Alvarion 20-F 2012
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the transition period from __________ to __________
Commission file number 000-30628
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
21A HaBarzel Street, Tel Aviv 69710, Israel
(Address of principal executive offices)
Chief Executive Officer and President
21A HaBarzel Street, Tel Aviv 69710, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2011, there were 62,378,801 Ordinary Shares, NIS 0.01 par value per share, outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 in the Exchange Act. (Check one).
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
¨ Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Alvarion Ltd. (NASDAQ: ALVR), provides optimized wireless broadband solutions addressing the connectivity, coverage and capacity challenges of telecom operators, smart cities (a vertical segment which uses technology to enhance sustainability, citizen well-being and economic development through applications such as traffic monitoring, Internet access in public venues, utility metering etc.), security (such as police and other safety agencies), and enterprise customers. Our innovative solutions are based on multiple technologies across licensed and unlicensed spectrums.
This annual report on Form 20-F (this “Annual Report”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition and results of operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all or any of the risks discussed in “Item 3—Key Information—Risk Factors” and elsewhere in this Annual Report.
In some cases, you can identify forward-looking statements by terms such as "may", "might", "will", "should", "could", "would", "expect", "believe", "intend", "plan", "anticipate", "project", "estimate", "predict", "potential" or the negative of these terms, and similar expressions intended to identify forward-looking statements.
These statements reflect our current views with respect to future events, are based on current assumptions, expectations, estimates and projections, and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by applicable law, including the securities laws of the United States, we do not undertake any obligation nor intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
As used in this Annual Report, the terms "we", "us", "our", "our Company", and "Alvarion" mean Alvarion Ltd. and its subsidiaries, unless otherwise indicated. ALVARION, ALVARION & Design, BreezeCOM, BreezeMAX, BreezeACCESS, BreezeNET, BreezeLITE, WALKair, 4Motion, INTERWAVE, Wavion and Wavion & Device are registered trademarks or service marks of Alvarion in certain jurisdictions. All other trademarks and trade names appearing in this Annual Report are owned by their respective holders.
TABLE OF CONTENTS
The selected financial data, set forth in the table below, have been derived from our audited historical consolidated financial statements as of, and for each of the years ended, December 31, 2007, 2008, 2009, 2010 and 2011. The selected consolidated statement of operations data for the years ended December 31, 2009, 2010 and 2011, and the selected consolidated balance sheet data at December 31, 2010 and 2011, have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statement of operations data for the years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data at December 31, 2007, 2008 and 2009, have been derived from our previously published audited consolidated financial statements, which are not included in this Annual Report. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). You should read the selected financial data together with the section of this Annual Report entitled, “Item 5—Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included elsewhere in this Annual Report, and the selected financial data are qualified entirely by reference to such consolidated financial statements and related notes.
(*) Includes charges for stock-based compensation of approximately $7.4 million, $7.6 million, $4.2 million, $3.3 million and $3.2 million as a result of ASC 718 Compensation – “Stock Compensation” for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, respectively.
(**) For more details of sales please see our Financial Statements.
Our business, financial condition and results of operations could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition, and our share price may decline. We cannot assure you that we will successfully address any of these risks.
Risks Related to Our Business and Our Industry
We have incurred significant losses in the past and we may continue to incur losses in the future.
In 2011, our operating loss and net loss were approximately $(32.8) million and $(33.8) million, respectively. Our losses in 2011 resulted from other charges and expenses related to our acquisition of Wavion Inc., remaining effects of the global economic slowdown, the continued limited availability of credit in the global capital markets, the aggressive competition which we face (especially from Chinese vendors), the continued delay in new project launches and delays in allocating spectrum in several countries. Each of the above reasons led to a sequential decline in our gross margin during 2011 and may continue to adversely affect our business and operating results in the future.
In 2010 and 2009, our operating loss was approximately $(90.5) million and $(9.6) million, respectively, and our net loss was approximately $(98.5) million and $(7.2) million, respectively. In addition, we have incurred operating losses in each of our last five fiscal years, and net losses in four of our last five fiscal years (with the exception of 2007). We may continue to incur operating losses and net losses in the future. Further, in the event our recent restructuring plan, which we implemented in 2011 (as hereinafter described in Item 4 – Organizational Restructuring and New Strategic Initiatives through Acquisitions) does not reduce costs as expected, it may have an adverse effect on our business and our results of operations may continue to incur losses. Continuing losses could have a material adverse effect on our business, financial condition and results of operations, and on the value and market price of our ordinary shares. Continuing losses could have a material adverse effect on our business, financial condition and results of operations, and on the value and market price of our ordinary shares, and may require that we further restructure our operations.
Continued unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition.
The crisis in the financial and credit markets in the United States, Europe and Asia which began in 2008 and 2009 and which has continued through 2010 and 2011, led to a global economic slowdown, with the economies of the United States and Europe showing significant signs of weakness. If the economies in the countries in which we operate do not improve or weaken further, telecom carriers and our partners and other customers in such countries may further significantly reduce or postpone their technology spending as well as require aggressive vendor financing. This could result in continued reductions in sales, further decreases in our revenues, longer sales cycles, slower market acceptance of our products and increased price competition. Any of these events would likely harm our business, operating results and financial condition. If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets do not improve or weaken further, our business, operating results and financial condition may be materially adversely affected.
Adverse conditions in the telecommunications industry and in the telecommunications equipment market may decrease demand for our products and may harm our business, financial condition and results of operations.
Our systems are used by telecom carriers and service providers and within vertical markets, such as municipalities and utility companies. As a result of our customers’ continued tightened spending as well as the limited licenses and substantial capital requirements which limit growth into new markets, our revenues further declined in 2010 and 2011 and may continue to decline and our losses may increase in the future since we believe that the economic global situation in general, and in specific regions such as Europe, will continue to be affected by the slowdown. Adverse market conditions in the past years have also led our customers and potential customers to be conservative in their spending, and this could continue in the future. Due to these conditions, the markets in which we operate may not grow as we expect or may decrease. While our goal is to increase our sales by expanding the range of customers that we address, there can be no assurance that we will be successful. Moreover, the number of orders received by carriers and service providers who are our current and potential customers may decrease because of the limited number of licenses granted in each country and the substantial capital requirements involved in establishing networks as well as the fierce competition we face in our business. As a result, our revenues declined in 2010 and 2011 and our revenues may continue to decline and our losses may continue to increase.
New markets we attempt to penetrate may not become substantial commercial markets or technologies that we develop or have developed, may become superseded by other competing technologies. In addition, if we do not maintain or increase our market share of the wireless broadband equipment market, our business will suffer.
The wireless broadband market, both fixed and mobile, and other new markets we attempt to penetrate may not become substantial commercial markets or may not evolve in a manner that will enable our products to achieve market acceptance. If such markets do not evolve or develop or we do not maintain or increase our market share within our current markets, our revenues may continue to decrease. In addition, our Mobile WiMAX technology targets 4th generation cellular technologies ("4G") services and therefore competes with other technologies such as Long Term Evolution ("LTE"), which is becoming the 4G leading technology and the major competitor of WiMAX for wireless broadband markets. The market transition to TD-LTE technology and the perception that LTE will replace WiMAX Technology have resulted in a decline in demand for WiMax technology and equipment and have negatively impacted our sales and results of operations. WiMAX market acceptance has been hampered by competing technologies (such as LTE) and may be hampered by intellectual property rights disputes. In order to maintain or increase our market share in the markets in which we operate, we must:
Our efforts in these markets may not succeed.
Intense competition in the markets for our products may have an adverse effect on our sales and profitability.
Many companies compete with us in the wireless broadband equipment market in which we sell our products, particularly Chinese vendors. These vendors have substantially increased their market share in the past few years. We expect that competition from Chinese and other large vendors will increase in the future, including with respect to products that we currently offer and products that we intend to introduce in the future. As the market transitions toward standardization and LTE technology, competition becomes increasingly more challenging for us. In addition, some system integrators and other strategic partners to which we sell our wireless broadband products could develop the capability to manufacture systems similar to our wireless broadband products or choose to work exclusively with our competitors. We expect our competitors to continue improving the performance of their current products and to introduce new products or new technologies that may supplant or provide lower cost alternatives to our products or perform better than our products. We also face competition from large telecommunication equipment vendors, such as Huawei, Samsung, and ZTE Corporation, especially with respect to the wireless broadband products. Some customers may prefer to purchase products from these large vendors, as has occurred on a number of occasions.
Multiple companies with a range of diverse products and solutions compete with us in the license-exempt and vertical markets in which we sell our products. These competitors may have a vertical-focus or a multi-vertical focus. Many of these vendors have been able to grow their market share in the past few years in the territories in which we are active. We expect that competition from these vendors will increase, including with respect to products that we currently offer and products that we intend to introduce in the future. As the market transitions toward standardization and WiFi 802.11n technology, competition becomes increasingly challenging and makes room for entry level, low cost offerings by our competitors. We expect our competitors to continue improving the performance of their current products and to introduce new products or new technologies that may have better performance or supplant our products entirely. We may also face new competition from larger players in the telecom market and/ or indoor wireless vendors, such as Cisco, Samsung, and Aruba, especially with respect to the WiFi-based products. Our license-exempt and vertical market business may be affected by the dynamics of spectrum allocations. The allocation of alternative spectrum such as TV white space spectrum, 24GHz unlicensed band, and 60GHz unlicensed band may become a relevant alternative to the current spectrum upon which our product portfolio is based. Additional license based spectrum, such as the 700MHz public safety band, 6GHz, 70GHz, or LMDS spectrum may become a relevant alternative for our vertical market customers and as such impact our license-exempt and vertical market business.
We expect all of these competitors to continue improving their technologies and products, which may cause us to lose some of our customers or prevent us from entering into new markets. Some of our existing and potential competitors, including large competitors arising from the continued consolidation in the telecommunications equipment market as well as increased competition from Chinese vendors, have substantially greater resources, including financial, technological, manufacturing and marketing, and distribution capabilities, and enjoy greater market recognition than we do. Increased competition, direct and indirect, has resulted in, and is likely to continue to result in, reductions of average selling prices, shorter product life cycles due to our competitors' launch of innovative products in the market more frequently, reduced gross margins, longer sales cycles and potential loss of market share and, consequently, could adversely affect our sales and profitability.
We may not be able to differentiate our products from those of our competitors, successfully develop or introduce new products that are less costly, offer better performance than the products of our competitors, or offer our customers payment or other commercial terms as favorable as those offered by our competitors. In addition, we may not be able to offer our products as part of integrated systems or solutions or provide services to the same extent as our competitors. A failure to accomplish one or more of these objectives could materially adversely affect our sales and profitability, harming our financial condition and results of operations.
Technological changes may have an adverse effect on the market acceptance of our products and may adversely affect our results of operations.
The development of new or enhanced productsin vertical markets is a complex and uncertain process. For example, product development is multi-disciplinary, involving hardware design and development, software, integration, and intensive and complicated system design, and resulting in a long development cycle. We are engaged and will continue to be engaged in the development of various types of product lines having using technologies. We have experienced and may continue to experience design, development, manufacturing, marketing and other difficulties due to delays in our development or delays by third party vendors, and these delays have caused and could continue to cause difficulties or prevent our development, introduction or marketing of new products or product enhancements and subject us to intensified competition. Such difficulties could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products or our inability to timely introduce to the market our products, any of which may adversely affect our results of operations. Also, such delays could lead sales partners and distributors to turn to competing vendors. The launch and availability of certain of our new products has also been delayed, which may harm our competitiveness and our ability to penetrate, and market these products in, vertical markets in an efficient and timely manner.
In addition, market changes could render our products and technologies obsolete or subject them to intense competition by alternative products or technologies or by improvements in existing products or technologies. For example, the wireless broadband equipment market may stop growing as a result of the deployment of alternative technologies that are constantly improving, such as DSL, cable modem, fiber optic, coaxial cable, satellite systems, third or fourth generation cellular systems, or high speed packet access (“HSPA”) and LTE technologies. New or enhanced products developed by our competitors may be technologically superior to our products, may limit our target markets or may render our products obsolete, and consequently adversely affect our results of operations. New chips introduced may include built-in capabilities which are currently an Alvarion product differentiator, which would lower the barrier for competition.
The success of our technology depends on the following factors, among others:
We may experience difficulties or delays in the introduction of new or enhanced products, which could result in reduced sales or unexpected expenses.
The development of new or enhanced products in vertical markets is a complex and uncertain process. For example, product development is multi-disciplinary, involving hardware design and development, software, integration, and intensive and complicated system design, and resulting in a long development cycle. We are engaged and will continue to be engaged in the development of various types of product lines having using technologies. We have experienced and may continue to experience design, development, manufacturing, marketing and other difficulties due to delays in our development or delays by third party vendors, and these delays have caused and could continue to cause difficulties or prevent our development, introduction or marketing of new products or product enhancements and subject us to intensified competition. Such difficulties could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products or our inability to timely introduce to the market our products, any of which may adversely affect our results of operations. Also, such delays could lead sales partners and distributors to turn to competing vendors. The launch and availability of certain of our new products has also been delayed, which may harm our competitiveness and our ability to penetrate, and market these products in, vertical markets in an efficient and timely manner.
Businesses we recently acquired may not be successfully integrated with our operations and our technologies, which may harm our business and results of operations.
During the fourth quarter of 2011, we acquired Wavion Inc. ("Wavion>") in order to create new growth engines and penetrate into new market segments (the “Wavion Transaction>”). Wavion is a provider of carrier grade outdoor Wi-Fi solutions, offering a variety of different products for Wi-Fi access and 3rd Generation cellular technologies (“3G”) off-load applications. We also acquired the intellectual property of Clariton Ltd. (“Clariton>”) in the beginning of 2011 in order to penetrate the indoor wireless market using Clariton's Distributed Antenna System (DAS) technology and know-how (the “Clariton Transaction” and together with the Wavion Transaction, the “Acquisition Transactions>”). The process of integrating an acquired business may be prolonged due to unforeseen difficulties such as leveraging our sales forces to sell and distribute the Wavion products and enable full support as well as integrating all of the operations including the two R&D divisions into one integrated operation, and may require a disproportionate amount of our resources and management’s attention.
We cannot assure you that we will be able to successfully integrate the acquired businesses into our operations or expand into new markets, such as the Wi-Fi market or the market for cellular indoor coverage solutions, as a result of any acquisition. We also cannot assure that the Wi-Fi market will grow as we expect or that our market share of the Wi-Fi market will grow as expected.
Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected and may increase our costs of operations, which may be higher than expected. We also cannot assure you that we will succeed in retaining our employees or those of any acquired companies following any acquisition, including key employees in managerial positions. The occurrence of any of these events could harm our business, financial condition or results of operations and as a result may decrease our share price in the future.
We received a $30 million loan facility from Silicon Valley Bank ("SVB"). If we fail to comply with the terms of the loan agreement with SVB, our available cash and our business operations may be significantly harmed.
For the purpose of financing the acquisition of Wavion, we obtained a $ 30 million credit facility from SVB (the “Long Term Loan”). As part of the transaction, we pledged all of our assets under a floating charge, and created a fixed charge on our IP rights and receivables. The loan and security agreement with SVB contains various provisions related to compliance with financial covenants, restrictive covenants, including negative pledges, and other customary commitments, contained in facility agreements of this type.
