engineering Task Force, or IETF, which has published the
SIP and MEGACO standards;
o CableLabs, an organization of cable operators, which is currently
working on defining the MGCP standard;
o IMTC, a global organization to promote interoperable multimedia
communication solutions based on international standards; and
o We regularly participate in IMTC-sponsored InterOP events, a
vendor-neutral forum where IMTC members test the interoperability of
their products.
Customer Care and Support
Our ability to provide our customers with responsive and qualified
customer care and support services globally is essential to attract and retain
customers, build brand loyalty and maintain our leadership position in the
market. We believe our customer care and support organizational structure
enables us to provide superior technical support and customer service on a cost-
and time-efficient basis.
We provide global customer care and support for our products and
technology. Our customer care and technical support teams are located in Tel
Aviv, Israel, Glen Rock, New Jersey, Sunnyvale, California, Hong Kong and China
and recently went to a 24x7x365 support timeline to better serve our networking
customers who desire the expanded service. We assist our networking customers
with the initial installation, set-up and training. In addition, our technical
support team trains and certifies our networking customers to provide local
support in each of the geographical areas in which our products are sold. In
2003, we developed and rolled out a customer support model where service
contracts are mandatory for each new customer.
In addition, customers who purchase our TBU software development kits
generally request that we provide them with ongoing engineering and technical
support services to
18
integrate our technology into their products, although these services are not
essential for the use of our software development kits. Our standard software
development kit contract provides for one year of support services, renewable
annually at the customer's option. Customers who have contracted for support
services receive all relevant software updates and enhancements as well as
access to our customer care and technical support teams.
Additionally, in 2003, we launched our Professional Services Division,
which provides development expertise to our TBU customers that might require not
only our developer solutions/toolkits but also our deep protocol experience and
development skill. In this case we work hand-in-hand with the customer
throughout the entire process, providing a full range of consulting, engineering
and software development services to support our customers in bringing
innovative voice and video products to market on time using the RADVISION
Ensemble suite of developer toolkits and RADVISION's protocol and development
expertise. The Professional Services team handles the complete project
life-cycle from design, throughout the product development, and even on-site
deployment
Intellectual Property
We rely on copyright, trademark and trade secret laws, confidentiality
agreements and other contractual arrangements with our customers, third-party
distributors, employees and others to protect our intellectual property.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products and technology or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products and technology is difficult. In addition, the laws of some foreign
countries in which we currently or may in the future sell products do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around our intellectual property.
We rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. For example, we license T.120
data collaboration software from Data Connection Limited and voice compression
technology from Siemens. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
our products or will be required to reduce the functionality of our products
until equivalent technology can be identified, licensed or developed, and
integrated into our current products.
Research and Development
We place considerable emphasis on research and development to expand the
capabilities of our existing products and technology, to develop new products
and to improve our existing technologies and capabilities. We believe that our
future success will depend upon our ability to maintain our technological
leadership, to enhance our existing products and technology and to introduce on
a timely basis new commercially viable products and technology addressing the
needs of our customers. Our gross investment in research and development for the
years ended
19
December 31, 2001, 2002 and 2003 was $17.9 million, $15.3 million and $14.6
million, respectively. 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 seek to maintain close relationships with
our customers to identify market needs and to define appropriate product
specifications.
As of December 31, 2003, our research and development staff consisted of
approximately 114 employees. Our research and development activities are
conducted at our facilities in Tel Aviv, Israel. To introduce new, high quality
products, we deploy procedures for the design, development and quality assurance
of our new product developments. Our team is divided according to our existing
product lines. Each product line team is headed by a team leader and includes
software or hardware engineers and quality control technicians.
Competition
We compete in a new, rapidly evolving and highly competitive and
fragmented market. We expect competition to intensify in the future. We believe
that the main competitive factors in our market are time to market, product
quality, features, cost, technological performance, scalability, compliance with
industry standards and customer relationships.
The principal competitors in the market for our products and software
development kits currently include:
Networking Products Software development kits
-------------------------------------- -------------------------------
o DynamicSoft Inc.
o Polycom Networks, a division
of Polycom Inc., which was o Trillium Digital Systems,
formerly known as Accord Networks acquired by Continuous
Computing.
o Tandberg
o Hughes Software Systems
o CUseeMe Networks Inc. (formerly
known as White Pine Software Inc., o DCL
which merged with First Virtual
Communication) o Dylithium
In the 3G market: o In-house developers
o Erickson employed by manufacturers
o Dylithium of telecommunication
equipment and systems
Additional competitors may enter any of our markets at any time.