As of April 1, 2012, the Company was in breach of certain financial covenants and on April 25, we reached a general agreement with SVB for the grant of a temporary forbearance of the breached covenants and a modification of the terms of the Long Term Loan, which amended terms include an increase in the interest rate applicable to the Long Term Loan and the repayment of approximately $7million of principal on the loan in addition to its normal loan payments by July 2012, after which the outstanding balance of the Long Term Loan is expected to be approximately $20 million. However, there is no assurance that we will not breach the terms of the Long Term Loan in the future or that we will remain in compliance with the amended terms. In addition, should we fail to comply with our obligations under the amended Long Term Loan, SVB may require immediate repayment of the Long Term Loan and realize on its security, which can significantly harm our available cash and our operations.
For more information please see "Item 10 C – Material Contracts" below.
We have engaged and may continue to engage in mergers and acquisitions which could harm our business, results of operations and financial condition, and dilute our shareholders’ equity.>
We have pursued and, subject to market conditions, may continue to pursue, growth opportunities through internal growth and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any prospective acquisitions will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Past and future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing, and could result, without limitation, in the following, any of which could seriously harm our results of operations or the price of our ordinary shares:
We have experienced in the past, and may experience in the future, quarterly and annual fluctuations in our results of operations which have caused, and may cause, volatility in the market price of our ordinary shares.
We have experienced, and may continue to experience, significant fluctuations in our quarterly and annual results of operations, in particular, in light of intense competition, especially from Chinese vendors as outlined earlier and hereinafter, the continuing effects of the global slowdown and the continued limited availability of credit in the global capital markets. Any fluctuations may cause our results of operations to decrease below the expectations of securities analysts and investors. This would likely affect the market price of our ordinary shares.
Our quarterly and annual results of operations may vary significantly in the future for a variety of reasons, many of which are outside of our control, including the following:
Our customers ordinarily require the delivery of products promptly after their orders are accepted. Historically, our business does not have a significant backlog of accepted orders. Consequently, revenues in any quarter depend primarily on orders that are received and accepted in that quarter. The deferral of the placing and acceptance of any large order from one quarter to another could materially and adversely affect our results of operations for the former quarter. Our revenue recognition is complex and dependent on various parameters and milestones. If revenues from our business in any quarter remain in the same level or decline in comparison to any previous quarter, our results of operations could be harmed.
In addition, our operating expenses may increase significantly. If revenues in any quarter do not increase correspondingly or at a higher rate, or if we do not reduce our expenses in a timely manner in response to lower level or declining revenues, our results of operations for that quarter would be materially adversely affected. Because of the variations that we have experienced in our quarterly results of operations, we do not believe quarter-to-quarter comparisons of our results of operations are necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance.
Our products have long and unpredictable sales cycles which could adversely impact our revenues and results of operations.
The sales cycle for most of our products encompasses significant technical evaluation and testing by each potential purchaser and a commitment of significant cash and other resources. The sales cycle can extend for more than one year and sometimes even two years from initial contact with a customer to receipt of a purchase order, and in certain instances may not even result in the receipt of an order. This time frame may be extended due to, among other reasons, a customer's desire to ensure that the systems work for a long period with increased number of subscribers’ coverage and capacity, a customer's need to obtain financing or other means of collateral to purchase systems incorporating our products, the regulatory authorization of competition in local services, delays in the licensing of spectrum for these services and other regulatory hurdles.
As a result of the length of these sales cycles, revenues from our products may fluctuate from quarter to quarter and fail to correspond with associated expenses, which are largely based on anticipated revenues. In addition, the delays inherent in the sales cycles of our products raise additional risks of customers canceling or changing their product plans. Our revenues will be adversely affected if a significant customer, or a significant potential customer, reduces, delays or cancels orders during the sales cycle or chooses not to deploy networks incorporating our products. Any such fluctuation in revenue or cancellation of orders may have an adverse effect on our business and may affect the market price of our ordinary shares. In addition, the global economic recession as well as the on-going European debt crisis may continue to have an adverse effect on the length and the success of our sales cycle.
Our business is dependent upon the success of our distributors, system integrators and other partners, who are under no obligation to purchase our products.
A portion of our revenues is derived from sales to our independent partners, such as distributors and system integrators. Our distributors resell our products to others, who further resell our products to end users. Changes in the distribution and sales channels of our products, a loss of a major distributor or a major distributor’s loss of a major end-user, or our inability to establish effective distribution and sales channels for new products may impact our ability to sell our products and result in a loss of revenues. Additionally, sales through our distributors and system integrator channels expose our business to a number of risks, each of which could result in a reduction in the sales of our products. For example, some of these distributors, system integrators and other partners may terminate their relationships with us, consolidate or face financial problems, as well as promote competing products or emphasize alternative technologies, which may turn them into our competitors rather than our partners, all of which may result in a decline in the purchase of our products.
We are dependent upon the acceptance of our products by the market through our partners' efforts in marketing and sales. In some cases, arrangements with our partners do not prevent them from selling competitive products and some of the arrangements do not contain minimum sales or marketing performance requirements. In addition, our efforts to increase sales may suffer from the lack of brand visibility resulting from the integration of these products into more comprehensive systems by distributors and system integrators. Changes in the financial condition, business or marketing strategies of our partners could have a material adverse effect on our results of operations. Any of these changes could occur suddenly and rapidly.
If our revenues decrease and our days- sales-outstanding (“DSO”) increase, we may suffer from a cash shortfall.
Our DSOs increased to 106 days in 2011 from 87 days in 2010.We expect that over time our DSOs may further increase and we expect our DSOs will range between 90 to 120 days during 2012, mainly due to our customers requesting more favorable payment terms from us as part of increased competition, as well as the limited availability of credit in the capital markets, which may also affect our ability to collect our customers' debts in a timely manner or at all. In addition, we may experience an increase in DSOs if we fail to timely collect revenues from our customers.
We may experience a decrease in our gross margin levels in the future, which may adversely affect our financial results.
We believe that several markets in which we operate have caused, and may continue to cause, a decline in our gross margin, mainly due to (a) the fact that our revenue mix contained a high proportion of third party equipment, combined with the continued aggressive competition as described hereinabove and hereinafter, (b) the delay in new project launches and (c) the continued economic slowdown in these markets, all of which resulted in a low level of revenue which led to a large sequential decline in gross margin. Additional reasons for a decline in our gross margin include the following: (i) increased competition in the regions in which we currently operate; (ii) changes in the mix of our products, such as an increase in the volume of sales of lower-margin Customer Premise Equipment (“CPEs”); (iii) the entry of new, large vendors into our markets; (iv) changes in the market demand of some of our existing and potential products; (v) our engaging in “turn-key” projects, which involve lower margins on third party equipment and services; and (vi) our entry into new geographical markets with lower margins, such as India. We expect this decline in gross margin to continue over time. If our revenues do not increase and our operating expenses remain the same or increase, the decline in gross margin will have a negative impact on our results of operations.
Our products are complex and may have errors or defects that are detected only after deployment in complex networks.
Some of our products are highly complex and are designed to be deployed in complex networks. Although our products are tested during manufacturing and prior to deployment, our customers may discover errors after the products have been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, including problems related to the site survey, radio planning and other problems that are not necessarily related to product functionality but to the associated services, or unable to correct the errors in a timely manner, we could experience:
In October 2011, Open Range Communications, Inc., one of our major customers, filed for bankruptcy in the Bankruptcy Court of Delaware. In the declaration filed by its Chief Financial Officer in support of the company’s Chapter 11 petition, Open Range alleged that Alvarion’s failure to achieve the system performance and quality, in accordance with the signed contracts, was one of the reasons for Open Range’s bankruptcy. If a legal action is filed against us, following such allegations, this may harm our reputation and our operations.
Our products are often integrated with other network components. There may be incompatibilities between these components and our products that could significantly harm service providers or their subscribers. Product problems in the field could require us to incur costs or divert resources and may subject us to liability for damages caused by the problems or delay research and development projects because of the diversion of resources. These problems could also harm our reputation and competitive position in the industry.
We could be subject to warranty claims and product recalls, which could be very expensive and harm our financial condition.
Products like ours sometimes contain undetected errors. These errors can cause delays in product introductions or require design modifications. In addition, we are dependent on unaffiliated suppliers for key components incorporated into our products. Defects in systems in which our products are deployed, whether resulting from faults in our products or products supplied by others, from faulty installation or from any other cause, may result in customer dissatisfaction. Additionally, we are continually marketing several new products. The risk of errors in these new products, as in any new product, may be greater than the risk of errors in established products. The warranties for our products permit customers to return for repair or replacement, within a period ranging from 14 to 21 months of purchase, any defective products. Any failure of a system in which our products are deployed (whether or not our products are the cause), any product recall and any associated negative publicity could result in the loss of, or delay in, market acceptance of our products and could harm our business, financial condition and results of operations. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for defective products and for related claims arising therefrom. A successful product liability claim could result in substantial cost or divert management’s attention and resources, which could have a negative impact on our financial condition and results of operations.
Our dependence on limited sources for key components of our products may lead to disruptions in the delivery and increased cost of our products, harming our business and results of operations. >
We currently obtain key components for our products from a limited number of suppliers, and in some instances from a single supplier. In addition, some of the components that we purchase from single suppliers are custom-made. We cannot be sure that we will not experience increased costs or disruptions in the delivery of our product components. In addition, there is a global demand for some electrical components that are used in our systems and that are supplied by relatively few suppliers. Our dependence on these limited sources for key components for our products presents the following potential risks:
Our dependence on third party equipment embedded in our products and complimentary systems may impact our business.
We rely on third party software and hardware embedded in our solution. If our licensors fail to support the software or hardware embedded in our solution we may suffer difficulties in supporting our customers and delivering our equipment. We are also dependent on complementary systems such as CPEs, and Access Service Networks Gateways, or ASN- GW, which are part of our solution. Failure by our vendors to deliver such products or discontinue production of such products may cause difficulties to, and may have an adverse effect, on our business.
Changes within any of these vendors’ environments can influence our business results. For example, the recent announcement by one of our ASN-GW partners that it would not continue investing in new developments in our line of business in 2011 may influence price levels or change the partners’ roadmap in a way that could harm our business.
In addition, in the past, we experienced delays and shortages in the supply of components on more than one occasion. We may experience such delays in the future, harming our business and results of operations.
We must be able to manage expenses and inventory risks associated with meeting the demands of our customers.
To ensure that we are able to meet customer demand for our products, we place orders with our subcontractors and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates, our inventory levels may be too high, and inventory may become obsolete and/or over-stated on our balance sheet. This result would require us to write off inventory, which could adversely affect our results of operations. In 2009, 2010 and 2011, we wrote off inventory in the amounts of $4.0 million, $4.8 million and $2.6 million, respectively. In addition, in 2011 we wrote off additional inventory related to bankruptcy of a customer in an amount of $7.1 million.
We are required to place manufacturing orders well in advance of the time we expect to sell products, and this may result in us ordering a larger or smaller number of these products than required. In the event that we order the manufacture of a greater or lesser amount of these products than necessary, we may be required to purchase the surplus products or to forego or delay the sale or delivery of the products that we did not order in advance. In either case, our business and results of operations may be adversely affected.
The limited manufacturing capacity of a number of subcontractors we depend on may prevent us from filling orders in the timeframe and with the quality specifications our customers demand, which may harm our business and results of operations.
We currently depend on a number of contract manufacturers with limited manufacturing capacity to manufacture our products. The assembly of certain of our finished products, and the manufacture of custom printed circuit boards utilized in electronic subassemblies and related services are also performed by these independent subcontractors. In addition, we rely on third-party “turn-key” manufacturers to manufacture certain sub-systems for our products. Reliance on third-party manufacturers exposes us to significant risks, including risks resulting from:
If the operations of our contract manufacturers are halted, even temporarily, or if our contract manufacturers are unable to operate at full capacity for an extended period of time, we may experience business interruption, increased costs, loss of goodwill and loss of customers.
Any of these risks could result in manufacturing delays or increases in manufacturing costs and expenses. If we experience manufacturing delays, we could lose orders for our products and, as a result, lose customers. There may be an adverse effect on our profitability and, consequently, on our results of operations, if we incur increased costs.
Regulation by governments or other public authorities may increase our costs of doing business, limit our potential markets or require changes to our products that may be difficult and costly.
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under international treaties and local laws, which differ by country. Some of our products operate in license-free bands in the radio spectrum, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain.
In some cases, the continued validity of licenses may be conditioned on the licensee complying with various conditions. Since WiMAX technologies evolve and enable new applications, such as mobile services, in some countries the regulators may not permit an operator to use the spectrum previously allocated according to its full technology potential and its latest technological evolution. The regulators in some countries may avoid granting WiMAX spectrum to protect owners of other spectrums previously allocated or they may wait until new technologies such as LTE become available before starting the frequency allocation process. In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to the operation or marketing of devices that emit radio frequency energy.
The regulatory environment in which we sell our products subjects us to several risks, including the following:
We are subject to certain European directives like the directive on Waste Electrical and Electronic Equipment and the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment and may also be subject to other similar legislation in other parts of the world.
Our proprietary technology is difficult to protect, and its unauthorized use by third parties may impair our ability to compete effectively.
Our success and ability to compete depends and will continue to depend, to a large extent, on maintaining our proprietary rights and the rights that we currently license or will license in the future from third parties. We rely primarily on a combination of patents, trademarks, trade secrets and copyright law and on confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We have obtained several patents and have several patent applications pending that are associated with our products. We also have several trademark registrations associated with our name and some of our products.
These measures may not be sufficiently adequate to protect our technology from third-party infringement. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Third-party patent applications filed earlier may block our patent applications or receive broader claim coverage. In addition, any patents issued to us, if issued at all, may not provide us with significant commercial protection. Third parties may also invalidate, circumvent, challenge or design around our patents or trade secrets, and our proprietary technology may otherwise become known, or similar technology may be independently developed by competitors. Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws. Failure to successfully protect our intellectual property from infringement may damage our ability to compete effectively and harm our results of operations.
We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
From time to time we receive letters alleging that we have infringed upon a patent, trademark or other proprietary right. As the broadband wireless access market transitions toward standardization, we are more exposed to intellectual property litigation by third parties who claim to hold intellectual property rights related to such standards. In addition, based on the size and sophistication of our competitors and the history of rapid technological change in our industry, it is possible that several competitors may have intellectual property rights that could relate to our products. Therefore, we may need to litigate to defend against claims of infringement or to determine the validity or scope of the proprietary rights of others. Similarly, we may need to litigate to enforce or uphold the validity of our patent, trademarks and other intellectual property rights. Other actions may involve ownership disputes over our intellectual property or the misappropriation of our trade secrets or proprietary technology. As a result of these actions, we may have to seek licenses to third-parties' intellectual property rights, which may not be able to be successfully integrated into our products. These licenses may not be available to us on reasonable terms or at all. In addition, litigation could be expensive and time consuming and could result in court orders preventing us from selling our then-current products or from operating our business. Any infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources and harm our business, financial condition and results of operations. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
If we are unable to maintain licenses to use certain technologies, we may not be able to develop and sell our products.
We receive licenses from third party companies for certain technologies we use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost. We cannot assure you that we can maintain these licenses or obtain additional licenses, if we need them in the future, on commercially reasonable terms or at all. Also, some of our products utilize open source technologies. These technologies are licensed to us on varying license structures. These licenses and others like them pose a potential risk to products should they be inappropriately used.