Both Vovida Networks (now part of Cisco Systems, Inc.) and OpenH323
offer H.323 source code for free. In addition, Vovida offers MGCP and SIP source
code for free. If our customers choose to use the free source code offered by
these organizations instead of
20
purchasing our technology, our revenues from the sale of our software
development kits will decline.
Manufacturing
Our manufacturing operations consist of materials planning and
procurement, out-sourcing of sub-assemblies, final assembly, product assurance
testing, quality control and packaging and shipping. We assemble our products in
a subcontractor's facilities in Israel and test our products at our facilities
in Tel Aviv, Israel. We test our products both during and after the assembly
process using internally developed product assurance testing procedures. We have
a flexible assembly process that enables us to configure our products at the
final assembly stage for customers who require that our products be modified to
bear their private label. This flexibility is designed to reduce our assembly
cycle time and reduce our need to maintain a large inventory of finished goods.
We use an enterprise resource planning, or ERP, system that we purchased from
BAAN Systems that we modified to our specific needs. This system allows us to
use just in time procurement and manufacturing procedures. We believe that the
efficiency of our assembly process to date is largely due to our product
architecture and our commitment to assembly process design. We manufacture our
software development kits on CD-ROMs and package and ship them accompanied by
relevant documentation.
As part of our commitment to quality, we have been certified as an ISO
9002 supplier. The ISO 9002 standard defines the procedures required for the
manufacture of products with predictable and stable performance and quality. We
are continuously trying to improve our quality based on the guidelines dictated
by the ISO 9002 standard.
Employees
As of December 31, 2003, we had 258 employees worldwide, of whom 114
were employed in research and development, 94 in sales and marketing, 30 in
management and administration and 20 in operations. We have standard employment
agreements with all of our employees located in Israel. Of our employees, 180
are based in Israel, 52 are based in the United States, 19 are based in Hong
Kong and China and 7 are based in the United Kingdom.
Our relationships with our employees in Israel are governed by Israeli
labor legislation and regulations, extension orders of the Israeli Ministry of
Labor and Welfare and personal employment agreements. Israeli labor laws and
regulations are applicable to all of our employees in Israel. The laws concern
various matters, including severance pay rights at termination, notice period
for termination, retirement or death, length of workday and workweek, minimum
wage, overtime payments and insurance for work-related accidents. We currently
fund our ongoing legal severance pay obligations by paying monthly premiums for
our employees' insurance policies.
In addition, Israeli law requires Israeli employees and employers to pay
specified sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Since January 1, 1995, such
amounts also include payments for national health insurance. The payments to the
National Insurance Institute that include health insurance fees are
approximately 14.5% of wages, of which the employee contributes approximately
66.0% and the
21
employer contributes approximately 34.0%. The majority of our permanent
employees are covered by life and pension insurance policies providing customary
benefits to employees, including retirement and severance benefits. We
contribute 13.3% to 15.8%, depending on the employee, of base wages to such
plans and the employee contributes 5.0%. RADVISION and its employees are not
parties to any collective bargaining agreements. However, certain 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 Manufacturers' Association of Israel, are
applicable to our employees by "extension orders" of the Israeli Ministry of
Labor and Welfare. These provisions principally concern periodic cost of living
adjustments, procedures for dismissing employees, travel allowances,
recuperation pay and other conditions of employment.
At the start of their employment, our employees in North America
generally sign offer letters specifying basic terms and conditions of employment
as well as non-disclosure agreements. At the start of their employment, our
employees in Israel generally sign written employment agreements that include
confidentiality and non-compete provisions.
22
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and
uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our ordinary shares. If any of the following risks
actually occurs, our business, prospects, financial condition and results of
operations could be harmed. In that case, the value of our ordinary shares could
decline, and you could lose all or part of your investment.
Risks Relating to Our Business
Until 2001, we had a history of losses and we cannot assure you that we will
continue to operate profitably in the future.
Although we operated profitably in 2003 we cannot assure you that we
will continue to operate profitably in the future. We incurred significant
losses in every fiscal year from our inception until 1999, and we incurred
operating losses in 2000 and 2001. As of December 31, 2003, our accumulated
deficit was $6.5 million.
Our quarterly financial performance is likely to vary significantly in the
future. Our revenues and operating results in any quarter may not be indicative
of our future performance and it may be difficult for investors to evaluate our
prospects.