We depend on key personnel and several members of our senior management have been recently appointed.
Our future success depends, in part, on the continued service of key personnel. Most members of our senior management team are new to their positions and we will have a new Chief Executive Officer as of May 6, 2012. They may need time to acquire the requisite knowledge of our company and the specific skills necessary to successfully carry out the tasks required of them, which could adversely affect our results of operations.
Five of the eight members of our senior management, including our chief financial officer, were only appointed to their present positions in 2011 and another was only appointed in October 2010. Some of these individuals had little or no previous experience working for Alvarion. Furthermore, Eran Gorev, our Chief Executive Officer and President, will leave the Company and be replaced by Mr. Hezi Lapid, effective May 6, 2012. Mr. Lapid is new to Alvarion while our chief financial officer joined Alvarion in September 2008 as the vice president of our financial division, and became chief financial officer on January 1, 2011. Our Chief Operating Officer (ex-Wavion CEO), Mr. Tal Meirzon, joined Alvarion in November 2011 as a result of the Wavion acquisition. Should any members of senior management, including our new Chief Executive Officer, fail to perform as expected, or should they or other new key managerial appointees fail to acquire the requisite knowledge and skills in a timely manner, or should they decide to leave the Company on their own initiative, our operations may be disrupted and this might adversely affect the results of our operations.
The restructurings that the Company underwent, and may carry out in the future, create morale issues, which may induce employees to leave the Company. If certain of our key technical, sales or senior management personnel terminate their employment and we are unable to retain qualified replacements, our business and results of operations could be harmed.
We may be classified as a passive foreign investment company.
As a result of the combination of our substantial holdings of cash, cash equivalents and securities and the decline in the market price of our ordinary shares from its historical highs, there is a risk that we could be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes. However, based upon our market capitalization during 2011, we do not believe that we were a PFIC for 2011. In addition, based upon our valuation of our assets as of the end of each quarter of 2002 and 2003 and an independent valuation of our assets as of the end of each quarter of 2001, we do not believe that we were a PFIC for 2001, 2002 or 2003, despite the relatively low market price of our ordinary shares during some of those years. We cannot assure you, however, that the United States Internal Revenue Service or the courts would agree with our conclusion if they were to consider our situation. There is no assurance that we will not become a PFIC in 2012 or in subsequent taxable years. If we were classified as a PFIC, U.S. taxpayers that own our ordinary shares would be subject to additional taxes upon certain distributions by us or upon gains recognized after a sale or disposition of our ordinary shares unless they appropriately elect to treat us as a “qualified electing fund” or to make a “mark-to-market election” under the U.S. Internal Revenue Code. Our classification as a PFIC could also adversely affect the market price of our ordinary shares. For more information, see “Item 10—Additional Information—Taxation—United States Federal Income Tax Considerations with Respect to the Acquisition, Ownership and Disposition of our Ordinary Shares—Passive Foreign Investment Company Status”.
The price of our ordinary shares is subject to volatility.
The price of our ordinary shares has experienced significant volatility in the past and may continue to do so in the future. For the two year period ended December 31, 2011, the price of our ordinary shares on the NASDAQ Global Select Market has ranged from a high of $4.28 to a low of $0.83. On December 31, 2011 and March 31, 2012, the closing price of our ordinary shares on the NASDAQ Global Select Market was $0.91 and $0.93 respectively. We may continue to experience significant volatility in the future, based on the following factors, among others:
We have received a written notice from NASDAQ that we are not currently in compliance with the continued listing requirements of the NASDAQ Global Select Market. If we fail to regain compliance, our ordinary shares may be delisted and the price of our ordinary shares and our ability to access the capital markets could be negatively impacted.
As of April 25, the bid price for our ordinary shares had closed under $1.00 for 30 consecutive business days. On April 26, 2012, we received a notice from the NASDAQ Listing Qualification Department indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on the NASDAQ Global Select Market under the NASDAQ Listing Rules. The notification letter states that pursuant to the NASDAQ Listing Rules the Company will be afforded 180 calendar days, or until October 23, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. If we do not regain compliance by October 23, 2012, we may be eligible for additional time to regain compliance. If we are not eligible for additional time or fail to regain compliance after such an extension, NASDAQ will provide written notification to us that our common stock will be subject to delisting. In addition, we must continue to satisfy NASDAQ's other continued listing requirements, including among other things, a minimum stockholders' equity of $10.0 million.
A delisting of our ordinary shares from the NASDAQ Global Select Market would have a material adverse effect on our business and could materially reduce the liquidity of our ordinary shares and result in a corresponding material reduction in the price of our ordinary shares. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees. If our ordinary shares are delisted from the NASDAQ Global Select Market, trading in our common shares would likely move to another market, such as the NASDAQ Capital Market, or be quoted on the Over-the-Counter Bulletin Board or pink sheets, which could adversely affect the liquidity or market price of our ordinary shares.
We may be named as a defendant in securities class action lawsuits, or in other time consuming and expensive litigation that requires extensive management attention and resources and which may be expensive, lengthy and disruptive.>
In the future, we may be named as a defendant in securities class action lawsuits or in other time consuming and expensive litigation. Legal proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. Moreover, we cannot predict the results of such legal proceedings, and an unfavorable outcome of a lawsuit or proceeding could materially and adversely affect our business, results of operations and financial condition.
Operating in international markets exposes us to risks, which could cause our sales to decline and our operations to suffer and could expose us to various legal, business, political and economic risks.
While we are headquartered in Israel, approximately 99% of our sales in recent years were generated globally, outside of Israel. Our products are marketed internationally and we are, therefore, subject to certain risks associated with international sales, including the following:
We may encounter significant difficulties with the sale of our products in international markets as a result of one or more of these factors. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
There may be health and safety risks related to wireless products.
In recent years, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Our wireless communications products emit electromagnetic radiation. Health and safety issues related to our products may arise that could lead to litigation or other actions against us, or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market our products and, in turn, could harm our business and results of operations.
Risks Related to Our Location in Israel
Conducting business in Israel entails special risks.
We are incorporated under Israeli law and our principal offices and the majority of our manufacturing and research and development facilities are located in the State of Israel. Political, economic and military conditions in Israel and in the Middle East directly affect our operations. We could be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. In the event of war, we and our Israeli subcontractors and suppliers may cease operations which may cause delays in the development, manufacturing or shipment of our products. In recent years, there has been an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive and continued hostilities along Israel's border with the Gaza Strip. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons which could attract preemptive actions by Israel and/or Western countries. Furthermore, since the beginning of 2011 there has been instability in the bordering countries such as Egypt and Syria. We have witnessed increased instability in the region, in particular related to the governmental changes in Egypt and the deterioration of the internal government and control of Syria's President Assad, over Syria's internal affairs. This and further deterioration could have an adverse effect on the stability of our region and specifically on the relations between Israel and Egypt, which have been parties to a peace treaty since the late 1970s. Ongoing violence between Israel and the Palestinians, as well as tension between Israel and terror organizations and other countries in the Middle East, combined with political instability in the Middle East such as in Egypt, Libya, Syria, Iran and Lebanon, may have a material adverse effect on our business, financial condition and results of operations.
Furthermore, several countries, principally some of those in the Middle East, still restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to offer our services to customers in these countries.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Many of our officers and employees in Israel are obligated to perform annual military service duty until they reach age 45 and, in the event of a military conflict could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees due to military service or the absence for extended periods of one or more of our key employees due to military service. A disruption could materially and adversely affect our business, operating results and financial condition.
We currently benefit from local government programs as well as international programs and local tax benefits that may be discontinued or reduced.
We have received grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (“OCS”) for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the “Research and Development Law”. Pursuant to our current arrangement with the OCS, the OCS finances up to 20% of our research and development expenses by reimbursing us for up to 66% of the approved expenses related to our generic research and development projects. In addition, we obtain other grants from the OCS to partially fund certain other research and development projects. These programs currently restrict our ability to manufacture particular products or transfer particular technology outside of Israel. The Research and Development Law and related regulations permit the OCS to approve the transfer of manufacturing rights outside Israel subject to approval of the research committee and in exchange for the payment of higher royalties, for royalty-bearing programs. As of 2012, we are in the process of entering into a new royalty-bearing program arrangement with the OCS under new terms which are currently being evaluated and discussed with the OCS. Under these programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially and adversely affected.
In addition, we have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) for our production facilities in Israel. Such status enables us to obtain certain tax relief for a definitive period upon compliance with the Investment Law regulations. On April 1, 2005, an amendment to the Investment Law came into effect which significantly changed the provisions of the Investment Law. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a “Privileged Enterprise” (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. However, the amendment provides that terms and benefits included in any certificate of approval granted prior to December 31, 2004 will remain subject to the provisions of the law as they were on the date of such approval. We believe that we are currently in compliance with these requirements. However, if we fail to comply with these conditions in the future, the tax benefits received could be canceled and we could be required to pay increased taxes in the future.
We also received grants from the European Union, Romania and Spain for the financing of a portion of our research and development expenditures in those countries through various European programs. Under these programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the European Union, the Government of Spain and/or the Government of Romania discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially and adversely affected.
We are adversely affected by the devaluation of the U.S. dollar against the New Israeli Shekel and could be adversely affected by the rate of inflation in Israel.
Substantially all of our revenues are generated in U.S. dollars. A significant portion of our expenses, primarily salaries, building leases and related personnel expenses is currently incurred in NIS, and we anticipate that a significant portion of our expenses will continue to be denominated in NIS.
As a result, inflation in Israel and/or the devaluation of the U.S. dollar in relation to the NIS has and may continue to have the effect of increasing the cost in U.S. dollars of these expenses; hence, our dollar-measured results of operations are and may continue to be adversely affected, though, the inflation in Israel has been moderate in recent years. In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time we enter into currency forward contracts and put and call options to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
Provisions of Israeli law and our Articles of Association may delay, prevent or make difficult a merger or an acquisition of us, which could prevent a change of control and therefore depress the market price of our ordinary shares.
Our Articles of Association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. In addition, the Israeli Companies Law regulates acquisitions of shares through tender offers and mergers, and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change of control of us, may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders.
It may be difficult to effect service of process and enforce U.S. judgments against our directors and officers in Israel or to assert U.S. securities laws claims in Israel.
We are incorporated in Israel. Our executive officers and a majority of our directors are not residents 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 to obtain a judgment in the United States or collect or get an Israeli court to enforce a judgment obtained in the United States against us or any of those persons. Furthermore, it may be difficult to assert U.S. securities laws claims in original actions instituted in Israel.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Marketplace Rules.
We do not comply with the NASDAQ requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice in accordance with which the establishment or amendment of certain equity based compensation plans is approved by our board of directors.
As a foreign private issuer listed on the NASDAQ Global Select Market, we may also follow home country practice with regard to, among other things, executive officer compensation, director nomination, composition of the board of directors and quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
Our legal and commercial name is Alvarion Ltd. We were incorporated in September 1992 under the laws of the State of Israel. Since our inception, we have devoted substantially all of our resources to the design, development, manufacturing and marketing of wireless products.
On August 1, 2001, Floware Wireless Systems Ltd., a company incorporated under the laws of the State of Israel (“Floware”) merged with and into us. As a result of the merger, we emerged as the surviving company and Floware’s separate existence ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we completed an acquisition of most of the assets and the assumption of related liabilities of InnoWave. In December 2004, we completed the amalgamation of interWAVE, and the interWAVE operations became our cellular mobile unit. In November 2006, we completed the sale of our cellular mobile unit to LGC Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking solutions in exchange for promissory and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC Telecommunications Inc. ("ADC") acquired LGC and we sold our LGC shares to ADC. In the beginning of 2011 we acquired the intellectual property of Clariton. On November 23, 2011 we completed the acquisition of Wavion Inc.
Our principal executive offices are located at 21A HaBarzel Street, Tel Aviv 69710, Israel, and our telephone number is 972-3-645-6262. In 1995, we established a wholly-owned subsidiary in the United States, Alvarion, Inc., a Delaware corporation. Alvarion, Inc. is located at 6701 Democracy Blvd., Suite 300, Bethesda, Maryland. We also have an additional office in Sunnyvale, California located at N. Mathilda Avenue, Suite 210, Sunnyvale, California 94043, and its telephone number is 408-773-7200. Alvarion, Inc. serves as our agent for service of process.
We also have several wholly owned subsidiaries worldwide that handle local support, promotion, sales and developing activities. For a discussion of our capital expenditures and divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
We concentrate our resources on the broad industry of wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 15 years, from developing core technology to creating and promoting industry standards. Through leveraging our key roles in the Institute of Electrical and Electronic Engineers (“IEEE”) and HiperMAN standards committees and having experience in extensive development and deployment of OFDM technology -based systems, we have been at the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and in leading the industry to adopt mobile WiMAX networks. The WiMAX standard is the outcome of the standardization work done by the WiMAX Forum™, widely based on the IEEE 802.16 standard working group. Through the Acquisition Transactions (see Item 3D "Risk Factors –Merger transactions recently performed by the Company may not be successfully implemented and integrated with our operations and our technologies, which may harm our business and results of operations"), we recently entered into the carrier grade Wi-Fi market as well as the cellular indoor coverage market and became the owners of certain additional product lines and technologies.
Our primary business is currently focused on three main market segments, offering a wide variety of applications, which are mainly the following:
Broadband Wireless Access Carriers ("BWA Carriers"):
Solutions for BWA Carriers include 4G wireless networks for fixed, nomadic and mobile subscribers, providing subscribers with home, office and personal broadband connectivity for internet access, social networking, gaming, VoIP, video and other broadband applications. Our solutions enable operators in both developed and emerging markets to offer broadband services to subscribers anytime, anywhere where the WiMAX network is deployed, through the use of a variety of devices, such as laptops, PDAs and smart handsets which have undergone interoperability testing with our WiMAX system. In the BWA Carriers category, we continue to offer standard products.
Vertical Markets (Enterprise):
Solutions for our Enterprise category include broadband wireless applications for a variety of vertical markets, providing owners and operators of public networks, private networks, utility companies and municipalities with broadband connectivity and applications that fulfill each organization's specific communication needs. Examples of such applications include government and municipal office connectivity, security and surveillance services, campus-to-campus broadband connectivity, oil and gas and mining company applications, emerging Smart Power Grids and Public Mobile Radio ("PMR") applications. In this market, we sell both WiMAX and Wi-Fi solutions, primarily in the license-exempt frequency bands with various applications, including point-to-point and point-to-multipoint.
Mobile (Cellular) Service Providers:
Solutions for Mobile Service Providers address these customers' challenges in providing ubiquitous coverage and sufficient capacity in an era of ever growing demand for mobile data services and applications. These solutions include Wi-Fi networks for off-loading of mobile data traffic from 3G/4G networks and distributed antenna systems (DAS) for optimized indoor service availability. In the Mobile Service Providers category, we are offering the Company's acquired carrier- grade Wi-Fi products and solutions as well as the DAS products, based on the technology developed by Clariton.
Our growth strategy is focused on providing optimized broadband wireless solutions to address connectivity, capacity and coverage challenges of public and private networks, enabling us to maintain our current position and grow along with the market demand for multi-technologies solutions and applications.
Organizational Restructuring and New Strategic Initiatives through Acquisitions
Since the beginning of 2011, we restructured the organization in order to improve our business results while re-sizing the company to a level appropriate to the available carrier and vertical market opportunities. As part of the restructuring, we also further adjusted the number of our employees to meet the needs of the restructured company and strategic initiatives arising from the acquisitions performed during 2011. The restructuring has resulted in a reduction in the number of employees by 194 and the vacating of certain leased premises in 2011.