Our quarterly revenues and operating results have varied significantly
in the past and are likely to continue to vary significantly in the future.
Fluctuations in our quarterly financial performance may result from the fact
that we may receive a small number of relatively large orders in any given
quarter. Because these orders generate disproportionately large revenues, our
revenues and the rate of growth of our revenues for that quarter may reach
levels that may not be sustained in subsequent quarters. In addition, some of
our products have lengthy sales cycles. For example, it typically takes from
three to twelve months after we first begin discussions with a prospective
customer before we receive an order from that customer. We also have a limited
order backlog, which makes revenues in any quarter substantially dependent upon
orders we deliver in that quarter. Because of these factors, our revenues and
operating results in any quarter may not meet market expectations or be
indicative of future performance and it may be difficult for investors to
evaluate our prospects.
Unless our revenues grow in excess of our increasing expenses, we will not be
profitable.
We expect that our operating expenses will increase significantly in the
future, both to finance the planned expansion of our sales and marketing and
research and development activities and to fund the anticipated growth in our
revenues. However, our revenues may not grow apace or even continue at their
current level. If our revenues do not increase as anticipated or if expenses
increase at a greater pace than our revenues, we will not be profitable. Even if
we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
23
If the use of packet-based networks as a medium for real-time voice, video and
data communication does not continue to grow, the demand for our products and
technology will slow and our revenues will decline.
Our future success depends on the growth in the use of packet-based
networks, including the Internet and other IP networks, as a medium for
real-time voice, video and data communication. If the use of packet-based
networks does not expand, the demand for our products and technology will slow
and our revenues will decline. Market acceptance of packet-based networks as a
viable alternative to circuit-switched networks for the transmission of
real-time voice and video communication is not proven and may be inhibited by
concerns about quality of service and potentially inadequate development of the
necessary infrastructure.
We must develop new products and technology and enhancements to existing
products and technology to remain competitive. If we fail to do so, we may lose
market share to our competitors and our revenues may decline.
The market for our products and technology is characterized by rapid
technological change, new and improved product introductions, changes in
customer requirements and evolving industry standards. Our future success will
depend to a substantial extent on our ability to:
o timely identify new market trends; and
o develop, introduce and support new and enhanced products and
technology on a successful and timely basis.
If we fail to develop and deploy new products and technology or product
and technology enhancements on a successful and timely basis, we may lose market
share to our competitors and our revenues may decline.
We are currently developing new products and technology and enhancements
to our existing products and technology. We may not be successful in developing
or introducing these or any other new products or technology to the market.
We have invested, and will continue to invest, in products and technology that
comply with those industry standards that we believe have been, or will be,
broadly adopted. If one or more alternative standards were to gain greater
acceptance than the standards that we believe have or will be broadly adopted,
sales of our products and technology might suffer.
Currently, we offer networking products that comply with the H.323
industry standard for real-time voice, video and data communication over packet
networks. During 2000, we expanded our enabling technology product family to
include additional key IP protocols. Our current suite of IP communication
protocol toolkits include H.323, SIP, MGCP, MEGACO and H.324M. We believe that
IP networks will be designed with components built around each of these
protocols. If these expectations ultimately prove to be incorrect, our
investments may be of little or no value.
24
We rely on a small number of marketing partners who distribute our products
either under our name or as private label products for a significant portion of
our business.
We rely in great measure on OEMs, systems integrators and value added
resellers, or VARs, to sell our products. Our OEM customers purchase our
products to integrate with products that they developed in-house to build
complete IP communication solutions. Our systems integrator customers either
purchase our full suite of products or integrate our individual products of
other manufacturers to build complete IP communication solutions. Our VAR
customers purchase our products to resell to end-users as separate units, or as
part of a family of related product offerings, either under our RADVISION label
or under their private label. If we are unable to maintain these marketing
partners or obtain new marketing partners, our future revenues and profitability
will be affected and we may lose market share.
Competition in the markets for our products and technology is intense. We may
not be able to compete effectively in these markets and we may lose market share
to our competitors.
The markets for our products and technology are highly competitive and
we expect competition to intensify in the future. We may not be able to compete
effectively in these markets and we may lose market share to our competitors.
The principal competitors in the market for our NBU products currently include
Polycom Inc., which acquired Accord Networks Inc., First Virtual Communication,
which merged with CUseeMe Networks Inc. (formerly known as White Pine Software
Inc.). The principal competitors in the market for our TBU products currently
include Hughes Software Systems, DynamicSoft, Dylithium, and in-house developers
employed by manufacturers of telecommunication equipment and systems. Additional
competitors may enter each of our markets at any time. Moreover, our customers
may seek to develop internally the products that we currently sell to them and
compete with us.
Major solutions providers who currently work with us might compete with us in
the future.
We currently provide our technology to major solutions providers
including Cisco, Siemens, Microsoft and Tanldberg. If these providers choose to
develop their own technologies, acquire technologies from our competitors, or
acquire such competitors, our financial condition and operating results could be
adversely impacted and we may face increased levels of competition from these
major companies.
Our software development kit revenues will decrease if our customers choose to
use source code that is available for free.
Both Vovida Networks, Inc. (part of Cisco Systems Inc.) and OpenH323
offer H.323 source code for free. In addition, Vovida offers MGCP and SIP source
code for free. If our customers choose to use the free source code offered by
these organizations instead of purchasing our technology, our revenues from the
sale of our software development kits will decline. Other companies, including
Microsoft, may offer similar development kits as part of their product
offerings.
25
Most of our competitors have greater resources than we do. This may limit our
ability to compete effectively with them and discourage customers from
purchasing our products and technology.
Most of our competitors have greater financial, personnel and other
resources than we do, which may limit our ability to compete effectively with
them. These competitors may be able to respond more quickly to new or emerging
technologies or changes in customer requirements. These competitors may also:
o benefit from greater economies of scale;
o offer more aggressive pricing; or
o devote greater resources to the promotion of their products.
Any of these advantages may discourage customers from purchasing our
products and technology. If we are unable to compete successfully against our
existing or potential competitors, our revenues and margins will decline.
Our agreements with our customers generally do not have minimum purchase
requirements. If our customers decrease or cease purchasing our products and
technology, our revenues will decline.
Our agreements with our customers generally do not have minimum purchase
requirements nor do they require our customers to purchase any products from us.
If any or all of our customers cease to purchase or reduce their purchases of
our products and technology at any time, our revenues will decline. We cannot
assure you that our customers will not choose to independently develop for
themselves, or purchase from others, products and technology similar to our
products and technology. Moreover, if our customers do not successfully market
and sell the systems and products into which they incorporate our products and
technology, the demand of these customers for our products and technology will
decline. Our customers' sales of systems and products containing our products
and technology may be adversely affected by circumstances over which we have no
control and over which our customers may have little, if any, control.
We are dependent upon a limited number of suppliers of key components. If these
suppliers delay or discontinue manufacture of these components, we may
experience delays in shipments, increased costs and cancellation of orders for
our products.
We currently obtain key components used in the manufacture of our
products from a single supplier or from a limited number of suppliers. We do not
have long-term supply contracts with our suppliers. Any delays in delivery of or
shortages in these components could interrupt and delay manufacturing of our
products and result in the cancellation of orders for our products. In addition,
these suppliers could discontinue the manufacture or supply of these components
at any time. We may not be able to identify and integrate alternative sources of
supply in a timely fashion or at all. Any transition to alternate suppliers may
result in delays in shipment and increased expenses and may limit our ability to
deliver products to our customers. Furthermore,
26
if we are unable to identify an alternative source of supply, we would have to
modify our products to use a substitute component, which may cause delays in
shipments, increased design and manufacturing costs and increased prices for our
products.
We intend to manufacture and maintain an inventory of customized products for
some customers who will have no obligation to purchase these products. If these
customers fail to purchase these products, our financial results may be harmed.
To satisfy the timing requirements of some of our larger customers, we
intend to manufacture and maintain an inventory of some of our products that we
will customize to the specifications of these customers. The size of this
inventory will be based upon the purchasing history and forecasts of these
customers, which we currently estimate to be approximately two months of sales
to these customers. These customers will have no obligation to purchase the
inventoried products at any time. If the customers for whom the inventoried
products are manufactured do not purchase them, we may be required to modify the
products for sale to others and we may be unable to find other purchasers. In
either case, the value of the products may be materially diminished which may
have a negative impact on our financial results.
Undetected errors may increase our costs and impair the market acceptance of our
products and technology.