Additionally, in 2011 we acquired Wavion in order to create new growth opportunities and penetrate into new market segments. Wavion is a provider of carrier-grade outdoor Wi-Fi solutions, with a variety of different products for the Wi-Fi access and 3G off-load applications segment. We also acquired the intellectual property of Clariton in the beginning of 2011 in order to penetrate into the indoor wireless market using Clariton's Distributed Antenna System (DAS) technology and know-how.
INDUSTRY DYNAMICS> –
4G BWA Techology, Applications and Industry Advantages
Mobile WiMAX is a technology based on the IEEE 802.16e air interface standard and the ETSI HiperMAN wireless metropolitan area network (“MAN”) standard. WiMAX is the worldwide standard for wireless broadband access and personal mobile broadband applications. Solutions based on WiMAX technology enable fixed-line, cable, and mobile operators and challengers to compete with each other in the relevant market for higher Average Revenue Per User (“ARPU”) services. WiMAX technology has the capacity to deliver sufficient bandwidth to enable value-added broadband applications, including live video broadcasting, high-speed data, toll-quality voice and multimedia content. Most importantly, the WiMAX (IEEE 802.16) standards were developed based on the concept of an "all-IP Network". A complete set of IP-based functions and interfaces allows for high quality service delivery, while keeping end-to-end Quality of Service (“QoS”) and minimizes investment and operating costs for operators with its distributed architecture and efficient, packet-based air interface.
WiMAX offers two technological advantages to the operators relative to most existing commercial technologies: (i) a superior radio access technology; and (ii) an open IP-based access network infrastructure.
Superior radio access technology: WiMAX benefits from advanced Non-Line-of-Sight (“NLOS”) radio and antenna technologies, such as MIMO, Beam Forming, and Spatial Division Multiple Access (“SDMA”). These new technologies can be used in fixed, portable and mobile WiMAX networks and facilitate high spectral efficiency and obstacle penetration (e.g., walls) resulting in best network coverage, capacity, low latency and improved user experience. As a result, WiMAX offers lower infrastructure costs and reduced cost per subscriber for the operator, compared to any other wireless technology.
Utilizing its built-in strong QoS mechanisms, WiMAX technology has the capacity to deliver maximum service quality under the subscriber’s Service Level Agreement ("SLA") to enable rich value-added applications, including high-speed data and Internet, live video multicasting, toll-quality voice and multimedia content in both download and streaming formats. These capabilities enable toll-quality delivery of differentiating services, coupled with an enhanced subscriber quality of experience (“QoE”).
Transition of the market to TD-LTE-
Alvarion's main BWA market has undergone a technology shift in the past year, which we believe is the result of a perception that TDD LTE technology will replace WiMAX technology. Although we believe that the availability to offer cost effective TDD LTE products is limited (especially in Alvarion's main market of 3.5GHz licensed operators), the perception that TDD LTE will replace WiMAX technology has caused a decline in demand for WiMAX technology and equipment.
Carrier Grade Wi-Fi Technology -
Driven by strong uptake among end-users, Wi-Fi has become a "game changer" for the mobile industry. With its high quality of service, low cost and ubiquitous availability, a growing number of users consume more traffic over Wi-Fi than on any other access technology. With this trend and with rapidly growing data requirements, operators have begun adopting Wi-Fi technology as a strategy for their future business. A growing number of operators, including AT&T, China Mobile, KDDI, DoCoMo, KT, PLDT, and Smart, are deploying or planning to deploy metro Wi-Fi networks for access and for cellular data offloading. With this trend the Company believes that the market for carrier-grade Wi-Fi equipment is poised to grow rapidly.
Carrier grade Wi-Fi is defined as a Wi-Fi infrastructure solution that enables operators to deliver the high quality service end-users expect with easy access, fast broadband speed, security, and ubiquitous indoor and outdoor coverage. From the operators’ perspective, carrier-grade Wi-Fi solutions must address the coverage and capacity needs of a large deployment and therefore should be scalable to millions of users, come with robust interference immunity technology (critical for operating in the unlicensed spectrum in which Wi-Fi is used) and enable rapid deployment.
Major carrier-grade Wi-Fi market trends:
We believe that Wi-Fi offloading is growing worldwide and that the number of Wi-Fi hotspots will increase substantially over the next several years. The expansion of Wi-Fi availability into large metro “hot-zones” such as San Francisco, London, Singapore, Seoul and Tokyo, will create opportunities for new applications and services such as indoor location-based navigation and location-based advertisements and there is already a growing interest in this space from small startups to large vendors such as Google, Microsoft and Nokia.
Alvarion WBSn – a family of carrier-grade Wi-Fi base stations:
WBSn is a family of advanced carrier-grade Wi-Fi base-stations operating in the 2.4 and 5 GHz bands. WBSn base-stations use powerful two-way beamforming 802.11n and unique interference immunity technology to deliver a good range, capacity and indoor penetration. WBSn is a service-aware platform, addressing the growing demand for faster connectivity and video applications and is optimized for scalable large networks, and applications related to Wi-Fi hotspots, mobile data offloading, capacity wholesale, smart cities, indoor/outdoor large venues, and large corporate networks. WBSn base stations enable operators to rapidly deploy profitable large scale Wi-Fi networks with the quality of service end-users expect.
The Evolution of Wireless Broadband –
During the last decade the desire to be connected anytime anywhere has grown extensively due to the introduction of new handsets allowing connectivity and easy-to-use applications (such as iPhones and iPads). Furthermore, the cultural effect of social networks (such as Facebook, twitter, LinkedIn) has changed the way people communicate on a daily basis.
Along with the increased demand for on-line connectivity, the wireless broadband market has grown due to the acceptance of wireless equipment as a high performance, cost-efficient alternative to wireline infrastructure for broadband connectivity.
In developed countries, government financial support encourages operators to provide broadband coverage in rural and suburban areas with low-density populations, where the business model for wired infrastructure is less cost-effective. In developing countries, government financial support is provided to encourage operators to offer basic telephony services and Internet access based on wireless broadband infrastructure in order to meet demand, mainly in urban and suburban areas.
The worldwide success of broadband connectivity and services creates demand for additional broadband networks mainly in regions where broadband was not yet widely available. The accelerated proliferation of broadband services and networks around the world as well as the commoditization of broadband devices and services has generated more demand for broadband in developing regions, often referred to as the world’s emerging markets. In these regions, wireline infrastructure is often non-existent, resulting in an accelerated widespread adoption of wireless broadband networks.
Government Spectrum Allocation Enables Network Deployments -
Global telecom spectrum allocation is opening up the telecommunications industry to competition from new players. Wireless technologies require the use of frequencies contained within a given spectrum to transfer voice, multimedia and other data services. Usually, governments allocate a specific range of that spectrum, either licensed or license-exempt (“unlicensed”) bands, to carriers, operators, ISPs and other service providers, enabling them to launch a variety of broadband initiatives based exclusively on wireless networking solutions. During 2011, additional licensed and unlicensed spectrums were allocated around the world and we expect this trend to continue in the future. Increased availability of licensed and unlicensed spectrums enables operators to address increasing demand for wireless broadband. New and developing technologies combine the use of license and license-exempt bands, allowing new cost-effective network deployment strategies and availability of coverage and capacity in very low density areas.
Additional Factors in the Widespread Adoption of Wireless Broadband -
Over the last few years, wireless broadband networks have increasingly grown in popularity and we believe they will continue to do so, due in part to the inability of wired infrastructure to meet demand, but also because of the following factors:
4G for Mobile Broadband Services and Applications
Mobile broadband promotes convergence of the fixed and mobile spheres, offering subscribers a combination of high-speed broadband and mobile services that are available anywhere, anytime, using any device. Mobile broadband offers always-on, high-speed and all- IP-based connectivity, providing direct access to the mobile Internet and creating a dynamic market for various services and applications.
Mobile broadband capabilities are already embedded in a wide range of computing, telephony and consumer electronics devices that aim to optimize personal lifestyle and professional productivity. These new mobile broadband capabilities would enhance traditional service provider business models and create opportunities for new entrants to penetrate the market with alternative business models.
However, for mobile broadband services to be adopted widely by consumers and businesses, vendors must offer interoperable diverse and innovative applications with the right devices to utilize the applications.
We believe that WiMAX and Wi-Fi as well as LTE are currently the technologies that are the most advanced and well-suited to cost-effectively meet the requirements of personal broadband. Wi-Fi complements the WiMAX / LTE technologies, especially in high traffic areas. For mobile operators, Wi-Fi is another Radio Access technology. It allows the operator to offer additional data services in different frequency bands, unlicensed, bases on the users’ existing mobile devices.
COMPANY STRENGTHS -
For more than 15 years, our primary business activity has been focused on fulfilling the growing demand for IP wireless broadband in the telecom industry by providing solutions and services to build wireless broadband networks. In addition, we have deployed through our customers fixed wireless broadband solutions for applications, such as toll quality telephony service, mobile base station feeding, hotspot coverage extension, municipal and community interconnection, utility company metering and monitoring applications, as well as public safety communications.
Our key strengths include:
Market Leadership and Brand Recognition: We believe that we are a worldwide 4G vendor with a combined multiple business focus in both licensed and unlicensed solutions, with carrier grade products for mobile operators and broadband wireless access networks, and we enjoy a strong brand purpose and brand identity.
Customer Base: We have a broad customer base, with over 280 world-wide fixed, nomadic and mobile 4G commercial deployments.
Technology: We have over 15 years of experience in end-to-end broadband wireless IP and we believe we have been a leader in the broadband wireless access market for more than a decade. In addition, we have continued our leadership in the relevant standardization organizations (IEEE 802.16, WiMAX Forum™). In the Wi-Fi market, we recently purchased Wavion (see Item 4 – Business overview – Organizational Restructuring and New Strategic Initiatives through Acquisitions) , which recently introduced its two-way beamforming 802.11n 3x3:3 base station with a unique Interference Immunity suite which enhances the Wi-Fi products available from our company.
We have the ability to deliver and deploy a complete end-to-end solution in terms of product, technology, and full end-to-end network deployments, radio planning and network services resulting in the ability to build long-term customer relationships.
We believe that we have the ability to compete with any other vendor in this industry, while keeping our flexibility and technology differentiators according to customer demands and needs.
Strategic Relationships: We are actively partnering with industry and market leaders to create go-to-market strategic relationships and best-of-breed end-to-end wireless broadband networks.
Experience in Wireless Broadband
Our experience in wireless broadband enabled us to identify the potential of WiMAX in early 2002, ahead of most equipment vendors. We have been at the forefront of developments with WiMAX technology since its inception, at a company and industry level. Examples of our active involvement include major roles in the standardization process through our work in the WiMAX Forum™ as a charter board member. In addition, our employees are active in other related technology organizations, such as Wireless Communications Association, IEEE 802.16, ETSI BRAN-HiperMAN and ITU standards.
By acquiring Wavion during the fourth quarter of 2011, we gained personnel with an average of 10 years of valuable experience and technical expertise in the field of carrier grade Outdoor Wi-Fi. These employees possess particular knowledge in several key technologies such as beamforming, real time radio management, advanced antenna design and smart location management.
GROWTH STRATEGY – >
Our growth strategy contains three primary elements. The first element is providing broadband wireless networks (based on WiMAX and additional technologies) to telecom service providers, maintaining our current leadership position and growing along with market demand for converged applications. We have accomplished significant milestones, such as a live demonstration of our TD-LTE technology, and, in terms of product development, we have entered into agreements with third parties to integrate their products into our complete solution. The second element is providing wireless broadband networks for select enterprise vertical markets (including safe city, mining, education, municipalities, utilities, among others) in licensed and license-exempt environments. We offer our customers optimized access, CPE’s and backhaul solutions. We plan to make additional investment in product development, channel recruitment and go-to-market activities in new vertical markets/domains. The third element of our strategy is to offer indoor coverage and capacity solutions and carrier-grade Wi-Fi offload systems to mobile carriers. This is a growing market looking for solutions to offload data from 3G networks, creating a large demand for Wi-Fi solutions.
Opportunities for Providing Solutions Based on an Open Architecture
The inherent, open architecture characteristics of WiMAX offer many opportunities for our company as a major global WiMAX end-to-end network provider. We continually strive to be at the forefront of exploring and maximizing the benefits of WiMAX in order to create a new operator-centric model based on best-of-breed solutions from a variety of OPEN WiMAX ecosystem partners.
PRODUCTS - >
BreezeMAX Platforms - WiMAX Solutions for converged applications
Our WiMAX-based BreezeMAX Frequency Division Duplex ("FDD") and Time Division Duplex ("TDD") (“BreezeMAX”) platforms are designed from the ground-up according to the IEEE 802.16 standard. BreezeMAX platforms feature advanced OFDM and OFDMA technologies to support non-line-of-sight ("NLOS") operation, adaptive modulation up to QAM64 and the highest spectral efficiency available. Currently commercially available and operating in the 2.3, 2.3WCS, 2.5, 3.3, 3.5, 3.6 and 5.2 GHz licensed frequency bands, BreezeMAX meets the immediate customer demand for cost-effective, next generation broadband wireless systems with a platform designed around the implementation of the IEEE 802.16 and HiperMAN standards by the WiMAX Forum™. The BreezeMAX carrier-class design supports broadband speeds and QoS to enable carriers to offer quadruple play (meaning broadband data, voice, mobility and multi-media) services to thousands of subscribers in a single-base station.
BreezeMAX has become a popular solution for operators offering fixed high-bandwidth, VoIP and data services to evolve their networks to industry-standard solutions with improved outdoor and indoor customer premises equipment ("CPE") economics. This platform includes an enhanced offering of primary voice services and allows an operator to leverage legacy voice infrastructure. The system’s features and cost-effective, versatile subscriber units make BreezeMAX a widely accepted broadband wireless solution for service providers that are interested in improving their business model.
In 2007, the BreezeMAX indoor Si CPE began offering personal broadband and primary broadband WiMAX standard-based solutions and enabled nomadic services via quick deployments based on a plug-and-play installation. In addition, the BreezeMAX indoor Si CPE enabled centrally provisioned, portable connectivity for subscribers to use the CPE in various points within the network coverage and reconnect to the service after moving from one location to another. The BreezeMAX’s FDD platform was designed according to the IEEE 802.16-2004 standard, and was partially certified by the WiMAX Forum™ during 2006 for fixed and nomadic networks, for both Base Stations and CPEs. In early 2007, we introduced our TDD pre-certified IEEE 802.16-2005 platform that was designed for fixed and nomadic networks. Our BreezeMAX platform, which is part of our 4Motion solution, provides support for fixed, nomadic and mobile WiMAX, and has been designed according to the IEEE 802.16e-2005 standard for portable and mobile networks.
BreezeMAX Macro Outdoor is a carrier-class, all outdoor, broadband wireless access platform. Based on the BreezeMAX Macro Indoor base station, BreezeMAX Macro Outdoor is a modular, scalable and reliable all outdoor base station which features flexible installation capabilities. The Outdoor Access Unit ("ODU") is a high power remote radio unit that connects to an external antenna, and provides high system gain and interference robustness by utilizing high transmit power and low noise figure. Supporting up to 20 MHz bandwidth, the ODU is scalable for future options such as increased capacity through carrier multiplexing or wider frequency bandwidths. The BreezeMAX Macro Outdoor base station offers a range of ODUs featuring diverse configurations and streamlining 2nd and 4th order diversity.
BreezeMAX Extreme 5000 is the first wireless broadband solution to bring WiMAX 16e technology to the 5 GHz license-exempt market. A highly integrated, all outdoor base station, BreezeMAX Extreme 5000 is designed for ease-of deployment and reduced total cost of ownership. Built with the customer in mind this solution offers easy configuration and a self-sustained ecosystem, ideally suited for Wireless Internet Service Providers (WISPs), municipalities, utilities, enterprises and public safety networks.
BreezeMAX Extreme 3650 is an all outdoor zero footprint WiMAX 16e wireless broadband solution for rural America.
IEEE 802.16e-2005 compliant technology enables portable and mobile networks to be IP-based, with a focus on open standards, end users and consumer devices. Portable access is defined according to the WiMAX Forum™ to apply to handsets, PDA, laptop Personal Computer Memory Card International Association ("PCMCIA") or mini cards at multiple locations, at least at walking speed, and enables a hard handoff of devices, in which the subscriber terminal is disconnected from one base station before connecting to the next base station. Mobile access ranges in scope from low to high vehicular speeds but adds PDAs and smart-phone devices, multiple locations and enables a soft handoff, in which the subscriber maintains a simultaneous connection with two or more base stations for a seamless handoff to the base station with the highest quality connection. Both consumer and business users have driven the demand for this technology that has resulted from the convergence of fixed broadband networks and mobile voice networks towards mobile broadband communications.
Our mobile WiMAX solution, 4Motion™, was introduced to the market during the second half of 2006 and was commercially deployed in the market in mid 2008. 4Motion™ is an end-to-end mobile WiMAX solution designed to comply with the IEEE 802.16e-2005 standard. The solution is a software defined radio base and as such allows migration to other OFDMA technologies. The solution portfolio was developed in conjunction with leading providers of core network and IP technology, devices and integration services and its evolution is under continuous development. 4Motion™ offers an open, end-to-end, carrier-class, scalable and cost-effective mobile broadband data solution that delivers personal broadband services of several Mbps per subscriber or more. Offering the benefits of the OPEN WiMAX approach to network strategy, our 4Motion™ solution provides operators with the flexibility to choose best-of-breed multi-vendor partners to add third-party IP services, while controlling costs.
The 4Motion™ solution includes Radio Access Network ("RAN") and includes both Alvarion’s and third parties’ core network, radio and IP networking elements, end-user devices and subscriber applications. The 4Motion™ as a whole is optimized to provide full mobility in line with the IEEE 802.16e-2005 standard.
Our Wireless Broadband Access Solutions (Non-WiMAX)
We provide a broad range of integrated wireless broadband solutions, addressing different markets and frequency bands, designed for the various business models of carriers, service providers and private network owners such as municipalities, businesses, utilities and more. Our products address point-to-point and point-to-multipoint architectures for a wide scope of end-user profiles, including residential, small office/home office (“SOHO”), small/medium enterprises (“SME”), multi-tenant/multi-dwelling units (MTU/MDU) and large enterprises (corporate). Our products operate in licensed and license-free bands, ranging from 900 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, media access control, IP-based mobile switches, networking protocols and very large systems integration (“VLSI”).
Most of our non-WiMAX wireless broadband solutions are based on OFDM technology with NLOS capabilities, creating more possibilities to cover a wireless access network.
Many applications can be deployed over wireless broadband systems. Data, voice and video applications can be utilized by telecom operators, service providers and regional carriers based on the needs of their regions of operation.
In addition to data and voice, applications such as video surveillance are deployed over our networks in municipalities and other markets such as mining, oil and gas, campus deployments and more.
Wireless broadband solutions are implemented in a modular infrastructure, enabling swift, cost-effective roll-out as needed. Sectorized base stations are deployed to provide radio coverage to the targeted area, and frequency channels are reused in non-adjacent base station sectors, making the most efficient use of the available spectrum. Base stations are connected to the operator’s central office, or point-of-presence, using wired or wireless point-to-point solutions. End users are provided with CPE, typically consisting of an outdoor unit with a radio and an antenna connected to an indoor unit or indoor self-installed unit, which present voice and data interfaces to the customer network.
BreezeACCESS Products (BreezeACCESS 4900, 900,VL,OFDM, Wi2)
BreezeACCESS enables fixed high-speed data and voice, point-to-multipoint wireless broadband applications. BreezeACCESS products operate in several frequency bands to meet the needs of our customers worldwide. The BreezeACCESS product family consists of base stations, including access units, controllers and subscriber units. The latter operates optimally when connected to computers or computer networks utilizing the Internet Protocol. The subscriber units include subscriber units for data applications and subscriber units for data and telephony applications. BreezeACCESS is modular in design, allowing for a low initial investment, and is scalable to enable future growth.
BreezeACCESS OFDM products support an extended coverage range in the 4.9, 5 GHz frequencies and the license-exempt 900 MHz frequency bands and features embedded security mechanisms with hardware-based encryption to ensure consistently secure wireless links that do not degrade performance
BreezeACCESS 4900 is a critical communications tool for the United States public safety sector. Deployable in point-to-point and point-to-multipoint configurations, the solution provides secure and reliable wireless connectivity in any terrain, environment and climate. The 50 MHz licensed spectrum in the 4.940 GHz-4.990 GHz, reserved for public safety and homeland security use, assists local municipal groups to provide license-protected, secure access for public safety, medical, emergency, government security and surveillance applications with superior capacity, range and scalability.
Operating in the license-exempt 902-928 MHz band, BreezeACCESS 900 is a cost-effective broadband wireless access solution that enables service providers to deliver high-speed, wireless data and voice services for fixed and mobile applications. BreezeACCESS 900 enables the reliable delivery of services in NLOS, foliage-dense environments.
BreezeACCESS VL is an OFDM-based, carrier-class, point-to-multipoint solution for wireless broadband outdoor connectivity and the delivery of high-quality data, voice and video services in urban and rural environments. BreezeACCESS VL lets WISPs, municipalities, governments, enterprises and utilities providers deliver an array of broadband wireless applications in urban and rural deployments. It provides enhanced QoS capabilities to enable the allocation of the necessary bandwidth and priority in line with application and user needs. BreezeACCESS VL supports an extended coverage range in the 4.9, 5 GHz frequencies and the license-exempt 900 MHz frequency bands, and features embedded security mechanisms with hardware-based encryption to ensure consistently secure wireless links that do not degrade performance. BreezeACCESS VL is a field-proven, flexible platform that enables diverse product configurations and power feeding options to match varying deployment needs. The solution adheres to Alvarion's "pay-as-you-grow" business model (enabling customers to start small and scale up) to ensure maximum scalability and supports a wide range of subscriber units to offer an affordable, optimized solution for top performance.
BreezeACCESS Wi2 combines the advantages of Wi-Fi access with the capabilities of BreezeACCESS VL systems to provide cost-effective solutions for personal broadband services today. BreezeACCESS Wi2 solutions can be deployed almost anywhere to provide personal broadband to standard IEEE 802.11 b/g end user devices such as laptops, PDAs, smart-phones and portable gaming devices. BreezeACCESS Wi2 solutions are ideal for operators, municipalities and communities looking to build metropolitan broadband networks or to integrate Wi-Fi hot zone capabilities into their existing broadband wireless access networks. These solutions provide personal broadband services ranging from public Internet access to public safety and Intranet applications.
OFDM technology, on which BreezeACCESS and BreezeACCESS VL are based, enables higher data rates of up to 12 Mbps and up to 54 Mbps, respectively, by utilizing the available radio spectrum in an efficient manner. In addition, OFDM technology enables NLOS operation with robust resistance to interference. OFDM-based products enable carriers to use the technology in applications where a high data rate is required, including serving medium to large enterprises and high-speed backbone applications.
BreezeNET B Products
Our BreezeNET B products are designed to provide highly reliable, backhaul, building-to-building bridging solutions, support mobile connectivity and provide individuals or small groups of users with wireless access to a LAN.
BreezeNET B products function as a wireless bridge system that provides high-capacity and high-speed point-to-point connectivity.
The BreezeNET B system operates in the unlicensed 2.4, 4.9-5.8 GHz bands and has flexible rate options: B10, B14, B28, B100, B300 delivering up to 250 Mbps with symmetric or fully symmetric, fixed or dynamically adjusted allocation reaching up to 60 km.
BreezeNET B operates in NLOS environments, such as buildings, foliage or ridgelines. The system also features adaptive modulation for automatic selection of modulation schemes to maximize data rate and improve spectral efficiency. BreezeNET B supports security sensitive applications through optional use of authentication and data encryption. The system supports Virtual Local Networks (“VLANs”), which enable secure operation, and VPN services, which allow workers in remote locations or remote offices to conveniently access their enterprise network.
The WALKair system is a wireless broadband system that enables carriers to provide high-speed Internet access, other data services and voice services primarily to SMEs. WALKair’s high spectral efficiency, dynamic bandwidth allocation, effective frequency reuse plan and high coverage capacity enable carriers to connect last-mile business subscribers to their network in an efficient and cost-effective manner.
In 2011 we announced “end of life” for the WALKair 1000 and 3000 lines. In their stead we have introduced the new WALKair 5000.
Our new WALKair 5000 operates in the 10.5, 26 and 28 GHz licensed bands.
WALKair products are based on time division multiplexing technology. WALKair systems support a complement of value-added classes of services including VPN, VLAN and QoS, based on per-user allocation of committed data rate and maximum data rate.
Alvarion introduced a distributed antenna system offering in 2011. The system uses proprietary RF technology based on intellectual property acquired from Clariton. By utilizing manipulation of cellular RF signals the system can transport these signals across cable TV infrastructure to provide coverage and capacity within large buildings. The system is comprised of various components deployed indoors, mainly head-end equipment connected directly to a cellular Base Station on one side and to coax cable infrastructure on the other side. Additional components include specialized diplexers and amplifiers and a Remote Unit (RU) that emits the original signal from the Base Station after it is transported over the cabling system.
The BreezeCELL product offering serves large buildings and is most commonly purchased and managed by a cellular operator. The onset of 3G data services has increased dramatically the use of DAS solutions.
Carrier Grade Wi-Fi – WBS Products
WBS-2400 is a carrier-grade range of base stations for advanced wireless broadband, and is a solution for urban and rural Wi-Fi deployments. Based on Alvarion’s spatially adaptive beamforming technology, and operating with any off-the-shelf 802.11b/g standard-based devices, the WBS-2400 provides significant performance gains in terms of range, throughput, indoor penetration and interference mitigation, enabling service providers to offer cost effective Wi-Fi service without compromising quality.
The beamforming technology maintains high quality signals under NLOS conditions, enabling uniform coverage of the entire area, and creating a larger addressable market per base station. The superior link gain provides higher throughput and network capacity, with the SDMA technology doubling the downlink capacity per base station. The inherent spatial filtering of the beamforming technology and the unique dynamic interference handling capabilities help ensure good operation even in noisy environments. WBS-2400 is cost-effective, and by increasing the addressable market per base station, and by the standards based approach, provides the lowest cost per line.
WBS-2400 is a robust and weatherproof IP-67 platform, and is designed to withstand extreme weather conditions. The WBS-2400 range of base stations have been optimized for a wide range of applications including business connectivity, municipal networks, metro zone networks for outdoor access and cellular data offload, public safety (video surveillance over wireless), VoIP / rural connectivity, education campuses, residential access, building coverage and the hospitality industry.
With an array of six antennas and six radios, the WBS-2400 Omni leverages our beamforming technology to provide superior connectivity, extended range and increased capacity, and succeeds in tripling the coverage provided in comparison to conventional access points. Furthermore, our advanced SDMA technology doubles the base station’s downlink capacity. These characteristics enable service providers, municipalities, and enterprises to deliver high quality Wi-Fi service with significantly fewer base stations compared to competing solutions at a much lower cost.
The WBS-2400 Sector base station is a solution for Wi-Fi deployments that require sector coverage. Based on an array of three antennas covering a 120° degree sector and three radios, the WBS-2400 sector leverages our beamforming technology to provide extended range and connectivity under both LOS and NLOS conditions. Furthermore, our advanced SDMA technology increases the base station’s downlink capacity. These characteristics enable service providers, municipalities, and enterprises to deliver high quality, Wi-Fi service with significantly fewer base stations compared to competing solutions at a much lower cost.
Carrier-Grade Wi-Fi Products -- WBSn
WBSn base stations, the Alvarion solution for carrier-grade Wi-Fi, is a family of advanced outdoor Wi-Fi base stations suitable for a broad range of applications. Operating in the license-exempt 2.4 and 5 GHz bands, and leveraging spatially adaptive beamforming together with 3x3:3 MIMO technology, the WBSn family delivers range and capacity, and addresses the growing needs of operators to deliver new content-rich services, while maintaining quality of service. WBSn base stations are carrier grade IP-68 certified, with a rich set of security, QoS and management tools, and with a built-in access controller, helping reduce cost and increase availability. Our spatially adaptive beamforming technology is based on an array of multiple radios and multiple antennas, leveraging the multiple signals received and transmitted. The multiple signals are properly adjusted by the beamforming technology to maximize the transmission signal at the client modem and the receiving signal at the base station modem. With Alvarion’s approach to beamforming, up to six powerful radios are in the base station and are used together with high gain antennas to form efficient dynamic beamforming per packet. The WBSn family is environmentally friendly with low power consumption, for off-grid powering, and complies with green standards.
Alvarion’s technology combines Tx and Rx spatially adaptive beamforming and 802.11n 3x3:3 MIMO for excellent coverage and capacity for delivering up to Gigabit per second capacity and 450 Mbps data speeds. The beamforming technology leverages a unique High Gain Diversely Polarized (HGDP) antenna array for enhanced performance, and significantly increases the link gain and interference immunity. Simultaneous 2.4 and 5 GHz band support for access services addresses the growing usage of 5 GHz in handheld devices and laptops, and the built-in integrated backhaul in 2.4 and 5 GHz, with self-forming and self-healing properties, provide strong performance under both LOS and NLOS conditions, by leveraging Alvarion’s beamforming and 3x3:3 MIMO technologies. WBSn base stations are complemented by Alvarion service provisioning, management tools, and a span of generic CPE devices, enabling numerous urban and rural applications at a low cost per bit. The WBSn base stations are IP-68 outdoor rated, are designed for high reliability, quality of service and security and come with a complete set of FCAPS management and service provisioning tools.
Alvarion’s base stations enable carriers, internet service providers, governments and private networks to deploy outdoor Wi-Fi networks in metropolitan and rural areas, for a variety of applications, including seamless cellular offload, hot-zone and hot-spots, residential and business access, rural communities, government and private networks, education (schools and universities), municipal networks and safe cities, the health and hospitality industries, oil and gas, industrial and construction sites, mining, terminal hubs, malls and other large venues, smart power grid and automatic meter reading and telemetry.