Our products and technology have occasionally contained, and may in the
future contain, undetected errors when first introduced or when new versions are
released. Our customers integrate our products and technology into systems and
products that they develop themselves or acquire from other vendors. As a
result, when problems occur in equipment or a system into which our products or
technology have been incorporated, it may be difficult to identify the cause of
the problem. Regardless of the source of these errors, we must divert the
attention of our engineering personnel from our research and development efforts
to address the errors. We cannot assure you that we will not incur warranty or
repair costs, be subject to liability claims for damages related to product
errors or experience delays as a result of these errors in the future. Any
insurance policies that we may have, may not provide sufficient protection or
coverage should a claim be asserted. Moreover, the occurrence of errors, whether
caused by our products or technology or the products of another vendor, may
result in significant customer relations problems and injury to our reputation
and may impair the market acceptance of our products and technology.
We rely on third party technology licenses. If we are unable to continue to
license this technology on reasonable terms, we may face delays in releases of
our products and may be required to reduce the functionality of our products
derived from this technology.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
products to perform key functions. For example, we license T.120 data
collaboration software from Data Connection Limited and voice compression
technology from Siemens. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
our products or will be required to reduce the functionality of our products
until equivalent technology can be identified, licensed or developed, and
integrated into our current products.
27
Third parties may infringe upon or misappropriate our intellectual property,
which could impair our ability to compete effectively and negatively affect our
profitability.
Our success depends upon the protection of our technology, trade secrets
and trademarks. Our profitability could suffer if third parties infringe upon
our intellectual property rights or misappropriate our technology and other
assets or the intellectual property rights licensed from third parties. To
protect our rights to our intellectual property, we rely on a combination of
trade secret protection, trademark law, confidentiality agreements and other
contractual arrangements. We rely on third parties to protect their intellectual
property which is licensed to us, but we do not generally investigate to what
extent such intellectual property is protected. The protective steps we have
taken may be inadequate to deter infringement or misappropriation. We may be
unable to detect the unauthorized use of our intellectual property or take
appropriate steps to enforce our intellectual property rights. Policing
unauthorized use of our products and technology is difficult. In addition, the
laws of some foreign countries in which we currently or may in the future sell
our products do not protect our proprietary rights to as great an extent as do
the laws of the United States. Failure to adequately protect or to promptly
detect unauthorized use of our intellectual property could devalue our
proprietary content and impair our ability to compete effectively. Further,
defending our intellectual property rights could result in the expenditure of
significant financial and managerial resources, whether or not the defense is
successful.
Our products may infringe on the intellectual property rights of others, which
could increase our costs and negatively affect our profitability.
Third parties may assert against us infringement claims or claims that
we have infringed a patent, copyright, trademark or other proprietary right
belonging to them. For example, in 1998, Lucent alleged that some products
manufactured by us infringed specified Lucent patents. See "Item 3. Legal
Proceedings." Any infringement claim, even if not meritorious, could result in
the expenditure of significant financial and managerial resources and could
negatively affect our profitability.
We are dependent on our senior management. Any loss of the services of our
senior management could negatively affect our business.
Our future success depends to a large extent on the continued services
of our senior management and key personnel. We do not carry key-man life
insurance for any of our senior management. Any loss of the services of members
of our senior management or other key personnel could negatively affect our
business.
Our failure to retain and attract personnel could harm our business, operations
and product development efforts.
Our products require sophisticated research and development, marketing
and sales, and technical customer support. Our success depends on our ability to
attract, train and retain qualified research and development, marketing and
sales and technical customer support personnel. We intend to increase
substantially the number of our employees who perform these functions.
Competition for personnel in all of these areas is intense and we may not be
able to
28
hire sufficient personnel to achieve our goals or support the anticipated growth
in our business. The market for the highly-trained personnel we require is very
competitive, due to the limited number of people available with the necessary
technical skills and understanding of our products and technology. If we fail to
attract and retain qualified personnel, our business, operations and product
development efforts would suffer.
Our non-competition agreements with our employees may not be enforceable. If any
of these employees leaves us and joins a competitor, our competitor could
benefit from the expertise our former employee gained while working for us.
We currently have non-competition agreements with our key employees in
Israel. These agreements prohibit those employees, if they cease to work for us,
from directly competing with us or working for our competitors. Under current
U.S. and Israeli law, we may not be able to enforce these non-competition
agreements. If we are unable to enforce any of these agreements, our competitors
that employ our former employees could benefit from the expertise our former
employees gained while working for us. In addition, we do not have
non-competition agreements with our employees outside of Israel.
Government regulation could delay or prevent product offerings, resulting in
decreased revenues.
Our products are designed to operate with local telephone systems
throughout the world and therefore must comply with the regulations of the
Federal Communication Commission and other regulations affecting the
transmission of voice, video and data over telecommunication and other media.
Each time we introduce a new product, we are required to obtain regulatory
approval in the countries in which it is offered. In addition, we must
periodically obtain renewals of the regulatory approvals for the use of our
products in countries where we have already obtained approval. We cannot assure
you that regulatory approval for our current products will be renewed or that
regulatory approval for future products will be obtained. If we do not obtain
the necessary approvals and renewals, we may be required to delay the sales of
our products in those countries until approval for use is granted or renewed.
This could result in decreased revenues.
Risks Relating to Our Location in Israel
Conditions in Israel affect our operations and may limit our ability to produce
and sell our products, which could decrease our revenues.
We are incorporated under the laws of Israel, and most of our offices
and our production facilities are located in the State of Israel. As a result,
the political, economic and military conditions in Israel directly influence us.
Any major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could have a material
adverse effect on our business, financial condition and results of operations.
Since the establishment of the State of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries
in the region. While Israel has entered into peace agreements with both Egypt
and Jordan and several other countries have announced their intentions to
establish trade and other relations with Israel, Israel has not entered into any
29
additional peace agreements with such countries or with Syria or Lebanon. Peace
talks between Israel and the Palestinian Authority began in the early 1990s, but
broke down in mid-2000. Attacks on Israel by Palestinian terrorists, and
military responses by Israel, have accelerated considerably since late 2000. The
continued hostilities between the Palestinian community and Israel and the
failure to settle the conflict has had and continues to have a material adverse
effect on the Israeli economy and may have a material adverse effect on our
business and us. Further expansion of hostilities might require more widespread
military reserve service by some of our employees, which may have a material
adverse effect on our business. We cannot predict whether or when the peace
process will resume, whether a full resolution of these problems will be
achieved, the nature of any such resolution or the consequences that any of
these factors may have on us.
The economic conditions in Israel have not been stable in recent years.
As a result of political instability, the increased level of hostilities
with the Palestinian Authority and the world-wide economic crisis in the
high-tech and communication industries, the Israeli rate of economic growth
deteriorated in 2001 and 2002, the Israeli currency was devalued and the rate of
inflation increased. The Israeli Government has proposed certain budgetary cuts
and other changes. Although with the assistance of the U.S. Government economic
stability was reached in 2003 and the rate of inflation was negative for the
first time in 2003 since the establishment of the State, we cannot assure you
that the Israeli Government will be successful in its attempts to stabilize the
Israeli economy or to maintain Israel's current credit rating. Should Israel's
credit rating decline, the ability of the Israeli government to generate foreign
financial and economic assistance may be adversely affected. Economic decline as
well as price and exchange rate instability may have a material adverse effect
on us.
Some of our directors, officers and employees are obligated to perform annual
military reserve duty in Israel. We cannot assess the potential impact of these
obligations on our business.
Our directors, officers and employees who are male adult citizens and
permanent residents of Israel under the age of 48 are, unless exempt, are
obligated to perform annual military reserve duty and are subject to being
called to active duty at any time under emergency circumstances. We cannot
assess the full impact of these requirements on our workforce or business if
conditions should change, and we cannot predict the effect on our business in
the event of an expansion or reduction of these obligations.
Because most of our revenues are generated in U.S. dollars or are linked to
the U.S. dollar while a portion of our expenses are incurred in new Israeli
shekels, our results of operations would be adversely affected if inflation in
Israel is not offset on a timely basis by a devaluation of the new Israeli
shekel against the U.S. dollar.
Most of our revenues are in dollars or are linked to the dollar, while a
portion of our expenses, principally salaries and the related personnel
expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the
risk that the rate of inflation in Israel will exceed the rate of devaluation of
the NIS in relation to the dollar or that the timing of this devaluation lags
behind inflation in Israel. This would have the effect of increasing the dollar
cost of our
30
operations. In 1999 and 2000 while the rate of inflation was low, there was a
devaluation of the dollar against the NIS. In the years 2001 and 2002 the rate
of devaluation of the NIS against the dollar exceeded the rate of inflation. In
2003 there was a devaluation of the dollar against the NIS. We cannot predict
any future trends in the rate of inflation in Israel or the rate of devaluation
of the NIS against the dollar. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely affected.
The tax benefits that we currently receive from our approved enterprise programs
require us to satisfy specified conditions. If we fail to satisfy these
conditions, we may be required to pay additional taxes and would likely be
denied these benefits in the future.
The Investment Center of the Israeli Ministry of Industry and Trade has
granted approved enterprise status to several investment programs at our
manufacturing facility. The portion of our income derived from these approved
enterprise programs commencing when we begin to generate net income from these
programs will be exempt from tax for a period of two years and will be subject
to a reduced tax rate for an additional five to eight years, depending on the
percentage of our share capital held by non-Israelis. The benefits available to
an approved enterprise program are dependent upon the fulfillment of conditions
stipulated in applicable law and in the certificate of approval. If we fail to
comply with these conditions, in whole or in part, we may be required to pay
additional taxes during the period in which we would have benefited from the tax
exemption or reduced tax rates and would likely be denied these benefits in the
future.
It may be difficult to enforce a U.S. judgment against us and most of our
officers and directors or to assert U.S. securities laws claims in Israel or
serve process on most of our officers and directors.
We are incorporated in Israel. Many of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Therefore, it may be difficult for an investor, or any other person or
entity, to enforce a U.S. court judgment based upon the civil liability
provisions of the U.S. federal securities laws in an Israeli court against us or
any of those persons or to effect service of process upon these persons in the
United States. Additionally, it may be difficult for an investor, or any other
person or entity, to enforce civil liabilities under U.S. federal securities
laws in original actions instituted in Israel.
Risks Relating to Our Ordinary Shares
Holders of our ordinary shares who are United States residents face income tax
risks.
There is a risk that we will be classified as a passive foreign
investment company, or PFIC. Our treatment as a PFIC could result in a reduction
in the after-tax return to the holders of our ordinary shares and would likely
cause a reduction in the value of such shares. For U.S. Federal income tax
purposes, we will be classified as a PFIC for any taxable year in which either
(i) 75% or more of our gross income is passive income, or (ii) at least 50% of
the average value of all of our assets for the taxable year produce or are held
for the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the
31
excess of gains over losses from the disposition of assets that produce passive
income. If we were determined to be a PFIC for U.S. federal income tax purposes,
highly complex rules would apply to U.S. Holders owning ordinary shares.
Accordingly, you are urged to consult your tax advisors regarding the
application of such rules.
As a result of our substantial cash position, if the value of our stock
declines, there is a substantial risk that we will be classified as a PFIC under
the asset test described in the preceding paragraph. Based on an independent
third party opinion, we believe that we were not deemed to be classified as a
PFIC in 2002, and as a result of the increase in the value of our stock, we
believe that we were not deemed to be classified as a PFIC in 2003. We have,
however, no assurance that the U.S. Internal Revenue Services will accept this
determination and there can be no assurance that we will not be classified as a
PFIC in the future.
United States residents should carefully read "Item 10E. Additional
Information - Taxation, United States Federal Income Tax Consequences" for a
more complete discussion of the U.S. federal income tax risks related to owning
and disposing of our ordinary shares.
Our share price has been volatile in the past and may decline in the future.
Our ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o announcements of technological innovations or new products by us or
our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o changes in the status of our intellectual property rights;
o announcements by third parties of significant claims or proceedings
against us;
o additions or departures of key personnel;
o future sales of our ordinary shares; and
o stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a
32
recession or interest rate or currency rate fluctuations or political events or
hostilities in or surrounding Israel, could adversely affect the market price of
our ordinary shares.
In the past, securities class action litigation has been brought against
a company following periods of volatility in the market price of its securities.
We could potentially in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
Anti-takeover provisions could negatively impact our shareholders.
The new Israeli Companies Law provides that an acquisition of shares in
a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company. There
is an exception to this provision, if someone else is already a majority
shareholder of the company. Regulations under the Companies Law provide that the
Companies Law's tender offer rules do not apply to a company whose shares are
publicly traded outside of Israel, if pursuant to the applicable foreign
securities laws and stock exchange rules there is a restriction on the
acquisition of any level of control of the company, or if the acquisition of any
level of control of the company requires the purchaser to make a tender offer to
the public shareholders.
Finally, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his company shares for shares in a foreign
corporation to immediate taxation.
Item 2. Properties
Our headquarters and principal administrative, finance, sales and
marketing and promotion operations are located in approximately 60,079 square
feet of leased office space in Tel Aviv, Israel at an approximate rental cost of
$1,164,000 in 2003. The lease for our principal offices expires in June 2005. In
the United States, we lease approximately 10,380 square feet of office space in
Glen Rock, New Jersey expiring in July 2004 and approximately 3,156 square feet
in Sunnyvale, California expiring in April 2004. We are in the final process of
signing a lease expiring in September 2007 for a 11,605 square foot building in
Fairlawn, New Jersey at a total annual rental of $191,499. We also lease
approximately 2,651 square feet in Hong Kong expiring in May 2004 and
approximately 800 square feet in the United Kingdom expiring in October 2005.
The aggregate annual rent for our sales and service offices in the United
States, Hong Kong, China and the United Kingdom was approximately $450,000 in
2003.
Item 3. Legal Proceedings
In January 2001, we entered into an agreement with Zohar Zisapel
Properties Inc. and Yehuda Zisapel Properties Inc. (entities that are wholly
owned by Zohar Zisapel, our Chairman of the Board and a principal shareholder,
and Yehuda Zisapel, a principal shareholder and our former Chairman,
respectively) to lease approximately 24,000 feet square of office space in
33
Paramus, New Jersey for a period of 5 years, which space we subsequently
surrendered. The parties disagreed as to the extent of damages caused by this
action, if any. In December 2003, the parties proceeded to binding arbitration
before Judge Robert E. Tarleton (retired) in Hackensack, New Jersey. The claim
filed against us was in the range of $1,500,000 and appropriate provision was
taken for such amount. Judge Tarleton issued his final ruling on February 12,
2004 stating the amount owed to Zisapel Properties is $400,000. This ruling will
not have a negative impact on our financial condition or results of operations.
Other than the above, we are not involved in any legal proceedings that
are material to our business or financial condition. From time to time we
receive requests from third parties to determine if we need to take out a
license to certain technology for which such third party may hold a patent or
other intellectual property right. We check such requests in the ordinary course
of business.
In 1998, Lucent sent correspondence to our affiliate, RAD Data
Communication Ltd., alleging that some products manufactured by RAD and some of
its affiliates, including us, infringe upon specified Lucent patents and
offering to license these patents to RAD and its affiliates. In subsequent
correspondence, RAD requested that Lucent specifically substantiate each
allegation of infringement before RAD or any of its affiliates considers
entering into any licensing arrangements. RAD has recently received further
correspondence from Lucent in which Lucent has reiterated its claims. RAD does
not believe Lucent has substantiated its claims and has communicated this belief
to Lucent. RAD advises us that the alleged infringement claims are unresolved.
The elements of our products that Lucent has alleged infringe upon its
patents are contained within components which we obtain from a third party
manufacturer. We believe that the third party manufacturer has a license to use
these patents and that we may be entitled to the benefits of this license.
In addition, based on Lucent's fee and royalty schedule for licensing
the relevant patents, we believe that any licensing fee and royalty payments
that we may be required to pay for the right to use Lucent's patents would not
have a material impact on our earnings. As a result, we do not believe that
Lucent's allegations will have a material adverse effect upon us, our business,
financial condition or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 2003.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our ordinary shares have traded on the Nasdaq National Market under the
symbol RVSN since our initial public offering on March 14, 2000. Since October
20, 2002, our ordinary shares have also traded on the Tel Aviv Stock Exchange.
The following table sets forth, for the periods indicated, the high and
low sale prices of our ordinary shares as reported by the Nasdaq National Market
and the Tel Aviv Stock Exchange:
Nasdaq National Market Tel Aviv Stock Exchange
---------------------- -----------------------
High Low High Low
---- --- ---- ---
2002
- ----
First Quarter....... $7.90 $5.39 $ -- $ --
Second Quarter...... 6.80 4.40 -- --
Third Quarter....... 5.45 4.05 -- --
Fourth Quarter...... 6.71 4.48 5.95 4.70
2003
- ----
First Quarter....... $7.70 $5.50 $7.16 $5.66
Second Quarter...... 7.20 5.05 7.17 5.30
Third Quarter....... 9.00 6.50 8.99 6.81
Fourth Quarter...... 13.26 7.81 12.97 7.99
As of March 8, 2004 we had approximately 2,523 beneficial shareholders
including 50 holders of record.
We have never paid dividends on our ordinary shares since our inception
and we do not anticipate paying any dividends in the foreseeable future. If we
were able to distribute cash dividends out of income that had been exempt from
tax because of our investment program's Approved Enterprise status (for
description of such status please refer to the section entitled "Effective
Corporate Tax Rate" in "Item 7. Management's Division and Analysis of Financia