WBSn Carrier-Grade Wi-Fi Form Factors
The WBSn family includes base stations in four form factors, all IP-68 compliant, designed to withstand harsh outdoor environments, with flexible pole/wall installation and various field-of-view antennas. The WBSn-2400-S Sector base station operates in the 2.4 GHz band, and theWBSn-2450-S Sector base station, operates in the 2.4 and 5 GHz bands simultaneously. The sector form factor base stations are suited for building or street coverage, offering a range of direction that can be adjusted according to the coverage needs of the customer. The WBSn-2400-O Omni base station operates in the 2.4 GHz band, and the WBSn-2450-O Omni base station operates in the 2.4 and 5 GHz bands simultaneously. The Omni form factor base station offers 360 degree coverage, making it an excellent choice for providing effective Metro Wi-Fi, and consequently enabling carriers to comprehensively cover larger areas and address more customers per base station. Operating in the unlicensed band requires strong interference immunity algorithms and tools to cope with existing and future interferences. The built-in Interference Immunity Suite combines the inherent beamforming ability to suppress interference, comprising the Dynamic Interference Handling (DIH) algorithm that continuously optimizes receiver’s parameters according to noise level, the Automatic Channel Selection (ACS) algorithm for best operating channel online selection, the Wavion Rate Adaptation (WARA) for optimal rate selection in environments with high interference, and the capabilities of both Down Tilted Antennas (DTA) and sector antennas to reject noise out of their field-of-view.
Network Management Solutions
We provide advanced management applications for our wireless solutions. Our network management applications are equipped with graphical user interfaces and provide a set of tools for configuring, monitoring and effectively managing our wireless broadband networks. The Star Management Suite, our flagship carrier-class Network Management System ("NMS"), is fully compliant with Telecommunications Management Network (TMN) standards and simplifies network deployment and maintenance for networks of every scale. The Star Management Suite is designed specifically for WiMAX deployments and helps service providers to cost-effectively manage WiMAX deployments, roll out new services and maintain high service levels. The Star Management Suite is made up of specific management tools that cover the entire WiMAX service life-cycle - from initial installation to full service provision, and all monitoring, reporting and troubleshooting tasks required for efficient network operation. The Star Management Suite can be deployed gradually, module by module, in accordance with network needs. The Star Management Suite is made up of four modules:
AlvariStar is a carrier-class, field-proven NMS for managing Alvarion’s WiMAX base stations in mobile and fixed deployments.
StarACS automatic configuration server is a scalable solution for unified management of various WiMAX CPEs including; residential gateways ("RGWs") and devices with WiFi, data and VoIP capabilities as well as any fixed or nomadic TR-069-supported devices.
StarQuality is a network performance and traffic monitoring system that helps operators optimize WiMAX network usage, maximize traffic capacity, maintain high level, quality services and comply with maintenance service license agreements.
StarReport provides a quick and efficient way to generate network inventory reports for a full, accurate and easy to understand status of the entire network.
Accessories Offered by Alvarion
In order to support our products and provide comprehensive solutions to our customers, we provide a family of accessories designed to extend the range of our BreezeMAX, 4Motion, BreezeACCESS, WALKair and BreezeNET solutions. These accessories include antennas, cables, surge arrestors, amplifiers and other components.
Our Geographic Markets
Our network installations can typically be found in developing regions in developed countries and in emerging markets.
Within developed countries there are rural or suburban regions with low-density populations, often extending over vast distances that have limited telecommunications infrastructures. Wireless broadband has made inroads in these areas due to the business opportunities, robust equipment, extensive coverage and non line-of-sight capabilities. In addition, government assistance in many countries has served as an incentive for alternative operators to consider WiMAX, LTE and Wi-Fi systems for providing broadband services. Examples of these markets are found in various parts of the world, including in North America, Western and Eastern Europe, Asia Pacific and Latin America. Alvarion currently serves all of these markets. Regional governments and municipalities in some areas have initiated free broadband networks to their local populations, with private Wi-Fi networks. We offer these regional governments various state-of-the art solutions for broadband connectivity.
We believe that wireless broadband service providers in emerging markets have found that deploying wireless broadband and new wireless solutions where there is a lack of telecommunication coverage due to poor infrastructure is an affordable means to provide broadband and telephony services. Emerging markets are countries where basic voice services combined with broadband data remain scarce. Examples of these locations are in Africa, Eastern Europe, Latin America and Asia Pacific. Alvarion currently serves all of these markets.
Geographic Breakdown of Our Revenue –
General – Industry Market Segments and Players
The operators in the wireless broadband market fall within the following categories, as determined by the industry:
Communications Service Providers: Tier One and Tier Two Operators
Tier One and Tier Two operators form the largest and most established group of telecom operators, with nationwide or global presence, serving tens of millions of users. These operators are a primary focus for two of our business lines.
In numerous cases, these operators have a broadband wireless services unit. These operations are well addressed by WiMAX networks which can provide robust services at high QoS levels to large scales of users and enable these operators to maintain their position at the front line of communications services business. Examples of Tier One and Tier Two carriers that have publicly indicated their strategy include: Telkom South Africa Ltd., France Telecom, Bharti and Telefonos de Mexico S.A. de C.V, Orange and Safaricom.
With the proliferation of smartphones and tablet devices, many of the mobile Tier One and Tier Two operators are experiencing congestion and deteriorating QoS in their data networks. Wi-Fi equipment enables these operators to offload some of this traffic from their networks, resulting in improved QoS and user experience. Many of the world's leading mobile operators have publicly indicated their intent to use this technology approach, including AT&T, Verizon, Vodafone, Orange, NTT and KDDI.
Broadband Service Providers
Broadband service providers build their business model primarily on converged WiMAX solutions, while providing in many cases improved services compared to legacy telecommunication operators. Broadband service providers are expected to constitute a greater portion of the WiMAX market in the future. Examples of service providers in this category include Bolloré Telecom (France), Enforta (Russia), Free (France), Iberbanda in Spain (a subsidiary of Telefonica de Espana), and Ertach (Argentina).
CLECs & Regional Carriers
Competitive Local Exchange Carriers (“CLECs”) seek to compete effectively with the Incumbent Local Exchange Carriers (“ILECs”). Wireless broadband is an attractive and cost-effective last-mile alternative to wired access solutions. CLECs deploy our products to provide voice and broadband services in rural and suburban areas where wire line infrastructure does not exist or does not support the demand. In addition, in the areas of landline infrastructure in developed countries, wireless broadband systems offer carriers the ability to reach otherwise inaccessible customers, while providing increased bandwidth flexibility and service differentiation, surpassing the inherent limitations in wire line infrastructure.
CLECs have constituted an important part of our focus in our fixed wireless access product line and have exhibited an interest in our technology. The reduced installation costs, rapid roll-out potential and modular architecture, coupled with high network capacity and coverage and enhanced service options, present an appealing alternative to service providers and regional carriers seeking to supply their customers with reliable comprehensive data and voice solutions. Examples of these operators include VMAX (Taiwan), Wisper (USA), Elro (Denmark), Linkem (Italy), Czech on line, KDN (Kenya), Millicom and Xplornet Communications Inc. (Canada).
Private and government sectors that operate private networks for business management and operations are in constant need of technologies to support their operational requirements. Examples of such requirements are enterprises that require leased line replacement for cost-effective connectivity to provide VoIP and data services; metropolitan area networks for broadband connectivity; metering and monitoring applications used by utility companies to collect information and supervise operations; and cost-effective access within communities, municipalities and educational institutions. Additional areas that have leveraged broadband wireless very effectively include surveillance, public safety and municipal applications. Government authorities and private organizations with government sponsored funds have begun to deploy broadband wireless systems to support remote video surveillance, traffic flow management, back-up for disaster recovery, leased line replacement, various forms of backhaul and other public safety uses. Examples may be found in various U.S. communities such as Houston, Texas, Richardson, Texas and many others.
2011 Partial Customer List for 4G Wireless Broadband Systems> –
Telecom carriers and service providers using our products include, among others:
ADAM INTERNET, AUSTRALIA
BHARTI TELE-VENTURES LIMITED ( AIRTEL ENTERPRISE SERVICES), INDIA
CONNECT DATAELRO, DENMARK
FORIS TELECOM LTD., ISRAEL
IBERBANDA, S.A, SPAIN
ICE COSTA RICA
MTN UGANDA, UGANDA
NETIA SA, POLAND
NEXTEL DEL PERU S.A
TELECOM NAMIBIA, NAMIBIA
TELKOM SOUTH AFRICA LTD., SOUTH AFRICA
TTML TATA TELESERVICES (MAHARASHTRA) LTD
XPLORNET COMMUNICATIONS INC., CANADA
ZAPFI NV (VIG), BELGIUM
TECHNOLOGIES UNDERLYING OUR PRODUCTS –
We use internally developed core technologies and continue to invest in augmenting our expertise in networking, radio, digital signal processing (“DSP”) modem technologies, Media Access Control ("MAC") technologies and Radio Resource Management ("RRM") technologies. We also participate as active members in international standards committees.
To support the OPEN WiMAX concept and our 4Motion™ solution as well as the BreezeMAX platform and other products, we have developed or otherwise acquired, and continue to invest in, networking expertise in the areas of IP Access and Mobile IP that is particularly adapted for mobile WiMAX networks, ASN-GW, Point-to-Point Protocol Over Ethernet (“PPPoE”) tunneling, VPN and VoIP, based on industry standards, such as H.323, SIP and MGCP, and other Internet standards and protocols. To support the SentieM™ technologies embedded in our 4Motion™ solution as well as in the BreezeMAX platform and other products, we have developed or otherwise acquired, and continue to invest in, distributed radio architecture and hierarchical ASN-GW network architecture. We have also developed, and are continuing to develop, know-how to satisfy market requirements with respect to quality of service, classes of services, committed information rate, maximum information rate, virtual LAN management and prioritization. We are developing access technology based on the IEEE 802.16-2004 and the IEEE 802.16e-2005 standards, as well as the WiMAX Forum™ technical specifications for both radio access and networking to further support the needs of customers using WiMAX. We have also developed a network management system that provides network surveillance, monitoring and configuration capabilities for all our products.
We have in-house radio development capabilities to address the diverse frequency bands and modulation methods of our products. The frequency bands include, among others, 900 MHz, 2.4 GHz, 2.3, 2.5-2.7 GHz, or MMDS, 3.3-3.8 GHz, 4.9-6 GHz, 10.5 GHz and 26 and 28 GHz. The modulation methods include Frequency Hopping Spread Spectrum (FHSS), Gaussian Frequency Shift Keying (GFSK), Direct Sequence Spread Spectrum (DSSS), Single Carrier QAM and OFDM and OFDMA. Our products include both TDD and FDD radios.
Our radio teams specialize in low cost, mass-production oriented radio design. The system level capability is software-assisted radio auto-calibration, which allows for reduced manufacturing costs and compensates for components’ parameter spread and instability, temperature-related changes and aging of components.
Our internal radio expertise enables us to attract customers by addressing promptly new needs, such as new frequency bands.
We have developed or otherwise acquired, and continue to invest in, radio technology expertise, specifically high efficiency, high power radios and new interfaces between the modem and the remote radio heads.
Digital Signal Processing ("DSP") Modem Technology
We maintain expertise in DSP and in modem design. Our capabilities include a hardware oriented design, as well as programmable DSP oriented design. Our modem design hinges on the Software Defined Radio paradigm. The extensive configurability of our base station modems, through Field Programmable Gate-Array (FPGA) and DSP reprogramming, allows us to readily introduce advanced features to our products and to follow amendments to emerging standards, including capability to upgrade deployed networks by downloading only software. Similarly, our CPE designs allow for upgradeability through over the air software download, simplifying our customers' operations.
We have developed the BreezeMAX base station platform, which is designed to support the WiMAX (IEEE 802.16) air interface specification. The platform supports the multiple antenna elements per sector to exploit the smart-antenna signal processing techniques for improved coverage and network capacity. The programmable DSP-based architecture of the BreezeMAX platform enables us to support the IEEE 802.16d-2004 standard, as well as the IEEE 802.16e-2005 standard for mobile broadband communications, while enjoying the benefits of OFDMA and smart-antenna processing. The base station architecture and capabilities are closely aligned and synchronized with the CPE application-specific integrated circuit (“ASIC”) and reference design developed by Intel resulting from our collaboration, which began in 2003, to ensure optimum performance in future WiMAX deployments. Our WiMAX CPE (Customer Premises Equipment) is based on commercial SoC (System On Chip) elements. As WiMAX technology matured, less interaction has been required with chipset vendors, reducing development risk. Furthermore, as the industry moves toward technologies such as LTE and SoC, vendors have refocused their investments from WiMAX to LTE. Therefore we may expect those chipset vendors to declare EoL (End of Life) for WiMAX chipsets, which will require Alvarion to acquire large stocks in addition to maintaining a low level of responsiveness for ongoing maintenance.
We have also developed mixed signal ASICs containing DSP cores. Inclusion on-chip of analog-digital converters is instrumental to both cost reduction and power consumption reduction. First generation ASIC supports our IEEE 802.11-based FH-GFSK products, with the above-standard capability of delivering 3 Mbps, with automatic fall back to 2 Mbps and 1 Mbps as necessary. Our second generation ASIC is optimized for OFDM modulation, as used by the IEEE 802.11a/g standards and the recently approved IEEE 802.16a standard. This ASIC is based on proprietary programmable “very long instruction word” DSP architecture. The programmable architecture allows us to implement numerous beyond-standard capabilities, such as OFDMA extensions to the baseline OFDM mode. This system-on-a-chip ASIC has been used as a key component of our BreezeACCESS-OFDM products. An additional ASIC developed in-house supports our WALKair products, with a full duplex point-to-multipoint single carrier trellis-coded 64QAM modem.
We have developed or otherwise acquired, and continue to invest in, MAC and RRM technology expertise that support channel aware rate adaptation and power control technology (part of the SentieM™ suite) technologies as well as advanced packet data scheduling and OFDMA frame building technologies embedded in the BreezeMAX platform and 4Motion™ solution. Additional features developed or otherwise acquired are MAC and RRM support for MIMO transmissions in the downlink, collaborative MIMO reception in the uplink and beam-forming in the downlink.
Alvarion introduced a distributed antenna system offering in 2011. The system uses proprietary RF technology based on intellectual property acquired from Clariton. By manipulating cellular RF signals the system can transport these signals across cable TV infrastructure to provide coverage and capacity within large buildings. The technology is termed TrueActive and provides amplification at the end points called Remote Units where the cellular signal is being emitted towards mobile handsets and where the signal is being received from transmitting mobile handsets.
This structure provides uplink gain and minimal noise level required for high capacity cellular data networks. The technology is protected by various patent filings.
Alvarion Carrier Grade Wi-Fi Technology
Alvarion’s technology combines Tx and Rx spatially adaptive beamforming and 802.11n 3x3:3 MIMO for effective coverage and capacity.
The true spatially adaptive beamforming technology leverages a High Gain Diversity Polarized (HGDP) antenna array for maximum performance. The beamforming significantly increases the link gain and interference immunity. Moreover, it exploits multipath to its advantage by coherently combining signals traveling in different propagation paths, providing LOS and NLOS coverage, and indoor penetration.
With 3x3 MIMO and three spatial data streams, Alvarion’s base stations set up a new market milestone delivering up to gigabit capacity and 450 Mbps data speeds.
Interference Immunity Suite
Alvarion’s interference immunity combines the beamforming inherent ability to suppress interference, the Dynamic Interference Handling (DIH) algorithm for continuous receiver parameter optimization according to the noise level, the Automatic Channel Selection (ACS) algorithm for optimal selection of the best operating channel, the Alvarion Rate Adaptation (WARA) for optimal rate selection for any environment, and the Down Tilted Antennas (DTA) and sector antennas capability to reject interference out of their field-of-view. Alvarion’s interference immunity suite leverages over a decade of outdoor Wi-Fi experience.
Alvarion’s multi-band access provides simultaneous 2.4 and 5 GHz band support for access services, addressing the growing usage of 5 GHz in handheld devices and laptops.
Alvarion’s integrated backhaul provides support in 2.4 and 5 GHz, with self-forming and self-healing, providing performance in both LOS and NLOS by leveraging Alvarion’s beamforming and 3x3:3 MIMO technologies
Alvarion’s base stations are IP-67 outdoor rated and are designed for high reliability, quality of service and security. Alvarion base stations come with a complete set of FCAPS management and service provisioning tools.
IOT Labs and Activities
To support our OPEN WiMAX strategy and enable a strong ecosystem of CPEs and devices by top industry vendors we have created our Inter-operability testing (IOT) lab which tests a variety of products for interoperability on an ongoing basis, with the goal of ensuring that customer specific configurations, including CPE's and frequencies, are fully supported. The IOT Center is tasked with testing both various forms of CPE's, including dongles, PCCards, USB's, notebooks, laptops and standalones, as well as a range of core products, including ASN-GW's, AAA's and Home Agents (an element in the carrier network). The IOT lab tests products from a variety of vendors, in an Alvarion network environment using Alvarion BaseStations and, on occasion, an Alvarion ASN-GW, depending on the customer configuration. In addition, the IOT lab performs scheduled maintenance for product versions which have already undergone IOT. Our IOT center can additionally engage in provisioning activities which enable end-to-end integration of a full solution per customer requirements.
Participation in International Standards Committees
As part of our strategy to become a technology leader and influence the industry in specific areas, we have, since our inception, been active members in standardization committees.
We are a principal founder of the WiMAX Forum™, a non-profit organization whose members work to promote adoption of the IEEE 802.16 OFDM/OFDMA standard and to certify interoperability of compliant equipment. Our representative on the board of directors of the WiMAX Forum™ is Dr. Mohammad Shakouri, Corporate Vice President of Innovation and Marketing at Alvarion, who holds the position of Vice President of the WiMAX Forum™.
The scope of the IEEE 802.16-based standard is the Wireless MAN, supporting larger range fixed/nomadic/mobile broadband access networks with more performance and dedicated high-end services. Our engineers actively participate in the technical group for defining inter-operability profiles and tests. Our representative, Dr. Vladimir Yanover, holds the position of Vice Chair of WiMAX Forum™’s Technical Working Group (TWG), which is responsible for defining the interoperability profiles and the interoperability and conformance tests for the IEEE802.16e-2005 standard.
We actively participate in the IEEE 802.16’s broadband wireless access work group. Similarly, we are part of the WiMAX Forum™’s groups that define and improve the OFDM/OFDMA mode for both fixed and mobile broadband applications and that improve the ability of the IEEE 802.16 standard to increase its market footprint in license-exempt applications as well as a registered member in the Wi-Fi Alliance (WFA) forum with regard to the 802.11n standard.
We are also very active in the international regulatory arena, including ITU-R, which aims to promote WiMAX in the regulatory domain and to secure the spectrum for broadband fixed/mobile deployment.
SALES, MARKETING AND SUPPORT OF OUR PRODUCTS –
Alvarion’s carrier products are mostly marketed directly to carriers. In the vertical markets, we sell our products primarily through an extensive network of more than 200 active partners. These include global and local system integration and service fulfillment partners in various geographic regions, solution partners, national and local distribution partners, and resellers. Our distribution partners in turn sell to resellers, including value-added resellers and systems integrators, as well as to end users.
We currently sell and distribute our products in more than 120 countries worldwide. The use of different types of marketing channels through our partnership network enables us to market our products to many different markets and to meet the differing needs of our customers.
We are seeking additional strategic relationships with international partners, strong local partners and other key companies to increase our exposure and establish ourselves as a supplier to service providers, telecom markets and end-user markets that are not reached by our present distribution channels.
We have strong relationships with leading telecom operators to whom we sell our solutions directly. Our relationships are primarily based on the following common activities: (i) we are building together the industry and leadership position; (ii) we have a common strategy and participate in world-wide standards authorities and consortia; and (iii) we have a positive commercial relationship and share a common vision and joint marketing activities.
We operate in various regions. Our subsidiaries and representative offices, located throughout North America, South America, Europe, Africa and Asia, support our international marketing network.
We derive our revenues from different geographical regions. For a more detailed discussion regarding the geographic allocation of our revenues based on the location of our customers, see “Item 5—Operating and Financial Review and Prospects—Operating Results.”
We conduct a wide range of marketing activities aimed at positioning and generating recognition and awareness of our brands throughout the telecommunications industry, as well as identifying leads for distributors and other resellers. These activities include public relations, participation in trade shows and exhibitions, advertising programs, public speaking at industry forums and website maintenance.
We maintain a highly trained global technical support team that participates in providing customer support to customers who have purchased our products. This includes both direct support rendered by us when we perform turn-key projects, and local support by distributors’ and system integrators’ personnel trained by our support team, support through help desks and the provision of detailed technical information on our website, expert technical support for resolution of more difficult problems, as well as participation in pre-sales and post-sales activities conducted by our distribution channels with large customer accounts and key end users.
We organize technical seminars covering general technologies, as well as specific products and applications. We also have qualification programs to advance the technical knowledge of our distributors and their ability to sell and support our products. These seminars are held in various countries and in different languages as needed.
MANUFACTURING OPERATIONS AND SUPPLIERS –
We currently subcontract most of the manufacturing of our products. We have a pre-qualification process for our contract manufacturers, which includes the examination of the technological skills, production capacity and quality assurance ability of each contract manufacturer. Our manufacturing capacity planning is based on rolling forecasts done on a monthly basis. The forecasts provided to the subcontractors are based on internal company forecasts, and are up to six months. We purchase our raw materials from several suppliers.
Our products are currently manufactured primarily by several contract manufacturers located in Israel, with additional manufacturing also taking place in the Philippines and Taiwan. Final assembly and testing are performed by our contract manufacturers and are monitored and controlled by our quality assurance personnel. The testing criteria are validated by the automatic fail safe mechanisms in order to ensure that all activities successfully pass the testing criteria. We have processes in place for the ongoing performance of quality assurance at our own facilities and at our subcontractors’ facilities. The automating testing equipment which is developed and owned by us and testing procedures at our subcontractors are part of our Approved Enterprise programs.
We monitor quality with respect to each major stage of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing and packaging and shipping.
We are ISO 9001, ISO 14000 and ISO 18000 certified. Our contractors are ISO 9002 certified.
All our manufacturing locations in Israel and in the Philippines comply with RoHS and WEEE regulations.
PROPRIETARY RIGHTS –
In order to protect our proprietary rights in our products and technologies, we rely primarily upon a combination of patents, trademarks, trade secrets, and copyrights, as well as confidentiality, non-disclosure and assignment of inventions agreements. Following the Acquisition Transactions (together with Clariton and Wavion's granted and pending patents) we have been granted 123 patents and 118 pending patent applications worldwide. The proprietary rights described above are material to our business and profitability. Because our proprietary rights are diversified and independent of each other, we believe that we are not dependent on any one patent.
We have trademark registrations in Israel, the United States, the European Union and many other countries. In addition, we have typically entered into nondisclosure, confidentiality and assignment of inventions agreements with our employees, our consultants and with some of our suppliers and customers who have access to sensitive information. We cannot assure you that the steps taken by us to protect our proprietary rights will be sufficiently adequate to prevent misappropriation of our technology or independent development or the sale by others of products with features based upon, or otherwise similar to, those of our products.
Given the rapid pace of technological development in the communications industry, we also cannot assure you that our products may not be adjudicated as infringing on existing or future proprietary rights of others. Although we believe that our technology has been independently developed and that none of our products infringe upon the rights of others, from time to time, we receive letters alleging that we have infringed upon a patent, trademark, license or other proprietary right. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
We receive licenses to certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost.
Currently, we participate in the formation of two patent pools administered by VIA licensing, a company experienced in technology licensing which formed the LTE patent pool and administers the WiMAX patent pool and the LTE patent pool. As a result, we expect that patents pertaining to WiMAX and LTE and their associated royalty rates will be more predictable and transparent. The patent pools may act as a “one stop shop” where companies building WiMAX and LTE solutions can obtain use of the patents more simply and cost effectively using a more competitive royalty structure that charges only for the features required to develop WiMAX and LTE products.
THE COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE –
The markets for our products are very competitive. Competition comes from both tier-1 network equipment vendors who have advantageous cost structure, scale advantage and can offer financing and turnkey solutions; and from smaller competitors providing lower end, lower cost solutions. We believe that the principal competitive factors in the markets for our products include:
Companies that are engaged in the manufacture and sale or the development of products that compete with our wireless broadband products include Airspan Inc., NewNet, Huawei Technologies, Samsung, and ZTE. Companies that compete with our products in the vertical markets include mainly Radwin, Redline, Proxim, and Ruckus Wireless. Companies that are engaged in the manufacture and sale or development of products that compete with our carrier-grade outdoor Wi-Fi products include Ruckus Wireless, Cisco, Altai, Aruba, GoNet, and BelAir (acquired by Ericsson). Other vendors in the 4G and Wi-Fi markets and other vendors of TD-LTE equipment may become our competitors in the future.
Our products use wireless media, which also competes with alternative telecommunications transmission media, including leased lines, copper wire, fiber-optic cable, cable modems, satellite technologies and television modems. Our products compete with other wireless media technologies, including (i) 3G, HSPDA, HSUPA, EVDO and (ii) 4G, such as UMB and LTE. Although LTE and mobile WiMAX are based on the same fundamental technologies, they originate from different eco -systems. However, over the last few years, LTE’s 4G has been adopted rapidly by cellular operators and their traditional eco-systems throughout the world, and we expect increased competition between WiMAX and LTE over the course of 2012.
During the last decade, the rise of Chinese telecom equipment vendors, such as Huawei and ZTE, has put pressure on Western telecom equipment vendors. In order to compete with Chinese vendors’ cost and financing advantages, Western vendors, such as Alcatel - Lucent, Nokia with Siemens and with Motorola, have consolidated in order to create advantages of scale. Still, Chinese vendors are gaining market share and competition in the telecom infrastructure is intense.
Some of our existing and potential competitors, have substantially greater resources including financial, technological, manufacturing, marketing and distribution capabilities, and enjoy greater recognition than we do.
Increased competition in our market results in price reductions, new business alliances, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market shares, which could harm the results of our operations. We have designed and engineered our products to minimize costs, maximize margins and improve competitiveness. However, we cannot assure you that we will be able to compete successfully against current or future competitors.
For more information regarding our competitive strengths, please see “Item 4—Information on the Company—Business Overview—Company Strengths”.
GOVERNMENT REGULATION -
Our business is premised on the availability of certain radio frequencies for broadband communications. Radio frequencies are subject to extensive regulation under the laws of each country and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. In the United States, our products are subject to FCC rules and regulations. In other countries, our products are subject to national or regional radio authority rules and regulations. Current FCC regulations permit license-free operation in FCC-certified bands in the radio spectrum in the United States. Outside of the United States the use of spectrum license, if any, and the purposes of such use, vary from country to country. Some of our products operate in license-exempt bands, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant changes, the results and timing of which are uncertain.
In many countries, the unavailability of radio frequencies for broadband communications has slowed down the growth of these networks. The process of establishing new regulations for wireless broadband frequencies and allocating these frequencies to operators is complex and lengthy. The regulation of frequency licensing began during 1999 in many countries in Europe and South America and continues in many countries in these and other regions. Licensed blocks in 2.3, 2.5, 3.3, 3.5 and 3.6 GHz were released in some countries. In Europe, the European Civil Code (the “ECC”) assigned the spectrum in 3.4-3.8GHz to broadband applications, in a flexible and technology-neutral mode. However, the implementation of the ECC decisions in individual countries may suffer delays or may be limited to a relatively small range of spectrum. In addition to the above, in some countries, particular frequency bands were allocated for licensing. Our current customers that commercially deploy our licensed band products have already been granted appropriate frequency licenses for their network operation. In some cases, the continued validity of these licenses may be conditional on the licensee complying with various conditions. In October 2007, the Radio-communication Sector of the International Telecommunication Union (ITU-R) made a decision that effectively includes WiMAX technology in the IMT-2000 set of standards. This inclusion of WiMAX in IMT-2000 may be viewed as placing WiMAX on equal footing with the legacy-based technologies ITU-R already endorses. However, establishing new regulations in individual countries for wireless broadband frequencies and allocating frequencies to operators is complex and lengthy. The European Commission started a process to revise the 2.5-2.69GHz regime to provide more flexibility in the spectrum usage and a more balanced protection of the TDD operation. A change in the European regulation may imply a need for revised type approval norms; such revisions may involve a lengthy process.
There is a trend to release more license-exempt bands. For example, in the United States, FCC rules were modified to include an additional 255MHz of spectrum, though actual use of this allocation is not permitted until a technical issue is resolved between the National Telecommunications and Information Administration (which manages government-used spectrum) and the FCC (which manages commercial and public spectrum). In Europe, the process is slower. We see potential for new markets in rural areas and developing countries, created by the availability of licensed-exempt spectrum in the 5GHz band. The FCC enforced the 3.65-3.7GHz spectrum to be used in a shared mode; the upper 25MHz require a special coexistence protocol. Such a protocol is defined for the WiMAX systems in 802.16 and this process might be lengthy.
An additional trend affecting our business involves allowing TDD operation in frequency bands allocated in the past for FDD operation. Generally, TDD operation allows for lower cost equipment and is currently the preferred mode of operations, according to the adopted WiMAX Forum’s profiles. However, the operation of TDD networks in proximity to FDD networks creates a mutual interference hazard that may postpone customer decisions, impede network deployment or require higher cost solutions to address such issues.
In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to marketing devices that emit radio frequency energy. These requirements were established, among other things, to avoid interference among users of radio frequencies and to permit the interconnection of equipment.
We are subject to export control laws and regulations with respect to all of our products and technology. In addition, Israeli law requires us to obtain a government license to engage in research and development, and export, of the encryption technology incorporated in some of our products. We currently have the required licenses to utilize the encryption technology in our products.
The following is a list of our subsidiaries, each of which is wholly-owned:
*Alvarion SARL, Alvarion GmbH, Wavion, Inc.
**Alvarion Mobile Inc., PT. Alvaritech Indonesia and Wavion Inc. are wholly-owned subsidiaries of Alvarion, Inc.
*** Alvarion Singapore PTE Ltd., Taiwan Branch Preparatory Office is a wholly-owned branch of Alvarion Singapore PTE Ltd.
**** Interwave Communications International SA and Alvarion Philippines are wholly-owned subsidiaries of Alvarion Mobile Inc.
***** Wavion Ltd. is a wholly-owned subsidiary of Wavion Inc.
In addition, we have representative offices in China and Russia.
We do not own any real estate. As of December 31, 2011, we leased an aggregate of approximately 153,095 square feet in Israel for annual lease payments (including management fees) of approximately $2.7 million and incurred annual parking expenses in connection with these leases of approximately $0.5 million. These premises consist mainly of our corporate headquarters in Tel-Aviv, Israel, and a separate warehouse located in Israel. Recently the company's management has decided to terminate the lease for this warehouse in Israel which will be vacated during the beginning of 2012. Thereafter the Company shall lease only one warehouse and reduce its costs accordingly.
We have been occupying our main premises since April 2001. These premises serve as our corporate headquarters, as well as the site at which we conduct our main research and development activities and some quality assurance, final assembly and testing operations. The lease agreement for our main premises is effective until 2013 for annual lease payments (including management fees) of approximately $2 million as well as annual parking expenses of approximately $0.5 million. We also lease approximately 18,320 square feet of office facilities located at 5 Hamada Street, Yokneam Ilit, Israel, at an annual rent of approximately $0.2 million. These premises serve as the corporate headquarters of our newly purchased subsidiary in Israel, Wavion Ltd. We also lease approximately 12,647 square feet of office facilities located at 555 N. Mathilda Avenue, Suite 210, Sunnyvale, CA 94085, at an annual rent of approximately $0.2 million and approximately 15,589 square feet of office facilities located at 6430 Fiddler's Green Circle, Suite 175 Greenwood Village, CO 80111, at an annual rent of approximately $0.1 million. We also have an additional office in Maryland located at 6701 Democracy Blvd., Suite 300, Bethesda, MD, at an annual rent of approximately $0.1 million. Our Maryland office serves as the corporate headquarters of our U.S. subsidiary, Alvarion Inc., and as our principal sales and marketing office in North America. We also lease approximately 22,098 square feet of office facilities in Romania, at an annual rent of approximately $0.5 million. These premises serve as the corporate headquarters of our Romanian subsidiary, Alvarion SRL, and as our principal research and development and technical support office in Romania. In addition, we lease office space for the operation of our facilities in Argentina, France, China, Uruguay, Mexico, Poland, Italy, South Africa, India and Spain. Some of the office space was vacated as part of the Company’s restructuring process. We believe that the facilities we currently lease are adequate for our current requirements.
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 3—Key Information—Risk Factors.”
Overview> We concentrate our resources on the broad industry of wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 15 years, from developing core technology to creating and promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and with experience in development and deployment of OFDM technology -based systems, we have been at the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and in leading portions of the industry to adopt our technology. The WiMAX standard is the outcome of the standardization work done by the WiMAX Forum™, widely based on the IEEE 802.16 standard working group.
We believe we will experience demand in the consumer, business and government segments for access to bandwidth-intensive applications (video, data and voice).
Our vision is focused on providing optimized broadband wireless solutions to address connectivity, capacity and coverage challenges of public and private networks, enabling us to maintain our current position and grow along with the market demand for multi-technologies solutions and applications.
Our solutions are usually used in a point-to-multipoint architecture and address a wide scope of end-user profiles, from the consumers, residential and SOHO markets, through SMEs and multi-tenant units/multi-dwelling units as well as applications in various vertical markets.
Our products operate in licensed and license-exempt bands, ranging from 450 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, MAC, IP-based mobile switches, compact mobile networks, networking protocols and VLSI. We have intellectual property rights in these technologies.
On November 23, 2011, we completed the acquisition of Wavion, a technology leader in outdoor Wi-Fi applications for metro and rural areas with deployments in more than 75 countries. Featuring Wavion Base Stations with 802.11n in 2.4 GHz and 5 GHz unlicensed bands and in the 700 MHz licensed band, Wavion offers end-to-end solutions including access, backhaul, CPEs, management and service provisioning tools. The acquisition was for total consideration of approximately $28.4 million in cash (including a $2.7 million performance earn-out which was paid). We believe that the Wavion acquisition will enable Alvarion to further leverage its years of experience providing carrier-grade solutions and creates a unique combination of multi-technology capabilities which can be optimized for various types of networks and applications.
2011 was a difficult year for us in light of the aggressive competition with other 4G vendors. In 2011, our revenues decreased by 7.7% to approximately $190.0 million from approximately $205.8 million in 2010, primarily due to the aggressive competition which we face especially from Chinese vendors, the postponement of some WiMAX projects as a result of the limited availability of funds related to the global credit crisis, the global economic slowdown and delays in allocating spectrum in several countries.
Despite these difficulties and challenges, in 2011, we won several projects, providing complete turnkey solutions from design and planning to implementation, by ourselves and together with partners. In addition, we formed numerous strategic relationships with world-wide partners adding technology, integration and channel partners. In order to ensure the timely introduction of a host of mobile WiMAX devices, we successfully completed interoperability testing with major chips and device manufacturers.
We believe that there is a strong demand for broadband access, and governments around the world, including in Europe, Australia and the United States, are creating programs to extend broadband coverage as a matter of national competitiveness.
In addition, a host of new mobile data opportunities in public safety, border control, utilities and other vertical markets are emerging.
During 2011 our gross margins decreased to approximately 32.3% of our revenues, compared to approximately 35.2% of revenues in 2010. This decrease in gross margin is mainly due to inventory write-off related to the bankruptcy filing of Open Range Communication in the amount of approximately $7.1 million. In addition, the fact that our revenue mix contained a higher proportion of third party equipment, combined with the continued effects from the global economic slowdown, the limited availability of credit in the global capital markets, the aggressive competition which we faced (especially from Chinese vendors) and the continued delay in new project launches led to a low level of revenue with a particularly unfavorable mix of our products and third party products, which resulted in a large sequential decline in gross margin. During 2011, due to the reasons mentioned above, we implemented another restructuring plan, which included the layoff of approximately 194 employees and the vacating of certain leased premises. As a result, we recorded other restructuring charges of approximately $12.0 million in 2011.
During 2011, our net loss amounted to approximately $(33.8) million compared to net loss of approximately $(98.5) million in 2010. This decrease in net loss was primarily a result of the impairment of goodwill in an amount of $57.1 million that we recognized in 2010 and an impairment of short term investment in an amount of $7.0 million that we recognized in 2010. Our operating expenses decreased to $94.3 million in 2011 compared to $162.8 million in 2010 due to the $57.1 million impairment of goodwill that we recognized in 2010 of as well as cost reduction which the Company implemented, as mentioned above.
Critical Accounting Principles –
Our financial statements are prepared in accordance with United States generally accepted accounting principles, and audited in accordance with standards of the Public Company Accounting Oversight Board (United States). A discussion of the significant accounting policies that we follow in preparing our financial statements is set forth in Note 2 to our consolidated financial statements included in Part III of this Annual Report. In preparing our financial statements, we must make estimates and assumptions as to certain matters, including, for example, the amount of new materials and components that we will require to satisfy the demand for our products based on our sales estimates and the period of time that will elapse before our products become obsolete. While we endeavor diligently to assure that our estimates and assumptions have a reasonable basis and reflect our best assessment as to the future circumstances in which we anticipate, actual results may differ from the results estimated or assumed and the differences may be substantial as to require subsequent write-offs, write-downs or other adjustments to past results or current valuations.
The following is a summary of certain critical principles, which have a substantial impact upon our financial statements and which we believe are most important to keep in mind in assessing our financial condition and operating result:
Revenue Recognition. We generate revenues from selling our products indirectly through distributors as well as selling them directly to end users.
Revenues are recognized in accordance with ASC 605-10-S99-1 (SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”) and ASC 605-25 “Multiple-Element Arrangements” when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable, no further obligation exists and collectability is probable.
We generally do not grant a right of return on our products. However, we have granted to certain distributors limited rights of return on unsold products. Product revenues on shipments to these distributors are recognized based on their history of actual returns provided that all other revenue recognition criteria are met.
Starting January 1, 2011 the Company adopted the guidance of ASU 2009-13 "Multiple-Deliverable Revenue Arrangements", (amendments to FASB ASC Topic 605, Revenue Recognition) ("ASU 2009-13") and ASU 2009-14, "Certain Revenue Arrangements That Include Software Elements", (amendments to FASB ASC Topic 985, Software) ("ASU 2009-14"). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendment eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance in determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. Company's management determined that the software is incidental to the product as a whole and therefore ASC 985-605 and ASU 2009-14 should not apply.
The Company prospectively applied these provisions to all revenue arrangements entered into or materially modified after January 1, 2011. This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting and the revenue is recognized when the applicable revenue recognition criteria are met. The Company’s arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue. While certain of the Company’s bundled products are now accounted for following ASC 605, the impact of the adoption of these standards was immaterial.
The Company's revenue recognition policies provide that, when a sales arrangement contains multiple elements, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company establishes VSOE of selling price using the price charged for a deliverable when sold separately when they have not yet sold the deliverable separately, using the price established by management having the relevant authority. When VSOE cannot be established, the Company establishes the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. The best estimate of selling price is established considering several external and internal factors including, but not limited to, historical sales, pricing practices and geographies in which the Company offers its products. The determination of ESP is judgmental.
For arrangements which include multiple elements, the Company considers the sale of equipment, professional services and maintenance to be three separate units of accounting in the arrangement in accordance with ASC 605-25, since all three elements have value to the customer on a standalone basis.
Equipment includes the software as the software is deemed incidental to the product as a whole. The Equipment element price was attained by using management best estimate based on the historical prices sold by the Company. The historical prices have been allocated based on product and region, due to variances between the regions in which the products have been sold.
Professional Services prices were based on TPE for which the Company has accumulated the prices from its suppliers throughout the year.
Maintenance price has been established using VSOE of fair value of maintenance services, based on the price charged when sold separately at renewal.
In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or the acceptance provision has lapsed.
Advances from customers include advances and payments received from customers, for which revenue has not yet been recognized.
Accounts Receivable. We are required to assess the collectability of our accounts receivable balances. Generally, we do not require collateral; however, under certain circumstances we require letters of credit, additional guarantees or advance payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including, but not limited to, the current credit-worthiness of each customer. We regularly review the amounts due and related allowance by considering factors, such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. For certain accounts receivable balances, we are also covered by foreign trade risk insurance. Should we consider it necessary to increase the level of provision for doubtful accounts, required for a particular customer, then additional charges will be recorded when they become probable.
Allowance for doubtful accounts amounted to $5.1 million and $5.5 million as of December 31, 2010 and 2011, respectively. The balance as of December 31, 2011, includes a doubtful debts provision from the Wavion acquisition of $0.3 million. The Company charges off receivables when they are deemed uncollectible. Actual collection experience may not meet expectations and there may be an effect in the Company's ability to collect customers' debts in a timely manner or at all and this may result in increased bad debt expense.
Total doubtful debts expenses during 2009, 2010 and 2011 amounted to $0.9 million, $4.6 million and $2.0 million, respectively. Total write-offs amounted $ 0 million, $0.7 and $1.8 million in 2009, 2010 and 2011, respectively.
Inventory Valuation. Our policy for valuation of inventory and commitments to purchase inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which we operate the wide range of products that we offer and the sales-cycles we experience all contribute to the exercise of judgment relating to maintaining, utilizing and writing-off inventory. The estimates of future demand that we use in the valuation of inventory are the basis for our revenue forecast, which is also consistent with our short-term manufacturing plan. Inventory reserves are also provided to cover risks arising from non-moving or slow-moving items. We write-down our inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value which is based on assumptions about future demand and market conditions. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
Note 2g to our financial statements describes the write-offs and provisions that we made and recorded in 2009, 2010 and 2011 to reflect the decline in our expectations about the value of inventory, which had become excessive, unmarketable or otherwise obsolete or the inventory of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales which we did not consummate. In addition, changes in demand, which result in increased demand for our products, may lead to utilization of our previously written-off products. Note 2g to our financial statements describes the effect of the utilization of the related products of our prior years’ written-off components, which are reflected in our revenues without additional cost in the cost of sales in the period the inventory was utilized.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory allowances and our gross margin could be adversely affected. In addition, if the demand for our products increases beyond our expectations following a write-off of inventory, we may need to further utilize our previously written-down inventory. Such utilization may contribute to our gross margin in future periods. Inventory management remains an area of management focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
Goodwill and long-lived asset impairment. We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and Others”.
Goodwill impairment testing is a two-step process. The first step involves comparing the fair value of a company's reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
For purposes of testing goodwill in accordance with ASC 350 for the year ended December 31, 2010, the Company operated in one operating segment, and this segment is comprised of a single reporting unit. During 2010, the global economic downturn negatively affected the Company's results of operations with a significant reduction in the Company's market capitalization. In calculating the fair value of the reporting unit, the Company used a Discounted Cash Flow (DCF) approach. The Company further applied a market approach, using multiples of earnings, to corroborate the results achieved in the estimated discounted cash flows model. As a result of performing step two, the Company's implied fair value of the reporting unit goodwill has decreased to zero.
For the year ended December 31, 2009, no impairment losses were recorded. In 2010, we recorded impairment of the outstanding goodwill balance in the amount of $57.1 million.
The acquisition of Wavion in November 2011 has been incorporated into the single reportable segment of the Company. Nevertheless, Wavion was considered its own reporting unit in 2011, as the full integration into the activity of the Company had not yet been completed. As part of the Wavion acquisition, the Company recorded goodwill in an amount of $13.1 million. Since the transaction occurred in November 2011 and no outstanding goodwill balances remained prior to the acquisition, no annual impairment test has been completed and no impairment has been recorded in 2011.
Warranties. We provide for the estimated cost of product warranties at the time the product is shipped. Our products sold are covered by a warranty for periods ranging from 14 to 21 months. We accrue a warranty reserve for estimated costs to provide warranty services. Our estimate of costs to service the warranty obligations is based on historical experience and expectation of future conditions. We accrue for warranty costs as part of our cost of sales based on associated material costs and technical support labor costs. Material cost is primarily estimated based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost is primarily estimated based upon historical trends in the rate of customer calls and the cost to support the customer calls within the warranty period. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.
Stock-Based Compensation Expense. We account for equity-based compensation in accordance with ASC 718 “Compensation - Stock Compensation”. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Stock-based compensation expense recognized under ASC 718 for 2009, 2010 and 2011 was $4.2 million, $3.3 million and $3.2 million, respectively. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted. Our stock based compensation expense decreased in 2011 as a result of updating several parameters in our stock-based compensation calculation due to the cost reduction that we implemented during the year and a decrease in the number of our principal granted options.
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model and for restricted stock units and options granted with par value exercise price, the fair value is calculated by multiplying the share price at the date of grant with the number of options granted. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon United States bonds treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical behavioral patterns rates of employee groups by job classification. In 2011, the expected term of options granted is estimated based on historical experience and represents the period of time that options granted are expected to be outstanding. Our expected dividend rate is zero since we do not currently pay cash dividends on our ordinary shares and do not anticipate doing so in the foreseeable future.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. In addition, we are subject to the continuous examination of our tax returns by the local tax authorities in each country that we have established corporations. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes.
ASC 740-10-55 requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. ASC 740-10-55 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB ASC 740 “Income Taxes”. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Contingencies. We are involved in legal proceedings and other claims from time to time. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for any contingencies are made after careful analysis of each individual claim. The required reserves may change due to future developments in each matter or changes in approach, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net loss. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. See “Item 8A Financial Information Finance – Consolidated Statements and Other Financial Information – Legal Proceedings.”
Business Combination. We apply the provisions of ASC 805 "Business Combination", accordingly we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
Results of Operations –
The following tables present our total revenues attributed to the geographical regions based on the location of our customers for the years ended December 31, 2009, 2010 and 2011:
The following tables set forth, for the periods indicated, selected items from our consolidated statement of operations in U.S. dollars in thousands and as a percentage of total sales: