PART I
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ITEM 1.
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IDENTITY OF
DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS
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Not applicable.
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ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not applicable.
ITEM 3. KEY INFORMATION
A. Selected financial data
The following selected financial data, which is presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), should be read together with our consolidated financial statements and related notes and Item 5 “Operating and Financial Review and Prospects” included elsewhere in this Annual Report. The selected balance sheet data as of December 31, 2012 and 2013 and the selected statements of operations data for the years ended December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected balance sheet data as of December 31, 2009, 2010 and 2011 and the selected statements of operations data for the years ended December 31, 2009 and 2010 have been derived from our audited financial statements not included in this Annual Report.
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(in thousands, except share and per share data and cash dividend per ordinary share)
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Statements of Operations Data:
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Revenues
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$
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93,687
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$
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102,027
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$
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112,920
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$
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113,400
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$
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121,795
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Cost of revenue
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64,548
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75,962
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86,939
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86,253
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92,313
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Gross profit
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29,139
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26,065
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25,981
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27,147
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29,482
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Operating expenses:
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Sales and marketing
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5,554
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6,380
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7,067
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7,388
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9,517
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General and administrative
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8,391
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9,194
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10,130
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10,106
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12,003
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Total operating expenses
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13,945
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15,574
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17,197
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17,494
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21,520
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Operating income
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15,194
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10,491
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8,784
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9,653
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7,962
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Financial income (expenses), net
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(362
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)
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667
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(2,471
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)
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1,521
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(153
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Income before taxes on income
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14,832
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11,158
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6,313
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11,174
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7,809
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Income taxes
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3,254
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2,448
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1,978
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2,884
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1,287
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Net income
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$
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11,578
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$
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8,710
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$
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4,335
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$
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8,290
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$
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6,522
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Basic income per ordinary share
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$
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0.67
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$
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0.50
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$
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0.25
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$
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0.48
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$
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0.38
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Diluted income per ordinary share
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$
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0.67
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$
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0.50
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$
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0.25
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$
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0.48
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$
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0.37
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Weighted average number of ordinary shares used to compute basic income per ordinary share
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17,310,005
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17,330,024
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17,346,561
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17,346,561
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17,346,561
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Weighted average number of ordinary shares used to compute diluted income per ordinary share
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17,399,324
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17,380,677
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17,346,561
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17,346,561
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17,571,188
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Cash dividend per ordinary share
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$
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0.49
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$
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0.38
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$
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0.24
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$
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0.91
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$
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0.29
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(in thousands)
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Balance Sheet Data:
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Cash and cash equivalents
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$
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14,941
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$
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13,091
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$
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14,443
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$
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12,133
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$
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14,165
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Marketable securities and short term investments
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32,608
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22,516
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18,764
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14,224
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9,998
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Working capital
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46,207
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36,965
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34,514
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28,364
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23,987
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Total assets
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115,121
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120,495
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120,021
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113,267
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128,578
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Total liabilities
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33,178
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36,083
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35,314
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35,316
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48,095
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Retained earnings
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29,407
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31,555
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31,727
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24,231
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25,723
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Shareholders’ equity
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81,943
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84,412
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84,707
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77,951
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80,483
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B. Capitalization and indebtedness
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Not applicable.
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C. Reasons for offer and use of proceeds
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Not applicable.
Our business faces a variety of risks that may affect our operations or financial condition. You should carefully consider the following risks, in addition to those set forth in the Special Note Regarding Forward-Looking Statements above, when investing in our securities. The risks described below are not the only ones that we face. Additional risks not currently known to us or that we presently deem immaterial may also impair our business operations, results of operations and financial condition.
Risks Relating to Our Business and Industry
We operate in a dynamic and relatively changing market and cannot assure you that it will continue to grow.
We operate in a relatively new segment of our industry involving comprehensive, global content management and distribution services for the television and radio broadcasting industries. The continued growth of this segment depends upon a number of factors, including, among others, the continued growth in the introduction of broadcast channels seeking a global audience, deregulation of broadcasting, and the scope, timeliness, sophistication and price of our services. We cannot assure you that the market will demand such services from us at prices and on terms acceptable to us. A lack of market demand or lack of additional revenues beyond our existing customer contracts would adversely affect our financial condition and ability to grow our business.
Significant damage to our principal teleports in Israel or the United States would have a material adverse effect on our ability to continue to operate our business.
One of our principal teleports and playout facilities is located in Israel, in Emek Ha’ela, and our second teleport, the Hawley Teleport, is in the United States. Significant damage to these facilities, for any reason, including by earthquake, fire or acts of terrorism or war, including hostilities among Israel, Hamas, the Palestinian Authority and other groups, could require substantial time and expense to repair, and would require reestablishing transmission links with our suppliers of capacity. Even though our facilities are covered under an insurance policy, the policy may not be sufficient to cover repair costs or the cost of disruption of our services. If this damage was to occur, it would have a material adverse effect on our ability to continue to operate our business or operate our business profitably. Furthermore, if our customers or potential customers were to be concerned that our principal teleports and playout facilities or our operations were at risk due to a perception of instability in the security situation in Israel or other global risks or concerns, they may be deterred from entering into agreements or extending their existing agreements to use our services.
Unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition.
The continuing instability in the financial and credit markets in Europe, the United States and Asia has impacted global economic growth, with the economies of Europe and the United States showing ongoing signs of weakness. If the United States’ or European economy weakens further, our existing or potential customers may reduce or postpone their spending significantly. This could result in reductions in the services we sell and lease, longer sales cycles and increased price competition. In addition, our ability to collect fees with respect to the services we provide may be adversely affected by the financial condition of our customers. A significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to services previously provided to that customer. As a result, our reserves for doubtful accounts and write-offs of accounts receivable may increase. Any of these events would likely harm our business, operating results and financial condition. If global economic and market conditions, or economic conditions in Europe, the United States or Asia or other key markets do not improve or continue to deteriorate, it may have a material adverse effect on our business, operating results and financial condition.
In addition, a slowdown in buying decisions due to this economic uncertainty and the tightened credit markets impacting our customers may extend our sales cycle period and may limit our ability to forecast our flow of new contracts.
Volatility in the broadcasting industry may adversely affect our revenues and margins, which could have a material adverse effect on our operating results and financial condition.
The broadcasting industry in which we operate historically has been volatile and is characterized by fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, and declines in general economic conditions, such as the current unfavorable economic conditions. This volatility could cause our operating results to decline dramatically from one period to the next. If in periods of decreased demand we are unable to adjust our levels of lease commitments and human resources or manage our costs and deliveries from suppliers in response to lower spending by customers, our gross margin might decline and we may experience operating losses. In addition, demand for mobile satellite services, or MSS, is specifically susceptible to changes in global commerce and use of international commercial shipping services or cruise shipping. Any decline in the use of such services may have an adverse effect on our business, operating results and financial condition.
If the level of available capacity in satellite networks remains at its current level, or if the level of capacity in fiber networks decreases in the future, we may not be able to obtain leased transmission capacity on competitive terms.
We lease satellite and terrestrial fiber capacity and use this capacity as part of a package together with our other services. In recent years we have experienced a decrease in the level of available capacity on satellites, in part due to the increased demand for such capacity by high definition television (HDTV) channels, and in part due to the retirement of certain satellites from services without an alternative satellite put in place of the retired satellite. This decrease may make it difficult for us to lease satellite capacity at competitive pricing. Fiber networks, including optic and copper based networks, and the increased use of Internet Protocol (IP) for the delivery of video and audio programming on such networks, are continuously evolving and expanding, and becoming more cost-effective. However, increased demand for fiber capacity may decrease the level of availability for such capacity in the future.
We may be adversely affected if the amount of satellite capacity available for video and audio programming remains low or if the amount of fiber network capacity decreases in the future. We need to renew our existing leases and enter into additional leases for such capacity in order to provide continuity of service to our existing customers, enter into contracts with new customers and expand our transmission service offerings. There can be no assurance, however, that we will be able to maintain our capacity, as needed to provide services to our customers on highly demanded satellites. For example, HDTV broadcasts and Ultra High Definition television require substantially greater bandwidth than conventional television broadcasts, and the success of HDTV broadcasts may lead to a reduction in the quantity of available capacity. We currently lease approximately 4% of our satellite transmission capacity pursuant to long-term preemptible leases, which means that the satellite fleet operator can use our transponder to provide service for another customer or to restore service to other customers in the event of satellite or transponder failure. A decline in the available capacity might lead our suppliers to preempt the use of some of our leased capacity, elect not to renew our satellite capacity leases, increase our transmission costs and therefore reduce our margins, increase costs to an extent that our potential customers would be less likely to pursue a global market, or require us to incur more long-term commitments for capacity without any corresponding assurance of customers for this capacity.
The need to provide our customers with “dual illumination” in certain conditions may adversely affect our margins, which could have a material adverse effect on our operating results and financial condition.
Agreements for the lease satellite capacity are for a fixed term. In some cases we are able to extend the term of the lease for an additional term. However, in other cases we are unable to extend the lease and in order to maintain the services to the customers on such capacity we must locate an alternative capacity on the same satellite or on another satellite with similar characteristics. Such alternative capacity utilizes a different frequency than the one utilized by the expiring capacity and so the viewers must adjust their receiver in order for the change to take effect. In such cases we enter into an agreement for the lease of the alternative satellite capacity before the expiration of the current lease and provide the customers on the expiring lease services on both the old and the new frequencies, or “dual illumination”, in order to allow seamless transition. Such periods of dual illumination may extend between two weeks and two months, during which the customers continue to pay us the fees agreed in their agreements for a single satellite capacity, while we pay for double satellite capacity. Should any of our satellite capacity leases expire and we are not able to renew such lease, we may need to provide our customers dual illumination services, which would adversely affect our margins and operating results.
Changes in technology may reduce the demand for our services.
The technology used in content management and distribution services is evolving rapidly. The technologies we currently use or plan to use may not be preferred by our customers or changes in these technologies may compromise our business. For example, in order to compete effectively in the evolving digital media broadcasting industry we must be able to provide our value-add content management and distribution services to all types of evolving platform operators, including Over-the-Top (OTT) and Internet television broadcasts. Similarly, to the extent that excess capacity develops in terrestrial fiber systems, our satellite-based content management and distribution offerings may be less attractive. In addition, the gradual extension of terrestrial wireline and wireless communications networks to areas not currently served by such networks or development of new technology for distribution to remote areas may reduce demand for our MSS services. If we are unable to keep pace with on-going technological changes in the content management and distribution services industry, our financial condition may be adversely affected.
Service disruptions and failures may result in customer dissatisfaction, customer loss or both, which could materially and adversely affect our reputation and business.
Our services are an integral part of our customers’ business operations. The continued performance of these services for our customers is important to our success. Sustained or repeated system failures would reduce the attractiveness of our services and could result in decreased demand for our services.
Our ability to serve our customers depends on our ability to protect our infrastructure, network and computer systems against material and continuous damages from fire, long term power loss, water damage, telecommunications failures, earthquake, terrorist attacks, vandalism and similar unexpected material adverse events. As part of our business, we develop, receive and retain confidential data about others. Despite our efforts to implement network security measures, our systems are also vulnerable to computer viruses, computer hackers, cyber terrorism and similar disruptions from unauthorized tampering. Although we maintain insurance that we believe is appropriate for our business and industry, we face risks associated with potential failure to adequately protect critical corporate, client, and employee data which, if released, could adversely impact our client relationships, our reputation, and even violate privacy laws an
d
such insurance coverage may not be sufficient to compensate for any significant losses that may occur as a result of any of these events.
We have experienced systems outages and service interruptions in the past. To date, these outages have not had a material adverse effect on us. However, in the future, a prolonged system-wide outage or frequent outages could cause harm to our reputation and could cause our customers to make claims against us for damages allegedly resulting from an outage or service interruption. Any damage or failure that interrupts or delays our operations could expose us to material liabilities and result in material harm to our business.
We acquired two businesses in 2012 and 2013 and two teleports in 2008, and we may acquire or establish additional teleports or complementary businesses or technologies. We may be unsuccessful in integrating any acquired businesses or assets, and these acquisitions could divert the attention of our management and resources, cause dilution to our shareholders and adversely affect our financial results.
We intend to use a significant amount of our cash, cash equivalents and marketable securities to acquire or establish additional teleports and playout centers or complementary businesses or technologies, such as the acquisitions we completed in 2008 to acquire the Emek Ha’ela and Hawley Teleports, the acquisition we completed in 2013 and 2012 to acquire JCA, a London-based provider of content management services, and Sm2, a U.S. based premier provider of international sports distribution and syndication services.
We intend to make additional acquisitions in the future. The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
Competition within our industry for acquisitions of businesses, technologies and assets has been, and may in the future continue to be, intense. As such, even if we are able to identify a target that we would like to acquire, we may not be able to complete the acquisition on commercially reasonable terms or because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:
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issue equity securities which would dilute current shareholders’ percentage ownership;
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incur substantial debt;
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assume contingent liabilities; or
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expend significant cash.
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These financing activities or expenditures could harm our business, operating results and financial condition or the price of our ordinary shares. Alternatively, due to difficulties in the capital and credit markets, we may be unable to secure capital on acceptable terms, or at all, to complete acquisitions.
In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, and technologies successfully or effectively manage the combined business following the completion of the acquisition. We may also not achieve the anticipated benefits from the acquired business due to a number of factors, including:
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unanticipated costs or liabilities associated with the acquisition;
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incurrence of acquisition-related costs;
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diversion of management’s attention from other business concerns;
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harm to our existing business relationships with distributors and customers as a result of the acquisition;
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inability to retain employees from the acquired company;
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use of resources that are needed in other parts of our business;
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litigation or other claims arising in connection with the acquired company;
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the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
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use of substantial portions of our available cash to consummate the acquisition; or
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unrealistic goals or projections for the acquisition.
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Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.
If we are unable to successfully balance our supplier and customer capacity commitments, our income will decline.
In order to minimize our capital expenditures and to maintain flexibility to reduce unused capacity in our network, we lease RRsat Global Network’s transmission capacity instead of owning our own fleet of satellites or fiber network. We are generally required to commit to lease satellite capacity on a long-term basis. In many cases our commitment is longer than the corresponding commitment that we obtain from our customers. In many cases we are not able to terminate our commitment before its scheduled expiration. If we commit to lease capacity in anticipation of customer orders and these orders do not materialize or are terminated, due to global economic conditions or otherwise, we will likely still be required to pay our suppliers, and may have difficulty in obtaining commitments from other customers for this capacity. In this case, we would have fixed cost commitments without a corresponding source of revenues.
In addition, we currently lease approximately 4% of our satellite transmission capacity pursuant to preemptible leases. If we commit to provide content distribution services to a customer and the satellite fleet operator then preempts our transponder, we would need to obtain capacity on other satellites with a comparable footprint, or geographic coverage. We may not be able to replace this capacity on economical terms, or with the quality of service necessary to satisfy our customers’ requirements, or at all. We would likely need a significant amount of time and would incur substantial expense to replace the capacity.
The failure of third parties to properly maintain transmission networks we lease from them would adversely affect the quality of the services we offer.
We rely on transmission capacity and other critical facilities that we lease from third parties. All of our satellite and terrestrial fiber transmission capacity is leased, and we receive teleport services and maintain points of presence (POPs) outside of Israel pursuant to contracts with third parties. We are dependent on the quality of service provided by these third parties.
Damage to a satellite on which we lease transponders could significantly degrade the satellite’s performance and result in a partial or total loss of our transmission capacity on that satellite. Similarly, the loss of a satellite on which we lease transponders would result in the total loss of our transmission capacity on that satellite. In addition, damage to the fiber line or network on which we lease transmission capacity could damage the service we provide to our customers. We cannot assure that the satellites on which we lease capacity or the fiber lines leased will perform properly or remain in operation for the duration of their expected commercial lives.
If we suffered a partial or total loss of leased capacity on a satellite, including as a result of the bankruptcy of the satellite owner or operator, we would need to obtain capacity on other satellites with a comparable “footprint”, or geographic coverage. We may not be able to obtain alternative capacity on economical terms or at all. We would likely need a significant amount of time and would incur substantial expense to replace the capacity. During any period of time in which any of our transponders is not fully operational, we likely would lose most or all of the revenues that we otherwise would have derived from the leased capacity on that transponder. Similar risks apply to our leased terrestrial fiber transmission capacity, as well as to our hosted teleports and points of presence (POPs) outside of Israel.
In the event of any such disruption in satellite we may incur additional costs to supplement or replace the affected service, and may be required to compensate our own customers for any resulting declines in service levels.
If we are unable to renew our agreements with Inmarsat on favorable terms, or at all, our ability to continue to provide MSS will be significantly impaired.
We use the Inmarsat satellite network to provide MSS. These services on the Inmarsat satellite network are provided by our company pursuant to an authorization granted to us under a Space Segment Access Service Agreement (SSAA) and a Network Services Distribution Agreement (NSDA). These agreements set forth the requirements and procedures for providing and reselling services on the Inmarsat satellite network as well as conditions of use of Inmarsat’s intellectual property rights. The agreements, which we signed in March 2009 and amended in March 2010, remain in effect unless terminated by Inmarsat with a prior notice of at least two years, with a minimum term ending March 20, 2016. We cannot guarantee that we will be able to renew the agreements on favorable terms, or at all, when the agreements expire. If we are unable to renew the agreements on favorable terms or at all or the agreements are terminated, our ability to continue to provide MSS will be significantly impaired.
If we are unable to compete with Inmarsat, our MSS business would be adversely affected.
In April 2009, Inmarsat purchased its largest distribution partner, Stratos Global Corporation, which became a wholly owned operating division of Inmarsat. This transaction was followed by the purchase in January 2010 of Segovia Inc., a provider of secure IP-based managed solutions to the U.S. government, and the purchase in April 2011 of Ship Equip International A.S., a leading very small aperture terminal (VSAT) provider.
In January 2012, Inmarsat announced that it intends to include its subsidiary companies within a new organizational structure, which will include direct and indirect distribution of services under the Inmarsat brand name and be supported by a new group, which will provide cross-business unit services.
Although Inmarsat has stated that despite the reorganization it does not intend to change its business strategy and policy of distributing its services primarily through independent channel partners, comprised of its network of distribution partners and service providers, including RRsat, and that the restructuring is expected to provide further support to its independent channel partners through greater coordination between Inmarsat and such channel partners, these acquisitions and the reorganization may have an adverse effect on our ability to compete in the Inmarsat services market, as existing and potential customers may prefer to procure services directly from Inmarsat, rather than from a vendor for Inmarsat services, even if our quality and pricing are more attractive.
Significant interruptions in the Inmarsat network and services could adversely affect our business.
Our MSS rely solely on the Inmarsat satellite network. Consequently, our MSS business is subject to many of the same risks to which the Inmarsat’s business is subject. Significant interruptions in the Inmarsat network could adversely affect our ability to provide reliable service to our customers and could negatively affect our business.
Furthermore, we rely on third-party service providers when providing services in regions covered by Inmarsat satellites that cannot be received at our Emek Ha’ela teleport, namely the Atlantic Ocean – West Region and the Pacific Ocean Region. If any of these service providers experiences interruptions or is unable to provide us with reliable services, we may not be able to provide services to our customers and our business may suffer.
Failure to compete successfully in providing value-add content management and distribution services, as well as MSS, would have a material adverse effect on our business and could prevent us from implementing our business strategy.
We compete in the market for global content management and distribution services, as well as MSS, with numerous commercial and other providers. Many of our competitors have greater technical, financial, human and other resources than we do, and some of them own satellites and teleports on several continents. The major global broadcasters may prefer to procure services from larger or more established vendors of content management and distribution services, or from vendors with their own satellites, even if our quality and pricing are more attractive.
Certain satellite fleet operators, whom typically had offered only connectivity, have recently begun to either acquire or partner with teleports and terrestrial fiber network operators to create global hybrid networks. In addition to our direct competitors, numerous companies and governments that operate global or regional fleets of satellites in the United States, Latin America, Europe, the Middle East, Africa and Asia may recommend individual teleport operators and service providers (whom are our competitors in providing value-added services and service packages) with whom they have relationships.
Our contracted backlog may not ultimately result in future revenues.
Contracted backlog represents services that our customers have committed by long-term contracts to purchase from us. As of December 31, 2013, we had contracted backlog totaling $203 million through 2017, of which $92 million are related to services expected to be delivered in 2014. Although we believe contracted backlog is an indicator of our future revenues, our reported contracted backlog may not be converted to revenues in any particular period and actual revenues from such contracts may not equal our reported contracted backlog. Our backlog includes contracts denominated in currencies other than the U.S. dollar, such as the Euro, and changes in currency exchange rates may change the value of the backlog and the amount of revenues expected in future years. Therefore, our contracted backlog is not necessarily indicative of the level of our future revenues. The majority of our contracted backlog is related to obligations to be provided under non-cancelable agreements. However, some of the contracts may be canceled under certain circumstances by an advanced notice of between 7 to 180 days or at certain predefined exit dates. Cancellations of customer contracts could substantially and materially reduce contracted backlog and could negatively impact our revenues. Our ability to collect our monthly fees with respect to all or a portion of the contracted backlog may also be adversely affected by the long-term financial condition of our customers. If, as a result of the current unfavorable global economic conditions or otherwise, several of our customers become insolvent or bankrupt or experience other financial difficulties which make them unable or unwilling to continue to use our services, our revenue would be adversely affected. Accordingly, we cannot assure you that our contracted backlog will ultimately result in revenues.
Because our functional currency is the U.S. dollar but a large portion of our expenses and revenues are incurred in Euros, New Israeli Shekels and British Pounds Sterling, currency fluctuations may adversely affect our financial results.
Although our functional currency is the U.S. dollar, approximately 26.86% of our revenues in 2013 and approximately 35.4% of our cost of revenue in 2013 were denominated in Euros. As a result, fluctuations in the U.S. dollar/Euro exchange rate have significant translation impact on our revenues and to a lesser extent on our gross margin and finance costs. If more of
our customers seek contracts that are denominated in currencies such as the Euro and not the U.S. dollar, our exposure to fluctuations in currency exchange rates will increase.
In addition, most of our payments for salaries, facility leases and other general and administrative expenses are in New Israeli Shekel (NIS), as are a small portion of our agreements with customers. Further, since our acquisition of JCA in September 2013, a portion of our payments for salaries, facility leases and other general and administrative expenses are in British Pounds Sterling (GBP), as are a portion of our agreement with customers. As a result, we are exposed to risk to the extent that the value of the U.S. dollar decreases against the NIS and the GBP. In that event, the U.S. dollar cost of our operations will increase and our U.S. dollar-measured results of operations will be adversely affected. Since November 2012 we enter into currency hedging transactions to partially decrease the risk of financial exposure from fluctuations in the exchange rate of the U.S. dollar against the NIS and we may enter into other hedging transactions with the Euro and the GBP. Under our current hedging policy, we use currency forward contracts, on a rolling 12 month basis, to partially hedge our operating profit exposure to NIS/U.S. dollars currency exchange rate fluctuations. Our financial results of operations could be adversely affected if we are unable to fully guard against currency fluctuations in the future. For additional information, see Item 5.A. “Operating and Financial Review and Prospects – Operating Results – Application of Critical Accounting Policies – Functional and Reporting Currency.
Contracts for content management and distribution services generally extend over several years, which will make it more difficult for us to sell our services to broadcasters who have entered into agreements with other providers of these services.
Broadcasters generally seek content management and distribution services over a lengthy period. Contracts for these services generally extend for terms of 2 to 5 years, and in some cases may extend for the expected life of a satellite. Once a broadcaster has entered into an agreement with one of our competitors, we may effectively be unable to obtain business from that potential customer for an extended period.
Our reported net income and income per share may be impacted by embedded derivatives.
Some of our customers and suppliers contracts provide for payment in currencies that are neither our functional currency nor the functional currency of the customer or supplier. Under FASB ASC Topic 815, Derivatives and Hedging, these contracts are deemed to include an “embedded derivative” in the form of a foreign currency forward contract. Accordingly, our U.S. GAAP statements of operations reflect non-operating, non-cash gains and losses attributable to changes in the fair value of foreign currency conversion embedded derivatives. Although we do not believe that these non-operating, non-cash gains and losses currently are meaningful to the understanding of our results of operations, they may result in unanticipated fluctuations in our reported results of operations
A decline in the value of our market capitalization during on-going world economic uncertainties could require us to write-down the value of our goodwill or other intangible assets, which could have a material adverse effect on our results of operations.
Our balance sheet contains goodwill and other amortizable intangible assets in long-term assets, totaling $17.5 million as of December 31, 2013. The goodwill recorded as a result of our business acquisitions from Bezeq, Sm2 and JCA totaled $4.9 million and $11.3 million as of December 31, 2012 and 2013, respectively, representing future synergy in the company’s content management and distribution services reportable segment resulting from the use of the acquired assets for expanding our business. We perform an annual impairment assessment of our goodwill at the end of the fourth quarter of each fiscal year, or more frequently if we determine that indicators of impairment exist. Our impairment review process compares the fair value of each reporting unit to its carrying value.
We conducted our goodwill impairment assessment at the end of 2012 and 2013 and concluded that our goodwill was not impaired in either period. However, we cannot assure you that there will not be a future impairment of such assets. A write-down, if required, could result in a significant non-cash expense on our income statement, which could have a material adverse effect on our results of operations.
Volatility and turmoil in global capital markets may adversely affect our investment portfolio and other financial assets
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The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and yield uncertain returns, which may fall below our projected return rates. Our cash, cash equivalents, short term deposits and marketable securities totaled $24.2 million as of December 31, 2013. Our policy is to retain substantial cash balances in order to support our growth. Our short-term investments consist primarily of corporate debentures, corporate shares, government debentures, mutual funds and treasury notes. Although we believe that we generally adhere to conservative investment guidelines, adverse market conditions may result in impairments of the carrying value of some of our investment assets. Realized or unrealized losses in our investments or in our other financial assets may adversely affect our financial condition.
We may be exposed to the credit risk of customers that have been adversely affected by weakened markets.
We typically sell our services as part of long-term contracts. During the life of a contract, a customer’s budgeting or cash flow constraints may impact the scope of the service sought by the customer and the customer’s ability to make required payments. In addition, adverse general business conditions may degrade the creditworthiness of our customers over time, and we can be adversely affected by customer bankruptcies or other business failures.
Future consolidations in the content management and content distribution services market, or in the satellite industry, may increase competition that could reduce our revenues and the demand for our services.
The markets in which we compete have been characterized by increasing consolidation, which may be accelerated due to the unfavorable global economic conditions. We may not be able to compete successfully in increasingly consolidated markets. Additional consolidation may reduce the amount of capacity that may be available to us and increase the cost of such capacity. Increased competition and consolidation in these markets also may require that we reduce the prices of our services or result in a loss of market share, which could materially adversely affect our revenues and reduce our operating margins. Additionally, because we now, and may in the future, depend on certain relationships with third parties in the satellite industry, any additional consolidation involving these parties could reduce the demand for our services and otherwise hurt our business prospects.
We may experience a decrease in our gross margin levels in the future, which may adversely affect our financial results.
Our gross margin levels decreased through 2011 and may decrease in the future. Several factors could cause our gross margin to fluctuate, including the following:
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general economic conditions in the markets in which we, our customers and suppliers operate;
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decrease in the level of available capacity on satellites;
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changes in the prices to lease satellite capacity;
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introductions of new products or new pricing policies by us or our competitors;
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trends in our industry, including industry consolidation and technology change;
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acquisitions or strategic alliances by us or others in our industry;
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mismatch between our long term contracts with suppliers compared to our long term contracts with customers that can result in excess capacity;
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the need to replace capacity suppliers with new suppliers with higher cost due to their failure to properly maintain transmission;
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cancelation of customer contracts;
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currency fluctuations; and
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size and profitability of new customer contracts.
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We may have difficulty managing the growth of our business, which could adversely affect our operating margins and limit our ability to increase sales and cash flow.
We have experienced significant growth in our operations in the past several years, with our annual revenues increasing from $4.4 million in 2000 to $121.8 million in 2013. In addition, in September 2013 we completed the acquisition of JCA, a London-based provider of content preparation services, in 2012 we completed the acquisition of Sm2’s business in the United States and in 2008 we completed the acquisition of the satellite business of Bezeq in Israel and the Hawley Teleport in Pennsylvania. Our growth has placed, and will continue to place, significant demands on our management, as well as our financial and operational resources, that are required to:
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manage a larger organization;
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integrate the assets and businesses we acquired and may acquire in the future;
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implement appropriate financial and operational systems;
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significantly expand our IP-based infrastructure to support the digital media broadcasting industry and a greater volume of services;
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expand our sales and marketing footprint, infrastructure and capabilities on an international basis, primarily in the United States and Europe, to enable us to serve first tier broadcasters and other platform operators; and
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develop regulatory compliance programs in foreign jurisdictions.
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If we are unable to manage and grow our business effectively during this period of rapid growth, our operating margins will be adversely affected and we may not be able to implement our business strategy and our business and financial results would suffer.
If we are unable to hire, train and retain qualified managerial, technical, and sales and marketing personnel, we may be unable to develop new services or sell or support our existing or new services. This could cause our revenues to decline and impair our ability to meet our development and revenue objectives. In addition we could face increased costs to attract, motivate and retain our skilled workforce.
Our success depends in large part on our ability to continue to attract, train, motivate and retain highly skilled managerial, technical, and sales and marketing personnel. If our business continues to grow, we will need to hire additional qualified managerial, technical engineering, and sales and marketing personnel to succeed. The process of hiring, training and successfully integrating qualified personnel into our operations is a lengthy and expensive one. The market for the qualified personnel we require is very competitive because of the limited number of people available with the necessary technical and sales skills and understanding of our services. This is particularly true in Israel and some of the markets into which we hope to expand, where competition for qualified personnel is intense. Our failure to hire and retain qualified employees could increase our costs of retaining a skilled workforce and make it difficult for us to manage our operations and compete for new customer contracts, and cause our revenues to decline and impair our ability to meet our sales objectives.
Our success will also depend, to a certain extent, upon the continued active participation of a relatively small group of senior management personnel. The loss of the services of any or several of these executives may adversely impact our operations and impair our efforts to expand our business.
If we are unable to provide uninterrupted or quality services, our reputation may suffer, which could cause the demand for our services to decline.
Our business depends on the efficient, uninterrupted and high-quality operation of our systems. Our service offerings are complex, depend on our successful integration of sophisticated third party technology and services, and must meet stringent quality requirements. Our services are critical to our customers’ businesses, and disruptions in our services may cause significant damage to our customers and our reputation. We do not know whether, in the future, we will be subject to liability claims or litigation for damages related to service disruptions. If such litigation were to arise, regardless of its outcome, it could result in substantial expenses to us, significantly divert the efforts of our technical and management personnel and disrupt or otherwise severely impact our relationships with current and potential customers. In addition, if any of our services has reliability or quality problems, our reputation could be damaged significantly and customers might be reluctant to buy our services, which could result in a decline in revenues, a loss of existing customers or the failure to attract new customers.
Our quarterly operating results may fluctuate, which could cause us to miss our targets with respect to these results and, in addition to other variables could cause the trading price of our ordinary shares to fluctuate or decline.
Our prospective customers generally must commit significant resources to evaluate our services. Accordingly, our sales process is subject to delays associated with the evaluation and approval process and delays associated with our customers’ preparations to begin broadcasting using our services. This approval process typically lasts 3 to 12 months and creates unpredictability regarding the timing of our generation of revenues. As a result, orders that we expect in one quarter may be deferred to another because of the timing of customers’ procurement decisions. Therefore, our quarterly operating results are likely to fluctuate, which could cause us to miss our targets or expectations about these results and cause the trading price of our ordinary shares to decline.
Additional factors that could cause our revenues and operating results to fluctuate from period to period include:
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market conditions in the broadcast industry;
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changes in global economic conditions;
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our service and customer mix;
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customer demand for our services;
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the size and timing and success of new service introductions by our competitors and us;
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cancellations of significant contracts by customers;
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the timing of contracts with new customers;
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changes in the price or the profitability of our services;
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changes in the availability or the cost of transmission capacity;
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changes in the utilization of transmission capacity;
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the timing of renewal or commencement of our long-term capacity commitments;
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changes in operating expenses;
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changes in our strategy;
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changes in regulatory and compliance requirements; and
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currency fluctuation that may change the level of our costs and revenues.
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Due to the relatively fixed nature of certain of our costs, any decline in revenue in any quarter could result in lower profitability for that quarter. In addition, fluctuations in our quarterly operating results could cause significant fluctuations in the market price of our ordinary shares.
Our international sales and operations are subject to complex laws relating to foreign corrupt practices and bribery. A violation of these laws could adversely affect our business, financial condition or results of operations.
Our operations in countries outside the U.S. are subject to the Foreign Corrupt Practices Act of 1977 as amended, or the FCPA, which, among other things, prohibits companies or their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals to help obtain or retain business or obtain any unfair advantage. We have internal control policies and procedures and have implemented training and compliance programs for our employees and agents with respect to the FCPA. However, we cannot assure that our policies, procedures and programs will always protect us from reckless or criminal acts committed by our employees or agents. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.
We face potential liability for content broadcast by our customers over our network.
Our potential liability for distributing content broadcast by our customers over our network is uncertain. We could become liable for such content based on obscenity, defamation, negligence, copyright or trademark infringement, or other bases.
Our standard agreement provides that our customers are fully responsible for the content of their programming, for ensuring that the content conforms to all applicable governmental regulations and for obtaining any local regulatory approvals relating to their broadcasts. The agreement further provides that we are not liable if the satellite fleet operator requires us to suspend or terminate service for any reason relating to content. Our customers are generally required to indemnify us for any financial costs of governmental or third party proceedings resulting from such content. Although we attempt to reduce our liability through contractual indemnification from our customers and our standard operational disclaimers, there is no guarantee that we would be successful in protecting ourselves against this type of liability. Even if we were ultimately successful in any such litigation, any litigation would divert management time and resources from our operation, could be costly and is likely to generate negative publicity for our business. We may also be forced to implement expensive measures to alter the way our services are provided to avoid any further liability.
We face potential liability for radiation generated by our teleports.
Our operations are subject to various environmental laws and regulations regarding the protection of the environment and personal health and safety, including the emission of radio frequencies and electromagnetic radiation. Our teleports in Israel and in the United States generate electromagnetic radiation, which above certain levels can be harmful to people. Although we believe that our facilities comply with all applicable standards in this regard, personal injury claims may be brought against us for harm to individuals allegedly caused by our transmission equipment. Similarly, new, more stringent environmental protection regulations may be promulgated, and we may need to incur significant expense to comply with such regulations.
Our business, including the operation of our network, may be vulnerable to acts of terrorism or war.
Our network may be vulnerable to acts of terrorism or war. If our facilities, including our headquarters or principal teleports become temporarily or permanently disabled by an act of terrorism or war, such as the hostilities along Israel’s border with the Gaza Strip or the missiles fired from the Gaza Strip into Israel in November 2012, it will be necessary for us to develop alternative infrastructure to continue providing service to our customers. We may not be able to avoid service interruptions if our facilities or the facilities we use are disabled due to a terrorist attack or war. Any act of terrorism or war that substantially destroys or disables our facilities or the facilities of our service providers would result in a material and substantial reduction in revenues and in the recognition of a loss of any uninsured assets that are substantially or totally disabled.
We may not be able to fulfill our dividend policy in the future and holders of our ordinary shares may not receive any cash dividends.
Our board of directors adopted in November 2013 a new dividend policy pursuant to which, subject to applicable law and the discretion of the board of directors from time to time, we shall distribute a dividend to the shareholders at the end of each calendar quarter equal to 50% of the net income recorded in our quarterly financial statements for the quarter. Our board of directors will consider, among other factors, our expected results of operations, financial condition, contractual restrictions, planned capital expenditures, financing needs and other factors our board of directors deems relevant in order to reach its conclusion that a distribution of dividends will not prevent us from satisfying our existing and foreseeable obligations as they become due. In 2011, 2012 and 2013, we distributed dividends to our shareholders in the aggregate amount of $4.2 million, $15.8 million and $5.0 million, respectively.
Dividend payments are not guaranteed and our board of directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends. Our ability to pay dividends is also subject to the requirements of Israeli law. Further, our dividend policy, to the extent implemented, will significantly restrict our cash reserves and may adversely affect our ability to fund unexpected capital expenditures. As a result, we may be required to borrow money or raise capital by issuing equity securities, which may not be possible on attractive terms or at all. Due to our approved enterprise program, dividend payments from earnings derived from our approved enterprise may result in additional taxes to our shareholders which are Israeli corporations. See Item 10.E. “Additional Information – Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about our “approved enterprise” status.
If we are unable to fulfill our dividend policy, or pay dividends at levels anticipated by investors, the market price of our shares may be negatively affected and the value of your investment may be reduced. For additional information, please also see Item 8.A “Financial information – Consolidated Financial Statements and Other Financial Information – Dividend Policy.”
Future sales of our ordinary shares by our principal shareholders, or the perception that such sales could occur, may cause the market price of our ordinary shares to decline.
Future sales of our ordinary shares by our principal shareholders may cause the market price of our ordinary shares to decline. We cannot predict what effect, if any, future sales of our ordinary shares, or the availability of our ordinary shares for future sale, will have on the market price of our ordinary shares. Sales of substantial amounts of our ordinary shares in the public marketplace by us or our shareholders, including our principal shareholders whose shares were registered in 2012 for resale with the Securities and Exchange Commission, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares and may make it more difficult for investors to sell ordinary shares at a time and price which such investors deem appropriate.
Market prices of companies involved in our industry, as well as our company, have been highly volatile and shareholders may not be able to resell their ordinary shares at or above the price they paid.
The trading price of our ordinary shares has been in the past, and may be in the future, subject to wide fluctuations. Since our ordinary shares commenced trading on NASDAQ on November 1, 2006 through February 28, 2014, the market price of the ordinary shares has fluctuated from $3.50 to $26.50. Factors that may affect the trading price include, but are not limited to:
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the level of liquidity available for our shares;
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changes in our shareholder base;
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future sales of our ordinary shares by our principal shareholders or the perception that such sales could occur;
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the gain or loss of significant customers;
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fluctuations in the timing or amount of customer orders;
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variations in our operating results;
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changes in our backlog levels;
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acquisitions or strategic alliances by us or others in our industry;
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results of integration of acquired assets and businesses;
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announcements of new services or service enhancements, technological innovations, new pricing strategies, strategic alliances or significant agreements by us or by our competitors;
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recruitment or departure of key personnel;
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commencement of, or involvement in, litigation; and
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market conditions in our industry, the industries of our customers and the economy as a whole and the political developments in the Middle East or other areas of the world.
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The trading price and volume for our ordinary shares may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If our future quarterly or annual operating results are below the expectations of securities analysts or investors, the price of our ordinary shares would likely decline. Share price fluctuations may be amplified if the trading volume of our ordinary shares is low.
In addition, in recent years, the global stock markets have experienced significant price and volume fluctuations. In the past, market fluctuations have, from time to time, particularly affected the market prices of the securities of many companies in our industry. These broad market fluctuations could adversely affect the market price of our ordinary shares.
Class action litigation due to share price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources.
In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Companies such as ours in the broadcasting industry and other technology industries are particularly vulnerable to this kind of litigation as a result of the volatility of their share prices. Any litigation of this sort could result in substantial costs and a diversion of management’s attention and resources.
We are controlled by a small number of shareholders, who may make decisions with which other shareholders may disagree.
Our directors, executive officers, principal shareholders and their affiliated entities beneficially own approximately 66% of our outstanding ordinary shares as of February 28, 2014. The interests of these shareholders may differ from the interests of other shareholders. These shareholders, if acting together, could control our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders and board of directors, including the approval or rejection of mergers or other business combination transactions. These shareholders have also entered into various shareholder agreements as described in Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions”. This concentration of ownership may delay, prevent or deter a change in control, or deprive shareholders of a possible premium for their ordinary shares as part of a sale of our company.
We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.
We may be classified as a passive foreign investment company (“PFIC”) by the U.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, U.S. investors who owned our ordinary shares during any taxable year in which we were a PFIC generally are subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we actually continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be available in certain circumstances. We do not intend to provide information to permit you to make a qualifying electing fund election to avoid the adverse U.S. tax consequences discussed above. The same adverse U.S. federal income tax consequences will apply to U.S. investors who acquire our ordinary shares during the current taxable year or any subsequent taxable year if we are treated as a PFIC for that taxable year.
The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is passive income, or (b) 50% or more of the average percentage of our assets during such taxable year either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.
We do not believe that we were a PFIC for the preceding taxable year or will be a PFIC for the current taxable year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that the IRS will not challenge our determination concerning our PFIC status. For further discussion of the adverse U.S. federal income tax consequences of our possible classification as a PFIC, please see Item 10.E. “Additional Information – Taxation – U.S. Federal Income Tax Consequences.”
Provisions of Israeli law and our Articles of Association, our Israeli Ministry of Communications license and the current agreements among our principal shareholders may delay, prevent or make difficult an acquisition of us, prevent a change of control and negatively impact our share price.
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his or her ordinary shares for shares in a foreign corporation to taxation before disposition of the investment in the foreign corporation. In addition, our Articles of Association require a threshold quorum of 70% of RRsat’s directors and a supermajority of more than 70% of the voting directors for approving specified key matters, as described in Item 10.B. “Additional Information – Memorandum and articles of association – Meetings of the Board of Directors”. Additionally, our license from the Israeli Ministry of Communications to operate our teleports in Israel impose certain restrictions on ownership of our shares, as described below under “Risks Relating to Government Regulation – Our license from the Israeli Ministry of Communications to operate our teleports impose certain restrictions on ownership of our shares. If these restrictions are breached, we could lose our license.” These provisions of Israeli law and of our license may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares. In addition, our principal shareholders have entered into various shareholders agreements as described in Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions” with respect to voting rights, as well as other provisions affecting the transferability of their shares. These agreements, which add to the concentration of ownership in our company, may have the effect of delaying or deterring a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our securities.
Our board of directors could choose not to negotiate with an acquiror that it did not feel was in our strategic interest. If a potential acquiror were discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by anti-takeover measures, shareholders could lose the opportunity to sell their shares at a favorable price.
We may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
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The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our obligations to comply with the requirements of Section 404 have resulted in increased general and administrative expense and a diversion of management time and attention from our operations, and we expect these efforts to require the continued commitment of resources.
Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of the Annual Report on Form 20-F for each fiscal year.
We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2013, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. Failure to maintain effective internal control over financial reporting could require us to expend significant resources and management time to implement and test remedial measures, or result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Risks Relating to Government Regulation
If we do not obtain or continue to maintain all of the regulatory permissions, authorizations and licenses necessary to provide our services, we may be required to relocate or shut down one or more of our principal teleports or other teleports, and we may not be able to implement our business strategy and expand our operations as we currently plan.
Aspects of the content management, content distribution and MSS industry are highly regulated, both in Israel and internationally. Our business requires regulatory permissions, authorizations and licenses from the Israeli Ministry of Communications, which we have obtained. Furthermore, the use, operation and sale of encryption devices such as those incorporated in our transmission systems and services require a license from the Israeli Ministry of Defense, and the employment of employees that are required to work on Saturday and Jewish Holidays in Israel requires a special permit from the Israeli Ministry of Industry, Trade and Labor, both of which we have obtained. These permissions, authorizations and licenses are subject to periodic renewal. If our principal license from the Israeli Ministry of Communications for operation of our teleports is revoked or not renewed, we will not be able to continue our operations as they are being conducted today.
In addition, the erection and operation of our Emek Ha’ela teleport site require building permits from local and regional zoning authorities, which are granted for limited periods and are subject to renewal from time to time.
Under Israeli law, the Israeli Prime Minister and the Minister of Communications, at their discretion or at the request of the Minister of Defense and subject to the approval of the Government of Israel, have the right to determine by order that certain telecommunications services, including certain of the services we provide, such as the downlink of broadcasts in Israel, are vital services. If such an order is issued, the Prime Minister and the Minister of Communications, subject to approval of the Government of Israel, may impose various requirements and limitations that may directly or indirectly affect us. These requirements and limitations may include, among other things, limitations on the identity of our shareholders, requiring that management and control of our company be located in and be carried out in Israel, obligations to provide information, limitations regarding the identity of our officers, limitations regarding our corporate reorganization and limitations on transfer of control of our company. If such an order is issued with respect to us, any transfer of control in the company would require prior approval by the Prime Minister and the Minister of Communications. In addition, the Israeli Prime Minister and the Minister of Communications may impose limitations on the transfer of information to certain of our officers and shareholders.
Further, under the Israeli Wireless Telegraph Ordinance, if the Government of Israel determines that the State of Israel is undergoing a state of emergency, the Minister of Communications can expropriate any device that is involved in the transmission of wireless telegraph information, visual signs or electromagnetic waves. During such an emergency period, the Minister of Communications can also enact orders to sell, buy, erect, use or restrict the operation of any such instrument. Any emergency appropriation or regulation of communications equipment could result in our equipment or frequencies required for us to operate our business being used by the State of Israel, or in our being forced to share with the State of Israel control of equipment or frequencies required for us to conduct our business. Additional emergency powers are accorded to the Minister of Communications under the Israeli Communications Law, whereby in a state of emergency the Minister of Communications may impose various instructions and limitations relating to the provision of our services, including mandating the provision of services to the Israeli security forces.
We are also required to obtain permits from the Israeli Ministry of Environmental Protection with regard to our transmission antennae and other radiation generating equipment. If the Ministry of Environmental Protection were to impose stricter requirements than currently exist in connection with the renewal of these permits, we may be unable to renew them. In this event, we could be forced to relocate our antennas and other equipment currently located at one of our principal teleports or other teleports, or could be restricted in our ability to expand our teleports. Relocation of our teleports would require significant additional capital expenditures. In addition, relocation of our teleports or significant restrictions on our ability to expand our teleports could disrupt or diminish the quality of the services we provide to our customers.
In addition, in the event of any amendment to any applicable law, or in the event any governmental agency to which we are subject adopts new regulations or policies or amends existing regulations or policies, which subject us to additional liability or different operating requirements, our operations, customer contracts and profitability could be adversely affected. For additional information, see Item 4.B. “Information on the Company – Business Overview – Regulation.”
Our license from the Israeli Ministry of Communications to operate our teleports imposes certain restrictions on ownership of our shares. If these restrictions are breached, we could lose our license.
Our license from the Israeli Ministry of Communications to operate our teleports provides that, without the consent of the Israeli Minister of Communications, no means of control of RRsat may be acquired or transferred, directly or indirectly.
In connection with our initial public offering in November 2006, our license was amended to provide that our entering into an underwriting agreement for the offering and sale of shares to the public, listing the shares for trading, and depositing shares with a depositary was not considered a transfer of means of control. In addition, pursuant to the amendments, transfers of our shares that do not result in the transfer of control of RRsat are permitted without the prior approval of the Ministry of Communications, provided that:
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in the event of a transfer or acquisition of shares without the consent of the Ministry of Communications, resulting in the transferee becoming a beneficial holder of 5% or more of our shares or being entitled to a right to appoint a director or the chief executive officer (or such beneficial holder is a director or the chief executive officer), we must notify the Ministry of Communications within 21 days of learning of such transfer; and
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in the event of a transfer or acquisition of shares without the consent of the Ministry of Communications, resulting in the transferee becoming a beneficial holder of 10% or more of our shares or having significant influence over us (but which does not result in a transfer of control of RRsat), we must notify the Ministry of Communications within 21 days of learning of such transfer and request the consent of the Ministry of Communications (the “Director General”) for such transfer.
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Should a shareholder, other than our shareholders prior to our initial public offering in November 2006, become a beneficial holder of 10% or more of our shares or acquire shares in an amount resulting in such shareholder having significant influence over us without receiving the consent of the Director General of the Ministry of Communications, its holdings will be converted into dormant shares for as long as the Minister’s consent is required but not obtained. The beneficial holder of such dormant shares will have no rights other than the right to receive dividends and other distributions to shareholders and the right to participate in rights offerings.
Our licenses also state that means of control of the company, or of an interested shareholder of the company (which generally would include a holder of 5% of the company’s voting power or other means of control), cannot be pledged unless such pledge agreement includes a condition that prohibits the exercise of the pledge without obtaining the advance written approval of the Minster of Communication.
Our articles of association contain the provisions described above, and any revisions to these provisions in our articles of association may result in the termination of our license from the Ministry of Communications or other sanctions provided for in our license. For additional information, see Item 4.B. “Information on the Company – Business Overview – Regulation.”
In connection with our acquisition of Bezeq’s satellite communications business in 2008, we agreed with the Israeli Ministry of Defense that the Israeli Prime Minister, at the request of the Israeli Minister of Defense, may issue an order to our company requiring us to provide certain services to the Israeli Defense Forces. Pursuant to the order, we would be required to amend our articles of association in a manner that would require us to maintain a certain number of Israeli citizens and residents on our management team and board of directors, which comply with certain security clearance criteria, and we will be required to comply with certain requirements relating to security and protection of confidential information. To date, the Israeli Prime Minister has not issued such an order. However, we cannot assure that such order will not be issued in the future.
Our ability to establish or acquire our own teleports in countries other than Israel may be restricted by government regulation of the telecommunications industry, including laws subjecting our licenses to renewal and potential revocation, as well as laws prohibiting or limiting foreign ownership.
Some of the teleports we use are owned and operated by third parties. Our customers and these third parties are responsible for obtaining any necessary licenses, approvals or operational authority for the transmission of data and/or audiovisual signals to and from the satellites that we, via our suppliers, use. Failure by our customers or suppliers to obtain and maintain some or all regulatory licenses, authorizations or approvals could have a material adverse effect on our business.
We intend to expand our presence in markets in which we currently have hosted facilities by acquiring or establishing our own teleports and content management facilities, such as the acquisition we completed in 2008 to acquire the Hawley Teleport in Pennsylvania. Specifically, on May 1, 2008 after receiving the approval of the Federal Communications Commission (“FCC”), we acquired various wireless and earth station licenses (the “FCC Licenses”) associated with the Hawley Teleport and now operate them on a non-common carrier basis for the provision of video and radio distribution services. As an FCC licensee, we are subject to regulation primarily by the FCC, which ensures that licensees comply with the Communications Act of 1934, as amended (the “Communications Act”) and related technical, licensing, operational, siting, and environmental protection regulations. Any state or local zoning, land use, building or similar regulation that materially limits the transmission or reception by earth stations is preempted by federal law, subject to certain exceptions. We believe that the Hawley Teleport materially complies with the Communications Act, FCC regulations, and any applicable state or local regulations.
The FCC Licenses also are subject to renewal upon the expiration of their license terms. The FCC has routinely renewed the FCC Licenses in the past. The Communications Act, however, provides that licenses may be revoked for cause and applications to renew licenses may be denied if the FCC concludes the renewal would not serve the public interest. We believe that the FCC Licenses will be renewed in the ordinary course, but we cannot provide assurances that the FCC will renew the FCC Licenses upon their expiration. If an FCC License is revoked or not renewed, we could not provide services under that license, which may have a material adverse effect on our business.
In addition, the United States has restrictions on the foreign ownership of companies that directly or indirectly hold common carrier wireless licenses, including earth station licenses that are used to communicate with satellites, which could prevent us from acquiring or owning our own teleports in the United States to the extent we seek to operate the teleports on a common carrier basis. In the event that we seek to operate the Hawley Teleport (or any other teleport in the United States) on a common carrier basis, U.S. law prohibits more than 20 percent of the capital stock of a common carrier wireless licensee to be directly owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. Additionally, no more than 25 percent of the capital stock of an entity that directly or indirectly controls a common carrier wireless licensee may be owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives, or by a foreign corporation. The FCC, however, may allow indirect non-controlling foreign ownership levels to exceed 20 percent, and indirect controlling foreign ownership levels to exceed 25 percent, if it finds that the higher foreign ownership levels are consistent with the public interest. Although the FCC has adopted a rebuttable presumption in favor of allowing indirect foreign ownership in excess of these limits by investors from World Trade Organization member countries, including Israel, there can be no assurance that we will be able to obtain a favorable ruling from the FCC in the future. In addition, the Department of Justice, the Department of Homeland Security, the Federal Bureau of Investigation and the US agencies (the “Executive Agencies”) review FCC applications to acquire new or existing wireless licenses and can require the applicant to enter into an agreement addressing any national security concerns before the application is granted. We were not, however, required to enter into a national security agreement with the Executive Agencies in connection with the acquisition of the Hawley Teleport, and the FCC Licenses include no other restrictions outside the ordinary course. Restrictions on foreign ownership of teleports may also exist in other countries in which we would at some future date like to establish or acquire teleport facilities. If we are not able to acquire additional teleports in the United States or other countries, our ability to expand our presence in those markets may be adversely affected.
We may also be affected by changes in the international regulatory regime pertaining to the provision of satellite services. The International Telecommunication Union (ITU), in particular its Radiocommunication Sector, adopts rules and recommendations (called the “Radio Regulations”) on radio communications matters to ensure the equitable and efficient use of spectrum on a global basis. Each nation then is responsible for writing and adopting rules that are applicable to that nation. Developments or changes in the Radio Regulations may have an effect on the regulation of spectrum by individual nations, and thus on the satellite-related industry, in a variety of matters, such as the frequency bands used for space services or terrestrial services.
We could in the future be subject to new laws, policies or regulations, or changes in the interpretation or application of existing laws, policies and regulations that modify the present regulatory environment in Israel, the United States or other countries in which we may wish to own or operate teleport facilities. For example, a country in which we currently operate without need of a license could modify its laws or regulations to require a license, which we may or may not be able to obtain. Similarly, a country in which we may wish to acquire a teleport could modify its laws or regulations to prohibit or limit foreign ownership, which could impair our ability to acquire a teleport in that country. For additional information, see Item 4.B. “Information on the Company – Business Overview – Regulation.”
Risks Relating to Our Operations in Israel
Potential political, economic and military instability in Israel, where our principal teleport and our senior management are located, may adversely affect our results of operations.
We are incorporated under the laws of the State of Israel, and our Emek Ha’ela teleport and principal executive offices are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations. In recent years, there has been an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into Israel. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and cause our revenues to decrease.
In addition, recent popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries. In addition, this instability may affect the global economy and marketplace through changes in oil and gas prices. Any events that affect the State of Israel may impact us in unpredictable ways. We have contingent plans, but these plans may be insufficient. Should our operations be impacted in a significant way, this may adversely affect the results of our operations.
Furthermore, several countries, principally 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 operations may be disrupted by the obligations of our personnel to perform military service.
Most of our employees are obligated to perform several weeks of military reserve duty annually, and are subject to being called to active duty at any time under emergency circumstances until they reach middle age. In response to the increase in terrorist activity and hostilities in the region, there have been, at times, significant call-ups of military reservists, including in connection with recent hostilities along Israel’s border with the Gaza Strip, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key employees. A disruption could materially adversely affect our business.
You may have difficulties enforcing a U.S. judgment against us and our executive officers and directors or asserting U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel, and substantially all of our directors and executive officers are not residents of the United States and most of our assets and their assets are located outside the United States. Service of process upon our non-U.S. resident directors or executive officers and enforcement of judgments obtained in the United States against us and our directors and executive officers may be difficult to obtain within the United States. It may be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the substance of the applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. Furthermore, there is little binding case law in Israel addressing these matters.
Israeli courts might not enforce judgments rendered outside Israel which may make it difficult to collect on judgments rendered against us. Subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable only if it finds that:
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the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
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the judgment may no longer be appealed;
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the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and
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the judgment is executory in the state in which it was given.
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Even if these conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. An Israeli court also will not declare a foreign judgment enforceable if:
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the judgment was obtained by fraud;
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there is a finding of lack of due process;
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the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;
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the judgment is at variance with another judgment that was given in the same matter between the same parties and that is still valid; or
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at the time the action was brought in the foreign court, a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.
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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. We do not comply with applicable NASDAQ requirements regarding the director nominations process and regularly scheduled meetings of independent directors at which only independent directors are present, and instead, we follow Israeli law and practice.
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, nor are we required to, comply with certain NASDAQ requirements regarding the director nominations process, which require that director nominees be selected/determined, or recommended for the board of directors selection/determination, either by a majority of the independent directors or a committee comprised solely of independent directors. Instead, we follow Israeli law and practice in accordance with which our directors are recommended by our board of directors for election by our shareholders and our board of directors. In addition, our independent directors do not have regularly scheduled meetings at which only independent directors are present, as such meetings are not required by Israeli law.
In addition, we follow our home country law, instead of the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans and arrangements, 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. Under Israeli law and practice, in general, the approval of the board of directors is required for the establishment or amendment of equity based compensation plans and arrangements, unless the arrangement is for the benefit of a director, or a controlling shareholder, in which case compensation committee and shareholder approval are also required. Similarly, the approval of the board of directors is generally sufficient for a private placement unless the private placement involves a director, a controlling shareholder or is deemed a “significant private placement,” in which case shareholder approval, and, in some cases, compensation committee or audit committee approval, would also be required. The Israeli Companies Law defined a “significant private placement” as a private placement (i) resulting in a party becoming a controlling shareholder, or (ii) involving the issuance of a 20% or more voting rights in the company, which (A) results in a 5% or more shareholder increasing its interest in the company or an offeree becoming a 5% or more shareholder, and (B) involves consideration that is not solely cash or public traded securities, or is not on fair market terms.
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, composition of the board of directors and quorum at shareholders’ meetings. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ Marketplace Rules.
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A. History and development of the company
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We were incorporated as a corporation in Israel in August 1981. We are registered with the Israeli registrar of companies under registration number 51-089629-3. Our legal and corporate name is RRsat Global Communications Network Ltd.
Our principal executive offices are located at RRsat Building, Hanegev Street, PO Box 1056, Airport City 7019900, Israel, and our telephone number is +972-3-928-0808. Our website address is www.rrsat.com. Our website address is included in this Annual Report as an inactive textual reference only, and the information on, or accessible through, our website is not part of this Annual Report.
Our agent for service of process in the United States is RRsat America - Global Communications Network Inc.; Suite 204, 720 Palisades Avenue, Englewood Cliffs, New Jersey 07632, Tel: 201-50-30-208.
See Items 5 and 18 of this Annual Report for a description of our current principal capital expenditures and our principal capital expenditures during the last three fiscal years. We have not made any significant divestitures during the same time period.
Item 4 includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources. These industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. While we believe the data to be accurate, we have not independently verified this data nor sought the consent of any organization to refer to their reports in this Annual Report, and we do not make any representation as to the accuracy of this data.
Overview
We are a global end-to-end digital media service partner for broadcasters and content owners, offering innovative cost-effective digital media management and distribution services that enable content owners to generate added revenues as their content reaches more people in more places on more devices.
We currently distribute over 630 channels, populate over 100 VOD (video on demand) platforms around the world, originate over 100 channels, and manage/distribute more than 60,000 hours of live programming. Our combined network has access to 150 countries and 95% of the world’s population.
We enable content owners and broadcasters to take advantage of changing media consumption patterns by offering sought after services, including:
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content acquisition and content distribution
– via satellite, dedicated fiber and over the top (OTT);
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content preparation
– ingest, transcoding, encryption and restoration; and
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content management
– media asset management (MAM), playout, archive, library and production services.
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We create and offer specialized services for the media industry. We acquire, prepare and distribute content to digital distribution platforms, including iTunes, Netflix, Hulu and other major pay-TV operators, using advanced networks and customized production workflows.
Some of our key customers are rights owners of sports leagues, networks and associations, including the NFL, Fox News, CNN, ESPN, MTV, National Geographic, Playboy, MSNBC, PGA, MP and Silva, LPGA, USGA Fox Sports, Dish Network, Nickelodeon, MGM Channel, SBN, iConcerts, BabyFirst TV and GOD TV in North America, Sky news, BBC, EBU, World Fashion, Baby TV and Euro News in Western Europe, and Russia Today, Al Jazeera, World Fashion and Tata in Eastern Europe, the Middle East and Asia.
Our corporate headquarters are based in Airport City, Israel, and we have facilities in Hawley, Pennsylvania (USA), London (UK) and Emek Ha’ela (Israel).
We provide digital distribution over satellite, fiber and broadband/IP to more than 150 countries reaching 95% of the world’s population. Thanks to our in-depth industry knowledge and well established presence, we believe we are able to assist our customers to optimize the way they reach viewers in places around the world over different screens.
Value added digital media services
As our industry changes, customers want to focus on developing creative content, and are seeking partners to provide services required in order to
prepare, package, manage, store and deliver
this content. RRsat offers a complete package of these services:
Digital content acquisition and distribution
Our customer’s workflows produce content on a variety of physical and digital media, including tapes, disks, downloads and cloud-based storage. We can capture content from all types of networks or handle transfers by FTP, accelerated FTP and tape and film ingest.
Content preparation
These services include multi-language audio or subtitling, closed captioning, ingestion and formatting for specific devices or regional formats; metadata is managed and inserted, archive content can be cleaned, restored and colorized; all content is inspected by quality assurance before it is played out.
Content management
With so many different devices, standards and platforms in use today, content must be carefully prepared to ensure it can be easily consumed. RRsat has a comprehensive content management solution which includes digital assets management, preparation, formatting and playout. We use sophisticated workflows to provide cost-efficient services for our customers while ensuring the customer’s viewers enjoy the highest quality experience, whether it is a large HD TV screen or a mobile phone. All content can be archived digitally or on physical media, including tapes or hard drives. All content is managed using the RRsat Digital-asset-management (DAM) system that tracks content from the moment it enters our system until it is delivered and archived.
Sports, News and Live Events
Major customers including NFL, IMG, Al Jazeera, Fox News and others use RRsat services to deliver news and sports worldwide. We currently deliver more than 60,000 hours of live events annually, providing feeds ranging from a few minutes to several hours in duration; one-time services, multiple feeds or regularly scheduled services, as well as immediate bookings at any time of day or night, as events unfold. Downlink, turnaround and uplink services deliver instantaneous broadcast distribution capabilities across the globe. RRsat also provides, close captioning and multi-language audio tracks handling.
Digital Distribution
We currently distribute over 630 channels to viewers around the world. Thanks to our flexible and highly advanced network, we cover 95% of the world’s population in more than 150 countries worldwide. We offer a unique combination of satellite, fiber and broadband/IP delivery that enables a customer to reach its target market in the most effective way – increasing its ROI. We also have access back up networks to ensure the content contains the quality of service requested.
OTT Delivery
Today’s consumers want content delivered to their device whenever and wherever they can watch it. Our OTT delivery service includes linear channels, VOD (video on demand), Catch up TV, promos and highlight, content protection and links to subscriber management and billing systems. The RRsat OTT service enables customers to shorten time to market and deliver their OTT offering to a wider audience over a range of screens.
MSS Mobile Satellite Services
We operate a business that provides Mobile Satellite Services (MSS) over the Inmarsat satellite network, including global telephony, fax, data, Internet and other value-added services to end-users and Inmarsat users and service providers.
Overview Summary
Our business model has historically resulted in growing revenue streams, strong operating cash flow and strong visibility from contracted backlog as described below. Our revenues grew from $4.4 million in 2000 to $121.8 million in 2013. In order to minimize our capital expenditures and to maintain flexibility to reduce unused capacity in our network, we lease transmission capacity instead of owning our own fleet of satellites or fiber network. Our agreements with our customers for content distribution services typically extend over terms of two to five years, and as of December 31, 2013, we had contracted backlog totaling $203 million of which $91.85 million are related to services expected to be delivered in 2014.
In 2013, we derived approximately 41.2% of our revenues from European customers (primarily Western Europeans) and approximately 29.2% of our revenues from North American customers. For additional information regarding our principal markets, see Item 5.A. “Operating and Financial Review and Prospects – Operating Results – Overview – Reporting Segments” and “– Geographic Revenue Breakdown.”
Our Strengths
Our global media services platform addresses most of the media services and distribution needs of broadcasters and content owners. We believe that the following are our business strengths:
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Comprehensive portfolio of Value-Added Services.
We provide our customers with a comprehensive package of value-added content management, media processing services and delivery services. As a “one stop shop” for ongoing services, we enable our customers to focus on content production rather than worry about technical “hassle”. This enables us to become a partner rather than just a supplier. We can handle all commonly used types of content, including new industry standards demanding specialized solutions, additional bandwidth and advanced processing systems. These services, suitable for both regional and global broadcasters and content owners, differentiate our service offerings, build customer loyalty and expand the revenue potential from each customer.
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We utilize state-of-the-art equipment and software in our service offerings, allowing us to provide highly sophisticated, cost-effective and flexible value-added services that are tailored to our customers’ specific needs. For example, we “localize” our customers’ content by creating audio tracks, subtitling, closed captioning, time shift a linear broadcast and inserting metadata.
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Flexible, Advanced Infrastructure
. Our centers and terrestrial infrastructure is IP-based providing scalability, simplicity and flexibility. We can provide a comprehensive OTT and streaming service to customers who want to enhance the value of their content by delivering it directly to consumers over the internet. These include critical services that customers are demanding such as live broadcasts and time shifting.
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Our systems also enable us to process, manage and deliver content integrating with Direct-to-Home (DTH) satellite, fiber, IP broadband and digital terrestrial and cable TV so that our customers can reach more viewers in more ways.
However, infrastructure is only as good as the people managing it. Our experienced engineering team and our relationships with technology and service providers have enabled RRsat to adapt rapidly to evolving requirements by supporting new technologies such as UHD/4K, 3D, online video and OTT. The addition of specialist content preparation services allows RRsat to further move up the value chain, delivering an improved offering to upper tier customers.
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Significant Barriers to Entry.
Due to the complexity and ever evolving nature of the industry’s demands, we believe that it would be very difficult for a new competitor to replicate our global network, facilities and breadth of value-added services as well as attain significant market share without expending significant time and resources. We believe it is also the main reason that small local and regional competitors are finding it harder and harder to compete. To offer global media services, it would be necessary to develop advanced know-how with respect to the various media services provided by us, as well as procure a critical mass of capacity on multiple platforms, which would entail negotiations with multiple suppliers. In addition to acquiring this capacity, a potential new entrant would need to incur a substantial long-term financial commitment for capacity, without any assurance of corresponding revenues (particularly since our business entails a lengthy sales cycle, typically 3 months to a year, before receipt of a customer commitment). We also benefit from a variety of economies of scale that derive from the number of customers we have obtained and the volume of their requirements. As viewers demand higher quality and broadcasting shifts from SD to HD and to UHD/4K and to multi-screens distribution, we believe such complexities will cause the barriers to entry to increase. Furthermore, in order for a potential competitor to successfully compete with us, they would have to create long term relationships with customers, as the media services industry is very much based on long-term and evolving relationships.
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Global Reach.
RRsat currently reaches 150 countries representing over 95% of the world’s population. This is covered by multiple delivery methods, enabling us to find the optimal way to reach customers in each and every territory. More importantly, as new populations in emerging nations or economies gain access to devices that enable them to enjoy content, we believe we are uniquely poised to enable our customers to reach these new consumers with compelling localized content.
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Stable and Predictable Business Model.
Multi-year contracts represent the majority of our revenues. Most of our customers, whether they use our global network for content distribution services or content management services, have entered into long-term contracts with us – as of December 31, 2013 we had a contracted backlog totaling $203 million of which $91.85 million are related to services expected to be delivered in 2014.
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Cost-effective Structure.
We have a reputation for being cost-effective and delivering significant value for money. We use leased capacity rather than buying, enabling us to deliver an attractively priced product, while giving us the flexibility to rapidly increase our capabilities without significant capital expenditures. We also closely manage our leased capacity to prevent underutilization. Our unique network design means we require minimal investments in growing our business. We strive to lease the most advanced delivery systems, without the risk of investing in equipment which becomes obsolete.
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Experienced, Entrepreneurial Management Team.
We believe that, in the years since our creation, our senior officers have demonstrated entrepreneurial orientation, ability to build a global business and deliver strong operational and financial performance. The recent additions to the executive team at RRsat Europe following the acquisition of JCA TV and other senior management arrivals during 2013 further strengthens our ability to understand and assimilate global requirements and add significant value to the services we offer our customers. We further believe that our management team has capitalized on its experience in the global content distribution and telecommunications industries and on our strengths to create an innovative provider of global value-added content management and distribution services with a strong business model and to consistently deliver profitability and strong growth in revenues.
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Global service capability.
Our main teleport in Israel allows us to structure our network in a star configuration, transmitting via a single satellite connection (or one hop) to Europe, Asia, Africa and the Middle East. Combined with the direct satellite access to North America and South America from our Hawley Teleport in Pennsylvania, RRsat can receive transmissions from and transmit to virtually any location in the world – an advantage that is currently impossible to attain from a single location in the United States or Western Europe. In addition, we are connected to the world through submarine
cables and wide terrestrial infrastructure with Points of Presence (POPs) in various remote locations around the world. This allows our customers to broadcast to specific regions or globally without the added expense of multiple satellite transmissions, and allows them to add new regions rapidly and cost effectively. We offer our customers a combination of distribution and contribution solutions to meet their individual requirements, such as satellites coverage to target audiences over wide territories in different regions, terrestrial fiber connectivity for point to point or defined multi points and broadband/IP in various levels supporting both professional grade broadcast level delivery or distribution to other target audiences.
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Superior technical support.
The nature of our business is complex and demands uninterrupted service availability and our customers require ongoing technical service and support. To provide that, we run a 24/7/365 operation center served by highly professional engineering and customer support teams. We monitor and control our global media and distribution services through our central Network Operation Center (NOC), together with local control centers that provide “local hands on” support to our customers at different regions across different time zones. This allows us to maintain the highest level of service required by all major media players.
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Our Strategy
Our objective is to become a leading partner of value-add digital media services for customers in the broadcast and digital media industry. Our services enable our customers to provide high quality video entertainment globally. Our strategy to attain these goals includes the following principal components:
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Moving up the value chain
. RRsat continues to move up the value chain by providing customers with a comprehensive package of value-added services they require provided on top of our robust infrastructure. Well integrated media services require a high level of skill, sophistication and infrastructure. Leveraging our well proven infrastructure of network, teleports and broadcast center with more value added services like content preparation and distribution for any screen, presents real convergence of content management and distribution services.
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Focus on upper tier broadcasters.
We currently target broadcasters and content owners that require global media and distribution service capabilities. These include large global broadcasters and content owners as well as significant regional broadcasters that are looking to expand globally. Contracts with upper tier broadcasters and content owners typically have a longer term and cover a larger scope of services. Most of these broadcasters and content owners place a high priority on cost-effective, high quality solutions. We believe there is a growing trend of such broadcasters and content owners to outsource channel origination, delivery and content operation services. We continue to target Tier 1 and Tier 2 customers who are looking for technical partners rather than just suppliers.
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Expand our
Sports, News and Live Events Services
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We strongly believe there is tremendous long-term potential in the growing market of services for sports and live events as more major players recognize RRsat’s global capabilities and resources. Through our acquisition of Sm2 Sports & Media Solutions in 2012, RRsat grew from being a small player in the sports and live events industry, to a relatively considerable provider for large names in the sports world, including NFL, IMG, MP & Silva, LPGA and USGA. By securing these major customers, and building credibility in the marketplace as a reliable and trustworthy sports and live events service provider, we believe we will be able to increase our high margin revenue from these services. Our live event services are synergistic to our core distribution services and we are looking to increase the portion of this revenue in our total revenue mix, by replicating recent wins. Many of these services are more complex and require a high level of sophistication and know-how on top of a highly reliable infrastructure which we believe we already have.
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Expand our activities with the global broadcasters.
The RRsat brand continues to gain recognition for quality, service and end-to end support. The world’s international broadcasters are now looking at global reach, and they are expanding their distribution of television content to the global market by creating local versions of their content for the different local television viewers in different regions. In order to achieve this, they require content operation and distribution services, such as the services RRsat is offering. We intend to continue to expand the services we provide to international broadcasters as they look to outsource the complex content operation and global distribution and solutions they need.
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Provide an expanded range of innovative, value-added services.
Our unique and comprehensive service offerings allow our customers to utilize us as a one-stop shop for their global technical needs. We offer sophisticated value-added services that allow our customers to focus on developing, acquiring and marketing content while we offer to cost-effectively handle all the “hassle” involved with the technical workflow. We intend to continue to broaden our service offerings and introduce new and innovative value-added services. We believe that this approach is appealing to customers who need to focus on producing and acquiring content and prefer to outsource these services to a single partner, and therefore, it attracts new customers, generates additional sources of revenue from existing customers and encourages customer loyalty.
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Provide technical expertise and adapt our offering.
The television and broadcasting industries are undergoing significant changes that are leading to the introduction of multiple technology standards. While our customers focus on how these new technologies affect the way they create content, we, as a trusted partner, are focused on the use of these new technologies to enhance our customers offering. HD is now a fact and 4K or Ultra High Definition broadcasts is expanding and so are VOD, OTT and TV everywhere. Finding innovative and cost-effective ways to process and deliver this content is a challenge we are constantly addressing. We continue to invest in enhancing our infrastructure and personnel to allow us to continue accommodating the evolving needs of the global media.
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Enhance geographical presence and local solutions.
We intend to continue to expand our presence in North America and Europe, where we believe there is the largest potential for increased upper tier outsourcing by large broadcasters. We recently established RRsat Europe following the 2013 acquisition of JCA, a London-based provider of content preparation services, and expanded our services in the United States following the 2012 acquisition of Sm2’s business in the United States. We continue to expand our presence in emerging markets, such as Russia, where we established an office in Moscow in 2013, the Middle East, APAC and Latin America. We believe that having local access in these markets to our global media services platform will help us attract and win new customers who demand local support. Such local presence will also provide us with greater control over our operations, while helping us provide the cost-effective end-to-end media and broadcast services our customers require, with better customer control.
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Offer customers the ability to expand their operations.
There is also a significant growth in the demand for live sports, news and other thematic types of broadcasting, resulting in increased demand for global broadcasting solutions. The world’s population is becoming increasingly mobile and increasingly connected, and geographic borders no longer are a physical constraint to population shifts. These shifts in population result in the increasing penetration of ethnic television channels and content which needs to be localized and distributed globally.
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Continue to grow the business via acquisitions.
We intend to continue to seek acquisition opportunities globally to expand our service offerings and geographical presence and to attain local talent, such as the acquisitions we completed in 2013 and 2012 to acquire JCA, a London-based provider of content management services, and Sm2,
a U.S. based premier provider of international sports distribution and syndication services.
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Find the best people.
Maintaining our position as technical partner requires recruiting and keeping the right caliber of experienced people around the world. One of the primary ways RRsat adds value to our customers is by providing innovative solutions at every level, as well as by being the customer’s advisor. We pursue and strive to keep experienced people who drive innovation and who are constantly forward-looking, to ensure that we have the tools, the infrastructure and the integrated capabilities to meet future challenges ensuring our customers remain competitive.
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Industry Background
Changes in the technology, regulation and economics of the content management and content distribution service industry over the past three decades have presented increasingly complex challenges and opportunities. The operation and distribution of video content has been dramatically altered by convergence in wireline, wireless and IP technologies. Carriers, satellite operators and other infrastructure providers have each tried to balance the quality and cost of their respective technologies. Similarly, broadcasters and other content providers have strategically tried to leverage different technologies and infrastructure to enable the most effective content operation, management and delivery in order to reach larger audience and monetize their content better through evolving business models.
Broadcasting Industry Dynamics
There are a number of continuing market trends in the broadcasting industry leading to significantly increased need for localized handling and global distribution of content in various shapes and formats. Some of these trends are:
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Globalization of content.
Technological developments, such as improvements in bandwidth utilization over existing networks, advanced video coding, transition from analog to digital cable and the growth of IPTV and OTT platforms as well as massive penetration of pay-TV to emerging markets, have prompted a rapid acceleration in the introduction of new channels by new broadcasters and have increasingly led incumbent broadcasters to target a more global audience with existing or new offering. Content providers are increasingly offering their programming on a global scale, which requires complex management and operation of their content assets and wider distribution infrastructures and capabilities. Broadcasters who seek to appeal to a niche market, such as speakers of a specific language, are now able to reach their target audience on a worldwide basis. These content providers rely upon networks and service providers with the ability to localize, operate and distribute across six continents in order to achieve global scale.
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Expanding channel lineups.
Increasing competition between different media corporations and platforms for audience and revenues, increasing competition among service providers for customers, has resulted in offering local channels versions and localized content. These are all catalysts for a larger number of channels becoming available on a local, national and worldwide basis. There is also a significant growth in the demand for live sports, news and other live broadcasting events, resulting in increased demand for broadcasting globally. The world’s population is becoming increasingly mobile and increasingly connected, and geographic borders no longer are a physical constraint to population shifts. These shifts in population result in the increasing penetration of thematic television channels. These new channels will lead to a greater volume of content being distributed over different distribution networks such as satellite and terrestrial fiber networks globally. It will also drive higher demand for content handling and preparation to fit any screen at any region.
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New broadcasting technology.
The migration shift from standard definition (SD) to high-definition (HD) format and the
newly emerging Ultra- High Definition (4K) technology and the requirement for simulcast (HD&SD), as well as the expansion of multiple screens targeted online and the emerging VOD (Video On Demand) trend, are expected to lead to even greater increases in the amount of premium and non-premium content to be handled and the number of linear channels available. At the same time, the adoption of these technologies will require wider infrastructure capabilities, higher capacity (bandwidth) and growing consumption of content operation service requirements (such as content preparation, transcoding, metadata handling, formatting, subtitling, close-captions, dubbing, storage, archive, playout, etc.). Such requirements are the value of the infrastructure of service providers such as our company. The origination and distribution of the new programming for these channels and platforms will require the use of combined satellite-terrestrial fiber and internet networks while content preparation and operation requires highly skilled broadcast operation and playout capabilities.
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Emergence of television alternatives.
Alternative content distribution mechanisms are causing content providers to rethink their means of reaching their audiences. New Internet Protocol television (IPTV) operators are using IP technology to provide services similar to cable television, reaching out to television sets with external or built-in set-top boxes. Over-the-top (OTT) video over the public Internet open the door for new content providers to enter the industry or existing providers to engage directly with viewers, bypassing the incumbent pay-TV operators in some cases. These emerging alternatives drive new and growing demands for re-proposing the same content in different formats. Thus, a much more complex, sophisticated and converged content operation and delivery infrastructure is required.
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Premium Content.
Premium content continues to be a key requirement for the expansion of our markets. Premium content is expensive to produce and requires clear monetization mechanism. In today’s TV ecosystem, monetization of premium content viewing is largely supported by the subscription fees to pay-TV as well as from the advertisement fees during the airing of such content. New alternatives for online video consumptions enjoy the availability of premium content. The current online video consumptions business models are unable to support the necessary cost of creating the premium content.
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Broadcasting/Video Distribution over Satellite and Terrestrial Fiber Networks
Broadcasters, video distributors and other media companies have actively leveraged both satellite and terrestrial fiber networks for a variety of communications and entertainment applications.
Historically, broadcasters, video distributors and other entertainment companies have relied heavily on satellite systems for the bulk of their distribution needs. A satellite has the advantage of being able to reach unlimited multiple points under its coverage with a single transmission, because satellites, in essence, “blanket” an entire coverage area with their signal, known as “point-to-multipoint” or “footprint” coverage. Satellite remains the best method for broadcasters to transmit ad hoc events occurring at remote locations and 24/7 TV channels, when multi receiving points over large territories are to be covered . Ad hoc events such as sports and news leverage the ability to use short-term satellite capacity and transportable/steerable uplink ground stations. More recent technological innovations, such as HDTV require more satellite capacity to transmit content than standard definition (SDTV) programming, and expected to grow rapidly as programmers seek to increase their revenues from audiences where these higher quality formats can enhance the content and viewer experience.
The availability of transmission capacity accompanied by the growth in the number of broadcasters and need to localize content has increasingly led content providers and broadcasters to seek greater flexibility and a broader array of service offerings. In certain regional and trans-regional developed markets, terrestrial fiber networks became significant complementary to an efficient satellite distribution services as it is a more cost-effective alternative for certain types of applications, such as “point-to-point” delivery. Thanks to technologies such as Video over IP, terrestrial fiber networks can provide certain benefits for intercontinental delivery between origination point and a distribution point at a region.
Hybrid Satellite / Terrestrial Fiber Networks and Teleports
Satellites and terrestrial fiber networks both offer flexible and versatile transmission and networking, and they lend themselves well to a variety of communications and entertainment applications. Although often viewed as competing technologies, they are frequently used to complement each other for specific and more efficient customer solutions.
In order to maximize the benefits from these competing and complementary technologies, hybrid satellite/terrestrial fiber networks have emerged – networks running traffic over both satellite and terrestrial fiber systems which are interconnected via a gateway at a teleport facility. While teleports are the ground-based side of the global satellite network, they also provide terrestrial fiber networks with access to satellite transponders. Most of today’s teleports offer comprehensive solutions by interconnecting via owned or leased terrestrial fiber networks and owned or leased satellite transponders. Teleports uniquely serve as a bridge for such incompatible systems and protocols and act as the hubs of broadband business-to-business networks.
Once providers of basic uplinking and downlinking services, teleports have evolved into providers of value-added complex solutions to the broadcasting community, ranging from television program production and post-production to content management and distribution, from systems integration to network management and network origination.
The media broadcast and transmission market is highly fragmented with in-house broadcasters, telecommunication companies, satellite fleet operators, and independent teleport operators (some of whom have become specialized service providers). The current teleport sector consists of four primary types of service providers, all with different strategies:
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In-house broadcasters
– broadcasters that have internal content distribution and management capabilities, which they continue to use. Because these in-house operations serve only one customer, mainly for the local markets of the broadcasters, and the customer’s primary focus is producing rather than distributing or managing the content, these operations usually have limited capabilities and very little flexibility. We believe that dedicated in-house operations represent an expensive solution that is not cost effective, not easily scalable and is limited in the ability to deliver complex distribution and content management solutions.
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Telcos
– telecommunications companies, some with business units focused on satellite services. Many of these companies are relatively minor players on a global basis because they concentrate on a specific region, and are tied to and limited by their own terrestrial network. Due to a lack of focus on the satellite and broadcasting sectors, these companies have had difficulty reacting to the dynamic needs of the industry, although some have carved out specialized business units to focus on satellite services.
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Satellite fleet operators (hybrids)
– some satellite carriers that typically had offered only transmission services, have acquired or partnered with teleports and terrestrial fiber network operators to create a hybrid global network. These carriers are typically limited to their own satellite fleet, which means that they are limited geographically, are not network neutral, focus on providing transmission capacity and generally cannot offer content management services, and are reticent to compete with their customers who provide value-added services.
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Independents
– traditional teleport operators founded by entrepreneurs to exploit the deregulation of satellite services in major markets. Traditional teleport operators have continued to innovate and prosper by reacting to the changing needs of customers, but generally do not offer a comprehensive solution via hybrid satellite-terrestrial fiber networks. Many of them are relatively small, resulting in less than global reach, an inability to scale to meet customer needs, only limited cost savings for their customers, and lack the adequate resources to invest in supporting emerging technologies.
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RRsat – Solutions supporting industry needs
The global media services that we provide are aimed at creating higher value to broadcasters and content owners supporting the market dynamics by offering a “hassle free”, one stop shop package of converged solutions for both the traditional broadcast and the new media with services such as OTT, as well as other value-added services that enable broadcasters and content providers to reach global audiences, providing localized quality content that is formatted and ready to use on a variety of different devices including traditional TV.
We help content providers grow their audience base, because we enable them to reach a larger audience around the world efficiently and rapidly. Larger audiences, or highly focused, niche markets are attractive to advertisers, who want to use local ads to generate greater revenues. By reaching 95% of the world’s population, RRsat reduces boundaries while increasing opportunities.
Detailed description of RRsat value-added digital media services
Our value-added content management and media processing services involve the digital archiving and sophisticated compilation of a customer’s programming, including encoding, encryption, advertisement insertion, closed-captioning, multi-language audio insertion and channeling, into one or more broadcast channels, with the ability to customize broadcast channels by target audience. We then provide automated origination services for these channels in accordance with our customer’s broadcast schedules, known as playlists. We offer our customers flexible packages, which we deliver with a high degree of redundancy and availability. Our content management and media processing services are discussed below.
Content Preparation:
Tape workflows.
With over 30 current and legacy broadcast video tape formats available, we are able to access, copy, reversion, convert and encode all common legacy video formats into all key file formats.
Digital workflows.
We can receive, manage, transcode, deliver digitally or output to video tape for clients globally.
Media Window.
Media Window is a white label window cloud based self-serve media management application developed especially by RRsat for its customers to manage their media service. We offer clients a range of options from online sales viewing to full upload, auto-transcode, download and streaming services.
Restoration.
We offer full digital restoration, clean and re-grading to repurpose archive content for the digital age. This enables companies to turn archives into valuable revenue-generators
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Film transfers.
We offer
real time standard and high definition telecine services and 2/3/4K film scanning via our Arri Scanner.
Playout (origination) Services
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Digital Storage and Archive.
We generally receive content directly from broadcasters on digital media (tapes, CDs, DVDs or hard disk drives), by satellite transmission, over leased terrestrial fiber telecommunications lines or through a file transfer in various technologies including cloud based solutions. Content that arrives either as files or on physical media such as tapes, CDs, DVDs or hard disk drives is loaded onto our high-capacity servers and our digital archive, which store tens of thousands of hours of broadcast video
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Playout and Play-lists
. We compile a customer’s discrete programming and advertising content as well as different dynamic graphics and insertion elements into a complete broadcast channel. We also compile a customer’s content into multiple broadcast channels, allowing the content to be aired at different times or with different commercials in different geographic markets. These services are supplied through a fully automated workflow supported by a central automation system enabling the scheduled content and different graphics layers and insertions to be ready and played on a frame accurate manner.
Multi-Language Audio.
We offer our customers the possibility to transmit the same program in different languages, by providing them with multi audio channels together with their video channel. We also provide the option to insert elements such as subtitling, closed captioning and voice overs allowing our customers to enhance their services while using the same transmission in multiple target markets.
Time Delay.
We offer our customers a time delay (shift) service for their transmitted channels, which enables the content to be aired at different times in different geographic markets
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Opt-Outs:
We offer our customers program opt-out services in which we replace specific programs over the original channel signal that we capture with either local or alternative content. These services are usually required due to content rights limitations or the need to localize a channel
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Standard and format Conversion.
Our services include any to any standard and format conversion of both media file assets or live linear stream. Conversions might include basic PAL/NTSC conversion, HD format resolution and frame rate conversions with or without motion compensation. Conversion between formats depending on the target markets to which our customers wish to broadcast
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Encryption/Encoding.
We provide in-house encryption and encoding capabilities, based upon technology that we license/buy from third parties as specified and required by our customers.
Dynamic Graphics.
This service permits our customers to brand their channel and enchase the video with high quality 2D/3D dynamic graphics overlay via an automated process. Examples vary from basic static brand logo insertion and 3D dynamic squeezes or multi video windows. We are also enabling character generation over the video, either pre-defined or automatically inserted through integration with an outside source for applications such as viewers’ text messages presentation.
Network Supervision.
We offer remote monitoring and control services, mostly through the public Internet, which allow our customers to supervise and alter the broadcasts that are transmitted from our facilities remotely from their own facilities
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Workflow Management & Media Asset Management.
Our playout center handles multiple broadcast workflows according to specific customer needs. We offer our content operation and playout customers with extensive workflow management that can handle the video assets from final creation all the way to the on air playlist. We control the workflows through a workflow management system integrated in our media asset management system (MAM) that enables us or the customer to set workflow rules, track the video asset along the process and add different meta-data or tagging over clips.
Managed Playout Services at Customer’s Premises.
We offer customers the convenience of installing and operating a fully-equipped playout center, at the customer’s premises, adjacent to customer’s studios and editing rooms. Our team of professional technicians provides around-the-clock services to ensure smooth operation and playout of the channel, which allows the customer to focus on what it does best – production of content.
News, Sports and Live Services:
We offer services for live events, also known as occasional use services, to leading channels worldwide. For sports, special events and news coverage, we provide feeds ranging from a few minutes to several hours in duration; one-time service, multiple feeds or regularly scheduled service, as well as immediate coverage at any time of day or night, as events unfold. Downlink, turnaround and uplink services deliver instantaneous broadcast distribution capabilities across the globe, from any origin.
Our advanced large-scale 3G router and HD motion-compensated convertors support the full range of format conversion and audio processing, including Dolby E routing, to ensure highest video and audio quality for sports and news feeds. Content can be broadcast as MPEG-2 4:2:0 or 4:2:2, MPEG-4, SD, HD or even 3-D.
Bring Your Correspondent.
For customers who use our satellite newsgathering systems (SNG) and the portable cameras linked to our satellite newsgathering vans, we provide all of the equipment and other crew members needed for external news gathering – cameras, camera operators, audio kits, audio engineers, lighting kits and an audio mixer. Customers who use our external SNG only need to provide their own reporters. These production services supplement our customers’ on-the-ground broadcasting capabilities.
Digital Satellite News Gathering.
We supplement the fixed uplink services we provide to customers with mobile and transportable uplink systems that operate throughout Israel, the territories administered by the Palestinian Authority and elsewhere in the Middle East.
Studio Facilities.
We offer a comprehensive range of studio services for broadcast video. We maintain terrestrial fiber networks on a full-time basis to various studios in Israel and the surrounding region, and we can obtain these studios for our customers’ use when needed. We operate a studio facility in Jerusalem, which enables our customers to broadcast news reports against various familiar Jerusalem backgrounds.
The RRsat Global Network
Our terrestrial network is an all Internet Protocol (IP) network. Our uplink, downlink and turnaround services have been ISO 9001:2000 certified since 2002, which indicates that an independent firm certified that we have complied with the quality of service standards developed by the International Organization for Standardization (ISO).
Network Operating Center
- RRsat’s teleports are connected and managed from our central Network Operations Center in Emek Ha’ela via a dynamic and robust fiber network that provides high quality point-to-multipoint connectivity for delivery of content. The unique geographical location of our principal teleport in Emek Ha’ela provides us direct access (via a single satellite hop) to satellites that can downlink from and transmit directly to Europe, Asia, Africa and the Middle East, combined with the direct satellite access to North America and South America from our Hawley Teleport in Pennsylvania, which affords us the capability to receive transmissions from and transmit to all the major population centers in both the Western and Eastern hemispheres from our principal teleports. We also maintain over 20 partner teleports in the United States, Spain, Australia, Hungary, Russia, Taiwan, the United Kingdom and the Netherlands, providing selective uplink, downlink and streaming capabilities in those regions.
Our teleports have approximately 200 satellite dish antennas, ranging from 1.2 meters in diameter to 32.0 meters. We have our technical staff on duty 24 hours a day, 7 days a week, 365 days a year.
Quality every step of the way -
RRsat recently implemented a new, advanced and automated system to monitor all traffic delivered through our RRsat system and network. The system automatically detects failures or degradation in the quality of service, before such failure is noticeable by viewers. The system automatically alerts the services technicians and representatives of the failure, provides reports and actions taken to correct and prevent future failures.
Content Distribution: Uplink, Downlink and Turnaround Services
We are an innovative provider of comprehensive transmission services to the global broadcasting industry. We operate teleports that we own and obtain additional teleport services under subcontract, to provide uplink, downlink and turnaround services including encryption, encoding, time delay and localization on both a continuous and occasional basis. We transmit to 46 satellites and have the ability to receive transmissions from 89 satellites, which allow our customers’ content to be distributed to six continents. Broadcasters use our uplink services to transmit programming to a satellite, from which the programming is distributed either to a cable television headend (a cable television, or CATV, system control center that receives and processes signals for distribution to subscribers), to a satellite television facility, to a mobile operator, to an Internet Protocol television (IPTV) operator headend, to direct-to-home (DTH) consumers or directly over the Internet.
Our downlink services involve the reception of a broadcast that is transmitted from a satellite. We operate an array of approximately 200 satellite dish antennas to receive broadcasts from Europe, North America, Africa, the Middle East and Asia. These services are available on a continuous basis, as well as for special events. We have the ability to receive downlinks from a total of 89 satellites, including those operated by Eutelsat, Intelsat, ArabSat, AsiaSat, Azersat, Spacecom, SES Sirius, SES Astra, SES World Skies, Thaicom, ABS, Telesat Canada, APT, ISRO, RSCC, Hellas Sat, HispaSat, PakSat, Optus, MEASAT and Gazprom.
We offer Turnaround services channel distribution and backhaul services, sports feeds, and other continuous and occasional feeds.
The RRsat network includes an integrated fiber network with over 7 points of presence (POPs) interconnected with the world’s major telecommunications providers such as AT&T, Verizon, Level 3 Communications, TeliaSonera, Deutsche Telecom, COLT, GTT, PCCW, Singtel and Intelsat Network. We connect six continents and provide our customers with a total 24/7 managed service for end-to-end connectivity. Our occasional services unit also provides ad hoc service on the fiber as well as the satellite network. This allows us to source content globally and cost-effectively.
RRsat Global Network- Satellite Component
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Europe
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Russia
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North America
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Asia
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Middle East and Africa
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South
America
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Australia
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AMOS 2
AMOS 3
EUTELSAT 12 WEST A
EUTELSAT 7A
EUTELSAT 9A
EUTELSAT 10A
EUTELSAT 21A
EUTELSAT 36B
SES ASTRA 19.2E
NSS 7
EXPRESS AM22
EXPRESS AM44
HELLAS SAT 2
HISPASAT 1E
EUTELSAT HOTBIRD 13A
EUTELSAT HOTBIRD 13B
EUTELSAT HOTBIRD 13C
EUTELSAT 16C
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ABS 1
EXPRESS AM22
EUTELSAT 9A
EUTELSAT 36B
EUTELSAT HOTBIRD 13A
EUTELSAT HOTBIRD 13B
EUTELSAT HOTBIRD 13C
YAMAL 201
YAMAL 300K
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GALAXY 19
GALAXY 23
HISPASAT 1E
INTELSAT 805
TELSTAR 12
INTELSAT 21
EUTELSAT (SATCOM) 6
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ABS1
APSTAR 7
ASIASAT 3S-5
INTELSAT 20
INTELSAT 902
MEASAT 3A
THAICOM 5
YAMAL 201
YAMAL 300K
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AMOS2
AMOS 3
AMOS 5
APSTAR 7
EUTELSAT 7 WEST A
BADR 4
EUTELSAT 25A
EXPRESS AM44
EUTELSAT HOTBIRD 13A
EUTELSAT HOTBIRD 13B
EUTELSAT HOTBIRD 13C
EUTELSAT 21A
ASIASAT 3S-5
INTELSAT 7
INTELSAT 20
MEASAT 3A
NSS 7
THAICOM 5
THAICOM 6
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GALAXY 19
GALAXY 23
HISPASAT 1E
INTELSAT 805
TELSTAR 12
INTELSAT 21
EUTELSAT (SATCOM) 6
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INTELSAT 20
MEASAT 3A
OPTUS D2
THAICOM 5
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A significant portion of the satellite capacity we use (approximately 45% as of December 31, 2013) is leased through long-term lease agreements with seven satellite operators, which provide coverage primarily for Europe, North America and Asia. The rest of the capacity (approximately 55%) is leased through a “shared-platform” arrangement in which the capacity is available for our needs on one hand but we are liable for it only once we have a customer utilizing it.
In addition, RRsat delivers TV channels directly over redundant, dual and diverse, fiber to satellite operators such as EchoStar and cable networks such as Comcast and HOT Israel. These fiber links are managed by the RRsat network management system.
Our network services costs amounted to $59.8 million in 2011, $58.5 million in 2012 and $68.9 million in 2013. As of December 31, 2013, our contractual commitments for the next five years under our operating network leases amounted to $126.2 million.
Mobile Satellite Services Business
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We provide our customers with a broad array of MSS, including telephony, fax and data transmission services, including value-added services, such as email, fleet tracking and electronic billing. “Station 711” is our brand name for the MSS segment. Other services we provide related to Mobile Satellite include mobile broadband services (BGAN) and Tactical Radio through Inmarsat i4 satellite net (Ltac).
Customers
Content providers who use our RRsat Global Network include commercial broadcasters, government-sponsored broadcasters and religious broadcasters. In 2013, we had 494 customers for distribution and content management services and 249 customers for MSS. Our top ten customers represented 22.4%, 21.7% and 19% of our revenues in 2011, 2012 and 2013, respectively, and no single customer accounted for more than 4.0%, 5.7% and 4.0% of our revenues during each of these periods, respectively.
Contracted Backlog and Agreements
Our agreements with our customers for content management and distribution services generally extend over terms of two to five years, most of the time with an automatic renewal option for an additional one to five years. Approximately 80% of our 2013 revenues were backed by long term contracts. As of December 31, 2013, we had contracted backlog totaling $203 million of which $91.8 million are related to services expected to be delivered in 2014. Contracted backlog represents the actual dollar amount (without discounting to present value) of the expected future revenues to be received from customers under all long-term contractual agreements. However, our recurring revenues are larger than our long-term contracts backlog since we do not backlog some of the sports related recurring revenues. For additional information regarding our contracted backlog, see Item 5.A. “Operating and Financial Review and Prospects – Operating Results – Overview.”
Sales and Marketing
Our sales and marketing strategy is to tailor cost-effective innovative solutions for each customers’ specific needs based on geographic reach, business needs and technical suitability. We market and sell our various media services directly to broadcasters and content owners globally.
We market and sell our mobile satellite services (MSS) either directly to end customers, such as shipping companies and government agencies, or to resellers (Inmarsat Service Providers, or ISPs) who in turn resell our services to their end customers. We strive to offer competitive pricing and innovative value-added services to attract new customers.
We use a combination of a direct sales force and a network of third party agents and representatives. Our sales force is based in Israel, Russia, the UK and in the United States. In addition, certain members of the marketing and sales team focus on specific needs within the broadcasting industry, such as mobile satellite broadcasting, sports & live events and production services. We also have a dedicated division within our marketing and sales team that focuses on the sale and marketing of our MSS.
In order to provide the best level of service, we assign an account executive to maintain the relationship with each customer. They work together with our technical department to ensure that we understand the customer’s business and needs. In addition, local agents and representatives familiar with the local market provide specialized technical knowledge.
We are active in industry organizations and we are members of the World Teleport Association, the Association of International Broadcasters, the Society of Satellite Professionals International and the National Telecommunications Cooperative Association. One of our senior employees also sits on the Board of Directors of the World Teleport Association.
Competition
Digital Media Services
We primarily compete in the market for digital media services including content preparation, content management and content distribution. The content distribution services market consists of four types of service providers: in-house distribution departments of broadcasters, telecommunications companies, satellite fleet operators (hybrids) and independent teleport operators.
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In-house broadcasters
– broadcasters have internal content distribution and management capabilities, which they continue to use. Because these in-house operations serve only one customer, mainly for local markets, and the customer’s primary focus is producing rather than distributing or managing content, these operations have limited capabilities and very little flexibility. We believe that dedicated in-house operations represent an expensive solution that is not cost effective, not easily scalable and that is limited in the ability to deliver complex distribution and content management solutions.
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Telcos
– telecommunications companies sometimes have business units focused on satellite services. Many of these companies are relatively minor players on a global basis because they concentrate on a specific region, and are tied to and limited by their own terrestrial network. Due to a lack of focus on the satellite and broadcasting sectors, these companies have had difficulty reacting to the dynamic needs of the industry, although some have carved out specialized business units to focus on satellite services.
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Satellite fleet operators (hybrids)
– These satellite carriers only offered transmission services. However, they have recently begun to either acquire or partner with teleports and terrestrial fiber network operators to create a hybrid global network. These carriers are typically limited to their own satellite fleet, which means that they are limited geographically. They are not network neutral, focus on providing transmission capacity and generally cannot offer content management service. They do not usually want to compete with their customers who provide value-added services.
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Independents
– traditional teleport operators founded by entrepreneurs to exploit the deregulation of satellite services in major markets. Traditional teleport operators have continued to innovate and prosper by reacting to the changing needs of customers, but generally do not offer a comprehensive solution via hybrid satellite-terrestrial fiber networks. Many of them are relatively small, resulting in less than global reach, an inability to scale to meet customer needs, only limited cost savings for their customers, and a lack of adequate resources to invest in supporting emerging technologies.
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Some of these service providers allow for the distribution of content and some also provide certain content management services.
However, as a comprehensive end-to-end a provider of global and comprehensive media services,
we believe that our most significant and direct competitors are GlobeCast, which is a subsidiary of France Telecom, Encompass Digital Media, Inc., which is controlled by Court Square Capital Partners, a private equity firm, and Arqiva Limited, a company held in part by Macquarie UK Broadcast Holdings Ltd.
Most of our customers are broadcasters. A number of broadcasters, such as CNN, HBO and Discovery, have internal content management and distribution capabilities, but may seek our services for complex projects and new initiatives. We believe that most broadcasters who do not currently possess media services and distribution capabilities will not establish their own content management and distribution systems since dedicated in-house operations represent an expensive solution that is not cost effective and not easily scalable. We offer a rapid get-to-market solution, with fast and cost-effective scaling, enabling customers to try or launch new services.
We also compete indirectly with telecommunications companies such as Telespazio (an Italian telecommunications provider), Vyvx (owned by Level 3) and Telefónica S.A. (the incumbent Spanish telecommunications provider) in Europe, and Singapore Telecommunications in Asia, to the extent that they offer content management and distribution services. We believe that our competition with these companies is limited since they are tied to their own terrestrial network and mainly provide regional broadcasting, while we focus on the provision of global content management, preparation and distribution service.
Some satellite carriers that had typically offered only transmission have acquired or partnered with teleports and terrestrial fiber network operators to create a global hybrid network. If they partner or begin to offer value-added services, these ventures pose direct competition to our business. Nevertheless, these carriers usually do not provide the comprehensive range of value-added services that we offer, mainly since they focus on providing transmission capacity and are reticent to compete with their customers who provide value-added services.
In addition, these carriers are typically limited to their own satellite fleet, which means that they are limited geographically, are not network neutral and cannot provide an optimal network agnostic solution. The satellite carriers that offer some value-added services with which we compete include Intelsat, Eutelsat and SES World Skies. In addition to our direct competitors, numerous companies and governments that operate global or regional fleets of satellites in North America, Latin America, Europe, the Middle East, Africa and Asia may recommend individual teleport operators and service providers (who are our competitors in providing value-added services and service packages) with whom they have relationships. The largest of these fleet operators are Eutelsat, Intelsat and the SES Group.
In addition, we compete with independent teleport operators that were founded by entrepreneurs to exploit the liberalization of satellite services in major markets. These operators include companies such as Encompass Digital Media and Arqiva. The specialized business units that were carved out of large telecommunication companies, such as GlobeCast, which is a subsidiary of France Telecom, may also be considered as an independent teleport operator, mainly due to their global network and ability to innovate and react to the changing needs of customers.
We believe that the independent teleport operators generally do not offer a global comprehensive solution via hybrid satellite-terrestrial fiber networks such as the one offered by our network. In addition, with the exception of GlobeCast, Encompass Digital Media and Arqiva, many of the independent operators are relatively small, resulting in less than global reach, inability to scale to meet customer needs, only limited savings for their customers, and a lack of resources to invest in supporting emerging technologies.
We lease satellite and terrestrial fiber capacity, and use this capacity as part of a package together with our other services. We would be adversely affected if the amount of satellite capacity available for video and audio broadcast will decrease, if satellite fleet operators will engage in aggressive price competition and offer our current and potential customers more attractive prices for capacity than we can offer them. In this case, our current and potential customers may prefer to obtain capacity directly from our suppliers of capacity rather than procuring a package of services from us.
In certain situations, the global content distribution services provided by one vendor may be indistinguishable in quality from those provided by another. In these situations, in addition to the quality factor, the largest global broadcasters may be influenced by the size and reputation of the service provider, while pricing can be the most important competitive factor for other broadcasters. In certain markets, the purchase of satellite transmission capacity may be influenced by factors in addition to price. Such competitive factors include a satellite’s technical capabilities, power, capacity, permitted frequencies of operation, broadcast coverage, popularity of the satellite amongst cable headend (master facilities) or direct consumer users, health, estimated end of life and availability of additional capacity, the provision of ancillary services by the operator, and the other users of the satellite. In addition, purchase decisions may be based upon the satellite operator’s country of origin and ownership. The low marginal cost of providing transmission capacity once a satellite is operating could result in adverse pricing pressure and reductions in anticipated profits.
Because customer contracts are generally for terms of two to five years there is limited movement of existing customers from one service provider to another.
Content Preparation.
Our primary competitors for content preparation services are Deluxe, Red Bee and Technicolor who offer a similar range of services but there are also a number of smaller service providers who although compromised in scale maintain longstanding relationships. Content Preparation relationships are generally based on Service Level Agreements covering the ad hoc placing of work according to volume requirements.
Global mobile satellite services (MSS)
The global MSS industry is highly competitive. We face competition from other Land Earth Station Operators (LESOs) and Inmarsat Distribution Partners (DPs), and from Inmarsat itself, as well as from distributors of a number of competing communications networks and technologies. We expect to continue to face significant competition in the future.
The major LESOs and DPs in the Inmarsat services market, which together hold the majority of the market share for these services, are Vizada Satellite Communications (Astruim), which was formed by the merger of Telenor Satellite Services and France Telecom Mobile Satellite Communications, and Stratos Global Corporation, formerly an independent Inmarsat services provider which was purchased by Inmarsat in 2009 and became a wholly owned operating division of Inmarsat, as described below. Other second tier LESOs and DPs include, among others, Singtel, MVS, OTE, Telecom Italia, KDDI and KT.
In April 2009, Inmarsat purchased its largest distribution partner, Stratos Global Corporation, which became a wholly owned operating division of Inmarsat. This transaction was followed by the purchase in January 2010 of Segovia Inc., a provider of secure IP-based managed solutions to the U.S. government, and the purchase in April 2011 of Ship Equip International A.S., a leading VSAT provider.
In January 2012, Inmarsat announced that it is reorganizing its structure to provide both direct and indirect distribution of its services under the Inmarsat brand name, which will be supported by a new group that will provide cross-business unit services. Inmarsat has noted that despite the reorganization it does not intend to change its policy of distributing its services primarily through independent channel partners, comprised of its network of distribution partners and service providers, including RRsat, and the restructure is expected to provide further support to independent channel partners through greater coordination between Inmarsat and its channel partners. These acquisitions and reorganization, however, may have an adverse effect on our ability to compete in the Inmarsat services market as existing and potential customers may prefer to procure services directly from Inmarsat, rather than from a vendor for Inmarsat services, even if our quality and pricing are more attractive.
We also face competition from competing networks and technologies, especially Iridium and maritime VSAT. We are currently looking for ways to integrate VSAT services in our portfolio.
Iridium provides data and voice services at rates of up to 64 kbps using compression software. The terminals used to access Iridium services are generally handheld devices that are smaller and less expensive than the terminals used to access Inmarsat’s traditional services. In addition, Iridium’s end-user call charges are competitive with, and in some cases cheaper than, the rates offered by us.
We face growing competition in some of our target market segments from communications providers who operate private networks using VSATs or hybrid systems to target business users. VSATs are fixed, transportable or mobile terminals that access higher bandwidth services provided over satellite systems operating in the C-band, Ku-band and Ka-band radio frequencies. Communication services provided by VSATs are primarily targeted at users who have a need for high-volume or high-bandwidth data services, although new entrants into the sector are offering lower volume and bandwidth products in competition with our MSS. The coverage area of VSAT services is not as extensive as the coverage area of MSS, but they are growing rapidly to meet demand and are expected to be substantially global within a few years. Technological innovation in VSAT terminals, together with increased C-band and Ku-band coverage and commoditization, have increased the competitiveness of VSAT and hybrid systems in some traditional mobile satellite communication services sectors by permitting smaller, more flexible and cheaper systems.
Regulation
Satellite and terrestrial fiber transmission services are highly regulated industries, both in Israel and internationally. Obtaining and maintaining the required approvals can involve significant time and expense. If we fail to obtain particular regulatory approvals, this failure may delay or prevent our ability to provide services to our customers. In addition, the laws and regulations to which we are subject could change at any time. The countries, territories and institutions that regulate us could adopt new laws, policies or regulations or change their interpretation of existing laws, policies or regulations at any time. Any of these changes could make it more difficult for us to obtain or maintain our regulatory approvals or could cause our existing authorizations to be revoked or terminated. If we fail to obtain regulatory authorizations important to our current business or our business strategy, this failure could result in decreased revenue, increased costs and a decline in our profitability.
We are also subject to fees associated with the regulatory and licensing requirements discussed above. The countries, territories and institutions that regulate us could change these fees at any time. Significant increases in the fees to which we are subject in a particular jurisdiction could negatively impact our plans to provide services in that jurisdiction or our profitability.
Israeli Regulation
Ministry of Communications
The Israeli Ministry of Communications is responsible for granting licenses for the use of satellite transponders and for the lease of satellite transmission capacity to our customers, as well as granting us the right to use radio frequencies for the reception, transmission and turnaround of video, audio and combined signals and data signals, and for the operation of an earth station for the provision of voice and data telecommunications services over the Inmarsat network. In January 2011 our license was extended to include the right to provide virtual private network (VPN) services via satellite, utilizing VSAT terminals and a hub (under certain limitations that are detailed in the license). The Israeli Ministry of Communications is also responsible for granting licenses for the operation, installation, construction and existence of any device for the transmission or reception of signals, signs and other information by optical or electro-magnetic means in Israel, to the extent not exempted from such requirement. Our current license for the provision of uplink, downlink and turnaround services has been extended and shall be in force until July 2018. This license sets the type of customers and the conditions under which we are authorized to provide uplink, downlink, turnaround and other satellite services. We have another license for the provision of telemetry, tracking and control services (TT&C) for specific satellites detailed in the license, which is scheduled to expire in March 2015. The Ministry of Communications has also granted us a trade license pursuant to the Wireless Telegraphy Ordinance. This license, mandated by our main operating license, regulates issues of importing communication equipment to Israel and servicing and trading in equipment, infrastructure and auxiliary equipment in Israel. A request to extend this license was submitted to the Ministry of Communications. Another license pursuant to the Wireless Telegraphy Ordinance was granted us in June 2012 and is scheduled to expire in December 2014, for the use of terminal equipment in the global Iridium satellite network.
Our licenses from the Israeli Ministry of Communications to operate our teleports provides that, without the consent of the Israeli Minister of Communications, no means of control of RRsat may be acquired or transferred, directly or indirectly. In connection with our initial public offering in November 2006, our licenses were amended to provide that our entering into an underwriting agreement for that offering and sale of shares to the public, listing the shares for trading, and depositing shares with a depositary was not considered a transfer of means of control. In addition, pursuant to the amendments, transfers of our shares (or other “traded means of control,” that is, means of control which have been listed for trade or offered through a prospectus and are held by the public) that do not result in the transfer of control of RRsat are permitted without the prior approval of the Ministry of Communications, provided that:
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in the event of a transfer or acquisition of shares without the consent of the Ministry of Communications, resulting in the transferee becoming a beneficial holder of 5% or more of our shares or being entitled to a right to appoint a director or the chief executive officer (or such beneficial holder is a director or the chief executive officer), we must notify the Ministry of Communications within 21 days of learning of such transfer; and
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in the event of a transfer or acquisition of shares without the consent of the Ministry of Communications, resulting in the transferee becoming a beneficial holder of 10% or more of our shares or having significant influence over us (but which does not result in a transfer of control of RRsat), we must notify the Ministry of Communications within 21 days of learning of such transfer and request the consent of the Director General of the Ministry of Communications (the “Director General”) for such transfer.
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Should a shareholder, other than our shareholders prior to our initial public offering in November 2006, become a beneficial holder of 10% or more of our shares or acquire shares in an amount resulting in such shareholder having significant influence over us without receiving the consent of the Director General, its holdings will be converted into dormant shares for as long as the Director General’s consent is required but not obtained. The beneficial holder of such dormant shares will have no rights other than the right to receive dividends and other distributions to shareholders and the right to participate in rights offerings.
In addition, our licenses also state that means of control of the company, or of an interested shareholder of the company (which generally would include a holder of 5% of the company’s voting power or other means of control), cannot be pledged unless such pledge agreement includes a condition that prohibits the exercise of the pledge without obtaining the advance written approval of the Minster of Communication.
In accordance with the provisions of our amended licenses, any shareholder seeking to vote at a general meeting of our shareholders must notify us prior to the meeting whether or not its beneficial holdings are subject to the consent of the Ministry of Communications in view of the restrictions on transfer or acquisition of means of control imposed by the license. If the shareholder does not provide such notice, its instructions shall be invalid and its vote shall not be counted.
As long as our articles of association include the provisions described above and we act in accordance with such provisions, the breach of these provisions by our shareholders in a manner that could cause their beneficial holdings to be converted into dormant shares will not serve in and of itself as the basis for the revocation of our licenses. Our articles of association contain the provisions described above.
The amendments to our licenses that provide for the dormant shares mechanism described above do not apply to our shareholders prior to our initial public offering.
Under Israeli law, the Israeli Prime Minister and the Minister of Communications, at their discretion or at the request of the Minister of Defense and subject to the approval of the Government of Israel, have the right to determine by order that the use of radio frequencies required to perform tracking, telemetry, command and monitoring services of satellites, as well as for the downlink of imagery data in Israel, is a vital service. If such an order is issued, the Prime Minister and the Minister of Communications, subject to approval of the government of Israel, may impose various requirements and limitations that may directly or indirectly affect us. These requirements and limitations include, among others, limitations on the identity of our shareholders, requiring that management and control of our company be carried out in Israel, obligations to provide information, limitations regarding the identity of our officers, limitations regarding our corporate reorganization and limitations on transfer of control of our company. If such an order is issued with respect to us, any transfer of control in the company would require prior approval by the Prime Minister and Minister of Communications. In addition, the Israeli Prime Minister and Ministry of Communications may impose limitations on the transfer of information to certain of our officers and shareholders.
Further, under the Israeli Wireless Telegraph Ordinance, if the Government of Israel determines that the State of Israel is undergoing a state of emergency, the Minister of Communications can expropriate any device that is involved in the transmission of wireless telegraph information, visual signs or electromagnetic waves. During such an emergency period, the Minister of Communications can also enact orders to sell, buy, erect, use or restrict the operation of any such instrument. Any emergency appropriation or regulation of communications equipment could result in our equipment or frequencies required for us to operate our business being used by the State of Israel, or in our being forced to share with the State of Israel control of equipment or frequencies required for us to conduct our business. Additional emergency powers are accorded to the Minister of Communications under the Israeli Communications Law, whereby in a state of emergency the Minister of Communications may impose various instructions and limitations relating to the provision of our services, including mandating the provision of services to the Israeli security forces.
In connection with our 2008 acquisition of Bezeq’s satellite communications business, we agreed with the Israeli Ministry of Defense that the Israeli Prime Minister, at the request of the Minister of Defense may issue an order to our company requiring us to provide certain services to the Israeli Defense Forces. Pursuant to the order, we would be required to amend our articles of association in a manner that would require us to maintain a certain number of Israeli citizens and residents on our management team and board of directors, which comply with certain security clearance criteria, and we will be required to comply with certain requirements relating to security and protection of confidential information. To date, the Israeli Prime Minister has not issued such an order. However, we cannot assure you that such order will not be issued in the future.
To date we have been able to obtain all necessary telecommunications licenses for the conduct of our business, but there can be no assurance that we will be able to renew or maintain the necessary licenses in the future.
Ministry of Environmental Protection
Pursuant to the Pharmacists (Radioactive Elements and Products) Regulations, 1980, or the Pharmacists Regulations, issued under the Pharmaceutics Ordinance, the Ministry of Environmental Protection is empowered to grant erection permits and operation permits for our antennas and other radiation generating equipment. The Ministry of Environmental Protection has adopted the International Radiation Protection Agency’s standard as a basis for the consents it gives for the erection and operation of antennas.
The company is required to submit a request for the setup and operation of transmitting antennas. The Company has an operating permit for radiation source effective through March 5, 2018. The company is obligated to perform radiation measurements once a year and to report the results to the Ministry of Environmental Protection. In the even that new transmitting antennas are added at site there is a requirement for issuing a new set up and operation permits for all the transmitting antennas at site. We are currently in the process of issuing a new set up permit due to the addition of transmitting antennas at site.
Local Building and Zoning Permits
The Planning and Building Law requires that we receive a permit for each facility, antenna and/or building.
When we acquired Emek Ha’ela teleport site there were building permits for part of the buildings and antennas. Following the acquisition we issued a construction permit for a number of antennas that were approved by the local committee. At the same time the local committee asked us to submit a detailed plan for the Emek Ha’ela teleport site which will include the existing and planned construction (including Antennas) for a period of twenty years. We prepared the plans and coordinated it with the relevant authorities, and submitted for approval. The plan is currently pending approval. Following the approval, we will be able to submit building permits to the existing and future planned facilities, antennas and/or buildings or land in Emek Ha’ela teleport site.
Other Licenses and Permits
The use, operation and sale of encryption devices such as those incorporated in our transmission systems and services require a license from the Israeli Ministry of Defense, which we have obtained.
The employment of employees that are required to work on Saturdays and Jewish Holidays in Israel requires a special permit from the Israeli Ministry of Industry, Trade and Labor, which we have not yet obtained.
International Regulation
We are subject to the regulatory regime of each country in which we propose to provide our services. The laws and regulatory requirements regulating access to satellite systems vary from country to country. Some countries have substantially deregulated satellite communications, while other countries maintain strict monopoly regimes. The application procedure can be time-consuming and costly, and the terms of licenses vary for different countries.
Other than the Hawley Teleport in Pennsylvania, the teleports we use in countries other than Israel are owned and operated by third parties. We believe our customers and these third parties are responsible for obtaining any necessary licenses, approvals or operational authority for the transmission of data to and from the satellites that we, via our suppliers, use. Failure by our customers or suppliers to obtain and maintain some or all regulatory licenses, authorizations or approvals could have a material adverse effect on our business.
Although we believe that we, our customers or our suppliers, as the case may be, will be able to obtain all required licenses and authorizations and comply with applicable laws, treaties and regulations necessary to operate effectively, there can be no assurance that we or they will be successful in doing so.
In the event that we seek to own and operate teleports in countries other than Israel, we may be required by those countries to obtain applicable licenses, approvals, or operational authority to own and operate earth stations and other teleport facilities.
In the United States, the Federal Communications Commission, or FCC, regulates satellite and other radio communication services. Entities seeking to operate an earth station or other radio communication facility in the United States must obtain a license from the FCC under Title III of the Communications Act. We could seek to obtain such a license on either a common carrier or private carrier basis. On May 1, 2008 after receiving the approval of the FCC, we acquired various wireless and earth station licenses (the “FCC Licenses”) associated with the Hawley Teleport and now operate them on a non-common carrier basis for the provision of video and radio distribution services. As an FCC licensee, we are subject to regulation primarily by the FCC, which ensures that licensees comply with the Communications Act and related technical, licensing, operational, siting, and environmental protection regulations. Any state or local zoning, land use, building or similar regulation that materially limits the transmission or reception by earth stations is preempted by U.S. federal law, subject to certain exceptions. We believe that the Hawley Teleport materially complies with the Communications Act, FCC regulations, and any applicable state or local regulations.
The FCC Licenses also are subject to renewal upon the expiration of their license terms. The FCC has routinely renewed the FCC Licenses in the past. The Communications Act, however, provides that licenses may be revoked for cause and applications to renew licenses may be denied if the FCC concludes the renewal would not serve the public interest. We believe that the FCC Licenses will be renewed in the ordinary course, but we cannot provide assurances that the FCC will renew the FCC Licenses upon their expiration. If an FCC License is revoked or not renewed, we could not provide services under that license, which may have a material adverse effect on our business.
Under the rules of the FCC, telecommunications providers are required to pay various fees and contributions to the federal Universal Service Fund (“USF”), which helps ensure that affordable telecommunications services are accessible throughout the United States. Many of these fees, including USF contributions, are based upon interstate and international end-user revenues. We believe that we previously were exempt from many of these fees due in part because our services, provided on a non-common carrier basis in the United States, were primarily international in nature, thus we had very little domestic interstate revenues. Our domestic business and associated revenues grew in 2010, however, which required us to start paying such fees and surcharges. Since our U.S. operations are conducted by our Delaware subsidiary, these fees are assessed only on our subsidiary’s telecommunications revenues. The fees imposed by the FCC are subject to change periodically by the FCC, and the manner in which telecommunications providers can recoup these fees from customers is subject to various restrictions. To the extent we begin providing service on a common carriage basis, additional assessments for certain regulatory support mechanisms may apply, including mechanisms that help sustain number portability administration, telephone numbering administration and telecommunications relay service for the hearing impaired. In addition, the FCC contribution methodology is subject to an on-going rulemaking proceeding in which the FCC is considering changes to how USF contributions are assessed on service providers. It is not possible to predict when the FCC will act on those proposals, and if so, how or whether the FCC’s decision will affect our USF contribution amounts.
In addition, the United States has restrictions on the foreign ownership of companies directly or indirectly holding common carrier wireless licenses that could prevent us from acquiring or owning our own teleports in the United States to the extent that we seek to operate any teleport radio communication facilities on a common carrier basis. In the event that we seek to operate the Hawley Teleport (or any other teleport in the United States) on a common carrier basis, U.S. law prohibits more than 20 percent of the capital stock of a common carrier wireless licensee to be directly owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. In addition, no more than 25 percent of the capital stock of an entity that directly or indirectly controls a common carrier wireless licensee may be owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives, or by a foreign corporation. The FCC, however, may allow indirect non-controlling foreign ownership levels to exceed 20 percent, and indirect controlling foreign ownership levels to exceed 25 percent, if it finds that the higher levels of foreign ownership are consistent with the public interest. Although the FCC has adopted a rebuttable presumption in favor of allowing indirect foreign ownership in excess of these limits by investors from World Trade Organization member countries, including Israel, there can be no assurance that an applicant will obtain a favorable ruling from the FCC in the future.
Additionally, entities offering telecommunications services in the United States on a common carrier basis (whether by satellite or terrestrial facilities) must comply with various regulatory requirements pursuant to Title II of the Communications Act, including obtaining operating authority from the FCC under Section 214 of the Communications Act before constructing, acquiring, operating, or engaging in transmission over any lines of communication. The FCC simplified the Section 214 authorization process by automatically granting “blanket authority” that permits common carriers providing interstate services to construct or operate domestic transmission lines without applying for domestic Section 214 authorization. This blanket authority, however, does not extend to common carriers providing international services (on a facilities or resold basis) and any such carriers must apply for and obtain Section 214 authority prior to providing international services. In addition, FCC approval under Section 214 of the Communications Act must be obtained before a domestic or international common carrier or its licenses or assets can be acquired by a third party. We believe that we are currently operating as a private carrier in the U.S., and therefore are not subject to Title II of the Communications Act and do not require Section 214 authorization from the FCC. If in the future we choose to operate the Hawley Teleport as a common carrier or to acquire another teleport in the United States and operate it as a common carrier rather than a private carrier, however, we will need to obtain an international Section 214 authorization in addition to the Title III wireless license(s) described above. We currently are not providing mobile satellite services (MSS) in the United States, but to the extent we do so in the future, and those services are provided on a common carrier basis, we would be required to comply with the FCC’s Title II requirements with regard to those services.
In addition, the Department of Justice, the Department of Homeland Security, the Federal Bureau of Investigation and other U.S. agencies (the “Executive Agencies”) review applications to acquire both Title III and Section 214 licenses or authorizations and can require the applicant to enter into an agreement addressing any national security concerns before the application is granted. We were not, however, required to enter into a national security agreement with the Executive Agencies in connection with the acquisition of the Hawley Teleport, and the FCC Licenses include no other restrictions outside the ordinary course.
We may also be affected by changes in the international regulatory regime pertaining to the provision of satellite services. The International Telecommunication Union (ITU), in particular its Radiocommunication Sector, adopts rules and recommendations (called the “Radio Regulations”) on radio communications matters to ensure the equitable and efficient use of spectrum on a global basis. Each nation then is responsible for writing and adopting rules that are applicable to that nation. Developments or changes in ITU rules or policies may have an effect on the regulation of spectrum by individual nations, and thus on the satellite-related industry, in a variety of matters, such as the frequency bands used for space services or terrestrial services.
In the UK, OFCOM (The Office of Communications) regulates Telecoms, Licensing (Amateur Radio, Business Radio, Community Radio and Digital Radio), and Broadcasting. OFCOM licenses all UK commercial television and radio services.
Trademarks
We have obtained trademark registrations for the name “RRSAT” in Israel, the United States, the European Union and Russia. The initial terms of the registration of our trademarks are for 10 years from the date of application and are renewable thereafter.
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C. Organizational structure
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We are organized under the laws of the State of Israel. We have no significant subsidiary.
D. Property, plants and equipment
In November 2008, we acquired the Emek Ha’ela teleport in Emek Ha’ela, Israel, from Bezeq, The Israel Telecommunications Corp. Limited. We acquired approximately 26.5 acres pursuant to a forty-nine year lease with the Israel Land Administration, which is set to expire in May 2042. We also have an option to extend the lease for an additional forty-nine years. We are not required to make any additional payments under the lease unless we elect to exercise the option to extend the lease beyond 2042. The teleport also includes a facility with approximately 42,000 square feet.
Since August 2005 we have been leasing a broadcasting studio facility of approximately 10,800 square feet located in Jerusalem, Israel. The studio facility lease expires in July 2015 following our exercise of an extension option. We have an option to extend the term for an additional period of ten years at our election. Since July 2007 we have also been leasing an approximately 4,100 square foot facility in the same building in Jerusalem, Israel. This lease expires in July 2015 with an option to extend the term for an additional period of 10 years. We also lease an additional 350 square foot facility in the same building in Jerusalem, Israel pursuant to a lease that expires in September 2015, with two options to extend the term for an additional period of five years each.
In March 2007, the Israel Land Administration, or ILA, authorized to allocate to our company a parcel of land of approximately 12.4 acres near Galon, Israel, to be used for erecting a ground station. In May 2007, our company and the ILA entered into a development agreement pursuant to which the company undertook to commence construction of the site within eighteen months as of the date of the approval of the allocation of the land, and to finish the construction by no later than April 1, 2010. Contingent upon our company complying with the terms of the development agreement, the ILA shall, upon completion of the building, enter into a lease agreement with our company for a term of forty-nine years as of the date of the approval of the allocation of the land, with an extension option of an additional term of forty-nine years. The Local Zoning and Building Committee has rejected our request for a building permit in Galon. Therefore, we have not yet commenced building the site and informed the ILA of such delay. We appealed such decision and in a hearing held before the District Building and Zoning Appeals Committee we agreed to prepare a new detailed plan for the site, without waiving our claims that a building permit may be issued according to the existing plans for the site. We prepared a new detailed plan for the site, which was approved by the ILA and requested the approval of the Local Zoning and Building Committee. The Local Zoning and Building Committee decided that approving the new detailed plan was not in its authority and therefore referred the new detailed plan to the District Zoning and Building Committee for approval. On January 21, 2013, the District Zoning and Building Committee rejected the new detailed plan. We appealed the decision to the National Zoning and Building Council, which is yet to hear the appeal.
If the development agreement is cancelled, the ILA will refund the fees we paid for the land less a 15% termination fee and 6% per annum fee. We believe it is unlikely that the ILA will cancel the allocation of the land to us.
In May 2008, we completed the acquisition of the Hawley Teleport located in Pike County, Pennsylvania from Skynet Satellite Corporation for approximately $4.9 million. The teleport includes approximately 212 acres and a three floor communications building with approximately 40,000 square feet.
In March 2010, we entered into a lease agreement, which was subsequently amended in June 2010, for the lease of a total of approximately 21,000 square feet of office space at the Airport City Industrial Zone in Israel. These premises serve as our company’s headquarters, sales and finance divisions. The lease expires in June 2015, with an option to extend for two additional terms of 5 years each.
As part of the acquisition of JCA TV, we assumed its lease for 6,700 square feet in London, the United Kingdom, which currently serves as the headquarters of RRsat Europe. The lease expires in November 2016 and we pay annual rent of approximately GBP UK£ 68,000.
As part of strengthening our presence in the US we have entered into a lease agreement for 3,300 square feet in Englewood Cliffs, New Jersey, which currently serves as the headquarters of RRsat America. The lease expires in December 31, 2018 with an option to extend for three additional terms of 5 years each. We pay an annual rent of approximately USD $76,000.
We believe that our current facilities and leases are adequate to meet our needs.
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ITEM 4A.
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UNRESOL
VED
STAFF COMMENTS
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Not applicable.
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ITEM 5.
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OPERATING AND FIN
ANCIA
L REVIEW AND PROSPECTS
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The following discussion and analysis of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this Annual Report (see Item 18, “Financial Statements”). The following discussion and analysis contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements (see “Special Note Regarding Forward-Looking Statements” above). Factors that could cause or contribute to such differences include those discussed in Item 3.D under the header “Risk Factors” and elsewhere in this Annual Report.
Overview
We are a global end-to-end digital media service partner for broadcasters and content owners, offering innovative cost-effective digital media management and distribution services that enable content owners to generate added revenues as their content reaches more people in more places on more devices.
We currently distribute over 630 channels, over 100 VOD platforms around the world, over 100 channels originated, and more than 60,000 live hours of programming. Our combined network has access to 150 countries and 95% of the world’s population.
We help content owners and broadcasters take advantage of changing consumption patterns by offering sought after services, including:
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·
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content acquisition and content distribution
– via satellite, dedicated fiber and over the top (OTT);
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·
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content preparation
– ingest, transcoding, encryption, restoration; and
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·
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content management
– MAM, playout, archive, library and production services
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We create and offer specialized services for the media industry. We acquire, prepare and distribute content, using advanced network, customized production workflows in our teleports and facilities to digital distribution platforms, including iTunes, Netflix, Hulu and other major pay-TV operators.
We provide digital distribution over satellite, fiber and broadband/IP to more than 150 countries reaching 95% of the world’s population. Thanks to our in-depth industry knowledge and well established presence, we believe we are able to assist our customers to optimize the way they reach viewers around the world over different screens.
We also provide MSS over the Inmarsat satellite network. Through this network, we provide global telephony, fax, data, Internet and other value-added services to end-users and Inmarsat Service Providers (ISPs) who use designated Inmarsat terminals. This service is aimed at shipping, aviation, construction and oil companies, humanitarian aid organizations, governmental agencies and other end customers that require telephony and Internet services in remote areas of the world that lack sufficient telecommunications infrastructure. We currently provide MSS to more than 242 end customers, either directly or through 56 ISPs.
In order to minimize our capital expenditures and to maintain flexibility to reduce unused capacity and potential underutilization of assets in our network, we lease RRsat Global Network’s transmission capacity instead of owning our own fleet of satellites or fiber network. Consequently, our network can be expanded substantially without having to incur significant capital expenditures. Most of our capital expenditures relate to transmission and playout equipment. Because of our network design, we have incurred relatively minimal indebtedness in growing our business. We enjoy significant cost benefits since we design our own network and equipment configuration, acquire the individual equipment components from manufacturers, perform the integration of our digital platforms and manage our entire network.
We sell our services primarily through a direct sales force in each market, supplemented by sales agents. These agents often have other business relationships with the customer.
We formed the company in 1981. In 1996, we were granted the first private license for transmission of television and radio channels via satellite in Israel and started to provide satellite services for Israeli governmental and commercial channels. In 2000, we formed the “RRsat Global Network” concept and entered into the global content management and distribution services market. We believe that RRsat has become one of the few companies worldwide to possess a global network allowing distribution via satellites, fiber networks and the public Internet. In 2003, we opened our playout center. We currently provide playout services to approximately 100 television channels for distribution through our RRsat Global Network.
In 2008, we acquired a teleport in Hawley, Pennsylvania, to strengthen our presence in the United States, and the satellite business of Bezeq, including its teleport in Emek Ha’ela, Israel, and its MSS business aimed at end customers that require telephony and Internet services in remote areas of the world that lack sufficient telecommunications infrastructure.
In 2012, we acquired the business of Sm2 Sports & Media in the U.S. in order to enhance our global sports, news and live events services.
In 2013, we acquired JCA TV a premier provider of automated content preparation services in London UK to penetrate the content preparation business in Western Europe and expand our global presence in key media markets
.
We see a significant financial advantage in leasing the satellite and fiber capacity of our global network. Our ability to match our supplier and customer contracts and to effectively utilize capacity on an ongoing basis affects our results.
Revenues.
We provide digital media services which are composed of content acquisition and distribution, content management, content preparation and content management services, and over 60,000 hours of live events. We provide MSS over the Inmarsat satellite network. Through this network, we provide global telephony, fax, data, Internet and other value-added services to end-users and ISPs who use designated Inmarsat terminals (see Item 4 “Information on the Company” for a detailed description of the services that we provide).
Below is a breakdown of our revenues:
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Year ended December 31,
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($ in thousands)
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2011
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2012
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2013
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Digital Media Services
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$
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104,586
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|
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$
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104,444
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|
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$
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110,757
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MSS
|
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8,334
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|
|
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8,956
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|
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11,038
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Total revenues
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$
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112,920
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|
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$
|
113,400
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|
|
$
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121,795
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Reporting Segments.
Our two reportable segments are (i) Digital Media Services and (ii) MSS. The company’s operating segments are strategic business units that offer different services to different industries and are managed accordingly. As a result of the acquisition in November 2008 of Bezeq’s MSS business unit, which is our “711” business unit, we have presented operating segments since 2008. We analyze our operating segments based on each segment’s revenues and gross profit.
Contracted Backlog.
Our backlog of long-term customer contracts provides us with revenue visibility for the next 12-month period as well as a relatively reliable stream of future revenues in the next.
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Backlog breakdown ($US in millions)
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Q1/14
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Q2/14
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Q3/14
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Q4/14
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FY 2014
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2015
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+2016
|
|
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25.36
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|
|
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23.9
|
|
|
|
22.52
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|
|
|
20.07
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|
|
|
91.85
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|
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58.89
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52.26
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We cannot rule out the possibility that we could face contract terminations arising in the normal course of business or as a result of other market forces.
Long-term contracts are generally billed monthly in advance and are usually secured via a cash deposit for the last one to three months of service. Contracted backlog represents the actual dollar amount (without discounting to present value) of the expected future revenues from customers under all long-term contractual agreements. Our contracted backlog for future services as of December 31, 2011, 2012 and 2013 was $193.7 million, $194.6
million and $203 million, respectively
.
If unfavorable global economic conditions occur, several of our customers may become insolvent or bankrupt or experience other financial difficulties which make them unable or unwilling to continue to use our services. In such case, a portion of this contracted backlog may not ultimately result in revenues. Further, as the number of Higher Tier customers with larger contracts increases, we expect that the average duration of our contracts will shorten, thereby resulting in an increase in our next 12 months’ backlog, on the one hand, and in a decrease in our total long term backlog, on the other hand.
Pricing.
Various market forces affect the pricing of our services. We sell our services at prevailing market prices, which vary based upon the regions to which the distribution is required by our customer, the type of service, the network capacity for the distribution needs, the duration of the service under contract and the supply of additional value-added services. In general, each service is tailored to the customer’s needs and is priced accordingly. The pricing of our MSS is determined by the type and volume of services.
Geographic Revenue Breakdown.
We have historically derived revenues from customers based in different geographical areas. The following table sets forth the breakdown of our revenues on a percentage basis, for the years 2011 through 2013, by the geographical locations of our customers. Most of our contracts are denominated in U.S. dollars. The services we render are not necessarily rendered in the same geographic areas as those in which the customers are located and billed.
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(as a percentage of total revenues)
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North America
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28.1
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%
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29.0
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%
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29.2
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%
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Europe
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42.7
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%
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42.6
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%
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41.0
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%
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Asia
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8.4
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%
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9.3
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%
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11.2
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%
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Israel
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8.8
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%
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7.9
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%
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7.5
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%
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Middle East (other than Israel)
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10.5
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%
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8.8
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%
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7.4
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%
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Rest of the world
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1.5
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%
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2.4
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%
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3.7
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%
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|
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100
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%
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100
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%
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100
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%
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Customers and Customer Concentration.
We supply our services to customers all over the world and our sales are derived from a large number of individual customers. During 2013, our content management and distribution services, including Sports, News & Live Events revenues, were derived from 494 customers and our MSS were derived from 249 customers. In 2013, our ten largest customers accounted for 5% of total revenues, and no single customer accounted for more than 1% of our total revenues. It is our policy to require a deposit for the last one to three months of service from most of our customers in the long term Digital Media Services. Due to these factors and the geographical dispersion of our customers, we believe that we adequately control our exposure to credit risks associated with accounts receivable.
Cost of Revenues.
Content Management and Distribution
. Our cost of revenues represents costs directly related to the operation of our network, including payments for network services (primarily satellite services and fiber capacity), salaries, our teleports operational expenses and depreciation of facilities, transmission and playout equipment. The principal component of cost of revenues is the monthly fees paid to network service providers, such as satellite space segment and fiber network leases and teleport services. We lease our space segment capacity pursuant to long-term contracts.
MSS
. Cost of revenues for our MSS business consists primarily of network services (such as satellite space) and payments to subcontractors.
A majority of the company’s cost of revenues are variable costs, mainly costs associated with broadcasting services. In 2011, 2012 and 2013, our cost of revenues included $66.9 million, $65.5 million and $69.0 million of variable costs. For this purpose, we define the company’s variable costs as direct costs that vary directly, or substantially directly, with the volume of our revenues, mainly broadcasting services costs, as opposed to depreciation, our teleports operational costs and labor costs, which we define for this purpose as non-variable costs.
Gross Profit.
Content Management and Distribution
. In order to minimize our capital expenditures and to maintain flexibility to reduce unused capacity and potential underutilization of assets in our network, we lease RRsat Global Network’s transmission capacity instead of owning our own fleet of satellites or fiber network. Our efficiency in matching supplier contracts with customer contracts affects our gross margins and is reflected in the utilization of our committed capacity on an ongoing basis. When we are required to commit to long-term capacity leases of network services, our gross margin may decrease until we are able to utilize the entire capacity. We may also be subject to price increases for new or renewed network services, and until we are able to adjust the prices we charge our customers, we may suffer a decrease of gross margin. In addition, we may be required to provide our customers with dual illumination services if we are unable to extend the lease of the capacity utilized by such customers, which means that we are required to pay for two satellite capacities while our customers continue to pay for a single satellite capacity. This may result in a decrease of our gross margin.
MSS
. Gross profit of our MSS business is affected by the volume of the services we provide and the portion of the services we provide using third parties.
Sales and Marketing Expenses.
Our sales and marketing expenses consist primarily of salary and related expenses for our direct sales force and success-based agent fees for our agents. Our agreements with agents are nonexclusive unless the agent has identified a potential customer, in which case he or she will be granted exclusivity for the sales process with such customer. If the agent is successful, his or her fees are payable during the term of the customer contract and are conditioned on the performance of the contracts, and therefore, we recognize those fees over the contract’s term. Those fees may be a percentage of the marginal profit from the individual customer contract or a percentage of the contract value. We expect that our selling expenses will continue to increase as we expand our direct sales and marketing efforts in conjunction with the establishment or acquisition of local teleports and playout centers in the United States, Europe and Asia, while continuing to employ our strategy in other parts of the world of working with local marketing and sales agents who are familiar with their local markets, needs and cultures. The expansion of our sales and marketing efforts as described above entail an increase of our direct sales force, resulting in increased wages, travel and overhead costs and additional success-based agent fees, and an investment in marketing activities to create local brand recognition. We could also face additional expenses depending on the location of our new local teleports and playout centers that we may acquire.
Our operating expenses include certain variable costs that vary directly, or substantially directly, with the volume of our revenues, mainly commissions paid to our agents and our direct sales force. In 2011, 2012 and 2013, our operating expenses included $2.9
million, $2.9 million and $2.5 million of variable costs.
General and Administrative Expenses.
Our general and administrative expenses consist of salaries and related costs for employees and other expenses related to administration, facilities and legal and accounting services. These include management and consulting fees to our principal shareholders that amounted to $398 thousand in 2011, $428 thousand in 2012 and $398 thousand in 2013 (see Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions”).
Our general and administrative expenses include changes in the provision for doubtful accounts, which, in management’s opinion, adequately reflect the loss included in those debts the company is unlikely to collect. The provision for doubtful accounts is calculated as a percentage of outstanding receivable balance based on the age of the debt, an evaluation of the security received from them, past experience and whether the debt has been transferred to a professional collector. A specific provision for doubtful debts is made based on an evaluation of the risk, by considering the available information on the financial position of the debtors, the volume of their business, an evaluation of the security received from them and past experience. We expect general and administrative expenses to increase for the foreseeable future as our operations continue to expand, resulting in our need for additional staff and professional consulting. We intend to fund these expenses from our working capital.
Depreciation and Amortization Expense.
Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets once the assets are placed into service. We generally depreciate teleport-related equipment (satellite dish antennas, receivers transmitters, playout room equipment, etc.), which represents the majority of our fixed assets other than land and buildings, over a 7-year period, while leasehold improvements are amortized over the shorter of the respective lease term or the estimated useful life of the assets, which is typically 10 years. Buildings are depreciated for a range of 30-40 years subject to each teleport facility expected useful life. Intangible assets other than goodwill are amortized on the basis of the estimated useful lives of the assets using annual rates between 10-33%. Prepaid leased land is amortized based on the term of the lease agreement assuming the renewal of such lease upon its expiration.
Share-based Compensation.
Our expenses also include share-based compensation expenses, which are allocated among cost of revenues, sales and marketing and general and administrative expenses. Share-based compensation expenses result from the granting of options to employees and non-executive directors under the fair-value based method of accounting (calculated using the Black-Scholes model) and restricted share units. The share-based compensation expenses are recorded to expenses over the vesting periods of the individual options or restricted share units.
Interest and Marketable Securities Income.
Interest and marketable securities income represents interest income earned (mainly on bank deposits and corporate and government debentures) and gains from marketable securities invested through brokers in Israel and the United States.
Marketable securities at December 31, 2012 and 2013 consisted of corporate debentures, corporate shares, government debentures, mutual funds and treasury notes. We classify our debt securities in one of three categories, “trading,” “available- for- sale,” or “held-to- maturity,” and our equity securities as “trading.” Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity debt securities are those securities in which we have the ability and intent to hold the security until maturity. All securities not included in trading or held-to-maturity were classified as available-for-sale.
As of December 31, 2012 and 2013, there was net unrealized gain
of
$197 thousand and net unrealized gain of $32 thousand, respectively, related to available-for-sale securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Available-for-sale securities are classified as short-term interest-bearing investments on our balance sheet.
Currency Fluctuation and Other Financial Income (Expenses), Net.
Currency fluctuation and other financial income (expenses), net, primarily result from currency exchange rate fluctuations affecting transactions denominated in currencies other than the US dollar, our functional currency. Other financial income (expenses) relate to bank charges. We expect our currency fluctuation and other financial income (expenses), net to be volatile as a result of fluctuations of the exchange rates between the US dollar and other currencies denominating our transactions, mainly the Euro and the NIS.
Income Taxes.
Income tax is computed on the basis of our results in nominal New Israeli Shekels (NIS) determined for statutory purposes. On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application) – 2008 (the “
Amendment
”) was passed by the Israeli Parliament (the “
Knesset
”). According to the Amendment, the Inflationary Adjustments Law is no longer applicable subsequent to the 2007 tax year, except for certain transitional provisions. Israeli companies are generally subject to corporate tax, currently at the rate of 25% of a company’s taxable income. In August 2013, the Israeli Knesset approved an increase in the corporate tax rate to 26.5% for 2014 and thereafter. Current and deferred tax balances as of December 31, 2012 and 2013 are calculated in accordance with the new tax rates provided in the recent legislative change.
We were granted in 2006 an “Approved Enterprise” status under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”), for our contemplated expansion of export revenues in the taxable years 2006 to 2012 as compared to our revenues in 2005. Under the terms of our Approved Enterprise program, our income from that Approved Enterprise will be subject to reduced tax rate of 25% for a period of up to a total of seven years, to be calculated on the portion of our taxable income associated with the expansion (calculated on a pro rated basis comparing the additional revenues for the taxable year to the base year, which is 2005). Under the terms of the program, which relate to our export of communications services to television channels and television operators via satellites, we were required, among other things, to increase the export of our services by at least $100 thousand annually and maintain arms’ length terms for all related party transactions. See Item 10.E. “Additional Information – Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about our “Approved Enterprise” status. In 2011, 2012 and 2013 the corporate tax rate was 24%, 25% and 25%, respectively, and therefore there was no tax benefit resulting from the Approved Enterprise program.
In January 2011 the Law for Encouragement of Capital Investments, 1959 (Amendment No. 68) (the “
Amendment
”) was passed by the Knesset. In accordance with Amendment the tax rate that may apply to income generated by certain enterprises that meet various conditions (“
Preferred Enterprise
”) will be as follows: 15% during 2011 and 2012 for Preferred Enterprises located in certain areas (i.e., center of Israel). In 2013 and 2014 the tax rate will be 12.5%, and from 2015 onward the tax rate will be 12%. We are in the process of examining our eligibility for the preferred tax rate mentioned above
, and have
not yet elected
the Preferred Enterprise route.
Expansion Plans.
We intend to expand our presence in the United States, Europe, Asia and other markets where we already operate through subcontractors, by establishing or selectively pursuing the acquisition of local teleports and playout centers, and connecting them to our global network, such as the acquisition we completed in September 2013 to acquire JCA, a London-based provider of content preparation services, the acquisition we completed in November 2012 to acquire Sm2’s business in the United States, and the acquisition we completed in 2008 to acquire the Hawley Teleport in Pennsylvania. We also upgraded and expanded the infrastructure and facilities in our Emek Ha’ela teleport, which we acquired in 2008. This upgrade and expansion is intended to accommodate new state-of-the-art technologies and solutions that will allow us to offer our customers a wider range of solutions and increase penetration to new media markets. We believe that having our own content management and distribution facilities in these markets will afford us greater control over our operations, allow us to protect proprietary information relating to our methods of operation, provide direct control over our relationships with our customers, facilitate our sales and marketing efforts, increase our profit margins and afford us access to customers for whom the proximity of our facilities may be an important factor (particularly customers who use our content management services, since playout services involve a significant degree of interaction with our customers).
Application of Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements in Item 18. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different conditions.
Our accounting policies that require management to apply significant judgment include:
Functional and Reporting Currency.
Our accounting records are maintained in NIS and U.S. dollars. The U.S. dollar is the currency of the primary economic environment in which our operations are conducted and expected to be conducted in the future.
We determined our functional currency to be the U.S. dollar in accordance with the provisions of ASC 830-10-20, 10-55-5, taking into consideration the following factors:
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·
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Cash flow indicators: Most of our cash flows are denominated in U.S. dollars. As of December 31, 2013, 79% of cash and cash equivalents, 74.41% of trade accounts receivable and 46.14% of deposits from customers were denominated in U.S. dollars. Our cash flow reports are denominated in U.S. dollars and we manage our budget in U.S. dollars.
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·
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Sales markets and sales price indicators: In 2013, 63.78% of our revenues were in U.S. dollars and a majority of the underlying value of our signed contracts were denominated in U.S. dollars.
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·
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Financing indicators: We finance our activities from current earnings and shareholders’ equity. In November 2006, we completed an initial public offering of our ordinary shares and our listing on the NASDAQ Global Market, in which we raised approximately $52.4 million.
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|
·
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Inter-company transactions indicators: Most of our inter-company transactions are denominated in U.S. dollars.
|
Based on the above criteria, we have determined that the U.S. dollar is our functional currency and there have not been any significant changes in the economic facts and circumstances that indicate that our functional currency has changed in 2013.
Provision for Doubtful Accounts.
The consolidated financial statements include general and specific provisions for doubtful debts, which, in management’s opinion, adequately reflect the estimated losses resulting from accounts receivable for which the collection is not reasonably probable. Doubtful debts, which according to the opinion of our management are unlikely to be collected, are written-off from our books, based on a management resolution. Management’s determination of the adequacy of the provision is based, inter alia, on an evaluation of the risk, by considering the available information on the financial position of the debtors, the volume of their business, the age of our receivables balance, an evaluation of the security received from them and our past experience
with the customers. If the financial condition of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, additional allowances may be required.
Business Combinations; Goodwill and Other Intangible Assets.
In our business acquisition described above, we accounted for our purchase in accordance with ASC 805-10, “Business Combinations,” which resulted in the recognition of goodwill and other intangible assets, and may in certain cases in the future result in non-recurring charges associated with the periodic reevaluation of goodwill, which may affect the amount of current and future period charges and amortization expense. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including identified intangible assets, in connection with our business combinations accounted for by the business combination method of accounting. In management’s opinion, the goodwill represents the future synergy in the company’s Digital Media Services resulting from the use of the Emek Ha’ela facility, Sm2 and JCA acquired assets for expanding its business. We adopted FASB ASC Topic 350, Intangibles - Goodwill and Other requirements regarding goodwill and other intangible assets with indefinite useful lives. Such goodwill is not amortized, but rather is periodically assessed for impairment at least annually.
We amortize our acquisition-related intangible assets other than goodwill using the straight-line method and based on forecasted cash flows associated with the assets over the estimated useful lives.
The determination of the fair value of these components of a business combination, as well as associated asset useful lives, requires management to make various estimates and assumptions. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from sales, customer contracts, supplier contracts, brand name, assumptions about the
useful lives period of time of the acquired assets, and their discount rates. Management’s estimates of fair value and useful lives are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur and assumptions may change. Estimates using different assumptions could also produce significantly different results.
Impairment of Goodwill and Other Intangible Assets.
We perform an annual impairment assessment of our goodwill at the end of the fourth quarter of each year, or more frequently if we determine that indicators of impairment exist.
Our impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying value (including goodwill). Our reporting units are consistent with the reportable segments identified in Note 12 to our Consolidated Financial Statements.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed, and the implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. In September 2011, the FASB amended its guidance to simplify testing goodwill for impairment, allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If an entity determines as a result of the qualitative assessment that it is more likely than not (> 50% likelihood) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required.
Income Taxes.
We account for income taxes under ASC 740-10 “Income Taxes – Overall.” Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets if it is more likely than not that we will not be able to realize their benefit. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets and liabilities are classified as current or non-current items in accordance with the nature of the assets or liabilities to which they relate. When there are no underlying assets or liabilities the deferred tax assets and liabilities are classified in accordance with the period of expected reversal. Income tax expenses represent the tax payable for the period and the changes during the period in deferred tax assets and liabilities.
Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) included in ASC 740-10 “Income Taxes – Overall” as of January 1, 2007, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities and available tax planning strategies. At December 31, 2012 and December 31, 2013, we had a liability for unrecognized tax benefits of approximately $1.5 million and $1.0 million, respectively, which if recognized in the future, would favorably impact our effective tax rate.
Derivative Instruments and Hedging Activities
We use financial instruments such as forward exchange contracts to hedge a portion, but not all, existing and forecasted foreign currency denominated transactions. The purpose of our foreign currency hedging program is to manage the effect of exchange rate fluctuations on our gross profit, operating expenses and eventual cash flows. We account for derivative and hedging activities in accordance with FASB ASC Topic 815, Derivatives and Hedging, which requires that all derivatives instruments be recorded on the balance sheet as either assets or liabilities at their respective fair value. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.
We only enter into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, we formally documents the hedging relationship and our risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. We also formally assess, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
We discontinue hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is redesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we continue to carry the derivative at our fair value on the balance sheet and recognize any subsequent changes in our fair value in earnings. When it is probable that a forecasted transaction will not occur, we discontinue hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
Gains or losses resulting from changes in the spot rate on the hedging instrument are recognized in other comprehensive income. Changes attributed to changes in the time value will be recognized in finance costs. Upon expenses recognition, the associated gains or losses that were recognized in other comprehensive income shall be reclassified from equity to cost of goods sold in the profit or loss report.
Accounting for Stock-Based Compensation.
We follow the fair-value based method of accounting for all of our option plans in accordance with the provisions of ASC Topic 718, Compensation - Stock Compensation. The grant date fair value of the options awarded is calculated using the Black-Scholes model and the associated compensation cost is amortized over their vesting period. As described in Note 11 to our consolidated financial statements included in Item 18, we estimate the fair value of stock options issued to employees and directors using the Black-Scholes option valuation model with certain assumptions that are significant inputs. The critical assumptions relate to determining the expected life of the option, considering the outcome of service-related conditions (
i.e.,
vesting requirements and forfeitures), expected volatility of the underlying shares as an estimate of the future price fluctuation for a term commensurate with the expected life of the option, expected dividend yield on the underlying shares, commensurate with the expected life of the option, and risk-free interest rate commensurate with the expected term of the option. These estimates introduce significant judgment into determining the fair value of stock-based compensation awards. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our consolidated financial statements.
As of December 31, 2013 there was approximately $1.7 million unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 2.83 years.
Results of Operations
The following table sets forth selected statements of operations data for each of the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
112,920
|
|
|
$
|
113,400
|
|
|
$
|
121,795
|
|
|
Cost of revenues
|
|
|
86,939
|
|
|
|
86,253
|
|
|
|
92,313
|
|
|
Gross profit
|
|
|
25,981
|
|
|
|
27,147
|
|
|
|
29,482
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
7,067
|
|
|
|
7,388
|
|
|
|
9,517
|
|
|
General and administrative
|
|
|
10,130
|
|
|
|
10,106
|
|
|
|
12,003
|
|
|
Total operating expenses
|
|
|
17,197
|
|
|
|
17,494
|
|
|
|
21,520
|
|
|
Operating income
|
|
|
8,784
|
|
|
|
9,653
|
|
|
|
7,962
|
|
|
Financial income (expenses), net
|
|
|
(2,471
|
)
|
|
|
1,521
|
|
|
|
(153
|
)
|
|
Income before taxes on income
|
|
|
6,313
|
|
|
|
11,174
|
|
|
|
7,809
|
|
|
Income taxes
|
|
|
1,978
|
|
|
|
2,884
|
|
|
|
1,287
|
|
|
Net income
|
|
|
4,335
|
|
|
|
8,290
|
|
|
|
6,522
|
|
|
Basic income per ordinary share
|
|
|
0.25
|
|
|
|
0.48
|
|
|
|
0.38
|
|
|
Diluted income per ordinary share
|
|
|
0.25
|
|
|
|
0.48
|
|
|
|
0.37
|
|
|
Weighted average number of ordinary shares used to compute basic income per ordinary share
|
|
|
17,346,561
|
|
|
|
17,346,561
|
|
|
|
17,346,561
|
|
|
Weighted average number of ordinary shares used to compute diluted income per ordinary share
|
|
|
17,346,561
|
|
|
|
17,346,561
|
|
|
|
17,571,188
|
|
Year Ended December 31, 2012 Compared to Year Ended December 31, 2013
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands and as a percentage of
total revenues)
|
|
|
Revenues
|
|
$
|
113,400
|
|
|
|
100
|
%
|
|
$
|
121,795
|
|
|
|
100
|
%
|
|
Cost of revenues
|
|
|
86,253
|
|
|
|
76.1
|
|
|
|
92,313
|
|
|
|
75.8
|
|
|
Gross profit
|
|
|
27,147
|
|
|
|
23.9
|
|
|
|
29,482
|
|
|
|
24.2
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
7,388
|
|
|
|
6.5
|
|
|
|
9,517
|
|
|
|
7.8
|
|
|
General and administrative
|
|
|
10,106
|
|
|
|
8.9
|
|
|
|
12,003
|
|
|
|
9.9
|
|
|
Total operating expenses
|
|
|
17,494
|
|
|
|
15.4
|
|
|
|
21,520
|
|
|
|
17.7
|
|
|
Operating income
|
|
|
9,653
|
|
|
|
8.5
|
|
|
|
7,962
|
|
|
|
6.5
|
|
|
Financial income (expenses), net
|
|
|
1,521
|
|
|
|
1.3
|
|
|
|
(153
|
)
|
|
|
0.1
|
|
|
Income before taxes on income
|
|
|
11,174
|
|
|
|
9.9
|
|
|
|
7,809
|
|
|
|
6.4
|
|
|
Income taxes
|
|
|
2,884
|
|
|
|
2.5
|
|
|
|
1,287
|
|
|
|
1.0
|
|
|
Net income
|
|
$
|
8,290
|
|
|
|
7.3
|
|
|
$
|
6,522
|
|
|
|
5.4
|
|
Revenues.
Revenues were $121.8 million for the year ended December 31, 2013, an increase of $8.4 million or 7.4%, from $113.4 million in 2012.
For the year ended December 31, 2013, our total revenues included $110.8 million of revenues derived from our Digital Media Services, an increase of 6%, compared to the year ended December 31, 2012. The increase in the Digital Media Services in 2013 was primarily due to the growth of our sports and events business. This growth is mainly attributed to the acquisition of Sm2 in November 2012 and our ability to fully integrate it into our facility, which assisted us to win several leading projects, and to the contribution of four months of JCA content preparation revenue which we acquired in September 2013.
Cost of Revenues.
Cost of revenues was $92.3 million for the year ended December 31, 2013, an increase of 7% from $86.3 million in 2012. As a percentage of total revenues, cost of revenues were 76% in 2012 and in 2013.
Network services costs were $69 million in 2013, an increase of $3.4 million or 5%, from $65.6 million in 2012. The $69 million network services costs incurred in 2013 consist of $60.7 million of expenses related to our Digital Media Services, an increase of $1.8 million, or 3%, compared to the year ended December 31, 2012, and $8.3 million of expenses related to the cost of MSS network and transmission services from third parties, an increase of $1.6 million compared to the year ended December 31, 2012. The other principal components of cost of revenues included salaries and depreciation and amortization. Salaries were $8.9 million in 2013, an increase of 24.5% from $7.1 million in 2012. This increase was due to an increase in the cost of maintaining our facilities, primarily the Hawley Teleport, which absorbed the Sports & Events business acquired from Sm2 in November 2012. The additional costs related to our acquisition on JCA in September 2013 and the depreciation of the U.S. dollar compared to the NIS, which increased our NIS expenses in U.S. dollar terms.
Depreciation and amortization was $8.6 million in 2013, an increase of 2.4%, from $8.4 million in 2012. This increase is directly attributable to the successful integration of Sm2 in our Hawley Teleport, consolidation of our broadcast center in Israel from two facilities into one, which was completed in September 2013, and the additional expense deriving from consolidating the JCA business in the last four months of 2013.
As a percentage of Digital Media Services revenues, cost of revenues attributable to such revenues was 75% in 2013 and in 2012. As a percentage of MSS revenues, cost of revenues attributable to such revenues was 82.3% in 2013 and in 2012.
As our customer base continues to grow, we will need to acquire and lease additional satellite and terrestrial fiber capacity to serve these customers, as well as invest in infrastructure to support this growth. In addition, we anticipate that the demand for network capacity will also continue to expand as a result of increased penetration of high definition television (HDTV). Our ability to handle such demand depends on the availability of satellite and terrestrial fiber capacity, as well as the use of internet protocol (IP) for the delivery of video and audio programming.
Sales and Marketing Expenses.
Sales and marketing expenses were $9.5 million in the year ended December 31, 2013, an increase of 28.4% from $7.4 million in 2012. The increase in sales and marketing expenses is due to our strategy to increase our global footprint, which means more sales people in the different regions, continued investment in business development and the consolidation of JCA for the last four months of 2013.
Sales and marketing salaries, wages and benefits, which include commissions paid to our direct sales representatives, comprised 40.6% and 48% of our total sales and marketing expenses in 2012 and 2013, respectively. Salaries, wages and benefits increased by $1.6 million from $3 million in 2012 to $4.6 million in 2013, primarily due to the increase in sales employees, increase in business development employees and the depreciation of the U.S. dollar compared to the NIS, which increased our NIS expenses in U.S. dollar terms.
Depreciation of assets related to marketing activities comprised 3.2% and 4.5% of our total sales and marketing expenses in 2012 and 2013, respectively. Depreciation increased from $0.24 million in 2012 to $0.43 million in 2013.
Agents and commission fees paid to third parties comprised 36.1% and 25% of our total sales and marketing expenses in 2012 and 2013, respectively. Agents and commission fees were $2.7 million in 2012 and $2.4 million in 2013.
General and Administrative Expenses.
General and administrative expenses were $12.0 million in the year ended December 31, 2013, an increase from $10.1 million in 2012. As a percentage of revenues, general and administrative expenses were 9% and 10% in 2012 and 2013, respectively.
Salaries, wages and service fees expenses paid to our general and administrative officers and employees comprised 34% and 33% of our total general and administrative expenses in 2012 and 2013, respectively. Salaries, wages and service fees expenses were $3 million and $4 million in 2012 and 2013, respectively.
Management and consulting fees paid to our principal shareholders were $428 thousand in 2012 and $398 thousand in 2013.
Professional services fees, which are legal and audit fees, fees associated with Sarbanes-Oxley compliance and other consulting fees increased from $0.8 million in 2012 to $2.4 million in 2013.
Allowance for doubtful accounts was $2.9 million in 2012 and $2.4 million in 2013.
Financial income (expenses), net.
Financial expenses were $0.2 million in the year ended December 31, 2013, a decrease from income of $1.5 million in 2012. The decrease is mainly due to the change in fair value of embedded currency conversion derivatives, which resulted in an expense of $0.4 million in the year ended December 31, 2013, compared to income of $1.2 million in 2012.
Income Taxes.
Income taxes were $1.3 million in the year ended December 31, 2013, a decrease of $1.6 million from $2.9 million in 2012. The decrease is mainly due to the lapse of the statute of limitations of the years 2005-2008 and write-off of bad debts expenses during the year. Most of our taxes are calculated based on Israeli tax law and are based on NIS denominated tax returns. The decrease in the effective tax rate from 26% in 2012 to 16.5% in 2013 was due to the lapse of the statute of limitations of the years 2005-2008 and the impact of the devaluation of the NIS against the U.S. dollar during 2011, which resulted in higher NIS income for tax purposes and from an increase in statutory tax rates for future years, which increased our deferred tax liabilities.
Net Income.
Net income was $6.5 million in the year ended December 31, 2013, a decrease of 21.3% from $8.3 million in 2012. The decrease is due primarily to the increase in sales, marketing and general and administrative expenses as described above.
Segment Results.
For the years ended December 31, 2013, the gross margin of our Digital Media Services was $27.5 million, an increase of $1.9 million, or 7.4%, compared to gross margin of $25.6 million in 2012.
For the year ended December 31, 2013, the gross margin of our MSS business was $1.9 million, an increase of $0.3 million, or 19%, compared to gross margin of $1.6 million in 2012.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2012
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands and as a percentage of
total revenues)
|
|
|
Revenues
|
|
$
|
112,920
|
|
|
|
100
|
%
|
|
$
|
113,400
|
|
|
|
100
|
%
|
|
Cost of revenues
|
|
|
86,939
|
|
|
|
77.0
|
|
|
|
86,253
|
|
|
|
76.1
|
|
|
Gross profit
|
|
|
25,981
|
|
|
|
23.0
|
|
|
|
27,147
|
|
|
|
23.9
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
7,067
|
|
|
|
6.3
|
|
|
|
7,388
|
|
|
|
6.5
|
|
|
General and administrative
|
|
|
10,130
|
|
|
|
9.0
|
|
|
|
10,106
|
|
|
|
8.9
|
|
|
Total operating expenses
|
|
|
17,197
|
|
|
|
15.2
|
|
|
|
17,494
|
|
|
|
15.4
|
|
|
Operating income
|
|
|
8,784
|
|
|
|
7. 8
|
|
|
|
9,653
|
|
|
|
8.5
|
|
|
Financial income (expenses), net
|
|
|
(2,471
|
)
|
|
|
0.0
|
|
|
|
1,521
|
|
|
|
0.0
|
|
|
Income before taxes on income
|
|
|
6,313
|
|
|
|
5.6
|
|
|
|
11,174
|
|
|
|
9.9
|
|
|
Income taxes
|
|
|
1,978
|
|
|
|
1.8
|
|
|
|
2,884
|
|
|
|
2.5
|
|
|
Net income
|
|
$
|
4,335
|
|
|
|
3.8
|
|
|
$
|
8,290
|
|
|
|
7.3
|
|
Revenues.
Revenues were $113.4 million for the year ended December 31, 2012, an increase of 0.4%, from $112.9 million in 2011. The increase in revenues was primarily due to additional revenues from MSS services.
For the year ended December 31, 2012, our total revenues included $104.3 million of revenues derived from our Digital Media Services, a decrease of $0.1 million, or 0.1%, compared to the year ended December 31, 2011. The decrease in Digital Media Services in 2012 was primarily due to the
completion of a large TV project and the weakening of the Euro relative to the U.S. dollar. Exchange rate differences between 2012 and 2011 reduced our revenues by approximately $3.0 million. The decrease was offset by additional revenues from Digital Media Services, mainly from Occasional Use services as a result of the acquisition of Sm2’s business.
For the year ended December 31, 2012, our total revenues included $9.0 million of revenues derived from our MSS business, an increase of $0.7 million, or 7.5%, compared to the year ended December 31, 2011. The increase in our revenues from MSS services was primarily due to the expanded value-added services we offer, including the increase in transition to fourth generation services which include fleet broadband services and expanding fourth generation services to Internet service providers (ISPs), and continuing third generation advanced data and fleet services.
Cost of Revenues.
Cost of revenues was $86.3 million for the year ended December 31, 2012, a decrease of 0.8% from $86.9 million in 2011. As a percentage of total revenues, cost of revenues decreased from 77% in 2011 to 76% in 2012.
Network services costs were $65.5 million in 2012, a decrease of $1.4 million or 2%, from $66.9 million in 2011. The $65.5 million network services costs incurred in 2012 consist of $58.8 million of expenses related to our Digital Media Services, a decrease of $1.0 million, or 1.6%, compared to the year ended December 31, 2011, and $6.7 million of expenses related to the cost of MSS network and transmission services from third parties, a decrease of $0.4 million compared to the year ended December 31, 2011. This decrease was due primarily to the following three factors: (i) increase in revenues from Occasional Use services, which tend to have higher margin, along with better utilization of satellite and terrestrial fiber capacity required to service our customers through our network, (ii) the weakening of the Euro relative to the U.S. dollar with the exchange rate differences between 2012 and 2011 reducing our expenses related to our Digital Media Services by approximately $1.5 million, and (iii) increasing efficiency in the payments related to our growing MSS network services.
The other principal components of cost of revenues included salaries and depreciation and amortization. Salaries were $7.2 million in 2012, a decrease of 1.4% from $7.3 million in 2011. This decrease was due to the weakening of the NIS relative to the U.S. dollar, offset by the increase that was due to the capitalization of salaries of certain direct employees to our Emek Ha’ela teleport until its activation during 2011. Depreciation and amortization was $8.4 million in 2012, an increase of 6.8%, from $7.9 million in 2011. This increase is directly attributable to the increase in fixed assets in order to support the addition of customers to our network and the above mentioned activation of the established infrastructure of the Emek Ha’ela teleport during 2011.
As a percentage of Digital Media Services revenues, cost of revenues attributable to such revenues was 75.5% in 2012 and in 2011, and as a percentage of MSS revenues, cost of revenues attributable to such revenues in 2012 was 82.3% compared to 95.4% in 2011.
Sales and Marketing Expenses.
Sales and marketing expenses were $7.4 million in the year ended December 31, 2012, an increase of 4.5% from $7.1 million in 2011. The increase in sales and marketing expenses is due to an increase of our direct sales force, resulting in increased salaries, wages and benefits, travel and overhead costs. Sales and marketing expenses as a percentage of revenues were 6.5% in 2012 and 6.3% on 2011.
Sales and marketing salaries, wages and benefits, which include commissions paid to our direct sales representatives, comprised 37.4%and 40.6% of our total sales and marketing expenses in 2011 and 2012, respectively. Salaries, wages and benefits increased by $0.4 million from $2.6 million in 2011 to $3.0 million in 2012 mainly due to an increase in commissions paid to our direct sales force and an increase in the number of employees.
Depreciation of assets related to marketing activities comprised 4.4% and 3.2% of our total sales and marketing expenses in 2011 and 2012, respectively. Depreciation decreased from $0.3 million in 2011 to $0.2 million in 2012.
Agents and commission fees paid to third parties comprised 38.1% and 36.1% of our total sales and marketing expenses in 2011 and 2012, respectively. Agents and commission fees were $2.7 million in both 2011 and 2012.
General and Administrative Expenses.
General and administrative expenses were $10.1 million in the years ended December 31, 2011 and 2012. As a percentage of revenues, general and administrative expenses were 9.0% and 8.9% in 2011 and 2012, respectively.
Salaries, wages and service fees expenses paid to our general and administrative officers and employees comprised 33.0% and 34.0% of our total general and administrative expenses in 2011 and 2012, respectively. Salaries, wages and service fees expenses were $3.3 million and $3.4 million, respectively, in 2011 and 2012.
Management and consulting fees paid to our principal shareholders were $398 thousand in 2011 and $428 thousand in 2012.
Professional services fees, which are legal and audit fees, fees associated with Sarbanes-Oxley compliance and other consulting fees decreased from $1.0 million in 2011 to $0.8 million in 2012.
Allowance for doubtful accounts was $2.3 million in 2011 and $2.9 million in 2012.
Interest and Marketable Securities Income.
Interest and marketable securities income, primarily representing interest income earned on bank deposits and gains from marketable securities, was $0.7 million in the year ended December 31, 2012, an increase of $0.3 million from $0.4 million in 2011. This increase is primarily the result of the increase in yield of our marketable securities and an increase in our bank deposits during 2012.
Currency Fluctuation and Other Financial Income (Expenses), Net.
Currency fluctuation and other financial expenses, net, primarily resulting from currency exchange rate fluctuations affecting transactions denominated in currencies other than the U.S. dollar, our functional currency, resulted in an expense of $0.4 million in the year ended December 31, 2012, a decrease of $0.3 million from currency fluctuation and other financial expenses, net, of $0.7 million in 2011.
Changes in Fair Value of Embedded Currency Conversion Derivatives.
The change in fair value of embedded currency conversion derivatives resulted in income of $1.2 million in the ended December 31, 2012, compared to an expense of $2.1 million in 2011.. The changes in the fair values of these embedded currency conversion derivatives are due to changes in the exchange rate fluctuations between the U.S. dollar and the Euro, and the amounts, timing, duration and composition of these contracts with customers and service providers. From 2013 the company designates the cash flows of these derivatives as hedging, gains or losses resulting from changes in the spot rate on the hedging instrument are recognized in other comprehensive income.
Income Taxes.
Income taxes were $2.9 million in the year ended December 31, 2012, an increase of $0.9 million from $2.0 million in 2011. The increase is due to the increase in income before taxes on income from $6.3 million in 2011 to $11.2 million in 2012. Most of our taxes are calculated based on Israeli tax law and are based on NIS denominated tax returns. The decrease in the effective tax rate from 31% in 2011 to 26% in 2012 was due to the impact of the revaluation of the NIS against the U.S. dollar during 2012, which resulted in lower NIS income for tax purposes in 2012 compared to devaluation of the NIS against the U.S. dollar during 2011, which resulted in higher NIS income for tax purposes and from an increase in statutory tax rates for future years during 2011, which increased our deferred tax liabilities (see also note 14 to the our consolidated financial statements).
Net Income.
Net income was $8.3 million in the year ended December 31, 2012, an increase of 91.2% from $4.3 million in 2011. The increase is due primarily to the increase in operating income and the change in the fair value of embedded currency conversion derivatives as discussed above.
Segment Results.
For the years ended December 31, 2012 and 2011, the gross profit of our Digital Media Services was $25.6 million.
For the year ended December 31, 2012, the gross profit of our MSS business was $1.6 million, an increase of $1.2 million, or 313.3%, compared to gross profit of $384 thousand in 2011. The increase was due to the factors described above.
|
B. Liquidity and capital resources
|
Principal Sources and Uses of Liquidity.
Our principal sources of liquidity are cash from operations and our cash and cash equivalents and marketable securities. We raised net proceeds of approximately $47.4 million in our initial public offering in November 2006. Our current principal liquidity requirements consist of capital expenditures and amounts owed to suppliers. We typically use our working capital to pay our suppliers, although, if needed, we may utilize the lines of credit provided to us by Bank Igud (approximately $2.8 million) and Bank Leumi (approximately $2.0 million) when an obligation to pay a supplier precedes the receipt of payments from customers. At present we only utilize a portion of these lines of credit ($2.8 million from the combined credit line ) mainly to provide guarantees required under several of our long-term contracts with our suppliers. Our capital expenditures consist primarily of transmission and playout equipment as required to provide services to new customers and to expand our MSS offering and to expand and upgrade our teleport in Emek Ha’ela.
In 2011, 2012 and 2013, our capital expenditures included mainly investments in fixed assets of approximately $14.7 million, $6.6 million and $11.0 million, respectively,
We intend to continue to expand our presence in the United States, Europe, Asia and other markets where we already operate through subcontractors, by establishing or selectively pursuing the acquisition of local teleports and playout centers, and connecting them to our global network. For example, in 2008 we completed the acquisitions of the Hawley Teleport in Pennsylvania and the satellite business of Bezeq for an aggregate cost of approximately $20.5 million, in 2012 we completed the acquisition of Sm2’s business in the United States for an aggregate cost of approximately $1.2 million, and in September 2013 we completed the acquisition of JCA TV, a London-based provider of content preparation services, for an aggregate cost of approximately $9 million and deferred payment of up to $5.5 million payable three years after the closing subject to achievement of defined business results. The cost of acquiring or establishing such operations will include the cost of fixed assets related to transmission equipment and playout equipment, customer contracts and customer relationships and potential value of synergies.
Taking into account our expansion plans, we believe that our cash generated from operations and cash balances, including our net proceeds from our initial public offering in November 2006, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, if the acquisition of new businesses will require additional funds, we may raise such amounts by offering debt or equity.
Cash and Cash Equivalents.
Cash and cash equivalents were $14.2 million at December 31, 2011, $12.1 million at December 31, 2012 and $14.1 million at December 31, 2013. The increase from 2012 to 2013 was primarily due to an increase in net cash provided by operating activities. The decrease from 2011 to 2012 was primarily due to dividend paid of $8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,245
|
|
|
|
15,892
|
|
|
|
21,301
|
|
|
Net cash used in investing activities
|
|
|
(10,730
|
)
|
|
|
(2,416
|
)
|
|
|
(14,348
|
)
|
|
Net cash used in financing activities
|
|
|
(4,163
|
)
|
|
|
(15,786
|
)
|
|
|
(5,030
|
)
|
|
Effect of translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
1,352
|
|
|
|
(2,310
|
)
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — beginning of year
|
|
|
13,091
|
|
|
|
14,443
|
|
|
|
12,133
|
|
|
Cash and cash equivalents — end of year
|
|
|
14,443
|
|
|
|
12,133
|
|
|
|
14,165
|
|
Operating Activities
For the year ended December 31, 2013, net cash provided by operating activities was $21.3 million, an increase of $5.4 million from $15.9 million of net cash provided by operating activities for the year ended December 31, 2012. Our cash flow from operating activities was positively impacted in 2013 compared to 2012 primarily by a decrease in account receivable and an increase in account payable. For the year ended December 31, 2012, net cash provided by operating activities was $15.9 million, a decrease of $0.3 million from $16.2 million of net cash provided by operating activities for the year ended December 31, 2011. Our cash flow from operating activities was negatively impacted in 2012 compared to 2011primarily by an increase in our account receivables. For the year ended December 31, 2011, net cash provided by operating activities was $16.2 million, an increase of $6.8 million from $9.4 million of net cash provided by operating activities for the year ended December 31, 2010. Our cash flow from operating activities was positively impacted in 2011 compared to 2010 primarily by a $5.9 million increase in non-cash expenses, such as depreciation and amortization and change in the value of embedded currency conversion derivatives, in addition to a $3.3 million increase in account receivables in 2011 compared to 2010 due to better collection. The increase was partially offset by a $4.4 million decrease in net income.
Investing Activities
For the year ended December 31, 2013, we used $14.3 million net for investing activities which was comprised mainly of investments of $11 million in fixed assets, $7.9 million in business combination less $4.4 million related to net proceeds from marketable securities. For the year ended December 31, 2012, we used $2.4 million net for investing activities which was comprised mainly of investments of $6.6 million in fixed assets, $1.2 million in business combination less $5.4 million related to net proceeds from marketable securities. For the year ended December 31, 2011, we used $10.7 million net for investing activities which was comprised mainly of investments of $14.7 million in fixed assets, less $3.9 million related to net proceeds from short-term deposits and marketable securities.
Financing Activities
During the years ended December 31, 2011, 2012 and 2013, we paid dividends to our shareholders in the amount of $4.2 million, $15.8 million and $5.0 million, respectively.
|
C. Research and development, patents and licenses, etc.
|
Not applicable.
See discussion in Parts A and B of Item 5 “Operating Results and Financial Review and Prospects.”
|
E. Off-balance sheet arrangements
|
We had no material off-balance sheet arrangements for the fiscal year ended December 31, 2013.
|
F. Tabular disclosure of contractual information
|
We have lease agreements for our facilities. See Part D of Item 4 “Information on the Company – Property, plants and equipment” for a description of these leases.
We lease cars for employees under operating leases. Those leases are for terms of three years each with a right to terminate with payment of certain cancellation fees.
The following are the contractual commitments at December 31, 2013, associated with lease obligations and contractual commitments*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Operating Leases
|
|
$
|
1,610
|
|
|
$
|
746
|
|
|
$
|
614
|
|
|
$
|
250
|
|
|
$
|
-
|
|
|
Operating Car Leases
|
|
|
1,276
|
|
|
|
661
|
|
|
|
539
|
|
|
|
76
|
|
|
|
-
|
|
|
Operating Network Leases
|
|
|
126,205
|
|
|
|
43,532
|
|
|
|
58,078
|
|
|
|
24,004
|
|
|
|
591
|
|
|
Total
|
|
|
129,091
|
|
|
|
44,939
|
|
|
|
59,230
|
|
|
|
24,330
|
|
|
|
591
|
|
* Does not include contingent payments that may be due pursuant to the Share Purchase Agreement, dated as of September 3, 2013, with respect to the acquisition of JCA.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPL
OYE
ES
|
A. Directors and senior management
|
Our directors and executive officers as of the date of this Annual Report are as follows:
|
|
|
|
|
|
|
Dr. Shlomo Shamir (1)
|
|
66
|
|
Chairman of the Board
|
|
Avi Cohen en
|
|
60
|
|
Chief Executive Officer
|
|
Shmuel Koren
|
|
43
|
|
Chief Financial Officer
|
|
Lior Rival
|
|
41
|
|
Chief Commercial Officer
|
|
Ziv Mor
|
|
38
|
|
Chief Technology Officer and Vice President –Business Development
|
|
Maya Rival
|
|
37
|
|
VP Procurement and Special Projects
|
|
Ohad Har-Lev
|
|
39
|
|
President of RRsat America
|
|
Tzurit Golan
|
|
42
|
|
VP HR & OD
|
|
Elad Manishviz
|
|
45
|
|
Chief Marketing Officer
|
|
Nissim Barda
|
|
57
|
|
VP Operations
|
|
Simon Kay
|
|
53
|
|
Managing Director RRsat Europe
|
|
Nicholas Pannaman
|
|
53
|
|
Managing Director RRsat Europe
|
|
David Assia (2)(3)(4)(5)(6)
|
|
62
|
|
Director
|
|
Harel Beit-On (1) (6)
|
|
54
|
|
Director
|
|
Yigal Berman (6)
|
|
65
|
|
Director
|
|
Vered Levy-Ron (2)(3)(4)(5)
|
|
47
|
|
Director
|
|
Alexander Milner
|
|
73
|
|
Director
|
|
Ron Oren
|
|
42
|
|
Director
|
|
David Rivel
|
|
67
|
|
Director
|
|
Yaron Sheinman (2)(4)(5)
|
|
59
|
|
Director
|
|
Ayal Shiran (1)
|
|
48
|
|
Director
|
|
|
(1)
|
“Independent Director” under the applicable NASDAQ Marketplace Rules (see explanation below)
|
|
|
(2)
|
“Independent Director” under the applicable NASDAQ Marketplace Rules and the applicable rules of the U.S. Securities and Exchange Commission (the “SEC”) (see explanation below)
|
|
|
(3)
|
“Outside Director” as required by Israel’s Companies Law (see explanation below)
|
|
|
(4)
|
Member of Audit Committee
|
|
|
(5)
|
Member of Compensation Committee
|
|
|
(6)
|
Member of Investment Committee
|
Dr. Shlomo Shamir
has been the Chairman of our board of directors since May 2011 and a member of our board of directors since April 2011. Dr. Shamir has significant senior-level management experience from several leading global technology companies, with business experience on six continents and in several industries. Prior to joining RRsat, Dr. Shamir served from July 2009 until March 2010 as the President of Aeronautics Systems Ltd. Prior to that position, he served from 2005 until 2009 as the President of NICE Systems Ltd. (NASDAQ:NICE), and from 2001 until 2005 as the President and CEO of NICE Systems Inc. Before joining NICE in 2001, Dr. Shamir served as President and CEO of CreoScitex Americas from 2000 to 2001 and as President and CEO of Scitex Americas from 1997 until 2000. Prior to joining Scitex, Dr. Shamir served for 24 years in the Israel Defense Forces and retired as a Brigadier General. He is currently also the Chairman of the Board of Directors of Scodix Ltd., and a board member of M.S.T. Raviv Modular Space Transportation 2002 Ltd. Dr. Shamir holds a Bachelor of Science degree in Physics from the Technion – Israel Institute of Technology (1969), and Master of Science (1978) and PhD (1980) degrees in Engineering Economic Systems from Stanford University, California..
Avi Cohen
has been our Chief Executive Officer since July 2012. Prior to joining our company, Mr. Cohen served as President and Chief Executive Officer of Orbit Technologies Ltd., a leading manufacturer and provider of Satellite Communication equipment and a public company traded on the Tel Aviv Stock Exchange, from 2008. Prior to joining Orbit, from September 2006, Mr. Cohen served as Chief Operating Officer and Deputy to the CEO at ECI Telecom. Prior to ECI, Mr. Cohen served in a variety of management positions at KLA-Tencor (NASDAQ: KLAC). From 2003, he was a Group Vice President, Corporate Officer and Member of the Executive Management Committee based at KLA-Tencor’s corporate headquarters in the U.S. From 1995, he was the President of KLA-Tencor Israel, responsible for the Optical Metrology Division. Before joining KLA-Tencor, Mr. Cohen spent three years as Managing Director of Octel Communications Israel (later sold to Avaya), after serving as Chief Executive Officer of Allegro Intelligent Systems, which he founded in 1985 and was acquired by Octel in 1991. Mr. Cohen also serves as a director of Nova Measuring Instruments (NASDAQ: NVMI). Mr. Cohen holds B.Sc. and M.Sc. degrees in electrical engineering and applied physics from Case Western Reserve University.
Shmuel Koren
has been our Chief Financial Officer since May 2013. Prior to joining our company, Mr. Koren served as CFO and COO of Orbit Technologies Ltd. (TASE: ORBI) for three years from 2010 and was responsible for worldwide finance, facility, IT, legal, IR and operations departments. Prior to Orbit, between 2006 to 2009, Mr. Koren served as President and CEO of Better Online Solutions (B.O.S.) Ltd. (NASDAQ and TASE: BOSC). From 1999 to 2006, he served as CFO and as a director of the Visonic Group (London and TASE: VSC.L and VSC.TA). Mr. Koren is a certified CPA in Israel and holds a B.A. degree in Business Administration and Accounting from Tel Aviv College of Business, an International MBA from the Herriot–Watt University Business School and an LL.M. degree from Bar Ilan University.
Lior Rival
has been our Chief Commercial Officer since December 2012, after having served as our Vice President – Sales and Marketing from January 2003 to December 2012 and Marketing Manager from April 1998 to January 2003. Mr. Rival holds a B.A. in Management and Communication from the Tel Aviv Open University. He is the son of David Rivel, our founder, director and former Chief Executive Officer, and the brother of Maya Rival, our Vice President Procurement and Special Projects.
Ziv Mor
has been our Chief Technology Officer and Vice President – Business Development since June 2010. From December 2006 until June 2010, Mr. Mor served as our Chief Technology Officer. From January 2003 until December 2006,Mr. Mor served as our Director of Engineering, after having served us in different technical management roles since November 1997. Mr. Mor holds a B.Sc. in Technology Business and Management from Holon Academic Institute of Technology and a practical engineering degree in Electronics and Communications from ORT College for Advanced Technologies and Sciences.
Maya Rival
has been our Vice President Procurement and Special Projects since January 2014, after having served as our Vice President - Global Operations from November 2006 to January 2014 and Administration Manager since 2000. In her current position as Vice President Procurement and Special Projects Ms. Rival is responsible for our procurement procedures and specific special projects. She is the daughter of David Rivel, our founder, director and former Chief Executive Officer, and the sister of Lior Rival, our Chief Commercial Officer.
Ohad Har-Lev
has been our President of RRsat America since April 2013. Mr. Har-Lev joined RRsat as General Counsel in May 2011 and was appointed Company Secretary in December 2011, and served in such roles through April 2013. Prior to joining RRsat, Mr. Har-Lev served as corporate and general counsel for publicly traded companies on NASDAQ, AIM and the Tel Aviv Stock Exchange and for several high tech companies in the private sector. Mr. Har-Lev served as a corporate counsel at Amdocs (NASDAQ: DOX) from 2009 until 2011 and as general counsel of Gilat Satcom (traded on the TASE and AIM) from 2005 until 2008. Mr. Har-Lev holds an LLB in Law and an MBA from The Interdisciplinary Center (IDC) Herzliya, and is a member of the Israeli Bar.
Tzurit Golan
joined RRsat in March 2013 as VP HR & OD. Prior to joining RRsat, Ms. Golan held several executive HR positions in the high-tech industry. During 2012, she was the Head of International HR at AudioCodes Ltd. (NASDAQ: AUDC)
.
Prior to joining AudioCodes, Ms. Golan was VP HR at Orbit Technologies Ltd. (TASE: ORBI) from 2010 to 2012, and Director HR at Alvarion Ltd. (NASDAQ: ALVR) from 2006 to 2009. Ms. Golan holds a B.A. in Behavioral Sciences from the College of Management and an M.A. in Organizational Sociology from Ben-Gurion University.
Elad Manishviz
joined RRsat in January 2014 as Chief Marketing Officer. Mr. Manishviz is a business leader with over 15 years’ experience in the digital media, entertainment, video and online advertising market segments. He has held a variety of executive positions in global media-related software, communications and internet-focused companies. From April 2013 until January 2014, Mr. Manishviz was the CEO of Wallstream, a startup company, providing a unique social media video advertising channel to top brands advertisers. Prior to that, from October 2011 to January 2013, Mr. Manishviz was VP Products and Strategy at DG- MediaMind where he was responsible for all strategic product and operational aspects of the company’s converged video advertising delivery business. Mr. Manishviz served as a VP of Products at NDS (acquired by Cisco in 2012) from January 2000 to November 2011, where he defined the product scope, roadmap and business aspects of NDS’s established and innovative products, such as DVR technology, VOD solutions, interactive applications, targeted advertising and the first hybrid multi-screen E2E OTT video platform. Mr. Manishviz holds an Executive MBA from the Hebrew University and a BA degree in Management and Mass Media from the Academic College in Tel-Aviv Jaffa.
Nissim Barda
has been our Vice President Operations since February 2014. From 2007 until February 2014 he served in several executive positions at Orbit Technologies Ltd. (TASE: ORBI) and in his last position as VP Operations & Delivery responsible for all operational aspects of the company including production, purchasing, logistics, and delivery. During most of his tenure at Orbit, Nissim also served as the business manager of “Orakim” product line responsible for revenues, P&L and the overall relationships with the Ministry of Defense. Between 1976 and 2007, Nissim served in the IDF. In his last role, he was Head of Planning and Human Resource Management. Nissim holds an MBA degree from Derby University, an MA degree from Haifa University and a BA degree from Tel Aviv University.
Simon Kay
joined RRsat in September 2013 as Managing Director of RRsat Europe. Prior to joining of RRsat, Mr. Kay was Managing Director of TVP Group from 2004 until September 2013, which he owned jointly with Nick Pannaman. TVP Group was re-established in 2004 and subsequently acquired JCA TV Facilities. Under new ownership the company expanded its existing services in the Restoration and Digital distribution markets. Prior to this Mr Kay had been in the video industry for over 20 years initially establishing TVP, in its first incarnation, with Nick Pannaman in 1981. During the ensuing years a number of companies were acquired and added to TVP until the business was sold to Four Media company in 1999. Four Media in due course became Ascent Media and latterly Deluxe and during his employment Kay acted as a Divisional Director before becoming CEO Ascent Media UK.
Nicholas Pannaman
joined RRsat in September 2013 as Managing Director of RRsat Europe subsequent to the purchase of TVP Group Ltd., which he owned jointly with Simon Kay. Prior to joining of RRsat, Mr. Pannaman was Managing Director of TVP Group from December 2004 until September 2013. Since 1981 Mr. Pannaman, in partnership with Simon Kay, has owned, managed, bought and sold businesses in the UK television industry operating across the broadcast, distribution, corporate and music sectors. Having been originally sold to Four Media Company (then Ascent Media, now Deluxe) TVP Group was re-established in 2004 for the acquisition of JCA TV which became a platform for the development of digital media services.
David Assia
, a member of our Board of Directors since October 2006, is a co-founder of Magic Software Enterprises Ltd. (NASDAQ: MGIC), and served there in various positions, including as Chairman of the Board of Directors and Chief Executive Officer, from 1983 until 2007. Mr. Assia is currently the CEO of Nadyr Investments, a privately held investment company. Mr. Assia was managing director of Mashov Computers Ltd. between 1980 and 1986 and has served as the Chairman of its Board of Directors since 1989. Mr. Assia also serves as a director of the First International Bank, eToro Group Ltd., Biocatch Ltd., MobeeArt, The Weizmann Institute of Science, Yeda Research & Development Company and The Israel Association of Electronics and Software. Mr. Assia holds a B.A. degree in economics and statistics and an M.B.A. degree, both from Tel Aviv University.
Harel Beit-On
, a member of our Board of Directors since December 2013, is a General Partner of Viola Private Equity, an Israeli private equity fund, since 2008. Mr. Beit-On is a seasoned executive with over 25 years of management leadership in the IT industry and an extensive investment and exit record. He is a co-founder of the Viola Group, one of the original co-founders of Carmel Ventures and the Founder of Viola Private Equity. Mr. Beit-On was the former CEO, President & Chairman of Tecnomatix (NASDAQ: TCNO), a leading provider of complete enterprise software solutions for process management and collaboration, where he led the company for over eight years. In 2005, he led the successful sale of Tecnomatix to UGS, a global leader in the Product Lifecycle Management, for $228 million. Mr. Beit-On served as Chairman of ECtel (NASDAQ:ECTX) from 2004 to 2006 and led the company’s successful turnaround. He is the Chairman of Lumenis Ltd., where he led an investment of $150 million, acquiring 80% of the company’s shares. He is also a member of the Boards of Directors of the following companies: Matomy Media Group Ltd. and Zend Technologies Ltd. and the Chairman of B. Gaon Holdings Ltd. (TASE:GAON), all of which are portfolio companies of Viola Private Equity. Mr. Beit-On has a B.A. in Economics from the Hebrew University in Jerusalem and an MBA from Massachusetts Institute of Technology.
Yigal Berman,
a member of our Board of Directors since December 2013, is the Vice President, Chief Financial Officer and Secretary of Inter-Gamma Investment Company Ltd., one of our principal shareholders (through its indirect subsidiary Del-Ta Engineering Equipment Ltd.). Mr. Berman served as our director from June 1993 through October 2007, and has served as an observer to our board of directors from October 2007 through December 2013. Mr. Berman serves as a director of various subsidiaries of Inter-Gamma Investment Company Ltd., including Rapac Communication & Infrastructure Ltd., a holding company that primarily operates in the fields of communication, energy, computers and military systems and is publicly traded on the Tel Aviv Stock Exchange, Orpak Systems Ltd., a company engaged in computerized fuel management and payment systems, and Orpak’s holding company, O.R.T. Technologies Ltd., a public company traded on the Tel Aviv Stock Exchange. Mr. Berman holds a B.A. in Economics and an M.B.A. from Tel Aviv University
Vered Levy-Ron
, a member of our Board of Directors since January 2007, has served as the CEO of HumanEyes Technologies since February 2010. Prior to that, she was president of DaLi Advisory from September 2005 until January 2010. Ms. Levy-Ron also served as head of the Prepaid Products and Services Group and as a VP of New Businesses at IDT Telecom, a subsidiary of IDT Corporation, from February 2002 to July 2005. Ms. Levy-Ron was also a strategy management consultant at A.T. Kearney in Paris from 1999 to 2001, at Booz Allen & Hamilton in New York from 1993 to 1999 and at Shaldor in Tel Aviv from 1990 to 1992. Ms. Levy-Ron holds a B.A. degree in French and economics from Tel Aviv University and an M.B.A. degree in finance and international management from Columbia Business School.
Alexander Milne
r
, a member of our Board of Directors since January 2012 (and a prior member of our board of directors from December 2006 until April 2011), is the Chairman of Rapac Communication & Infrastructure Ltd. Mr. Milner was the Managing Director of Rapac Communication & Infrastructure Ltd. from 1989 until the end of 2006. Prior to that, Mr. Milner was Corporate Vice President and General Manager of the communications group of Tadiran Electronics Ltd. Mr. Milner is also the Managing Director of O.R.T. Technologies Ltd., a public company traded on the Tel Aviv Stock Exchange, and the Chairman of Orpak Systems Ltd. and Transway Ltd. Mr. Milner received an M.Sc. degree in Electrical Engineering from the Technion in Israel and is a graduate of the Advanced Management Program from INSEAD/Stanford University.
Ron Oren
, a member of our Board of Directors since March 2006, is the Chief Executive Officer and President of Rapac Communication & Infrastructure Ltd. Mr. Oren served as Vice President – Business Development of Rapac Communication & Infrastructure Ltd. from July 2005 until the end of 2006. Prior to his engagement at Rapac Communication & Infrastructure Ltd., Mr. Oren served as the Technology Manager of Delta Film Ltd., the largest importer of photographic materials and products in Israel, from July 2001 to July 2005, and as the Logistic Control Manager of Orbotech Ltd., a company that develops equipment for inspecting and imaging circuit boards and display panels, from February 1999 to June 2001. He is also a director of various subsidiaries of Inter-Gamma Investment Company Ltd., including Del-Ta Engineering Equipment Ltd., Orpak Systems Ltd. and O.R.T. Technologies Ltd., a public company traded on the Tel Aviv Stock Exchange. Mr. Oren holds a B.Sc. in Industrial and Management Engineering from the Technion – Israel Institute of Technology and an M.B.A. from the Herzliya Interdisciplinary Center.
David Rivel
, our founder and Chief Executive Officer from 1991 through June 2012, is also one of our directors. Mr. Rivel is an electronic, computers and communications engineer with over 30 years of experience in radio frequency communications, antennas, video, television and satellite communication. He is responsible for the development and implementation of our strategy, our business development and the overall management of our company. He holds an M.Sc. degree in Electrical Engineering from the Technion – Israel Institute of Technology, Be’er Sheva Campus, and is a member of the Institute of Electrical and Electronics Engineers (IEEE), World Teleport Association and Society of Satellite Professionals Association. He is the father of Lior Rival, our Chief Commercial Officer, and Maya Rival, our Vice President – Global Operations.
Yaron Sheinman
, a member of our Board of Directors since December 2013, has been the Chairman of Ananey Communications Ltd., an Israeli TV content developer and provider, since 2010. Prior to joining Ananey Communications, Mr. Sheinman was the founder, CEO and chairman of the board of directors of BVR Technologies Ltd., one of the first Israeli start-ups - from its commencement in 1987 through 2004. In his capacity with BVR Technologies, Mr. Sheinman started several subsidiaries, including Nexus Telocation (NASDAQ: PNTR), NexusData, VIZRT (OSE : VIZ) BVR Systems (NASDAQ: BVRS) and Unisfair. In addition, Mr. Sheinman was involved in several privately-held Israeli companies. Previously, he acted as an independent consultant to Israel Aircraft Industries for the development of avionics systems. Mr. Sheinman served as a combat pilot with the Israeli Air Force (including reserve service) for 15 years.
Ayal Shiran
, a member of our Board of Directors since March 2014, is a General Partner in Viola Private Equity, an Israeli private equity fund. Prior to joining Viola Private Equity, Mr. Shiran served as President of Amdocs (NYSE:DOX) Customer Business Group from 2008 to 2013 with extensive responsibilities that ranged from managing a large portion of Amdocs’ business operations, strengthening Amdocs’ customer business worldwide to leading a team of Division Presidents in targeting emerging businesses new to Amdocs’ existing portfolio. Mr. Shiran also managed cross-divisional issues and was responsible for seeking out new opportunities within existing customers. Mr. Shiran and his team were responsible for evaluating new technology and business models and for identifying and executing potential acquisition transactions. Prior to his appointment as Amdocs’ Customer Business Group President, Mr. Shiran held the position of Amdocs’ Division President responsible for the AT&T group of companies, including SBC, Bellsouth and Cingular, from 2004 to 2008. Before joining Amdocs in 2004, Ayal served as Acting Vice President at TTI Team Telecom International (Nasdaq: TTIL, later acquired by TEOCO Corporation), where he was responsible for all project deliveries and follow-up sales in the Americas region. Mr. Shiran holds a Master’s degree in Computer Engineering from the Technion – Israel Institute of Technology.
The term of each of our directors, other than our outside directors, will expire at the time of our 2014 annual general meeting of shareholders. The term of our outside directors will expire in January 2016.
The aggregate direct compensation we paid to our executive officers as a group for the year ended December 31, 2013 was $3 million. This amount includes $200,000 that was set aside or accrued to provide for severance and retirement insurance policies, and $300,000 that was paid or accrued as bonuses pursuant to individual bonus arrangements provided for in the executive officers’ employment agreements. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses and benefits commonly reimbursed or paid by companies in Israel.
We pay each director an annual fee of $17,000, $500 per each meeting of the board attended and $500 per each meeting of a committee attended, unless such meeting is held immediately before or after a board meeting, in which case, the fee for such meeting is $200. In the event that a director attends a meeting by phone or a resolution is adopted by written consent, then the fee for such action is $150.The cash compensation of our outside directors is the same as the cash compensation of all our other directors.
In addition, commencing May 2011, in consideration for the services provided to the company, we pay a company controlled by the Chairman of our board of directors a monthly fee of $8,000 and an annual bonus. The payment of the annual bonus is subject to compliance with criteria based on our annual operating results. We also granted the Chairman of our board of directors in September 2012 options to purchase 200,000 ordinary shares at an exercise price of $5.28 vesting over a period of 3 years and 9 months, with an expiration date of June 2016.
During 2013, we granted our directors (including one director who is no longer a director of the company), options to purchase an aggregate of 65,000 ordinary shares at an exercise price of $6.85 per ordinary share that vest over a period of three years, with an expiration date of January 2016.
During 2013, we granted our executive officers options to purchase 212,500 ordinary shares, at exercise prices ranging from $6.85 to $8.03 per ordinary share that vest over a period of four years, with expiration dates ranging from March 2017 to September 2017.
As of December 31, 2013, there were outstanding options to purchase 1,368,000 ordinary shares granted to our executive officers, employees and directors as a group, at exercise prices ranging from $5.22 to $8.03 per ordinary share, with expiration dates ranging from January 2016 to December 2017. Other than as specified in the share ownership table under Item 7.A. “Major Shareholders and Related Party Transactions – Major Shareholders,” none of our directors and officers holds more than 1% of our outstanding shares.
Our current board of directors consists of ten directors, including two outside director as required by Israeli law.
Other than the outside directors, who are subject to special election requirements under Israeli law, our directors are elected by the affirmative vote of the holders of a majority of the voting power present, in person or by proxy, at a shareholders meeting convened for that purpose, not taking into consideration any abstentions.
Any change in the number of our directors requires an amendment of our articles of association and approval by a special majority vote of at least sixty (60%) of the votes cast by those shareholders present and voting, not taking into consideration abstentions. A general meeting may remove a director during the term by a simple majority vote (except for outside directors, who can be removed only in accordance with the Israeli Companies Law of 1999, or the Companies Law). For further information regarding our directors’ service and terms, see Item 6.A. “Directors and senior management.”
Our principal shareholder, Viola Private Equity, is a party to shareholders agreements with each of Del-Ta Engineering, Kardan Communications and David Rivel with respect to the election of directors and other matters. For a detailed description of these agreements, see Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions.”
Each of our executive officers serves at the discretion of our board of directors and holds office until his or her successor is elected or his or her resignation or removal. Except for David Rivel, who served as our Chief Executive Officer until June 30, 2012 and also serves as a member of our board of directors, none of our directors have contracts or agreements with the company providing for benefits upon termination of employment or includes provisions regarding benefits upon termination of employment. For a detailed description of Mr. Rivel’s agreement, see Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions.”
Corporate Governance Requirements
The Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented by the SEC and NASDAQ, require issuers to comply with various corporate governance practices.
In general, NASDAQ Marketplace Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors, each of whom satisfies the “independence” requirements of NASDAQ, and its audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of NASDAQ and the SEC. Our board of directors has determined that each of Messrs. Assia, Beit-On, Sheinman and Shiran and Ms. Levy-Ron qualifies as an independent director under the requirements of NASDAQ, and that each of Messrs. Assia and Sheinman and Ms. Levy-Ron (who serve on our audit committee and compensation committee) qualifies as an independent director under the respective requirements of the SEC and NASDAQ.
Under the Companies Law, an Israeli company whose shares are publicly traded, may elect to adopt a provision in its articles of association pursuant to which a majority of its board of directors (or a third of its board of directors in the case the company has a controlling shareholder) will constitute individuals complying with certain independence criteria prescribed by the Companies Law, as well as certain other recommended corporate governance provisions. We have not included such provisions in our articles of association since our board of directors complies with the independence requirements and the corporate governance rules of NASDAQ and the SEC regulations.
Home Country Practices
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 NASDAQ requirements regarding the director nominations process, which require that director nominees be selected/determined, or recommended for the board of directors’ selection/determination, either by a majority of the independent directors or a committee comprised solely of independent directors. Instead, we follow Israeli law and practice in accordance with which our directors are recommended by our board of directors for election by our shareholders and our board of directors. In addition, our independent directors do not have regularly scheduled meetings at which only independent directors are present, as such meetings are not required by the Companies Law.
In addition, we follow our home country law, instead of the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans and arrangements, 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. Under Israeli law and practice, in general, the approval of the board of directors is required for the establishment or amendment of equity based compensation plans and arrangements, unless the arrangement is for the benefit of a director, or a controlling shareholder, in which case compensation committee and shareholder approval are also required. Similarly, the approval of the board of directors is generally sufficient for a private placement unless the private placement involves a director, a controlling shareholder or is deemed a “significant private placement,” in which case shareholder approval, and, in some cases, compensation committee or audit committee approval, would also be required. The Israeli Companies Law defined a “significant private placement” as a private placement (i) resulting in a party becoming a controlling shareholder, or (ii) involving the issuance of a 20% or more voting rights in the company, which (A) results in a 5% or more shareholder increasing its interest in the company or an offeree becoming a 5% or more shareholder, and (B) involves consideration that is not solely cash or public traded securities, or is not on fair market terms.
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, composition of the board of directors and quorum at shareholders’ meetings. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.
For a discussion of the requirements of Israeli law in this regard, see Item 10.B. “Additional Information – Memorandum and articles of association – Fiduciary Duties and Approval of Related Party Transactions,” “– Shareholders” and “– Anti-Takeover Provisions.”
Outside Directors
We are subject to the Companies Law. Under the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a stock exchange in or outside of Israel, is required to elect at least two outside directors to serve on its board of directors, which we have reelected in January 2013. All of the outside directors must serve on our audit committee and compensation committee (including one outside director serving as the chair of the audit committee and compensation committee), and at least one outside director must serve on each other committee of our board of directors. In addition, at least one of the outside directors is required to have “financial and accounting expertise,” unless another member of the audit committee, who is an independent director under the NASDAQ Marketplace Rules, has “financial and accounting expertise,” and the other outside director or directors are required to have “professional expertise,” all as defined under the Companies Law. Our board of directors has determined that our outside director, Mr. David Assia, is independent under the applicable SEC, NASDAQ Marketplace Rules and the Companies Law and has “financial and accounting expertise,” and our other outside director, Ms. Vered Levy-Ron, is independent under the applicable SEC, NASDAQ Marketplace Rules and the Companies Law and has “professional expertise.” Our board of directors has also determined that each of Mr. Assia and Ms. Levy-Ron is an expert outside director, as defined in the Companies Law regulations.
Under the Companies Law, a person may not serve as an outside director if at the date of the person’s election or within the prior two years the person is a relative of the company’s controlling shareholder, or the person or his or her relatives, partners, employers, supervisors or entities under the person’s control, have or had any affiliation with us or with a controlling shareholder or relatives of a controlling shareholder, and, in the case of a company without a controlling shareholder or a shareholder holding at least 25% of the voting rights, any affiliation, at the time of election, to the chairman of the board of directors, the chief executive officer, an interested party or the company’s most senior finance officer. Under the Companies Law, “affiliation” includes:
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an employment relationship,
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a business or professional relationship maintained on a regular basis,
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service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed or elected as a director of the private company in order to serve as an outside director following the initial public offering.
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In addition, a person may not serve as an outside director:
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if the person or his or her relatives, partners, employers, supervisors or entities under the person’s control, maintains a business or professional relationship with the company, even if such relationship is not on a regular basis, other than a negligible business or professional relationship, or
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if the person received compensation as an outside director in excess of the amounts permitted by the Companies Law and regulations thereunder.
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An “office holder” is defined as any managing director, general manager, chief executive officer, executive vice president, vice president, or any other person assuming the responsibilities of any of these positions regardless of that person’s title, or any director or any manager directly subordinate to the general manager. Each person listed in the table under “Directors and senior management” is an office holder. A “relative” is defined as a spouse, sibling, parent, grandparent or descendent, or a spouse’s descendant, sibling or parent or the spouse of any of the foregoing. An “interested party” is defined as a holder of 5% or more of our shares or voting rights, any person or entity that has the right to nominate or appoint at least one of our directors or our general manager, or any person who serves as one of our directors or as our general manager.
A person may not serve as an outside director if that person’s position or other business activities create, or may create, a conflict of interest with the person’s service as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time any outside director is to be elected all members of the board that are not controlling shareholders or their respective relatives are of the same gender, then the outside director to be elected must be of the other gender. There is also a restriction on interlocking boards: A director of a company may not be elected as an outside director of another company if, at that time, a director of the other company is acting as an outside director of the first company. Until the lapse of two years from the termination of office, the company, a controlling shareholder and entities under the company’s control may not grant the outside director or any of his or her relatives, directly or indirectly, any benefit, or engage the outside director or his or her relatives as an office holder of the company, of a controlling shareholders or of an entity under the company’s control, and may not employ or receive services from the outside director or any of his or her relatives, either directly or indirectly, including through a corporation controlled by that person. The restriction on a relative that is not the spouse or child of the outside director is limited to one year from the termination of office instead of two years.
Outside directors are elected by a majority vote at a shareholders’ meeting. In addition to the majority vote, the shareholder approval of the election of an outside director must satisfy either of two additional tests:
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the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the controlling shareholders); or
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the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the outside director does not exceed 2% of the aggregate voting rights of our company.
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The Companies Law provides for an initial three-year term for an outside director, which may be extended for additional three-year terms, subject to certain requirements. An outside director may be removed only by the same special majority required for his or her election or by a court, and then only if the outside director ceases to meet the statutory qualifications for election or if he or she breaches a duty of loyalty to our company. In the event of a vacancy in the position of an outside director, if there are then fewer than two outside directors, our board of directors is required under the Companies Law to call a special shareholders meeting as promptly as practical to elect a new outside director. David Assia and Vered Levy-Ron are our outside directors under the Companies Law. Their term of office will expire in January 2016.
Outside directors may be compensated only in accordance with regulations adopted under the Companies Law. The compensation of an outside director must be determined prior to the person’s consent to serve as an outside director. Compensation of all directors requires the approval of our compensation committee, board of directors and shareholders, in that order.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee and an investment committee.
Audit Committee.
Under the Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. The audit committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its relatives. Individuals who are not permitted to be audit committee members may not participate in the committee’s meetings other than to present a particular issue;
provided
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however
, that an employee that is not a controlling shareholder or relative may participate in the committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
In addition, under the listing requirements of the NASDAQ Global Market, we also are required to maintain an audit committee. Our audit committee consists of Yaron Sheinman and our two outside directors, David Assia and Vered Levy-Ron, each of which is an independent director under the respective requirements of the SEC and NASDAQ and complies with the Companies Law criteria for audit committee members. Mr. Assia serves as the Chairman of the audit committee. Our audit committee meets as often as it determines to be necessary and appropriate, but not less than every three months. Under the Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and a majority of the attending committee members are independent directors within the meaning of the Companies Law and include at least one outside director.
The audit committee’s duties include providing assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the fees of, and services performed by, our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor deficiencies in the administration of our company, including by consulting with the internal auditor and independent accountants, to review, classify and approve related party transactions and extraordinary transactions, to review the internal auditors audit plan and to establish and monitor whistleblower procedures.
Compensation Committee.
Under the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the compensation committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. Similar to the rules that apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its relatives. Individuals who are not permitted to be compensation committee members may not participate in the committee’s meetings other than to present a particular issue;
provided
,
however
, that an employee that is not a controlling shareholder or relative may participate in the committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
The compensation committee’s duties include recommending to the board of directors a compensation policy for executives and monitor its implementation, approve compensation terms of executive officers, directors and employees affiliated with controlling shareholders, make recommendations to the board of directors regarding the issuance of equity incentive awards under our equity incentive plan and exempt certain compensation arrangements from the requirement to obtain shareholder approval under the Companies Law. The compensation committee meets at least twice a year, with further meetings to occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee or its chairperson.
Our compensation committee consists of Yaron Sheinman and our two outside directors, David Assia and Vered Levy-Ron, each of which is an independent director under the respective requirements of the SEC and NASDAQ and complies with the Companies Law criteria for compensation committee members. Mr. Assia serves as the Chairman of the compensation committee.
Investment Committee.
Our investment committee consists of three directors, Harel Beit-On, Yigal Berman and David Assia, our outside director. The investment committee’s duties include reviewing and making recommendations to the board of directors regarding the company’s investment policies, hedging policy and other banking related matters. The investment committee meets at least twice a year, with further meetings to occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee.
Chairman of the Board
Under the Companies Law, the general manager of a company or his or her relatives shall not serve as the chairman of the board of directors, and the chairman of the board of directors or his or her relatives may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Companies Law. In any event, the shareholder vote cannot authorize such appointment for a period longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote. The chairman of the board of directors shall not fill any other position at the company or in any entity controlled by the company, other than the chairman of the board of directors of a controlled entity, and the company shall not designate the chairman with duties that are, directly or indirectly, subordinate to the general manager.
Internal Auditor
Under the Companies Law, the board of directors also must appoint an internal auditor nominated following the recommendation of the audit committee. The primary role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of ours but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our independent accounting firm or its representative. Our internal auditor is Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu.
As of December 31, 2013, we had 319 employees, of whom 220 were in operations, 58 were in sales and marketing, and 41 were in general and administration, as of December 31, 2012, we had 258 employees, of whom 186 were in operations, 32 were in sales and marketing, and 40 were in general and administration; and as of December 31, 2011, we had 252 employees, of whom 185 were in operations, 28 were in sales and marketing, and 39 were in general and administration. Competition for personnel in our industry is intense. We have never experienced any work stoppage and we believe that our employee relations are good. The number of employees above includes 13 employees in the MSS business as of December 31, 2013, of whom 7 were in operations and 6 in sales and marketing, 9 employees in the MSS business as of December 31, 2012, of whom 4 were in operations and 5 in sales and marketing; and 9 employees in the MSS business as of December 31, 2011, of whom 5 were in operations and 4 in sales and marketing.
As of December 31, 2013, 243 of our employees were located in Israel, 46 of our employees were located in the United Kingdom and 31 employees were located in the United States; as of December 31, 2012, 236 of our employees were located in Israel and 22 employees were located in the United States; and as of December 31, 2011, 238 of our employees were located in Israel and 14 employees were located in the United States.
Certain provisions of Israeli law and of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli federation of employers’ organizations) apply to our Israeli employees by order of the Israeli Ministry of Industry, Trade and Labor. These provisions principally concern the maximum length of the work day and the work week for employees. Furthermore, under these provisions, the wages of most of our employees are automatically adjusted in accordance with cost of living adjustments, as determined on a nationwide basis and under agreements with the Histadrut based on changes in the Israeli consumer price index. The amounts and frequency of such adjustments are modified from time to time. In addition, Israeli law determines minimum wages, procedures for dismissing employees, minimum severance pay that we must pay and other conditions of employment.
Israeli law generally requires the payment by Israeli employers of severance pay upon the retirement or death of an employee, or upon termination of employment by the employer or, in certain circumstances, by the employee. We currently fund our ongoing severance obligations by making monthly payments for severance insurance policies. According to Section 14 to the Israeli Severance Pay Law (“Section 14”), the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing 2009, we entered into agreements with a majority of our employees in order to implement Section 14. Therefore, beginning on that date, the payment of monthly deposits by the company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore we incur no additional liability since that date with respect to such employees. In addition, according to the National Insurance Law, Israeli employees and employers are required to pay specified amounts to the National Insurance Institute, which is similar to the United States Social Security Administration. These contributions entitle the employees to benefits during periods of unemployment, work injury, maternity leave, disability, and military reserve duty, and in the event of the bankruptcy or winding-up of their employer. These amounts also include payments for national health insurance payable by employees. The payments to the National Insurance Institute are determined progressively in accordance with wages. They currently range from approximately 7% to 15% of wages up to certain wage levels, of which the employee contributes approximately 66% and the employer contributes approximately 34%. All of our full-time employees in Israel are covered by general and/or individual life and pension insurance policies providing customary benefits to employees, including retirement and severance benefits. Pursuant to an order of the Israeli Minister of Industry, Trade and Labor, provisions relating to pension arrangements in the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli federation of employers’ organizations) apply to all employees in Israel, including our employees. According to these provisions, all employees employed for at least six months are entitled to pension benefits to be funded by preset monthly contributions of the employee and the employer.
Share Ownership by Directors and Executive Officers
For information regarding ownership of our ordinary shares by our directors and executive officers, see Item 7.A. “Major Shareholders and Related Party Transactions – Major shareholders.”
2006 Israel Equity Incentive Plan
We have adopted an equity incentive plan under Section 102 of the Israeli Income Tax Ordinance, or Section 102, which provides certain tax benefits in connection with share-based compensation to employees, officers and directors. This plan, our 2006 Israel Equity Incentive Plan, as amended in June 2011, June 2012 and August 2013, was approved by the Israeli Tax Authority.
Under our equity incentive plan, we may grant our directors, officers and employees restricted shares, restricted share units and options to purchase our ordinary shares under Section 102. We may also grant other persons awards under our equity incentive plan. However, such other persons (controlling shareholders, services providers, etc.) will not enjoy the tax benefits provided by Section 102. As of December 31, 2013, the total number of ordinary shares that are available for grant under our plan is 25,892, which is reduced by two shares for each restricted share unit or restricted share that we grant under the plan and by one share for each option that we grant under the plan.
The terms of the granted options provide that the options may only be exercised in the method of cashless exercise, and the exercise price of the options shall be adjusted for any cash dividends distributed to shareholders of record after the date of grant and prior to the date of vesting of the applicable option tranche.
During the year ended December 31, 2013, we granted our employees and directors options to purchase 395,000 ordinary shares at exercise prices ranging from $6.85 to $8.03 per ordinary share. As of December 31, 2013, we had outstanding options under the plan to purchase 1,368,000 ordinary shares. As of December 31, 2013, no other awards were outstanding under the plan.
The Israeli Tax Authority approved our equity incentive plan under the capital gains tax track of Section 102. Based on Israeli law currently in effect and the election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers and directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares’ market value at the date of grant, the 25% capital gains tax rate will apply only with respect to capital gains in excess of the underlying shares’ market value at the date of grant and the remaining capital gains will be taxed at the grantee’s regular tax rate. We may not recognize expenses pertaining to the employees’ restricted shares, restricted share units and options for tax purposes except in the events described above under which the gain is taxed at the grantee’s regular tax rate.
If we terminate the employment of an employee for cause, all of his or her vested and unvested options expire immediately and all unvested restricted shares and unvested restricted share units expire immediately. If we terminate the employment of an employee for any other reason, the employee may generally exercise his or her vested options within three months of the date of termination and shall be entitled to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date his or her employment terminates. An employee whose employment is terminated due to disability or death may generally exercise his or her options (or his or her heirs, in the event of death) within one year of the date the employment is terminated. Any expired or unvested options, restricted shares or restricted share units return to the plan for reissuance.
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ITEM 7.
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MAJOR SHAREHOL
DER
S AND RELATED PARTY TRANSACTIONS
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The following table shows information as of February 28, 2014 for (i) each person who, to the best of our knowledge, beneficially owns more than 5% of our outstanding ordinary shares, (ii) each of our executive officers and directors and (iii) our executive officers and directors as a group. The information in the table below is based on 17,346,561 ordinary shares outstanding as of February 28, 2014. In computing the number of ordinary shares beneficially owned by a person and the percentage ownership of that person, we deemed as outstanding ordinary shares subject to options or restricted share units held by that person that are currently exercisable or exercisable within 60 days of February 28, 2014. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as otherwise set forth below, the street address of the beneficial owners is c/o RRsat Global Communications Network Ltd., RRsat Building, Hanegev Street, PO Box 1056, Airport City 7019900, Israel. Each of our outstanding ordinary shares has identical rights in all respects.
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Number of
Ordinary Shares
Beneficially Owned (1)
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Percentage
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Executive Officers and Directors
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Dr. Shlomo Shamir
|
|
|
-
|
|
|
|
-
|
|
|
Avi Cohen
|
|
|
-
|
|
|
|
-
|
|
|
Shmuel Koren
|
|
|
-
|
|
|
|
-
|
|
|
Lior Rival
|
|
|
27,000
|
|
|
|
*
|
|
|
Maya Rival
|
|
|
12,000
|
|
|
|
*
|
|
|
Ohad Har-Lev
|
|
|
-
|
|
|
|
-
|
|
|
Ziv Mor
|
|
|
-
|
|
|
|
-
|
|
|
Tzurit Golan
|
|
|
-
|
|
|
|
-
|
|
|
Elad Manishviz
|
|
|
-
|
|
|
|
-
|
|
|
Nissim Barda
|
|
|
-
|
|
|
|
-
|
|
|
Simon Kay
|
|
|
-
|
|
|
|
-
|
|
|
Nicholas Pannaman
|
|
|
-
|
|
|
|
-
|
|
|
David Assia (2)
|
|
|
14,000
|
|
|
|
*
|
|
|
Harel Beit-On
|
|
|
-
|
|
|
|
-
|
|
|
Yigal Berman
|
|
|
-
|
|
|
|
-
|
|
|
Vered Levy-Ron (2)
|
|
|
5,000
|
|
|
|
*
|
|
|
Alexander Milner
|
|
|
4,300
|
|
|
|
*
|
|
|
Ron Oren
|
|
|
-
|
|
|
|
-
|
|
|
David Rivel (3)
|
|
|
821,381
|
|
|
|
4.74
|
%
|
|
Yaron Sheinman
|
|
|
-
|
|
|
|
-
|
|
|
Ayal Shiran
|
|
|
-
|
|
|
|
-
|
|
|
All directors and officers as a group (22
persons)(2)(3)
|
|
|
883,681
|
|
|
|
5.09
|
%
|
|
Five Percent Shareholders
|
|
|
|
|
|
|
|
|
|
Del-Ta Engineering Equipment Ltd. (4)
|
|
|
5,940,367
|
|
|
|
34.25
|
%
|
|
Viola A.V. RRsat, Limited Partnership (5)
|
|
|
3,816,243
|
|
|
|
22.00
|
%
|
|
Kardan Communications Ltd. (6)
|
|
|
1,631,616
|
|
|
|
9.41
|
%
|
|
Harel Insurance Investments & Financial
Services Ltd. (7)
|
|
|
1,144,319
|
|
|
|
6.60
|
%
|
___________
* Less than 1%.
(1) Excludes outstanding options that do not vest within 60 days of February 28, 2014.
(2) Includes vested options to purchase our ordinary shares and outstanding options that vest within 60 days of February 28, 2014.
(3) Based on Schedule 13G/A filed with the SEC on May 20, 2013 and on other information provided to us.
(4) Based on Schedule 13D/A filed with the SEC on December 5, 2013 and on other information provided to us. The address of Del-Ta Engineering Equipment Ltd. is Inter-Gamma house industrial P.O.B 3805 Kfar Neter 40900. Del-Ta Engineering Equipment Ltd. is a wholly-owned subsidiary of Rapac Communication & Infrastructure Ltd. Based on information provided to us by Del-Ta Engineering Equipment Ltd., as of February 28, 2014, Inter-Gamma Investment Company Ltd., a company publicly traded on the Tel Aviv Stock Exchange, beneficially owned shares of Rapac Communication & Infrastructure Ltd. representing approximately 56.38% of the voting power and share capital of Rapac Communication & Infrastructure Ltd. Based on information provided to us by Del-Ta Engineering Equipment Ltd., as of February 28, 2014, Mr. Tanhum Oren beneficially owned shares of Inter-Gamma Investment Company Ltd. representing approximately 89.57% of the voting power and share capital of Inter-Gamma Investment Company Ltd. Del-Ta Engineering Equipment Ltd. directly holds 5,439,300 Ordinary Shares. InterGamma International Trade Founded by InterGamma Investments Co., a wholly owned subsidiary of Del-Ta Engineering Equipment Ltd., directly holds 501,067 Ordinary Shares. Mr. Oren disclaims beneficial ownership of the Ordinary Shares beneficially owned by Del-Ta Engineering Equipment Ltd. except to the extent of his interest in Inter-Gamma Investment Company Ltd.
(5) Based on Amendment No. 2 to Schedule 13D filed with the SEC on December 9, 2013 and on other information provided to us. The address of Viola A.V. RRsat, Limited Partnership is 12 Abba Eban Avenue, Herzliya Pituach 4672530, Israel. Viola P.E. GP Ltd. serves as the general partner of Viola A.V. RRsat, Limited Partnership and possesses voting and investment authority with respect to the Ordinary Shares held thereby. Mr. Harel Beit-On is the sole director of Viola P.E. GP Ltd. The holdings of equity interests of Viola P.E. GP Ltd. by Messrs. Shlomo Dovrat, Harel Beit-On and Avi Zeevi constitute, directly or indirectly, a majority of the issued and outstanding share capital of Viola P.E. GP Ltd., in the aggregate, and provide them with ultimate voting and investment authority with respect to the Ordinary Shares directly held by Viola A.V. RRsat, Limited Partnership. In addition, Viola A.V. RRsat, Limited Partnership has voting rights over an additional (i) 1,631,616 ordinary shares held by Kardan Communications Ltd. pursuant to that certain Shareholders Agreement, dated April 4, 2013, by and between Viola A.V. RRsat, Limited Partnership and Kardan Communications Ltd.; and (ii) 821,381 ordinary shares held by Mr. David Rivel pursuant to that certain Shareholders Agreement, dated April 4, 2013, by and between Viola A.V. RRsat, Limited Partnership and Mr. David Rivel. In addition, we have been notified by Viola that Viola agreed to purchase, and Kardan Communications agreed to sell, an additional 1,142,131 ordinary shares of RRsat held by Kardan Communications. The closing of such transaction is scheduled to occur at the end of March 2014 subject to any conditions agreed between such parties.
(6) Based on Schedule 13G/A filed with the SEC on February 3, 2014 and on other information provided to us. The address of Kardan Communications Ltd. is 154 Menachem Begin Road Tel Aviv 64921, Israel. Kardan Israel Ltd., a company publicly traded on the Tel Aviv Stock Exchange, beneficially owns all the shares of Kardan Communications Ltd. As of February 28, 2014, Kardan Yazamut (2011) Ltd., a company publicly traded on the Tel Aviv Stock Exchange, beneficially owned shares of Kardan Israel Ltd. representing approximately 73.67% of the voting power of Kardan Israel Ltd. In addition, we have been notified by Viola that Viola agreed to purchase, and Kardan Communications agreed to sell, an additional 1,142,131 ordinary shares of RRsat held by Kardan Communications. The closing of such transaction is scheduled to occur at the end of March 2014 subject to any conditions agreed between such parties.
(7) Based on Schedule 13G filed with the SEC on December 9, 2013. The address of Harel Insurance Investments & Financial Services Ltd. is Harel House, 3 Aba Hillel Street, Ramat Gan 52118, Israel. In accordance with the Schedule 13G, (i) 1,114,019 ordinary shares are held by Harel for members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or index-linked securities and/or insurance policies, which are managed by Harel’s subsidiaries, each of which subsidiaries operates under independent management and makes independent voting and investments decisions, and (ii) 30,300 ordinary shares are beneficially held for its own account.
Based on Schedule 13D filed with the SEC by Viola A.V. RRsat, Limited Partnership (“Viola”), Schedules 13Gs filed with the SEC by Kardan Communications and David Rivel and on other information provided to us, during 2013 Viola A.V. RRsat, Limited Partnership acquired (i) 2,601,984 ordinary shares from Kardan Communications and (ii) 1,214,259 ordinary shares from David Rivel.
Based on Schedule 13D filed with the SEC by Del-Ta Engineering Equipment Ltd. and on other information provided to us, during 2013, InterGamma International Trade Founded by InterGamma Investments Co. sold 170,000 ordinary shares and Del-Ta Engineering Equipment Ltd. sold 700,000 ordinary shares.
We were notified by Kardan Communications Ltd. that it has pledged all its ordinary shares of the company in favor of a bank to secure a bank loan.
We were notified by Del-Ta Engineering Equipment Ltd. that it has pledged 2,600,000 of its ordinary shares of the company in favor of Bank Igud of Israel Ltd. to secure outstanding loans of its parent company, Rapac Communication & Infrastructure Ltd. (“Rapac”), and it pledged 3,324,036 of its ordinary shares of the company in favor of Strauss Lazer Trust Company (1992) Ltd. for the benefit of the holders of outstanding bonds of Rapac to secure Rapac’s obligations pursuant to the bonds.
According to our transfer agent, as of February 28, 2014 we had two holders of record of our ordinary shares in the United States, including Cede & Co., the nominee of The Depository Trust Company, holding 7,727,161 ordinary shares representing approximately 44.55% of the outstanding shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees.
|
B. Related party transactions
|
Shareholders Agreements
Del-Ta-Viola Shareholders Agreement
. On April 17, 2013, Del-Ta Engineering and Viola entered into a shareholders agreement relating to their holdings in RRsat. The agreement was entered into in connection with the purchase by Viola of ordinary shares from Kardan Communications and David Rivel, as described above. The key terms of the agreement are as follows:
RRsat Shareholders Meeting
– Each of the parties agreed to cause RRsat to call a general meeting of shareholders as soon as possible after the consummation of the sale of ordinary shares by Kardan Communications to Viola, for the purpose of:
|
|
1.
|
amending RRsat’s Articles of Association (i) to increase the size of RRsat’s board of directors and provide that members of RRsat’s board of directors shall be elected, replaced and removed by a simple majority vote and (ii) to require a threshold quorum of 70% of RRsat’s directors and a supermajority of more than 70% of the voting directors for approving specified matters; and
|
|
|
2.
|
replacing all the serving members of RRsat’s board of directors in accordance with the nominee designation process agreed upon between Del-Ta Engineering and Viola, as described below (other than the two outside directors, and a third unaffiliated director).
|
At our 2013 annual general meeting of shareholders, our shareholders approved the amendment of our Articles of Association as set forth above and elected directors as described above. See Item 10.B. “Additional information – Memorandum and articles of association”.
RRsat Board Designation
– The parties agreed that each shareholder shall designate four directors to RRsat’s board of directors and one outside director, and jointly agree on the identity of a third unaffiliated director, and vote their ordinary shares (including ordinary shares for which each party holds voting power) in favor of such designated nominees. The right of a shareholder to designate directors shall be reduced from four directors to two directors if such shareholder holds voting power for less than 3,469,312 ordinary shares and more than 1,734,656 ordinary shares.
Appointment of Chairman
– The parties agreed that the Chairman of RRsat’s board of directors will be elected out of the designated directors of the party holding a greater portion of RRsat’s voting power, subject to the prior written consent of the other party. Currently, Del-Ta Engineering holds the largest voting power in RRsat, and therefore has the right to designate the Chairman of RRsat’s board of directors. Viola shall obtain such appointment right if its voting power of RRsat exceeds Del-Ta Engineering’s voting power by at least 4%.
Dividend Policy
– The parties agreed that, subject to discretion of RRsat’s board of directors from time to time and to the extent permitted by applicable law, RRsat shall distribute to its shareholders, after the end of each calendar quarter 50% of the net income recorded in RRsat’s quarterly financial statements for such preceding quarter.
Allocation of Sales under Rule 144 and Registration Rights
– The parties agreed on a mechanism for allocating the amount of ordinary shares permitted to be sold under the safe harbor of Rule 144 under the Securities Act of 1933, as amended, and that the outstanding resale registration statement on Form F-3 shall be supplemented to include Viola as a selling shareholder with respect to all ordinary shares purchased from Mr. David Rivel and Kardan Communications, including in any new registration statement that replaces or succeeds the existing registration statement on Form F-3.
Participation in Purchases
– Each party shall have the right to participate in 50% of any future purchase of ordinary shares by the other party, other than purchases (i) in connection with the purchase by Viola from Kardan Communications and David Rivel (including any option rights thereunder or pursuant to exercise of its rights under the shareholders agreements with David Rivel and Kardan Communications), (ii) from specified permitted transferees or (iii) limited purchases of ordinary shares on the market up to 4% of RRsat’s issued and outstanding share capital in the aggregate within any period of 12 months.
Term and Termination
– Each party may terminate the agreement when the other party holds in the aggregate less than 10% of the voting power of RRsat.
David Rivel-Viola Shareholders Agreement
. On April 4, 2013, Viola and David Rivel entered into a Shareholders Agreement relating to their holdings in RRsat. The shareholders agreement was entered into in connection with the purchase of ordinary shares by Viola from David Rivel. The key terms of the shareholders agreement are as follows:
|
|
·
|
Voting Undertaking
. David Rivel agreed to vote his ordinary shares as directed by Viola for as long as Viola and its affiliates beneficially own at least 5% of RRsat’s issued and outstanding share capital, and Viola agreed to vote its ordinary shares in favor of the appointment of David Rivel as a director of RRsat so long as it can appoint three directors to the board of RRsat and David Rivel continues to maintain his shareholding in RRsat. In addition, David Rivel delivered to Viola an irrevocable proxy to vote such shares.
|
|
|
·
|
Standstill and Right of First Offer
. David Rivel agreed to a standstill of his remaining ordinary shares until August 6, 2015 and to provide Viola with a right of first offer with respect to the shares.
|
|
|
·
|
Allocation of Sales under Rule 144 and Registration Rights
. The parties agreed on a mechanism for allocating the amount of ordinary shares permitted to be sold under the safe harbor of Rule 144 under the Securities Act of 1933, as amended.
|
|
|
·
|
Tag-Along
. Each shareholder was granted a right to tag along to any proposed sale of ordinary shares or other securities of RRsat by the other party. The tag along right does not apply to sales on a stock exchange under Rule 144.
|
|
|
·
|
Term and Termination
. Each party may terminate the agreement by written notice on any date on which Viola holds in the aggregate less than 10% of RRsat’s issued and outstanding share capital. In addition, Viola may terminate the agreement by written notice commencing on the first date on which David Rivel holds in the aggregate less than 2.5% of RRsat’s issued and outstanding share capital. The agreement shall also automatically terminate upon the consummation of a liquidation event in RRsat.
|
Kardan Communications-Viola Shareholders Agreement
.
On April 4, 2013, Viola and Kardan Communications entered into a Shareholders Agreement relating to their holdings in RRsat. The shareholders agreement was entered into in connection with the purchase of ordinary shares by Viola from Kardan Communications and became effective on September 4, 2013. The key terms of the shareholders agreement are as follows:
|
|
·
|
Voting Undertaking
. Kardan Communications agreed to vote its ordinary shares as directed by Viola except for specified related party transactions and assign its right to appoint an observer for so long as such right continues to exist, and Viola agreed to vote its ordinary shares in favor of the appointment of a designee of Kardan Communications as a director of RRsat so long as Viola continues to own at least 7% of RRsat’s shares. In addition, Kardan Communications delivered to Viola an irrevocable proxy to vote such shares.
|
|
|
·
|
Standstill and Right of First Offer
. Kardan Communications agreed to a standstill of its remaining ordinary shares other than between March 31, 2014 and March 10, 2016 and each party agreed to provide the other with a right of first offer with respect to the shares.
|
|
|
·
|
Allocation of Sales under Rule 144 and Registration Rights
. The parties agreed on a mechanism for allocating the amount of ordinary shares permitted to be sold under the safe harbor of Rule 144 under the Securities Act of 1933, as amended.
|
|
|
·
|
Tag-Along
. Each shareholder was granted a right to tag along to any proposed sale of ordinary shares or other securities of RRsat by the other party. The tag along right does not apply to sales on a stock exchange under Rule 144.
|
|
|
·
|
Bring-Along
. Following March 10, 2016, Viola can cause Kardan Communications to sell its shares in the event Viola accepts an offer to sell all of all its shares at least $8 plus annual interest of 5% to the date of sale.
|
Del-Ta-Rivel Shareholders Agreement
. Del-Ta Engineering and David Rivel entered into a shareholders agreement on October 5, 2006, as amended on October 26, 2006 and August 14, 2007. Pursuant to the agreement, Mr. Rivel granted Del-Ta Engineering an irrevocable proxy to vote all shares beneficially owned by him at shareholders meetings on any matter relating to the election of directors, including their removal, substitution or replacement. On May 7, 2013, the agreement terminated upon the consummation of the sale of ordinary shares from David Rivel to Viola.
Del-Ta-Kardan-Rivel Shareholders Agreement
. Del-Ta Engineering, Kardan Communications and David Rivel entered into a shareholders agreement on October 5, 2006. Pursuant to the agreement, each shareholder was granted a right to tag along to any proposed sale of ordinary shares or other securities of RRsat by Del-Ta Engineering or Kardan Communications. The tag along right does not apply to sales on a stock exchange and sales to specified permitted transferees. Each shareholder has the right to tag along based on its pro rata share of RRsat’s ordinary shares at the time of the proposed sale. The agreement had an initial term of three years that commenced in November 2006. At the end of each year, the agreement automatically extends for an additional one year period beyond the then current three year term unless one of the parties unless notifies the other of its interest in not extending. To RRsat’s knowledge, to date, no shareholders notified the other shareholders of their interest in not extending the agreement. Furthermore, the agreement will terminate with respect to any shareholder on the date such shareholder’s holdings represent less than 10% of RRsat’s outstanding share capital. As of December 31, 2013, each of David Rivel and Kardan Communications holdings represent less than 10% of RRsat’s outstanding share capital.
Management Services Agreement.
In October 2006, we entered into a management service agreement with Del-Ta Engineering and Kardan Communications effective as of January 2007. This agreement sets forth the management and consulting services that Del-Ta Engineering and Kardan Communications are obligated to provide us and the annual management fees payable thereunder as follows: (i) $235,000 to Del-Ta Engineering and (ii) $163,000 to Kardan Communications. In June 2011, the management services agreement was amended to provide that the term of the agreement shall extend until June 2014 unless terminated earlier by us or, jointly, by Del-Ta Engineering and Kardan Communications. The payments pursuant to this agreement totaled $398,000 in each of 2011, 2012 and 2013.
David Rivel/Datacom – Services Agreement, Consulting Agreement and Finder’s Agreement
Services Agreement
. In March 2006, we entered into a service agreement (which replaced an agreement of March 2001) with Datacom Communications L.R. Ltd., or Datacom, a company controlled by David Rivel, which was amended in September 2006 and December 2011, pursuant to which Datacom agreed to provide us with the services of David Rivel as our Chief Executive Officer. The term of the agreement extended through June 30, 2012.
We also agreed to pay Mr. Rivel, following the termination of the agreement on June 30, 2012, $650,000 in consideration for a non-competition undertaking on his part, payable in installments over a period of 24 months.
Consulting Agreement and Finder’s Agreement
with Datacom
. Pursuant to a consulting agreement we entered with Datacom in December 2011, as amended in September 2012, Datacom provides consulting services to RRsat, as requested and directed from time to time by the Chairman of the board of directors and Chief Executive Officer. The agreement extends for a period of two years from July 1, 2012 through June 30, 2014. In consideration for the services, we pay Datacom an annual fee of $60,000 plus VAT, payable in four equal quarterly installments per year, and reimburse Datacom for certain car expenses incurred by Mr. Rivel.
Pursuant to a finder’s agreement we entered with Datacom in September 2012, as amended in January 2013, Datacom is entitled to a success fee relating to new customers entering into contracts during the term of the agreement which entitles the company to receive revenue in excess of $120,000 on an annual basis. Datacom is not entitled in any event to any fee or other compensation relating to maintaining relationships with then current customers and/or new agreements with then current customers. The success fee will equal 5% of the actual consideration received by the company during the initial term of the relevant customer agreement. The agreement extends for a period of two years from July 1, 2012 through June 30, 2014.
Lior Rival and Maya Rival.
We also have employment agreements with Lior Rival, our Chief Commercial Officer, who is the son of David Rivel, and with Maya Rival, our Vice-President Procurement and Special Projects, who is the daughter of David Rivel. These agreements can be terminated at will with a 90 days’ prior written notice, except as required by Israeli law.
Mr. Rival’s current monthly gross salary is NIS 50,000 and he is entitled to a non-refundable monthly advance bonus payment of NIS 10,000 to be offset against his annual bonus. Through 2013, Mr. Rival is entitled to an annual bonus subject to the company reaching in the applicable year not less than 75% of budgeted annual gross profit. In such case, the annual bonus shall be calculated as follows:
|
|
·
|
0.33% of the company’s annual gross profit less sales and marketing expenses.
|
|
|
·
|
For any increase in the company’s annual gross profit less sales and marketing expenses compared to the prior year:
|
|
|
o
|
2.0% for the portion of any increase up to 10%.
|
|
|
o
|
2.5% of the portion of any increase that is more than 10% and up to 15%.
|
|
|
o
|
3.5% of the portion of any increase that is more than 15% and up to 20%.
|
|
|
o
|
4.5% of the portion of any increase that is more than 20%.
|
|
|
·
|
Increases to annual gross margin resulting from M&A activity which do not exceed $5 million shall be taken into account in the calculation of the bonus.
|
|
|
·
|
In the event of any increase to annual gross margin that result from M&A activity that exceed $5 million, the parties will reevaluate whether any changes are required to the bonus formula.
|
Ms. Rival’s current monthly gross salary is NIS 36,000 and she is entitled to a non-refundable monthly advance bonus payment of NIS 5,000 to be offset against her annual bonus. Ms. Rival’s target bonus for 2013 was three months’ salary. Pursuant to the company’s bonus plan, the annual bonus shall be calculated based on our financial performance and the participant’s personal performance, and in any event shall not exceed 150% of the participant’s annual target bonus.
The compensation paid to Lior Rival and Maya Rival is included in the aggregate direct compensation amount reported under Item 6 “Directors, Senior Management and Employees – Compensation.”
Registration Rights Agreement.
Our principal shareholders had the right, subject to various conditions and limitations, to include their shares in registration statements relating to our securities and we agreed to continue to use our best efforts to assist the selling shareholders in disposing of such shares. Pursuant to this registration right agreement, in April 2012 we registered with the Securities and Exchange Commission such shares with a Registration Statement on Form F-3 (No. 333-180580). The registration statement was declared effective by the Securities and Exchange Commission on April 10, 2012.
Chairman Services Agreement
In June 2011 we entered into a Chairman Services Agreement with a company controlled by Dr. Shlomo Shamir, the Chairman of our board of directors. Pursuant to the agreement, in consideration for the services provided by Dr. Shamir to us, his company is entitled to a monthly fee of $8,000 and an annual bonus. The payment of the annual bonus is subject to compliance with criteria based on our annual operating results. Pursuant to its terms, the Chairman Services Agreement is currently effective until June 30, 2014, and, subject to Dr. Shamir continuing to serve as the Chairman of our board of directors and neither party terminating the agreement or electing not to extend it in accordance with its terms, the Chairman Service Agreement will be automatically renewed for additional one year periods. In addition, in September 2012, we granted Dr. Shamir options to purchase 200,000 Ordinary Shares at an exercise price of $5.28, vesting over a period of 4 years.
Indemnification and Insurance
We have entered into an insurance, indemnification and exculpation agreement with each of our directors and executive officers and purchased directors’ and officers’ liability insurance. The insurance, indemnification and exculpation agreements and our articles of association require us to indemnify our directors and officers to the full extent permitted by law. See Item 10.B. “Additional Information – Memorandum and articles of association – Exculpation, Indemnification and Insurance of Directors and Officers.”
|
C. Interests of experts and counsel
|
Not applicable.
|
A. Consolidated statements and other financial information
|
You can find our consolidated financial statements in Item 18 “Financial Statements.”
Legal proceedings
We are, from time to time, subject to various asserted or unasserted legal proceedings and claims. Any such claims, regardless of merit, could be time-consuming and expensive to defend and could divert management’s attention and resources from our operations. While management believes we have adequate insurance coverage and we accrue loss contingencies for all known matters that are probable and can be reasonably estimated, we cannot assure that the outcome of all current or future litigation will not have a material adverse effect on us and our results of operations.
On December 11, 2012, Marbella Equities, LLC filed a demand for arbitration against Sm2 Sports & Media Solutions, LLC and against our subsidiary, RRsat America - Global Communications Network Inc. Marbella was seeking $300,000 due to an alleged breach of a financial services agreement between Marbella and Sm2. On December 21, 2012, RRsat America filed a motion to dismiss the demand for arbitration filed against it because RRsat America is not party to such financial services agreement between Marbella and Sm2, and, further, RRsat America merely acquired certain assets of Sm2 but did not acquire any ownership interest in Sm2. On May 9, 2013 Marbella, Sm2 and RRsat America signed a Settlement Agreement according to which Sm2 agreed to pay Marbella $36,000. Following the payment by Sm2, RRsat America and Sm2 were released and forever discharged from all claims relating to the above matter.
On February 6, 2014, we filed in the District Court of Tel-Aviv-Jaffa, Israel a contractual, torts, unjust enrichment and pecuniary claim against FTV BVI (“FTV”) and Michel Adam seeking damages in the amount of NIS 15,612,064. The amount claimed is based on a breach of an agreement between FTV BVI and us. The District Court has also ordered attachments over certain rights and assets of FT, and approved an application to serve FTV and Michelle Adam with the court’s documents and decisions. The defendants have not yet submitted a statement of defense.
Dividend policy
We distributed to our shareholders cash dividends of $4.2 million, $15.8 million and $5.0 million in 2011, 2012 and 2013, respectively.
Our board of directors adopted in November 2013 a new dividend policy in dividend policy pursuant to which, subject to applicable law and the discretion of the board of directors from time to time, we shall distribute a dividend to the shareholders at the end of each calendar quarter equal to 50% of the net income recorded in our quarterly financial statements for the quarter. Our board of directors will consider, among other factors, our expected results of operations, financial condition, contractual restrictions, planned capital expenditures, financing needs and other factors that our board of directors deems relevant in order to reach its conclusion that a distribution of dividends will not prevent us from satisfying our existing and foreseeable obligations as they become due. Dividend declaration is not guaranteed and is subject to our board of directors’ sole discretion, which may elect to pay or not pay dividends in the future or change our dividend policy.
The distribution of dividends is also limited by Israeli law, which permits the distribution of dividends only out of cumulative retained earnings or out of retained earnings over the prior two years, provided that there is no reasonable concern that the payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Furthermore, the distribution of dividends may be subject to Israeli withholding taxes. See Item 10.B. “Additional Information – Memorandum and articles of association – Dividends” and Item 10.E. “Additional Information – Taxation – Taxation in Israel,” respectively.
Except as otherwise disclosed in this Annual Report, there has been no significant change in our financial position since December 31, 2013.
|
A. Offer and listing details
|
Our ordinary shares began trading publicly on the NASDAQ Global Market on November 1, 2006 under the symbol “RRST,” and commenced trading on the NASDAQ Global Select Market on January 1, 2008. Prior to November 1, 2006, there was no public market for our ordinary shares.
The following table sets forth, for the periods indicated, the high and low sale prices of our ordinary shares as reported by the NASDAQ Global Select Market:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
15.68
|
|
|
$
|
9.50
|
|
|
2010
|
|
$
|
12.50
|
|
|
$
|
6.70
|
|
|
2011
|
|
$
|
8.03
|
|
|
$
|
3.77
|
|
|
2012
|
|
$
|
6.96
|
|
|
$
|
3.50
|
|
|
2013
|
|
$
|
9.35
|
|
|
$
|
6.45
|
|
2012
|
First quarter
|
|
$
|
4.60
|
|
|
$
|
3.50
|
|
|
Second quarter
|
|
$
|
6.00
|
|
|
$
|
4.05
|
|
|
Third quarter
|
|
$
|
5.89
|
|
|
$
|
4.51
|
|
|
Fourth quarter
|
|
$
|
6.96
|
|
|
$
|
5.31
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
8.50
|
|
|
$
|
6.45
|
|
|
Second quarter
|
|
$
|
9.35
|
|
|
$
|
7.25
|
|
|
Third quarter
|
|
$
|
8.62
|
|
|
$
|
6.97
|
|
|
Fourth quarter
|
|
$
|
8.53
|
|
|
$
|
7.41
|
|
|
Most recent six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2013
|
|
$
|
8.62
|
|
|
$
|
6.97
|
|
|
October 2013
|
|
$
|
7.93
|
|
|
$
|
7.49
|
|
|
November 2013
|
|
$
|
7.95
|
|
|
$
|
7.50
|
|
|
December 2013
|
|
$
|
8.53
|
|
|
$
|
7.41
|
|
|
January 2014
|
|
$
|
9.32
|
|
|
$
|
8.10
|
|
|
February 2014
|
|
$
|
9.39
|
|
|
$
|
8.31
|
|
|
March 2014 (through March 5, 2014)
|
|
$
|
9.39
|
|
|
$
|
7.41
|
|
On March 5, 2014, the last reported sale price of our ordinary shares on the NASDAQ Global Select Market was $9.10 per share. According to our transfer agent, as of February 28, 2014 there were two holders of record of our ordinary shares.
Not applicable.
Our ordinary shares began trading publicly on the NASDAQ Global Market on November 1, 2006 under the symbol “RRST,” and commenced trading on the NASDAQ Global Select Market on January 1, 2008.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL I
NF
ORMATION
Not applicable.
|
B. Memorandum and articles of association
|
Incorporation
We were incorporated under the laws of the State of Israel in August 1981. Our registration number with the Israeli Registrar of Companies is 51-089629-3. Our purpose under our memorandum of association is to engage in any business permitted by law.
Ordinary Shares
Our authorized share capital consists of 27,000,000 ordinary shares, par value NIS 0.01 per share. As of February 28, 2014, we had 17,346,561 ordinary shares outstanding.
The holders of our ordinary shares are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Holders of our ordinary shares are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, after payment of all of our debts and liabilities, the holders of our ordinary shares are entitled to share ratably in all assets. These rights may be affected by the grant of preferential liquidation or dividend rights to the holders of a class of shares that may be authorized in the future. Our ordinary shares have no preemptive or conversion rights or other subscription rights.
The Companies Law and our articles of association provide that the rights of a particular class of shares may not be modified without the vote of a majority of the affected class, unless otherwise provided for in the terms of the issuance of such class.
Shareholder Meetings
Under the Companies Law, an annual meeting of our shareholders must be held once every calendar year and not more than 15 months from the date of the previous annual shareholders meeting. In addition, our board of directors may, in its discretion, convene additional meetings as special shareholders meetings. The board of directors also is required to convene a special shareholders meeting upon the demand of any of the following: two directors; one quarter of the directors in office; the holder or holders of at least 5% of our share capital, provided they hold at least 1% of the voting rights in our company; or the holder or holders of at least 5% of the voting rights in our company. Our articles of association provide that each shareholder of record is entitled to receive prior notice of any shareholders meeting in accordance with the requirements of the Companies Law, which is currently at least 21 days or 35 days, depending on the meeting agenda matters.
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy holding at least 33
1
¤
3
% of the voting power. A meeting adjourned for lack of a quorum will be adjourned to the next day at the same time and place, or any time and place as our directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of two shareholders holding at least 10% of the issued and outstanding share capital. The chairman of the board of directors presides at each of our shareholders meetings. The chairman of the meeting does not have an additional or casting vote.
As described above under Item 4.B. “Information on the Company – Business Overview – Regulation –Israeli Regulation – Ministry of Communications,” any shareholder seeking to vote at a general meeting of our shareholders must notify us prior to the meeting whether or not its beneficial holdings are subject to the consent of the Ministry of Communications in view of the restrictions on transfer or acquisition of means of control imposed by our license. If the shareholder does not provide such notice, its instructions shall be invalid and its vote shall not be counted.
Shareholders Resolutions
All resolutions at shareholders meetings will be deemed adopted if approved by the holders of a majority of the voting power represented and voting at the meeting, except for the following decisions which require a different majority:
(1) a voluntary liquidation – a majority of 75% of the shareholders voting at the shareholders meeting is needed;
(2) a compromise or arrangement between a company and its creditors or shareholders have to be approved by the majority in number of the persons participating in the vote (except for abstentions) together holding three quarters of the value at the vote. In addition, these resolutions must be approved by a court;
(3) amendment to the articles of association- a majority of 60% of the shareholders voting at the shareholders meeting is needed;
(4) election and dismissal of an outside director – see Item 6.C. “Directors, Senior Management and Employees – Board practices – Outside directors;”
(5) the adoption of an executive compensation policy and certain votes relating to compensation of directors and executive officers – see “—Compensation of Executive Officers and Directors; Executive Compensation Policies” below;
(6) related party transactions – see “– Fiduciary Duties and Approval of Related Party Transactions” below;
(7) the appointment of the chief executive officer as the Chairman of the Board of Directors – see Item 6.C. “Directors, Senior Management and Employees – Board practices – Chairman of the Board;” and
(8) exculpation, indemnification or insurance of directors – see “—Exculpation, Indemnification and Insurance of Directors and Officers” below.
Election of Directors
Other than the outside directors, who are subject to special election requirements under Israeli law, our directors are elected by the affirmative vote of the holders of a majority of the voting power present, in person or by proxy, at a shareholders meeting convened for that purpose, not taking into consideration any abstentions.
A director may nominate an alternate director, as long as the alternate qualifies to serve as a director.
Dividends
The holders of our ordinary shares are entitled to their proportionate share of any cash dividend, share dividend or dividend in kind distributed with respect to our ordinary shares. We may declare dividends out of retained earnings. Even in the absence of retained earnings, we may declare dividends out of earnings generated over the two most recent fiscal years (Profit Test). In either case, our board of directors must reasonably believe that the dividend will not render us unable to meet our current or foreseeable obligations when due (Solvency Test). If we do not comply with the Profit Test, a court may nevertheless allow us to distribute a dividend, provided the court is convinced that the Solvency Test is satisfied.
Our articles of association provide that the board of directors may declare and distribute dividends without the approval of the shareholders. For information about our dividend policy, see Item 8.A. “Financial Information – Consolidated statements and other financial data – Dividend policy”.
Meetings of the Board of Directors
Our articles of association provides that the quorum for a meeting of the Board of Directors shall generally be a majority of directors then in office, and the required vote shall be the affirmative vote of the directors attending the meeting; provided, however, that the following matters shall require a threshold quorum of 70% of the directors then in office and a supermajority of more than 70% of the voting directors for approving the following specified matters:
|
|
·
|
material changes in the nature of RRsat’s business;
|
|
|
·
|
the issuance of RRsat securities constituting more than 25% of RRsat’s outstanding share capital (on a fully diluted basis) in the aggregate within any period of 24 months;
|
|
|
·
|
the appointment and removal of RRsat’s chief executive officer, and amendment of his/her employment terms;
|
|
|
·
|
an acquisition or investment by RRsat in excess of $30 million; and
|
|
|
·
|
a change to RRsat’s dividend policy or the declaration of a dividend inconsistent with the dividend policy then in effect.
|
Shareholder Duties
Under the Companies Law, a shareholder has a duty to act in good faith and in a customary manner towards the company and other shareholders, and to refrain from abusing his or her power in the company, including when voting in a shareholders meeting or in a class meeting on matters such as the following:
|
|
·
|
an amendment to our articles of association;
|
|
|
·
|
an increase in our authorized share capital;
|
|
|
·
|
approval of related party transactions that require shareholder approval.
|
In addition, any controlling shareholder, any shareholder who knows that he or she possesses the power to determine the outcome of a shareholders meeting or a shareholders class meeting and any shareholder who has the power to prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking into account the position in the company of those who breached the duty of fairness.
Fiduciary Duties and Approval of Related Party Transactions
Fiduciary duties.
The Companies Law codifies the fiduciary duties that office holders, which under the Companies Law includes our directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, including to avoid any conflict of interest between the office holder’s position in the company and personal affairs, and prohibits any competition with the company or the exploitation of any business opportunity of the company in order to receive a personal advantage for himself or herself or for others. This duty also requires an office holder to reveal to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder. A company may approve any of the acts mentioned above provided that all the following conditions apply: the office holder acted in good faith and neither the act nor the approval of the act prejudices the good of the company and, the office holder disclosed the essence of his personal interest in the act, including any substantial fact or document, a reasonable time before the date for discussion of the approval. A director is required to exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director. A violation of these requirements is deemed a breach of the director’s duty of loyalty.
The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information material to these actions.
Disclosure of personal interest.
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents known to him or her, in connection with any existing or proposed transaction by the company. “Personal interest,” as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporation in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager, and includes shares for which the person has the right to vote pursuant to a power-of-attorney. “Personal interest” does not apply to a personal interest stemming merely from holding shares in the company.
The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary transaction.” The Companies Law defines an “extraordinary transaction” as a transaction that is not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities.
Approvals.
The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. Our articles of association do not provide otherwise. The transaction may not be approved if it not in our best interest. If the transaction is an extraordinary transaction, or if it concerns exculpation, indemnification, insurance or compensation of an office holder, then the approvals of the company’s compensation committee and the board of directors are required, except if the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director, in which case the approval of the compensation committee is sufficient. Exculpation, indemnification, insurance or compensation of a director or the Chief Executive Officer also requires shareholder approval.
A person who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee generally may not attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee has a personal interest in the matter or if such person is invited by the chair of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
Shareholders
The Companies Law imposes on a controlling shareholder of a public company the same disclosure requirements described above as it imposes on an office holder. For this purpose, a “controlling shareholder” is any shareholder who has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for extraordinary transactions, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the terms of compensation or employment of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the company, including through a company controlled by a controlling shareholder.
The shareholders approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
|
|
·
|
the majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or
|
|
|
·
|
the total number of shares held by disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the aggregate voting rights of our company.
|
Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern compensation for employment or service, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a period longer than three years is reasonable under the circumstances.
Compensation of Executive Officers and Directors; Executive Compensation Policies
In accordance with the Companies Law, we have adopted compensation policies for our executive officers and directors. The purpose of the policies is to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by the Companies Law. In accordance with the Companies Law, the policies must be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation policies. The shareholders approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
|
|
·
|
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the adoption of the compensation policies; or
|
|
|
·
|
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the compensation policies does not exceed 2% of the aggregate voting rights of our company.
|
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our executive compensation policy, the arrangement may only be approved by the compensation committee and the board of directors for special reasons to be noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the compensation committee is sufficient.
Arrangements regarding the compensation of the Chief Executive Officer and directors require the approval of the compensation committee, the board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved without approval of the shareholders.
Exculpation, Indemnification and Insurance of Directors and Officers
Indemnification of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, indemnify an office holder for any of the following liabilities or expenses that they may incur due to an act performed or failure to act in his or her capacity as the company’s office holder:
|
|
·
|
monetary liability imposed on the office holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court,
|
|
|
·
|
reasonable legal costs, including attorneys’ fees, expended by an office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the office holder and either:
|
|
|
o
|
no financial liability was imposed on the office holder in lieu of criminal proceedings, or
|
|
|
o
|
financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent, and
|
|
|
·
|
reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a court:
|
|
|
o
|
in an action brought against the office holder by the company, on behalf of the company or on behalf of a third party,
|
|
|
o
|
in a criminal action in which the office holder is found innocent, or
|
|
|
o
|
in a criminal action in which the office holder is convicted but in which proof of criminal intent is not required.
|
Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than litigation expenses, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the board of directors.
Insurance of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third party, including a breach arising out of negligent conduct of the office holder, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third party.
Exculpation of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, exculpate an office holder from a breach of duty of care in advance of that breach. Under our articles of association we may also exculpate an officer retroactively, to the extent permitted by law. Our articles of association provide for exculpation both in advance or retroactively, to the extent permitted under Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty towards the company or from a breach of duty of care concerning dividend distribution or a purchase of the company’s shares by the company or other entities controlled by the company.
Limitations on Exculpation, Indemnification and Insurance
Under the Companies law, there are certain general limitations on the ability of an Israeli company to indemnify, insure or exculpate an office holder. A company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, an Israeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
Our articles of association allow us to indemnify, exculpate and insure our office holders to the fullest extent permitted under the Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders if the office holder is a director. Our articles of association also allow us to indemnify any person who is not our office holder, including an employee, agent, consultant or contractor who is not an office holder.
Our audit committee, board of directors and shareholders have resolved to indemnify our directors and officers to the full extent permitted by law and by our articles of association for liabilities not covered by insurance and that are of certain enumerated types of events. In addition, we have entered into an insurance, indemnification and exculpation agreement with each of our directors and executive officers.
Anti-Takeover Provisions
Mergers and Acquisitions.
The Companies Law requires the parties to a proposed merger to file a merger proposal with the Israeli Registrar of Companies, specifying certain terms of the transaction. Each merging company’s board of directors and shareholders must approve the merger. Shares in one of the merging companies held by the other merging company or certain of its affiliates are disenfranchised for purposes of voting on the merger. A merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 50 days have passed from the time that the merger proposal was filed with the Israeli Registrar of Companies and at least 30 days have passed from the approval of the shareholders of each of the merging companies.
Tender Offer.
The Companies Law provides that certain ownership thresholds in public companies may be crossed only by means of a tender offer made to all shareholders. A purchaser must conduct a tender offer in order to purchase shares in publicly held companies if, as a result of the purchase, the purchaser would hold 25% or more of the voting rights of a company in which no other shareholder holds 25% or more of the voting rights, or the purchaser would hold more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights. A tender offer is not required if: (i) the shares are acquired in a private placement that is approved by the shareholders with the knowledge that as a result the purchaser would reach 25% or 45% of the voting rights, as applicable, (ii) the purchaser reaches the 25% threshold by purchasing shares from a shareholder who held 25% or more of the voting rights immediately prior to the transaction, or (iii) the purchaser crosses the 45% threshold by purchasing shares from a shareholder who held more than 45% of the voting rights immediately prior to the transaction.
Under the Companies Law, a person may not purchase shares of a public company if, following the purchase, the purchaser would hold more than 90% of the company’s shares or of any class of shares, unless the purchaser makes a tender offer to purchase all of the target company’s shares or all the shares of the particular class, as applicable. If, as a result of the tender offer, either:
|
|
·
|
the purchaser acquires more than 95% of the company’s shares or a particular class of shares and a majority of the shareholders that did not have a personal interest accepted the offer; or
|
|
|
·
|
the purchaser acquires more than 98% of the company’s shares or a particular class of shares;
|
then, the Companies Law provides that the purchaser automatically acquires ownership of the remaining shares. However, if the purchaser is unable to purchase more than 95% or 98%, as applicable, of the company’s shares or class of shares, the purchaser may not own more than 90% of the shares or class of shares of the target company.
Ownership Limitations.
Our license from the Israeli Ministry of Communications to operate our teleports provides that, without the consent of the Israeli Minister of Communications, no means of control of RRsat may be acquired or transferred, directly or indirectly. Our license was amended in connection with our initial public offering in November 2006 to provide, among other things, that should a shareholder, other than our shareholders prior to the initial public offering, become a beneficial holder of 10% or more of our shares or acquire shares in an amount resulting in such shareholder having significant influence over us without receiving the consent of the Director General of the Ministry of Communications, its holdings will be converted into dormant shares for as long as the Ministry of Communications’ consent is required but not obtained. The beneficial holder of such dormant shares will have no rights other than the right to receive dividends and other distributions to shareholders and the right to participate in rights offerings. For additional information regarding the provisions of our amended license as it relates to restrictions on the transfer of control, see Item 4.B. “Information on the Company – Business Overview – Regulation – Israeli Regulation – Ministry of Communications.”
Our license also states that means of control of the company, or of an interested shareholder of the company (which generally would include a holder of 5% of the company’s voting power), cannot be pledged unless such pledge agreement includes a condition that prohibits the exercise of the pledge without obtaining the advance written approval of the Minster of Communication
s.
Tax Law.
Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation.
Articles of Association.
Our Articles of Association requires a threshold quorum of 70% of RRsat’s directors and a supermajority of more than 70% of the voting directors for approving specified key matters, as described above under “– Meetings of the Board of Directors”. This special approval threshold can have an effect of delaying, deferring or preventing a change of control.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, New York, New York.
Summaries of the following material contracts are included in this Annual Report in the places indicated:
|
Material Contract
|
|
Location
|
|
Finder’s Agreement, dated September 24, 2012, between the registrant and Datacom Communications L.R. Ltd., as amended January 24, 2013
|
|
Item 7.B. “Major Shareholders and Related Party Transactions – Related party transactions – Employment Agreements – Consulting Agreement and Finder’s Agreement.”
|
|
Insurance, Indemnification and Exculpation Agreement, dates September 24, 2012, between the registrant and each of its directors and executive officers
|
|
Item 10.B. “Additional Information – Memorandum and articles of association – Exculpation, Indemnification and Insurance of Directors and Officers.”
|
|
Asset Purchase Agreement, dated as of November 13, 2012, by and among Sm2 Sports & Media Solutions LLC, Susanna Mandel-Mantello and RRsat America – Global Communications Network Inc.
|
|
Item 4.D. “Information on the Company – Property, plants and equipment.”
|
|
Share Purchase Agreement, dated as of September 3, 2013, by and among the registrant and Nicholas Paul Pannaman, Simon Paul Kay and Matthew James Bowman
|
|
Item 4.D. “Information on the Company – Property, plants and equipment.”
|
Each summary of a material contract is qualified in its entirety by the text of the material contract (or summaries thereof), which is filed as an exhibit to this Annual Report.
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares, whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Until May 1998, Israel imposed extensive restrictions on transactions in foreign currency. These restrictions were largely lifted in May 1998. Since January 1, 2003, all exchange control restrictions have been eliminated although there are still reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls can be imposed by administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel.
Taxation in Israel
The following is a discussion of the material tax consequences under Israeli tax laws relating to the ownership and disposition of our ordinary shares and of the Israeli government programs we benefit from. This discussion does not address all aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include banks, financial institutions, insurance companies and securities dealers; persons that own, directly or indirectly, on the date the dividend was distributed or during the prior 12 months, 10% or more of our outstanding voting rights; or a foreign corporation if Israeli residents hold 25% or more of its shares or have the right to 25% or more of its income or profits.
Some parts of this discussion are based on new tax legislation that has not been subject to judicial or administrative interpretation. Therefore, the views expressed in the discussion may not be accepted by the tax authorities in question. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
Corporate Tax Structure in Israel
Generally, Israeli companies were subject to corporate tax at the rate of 25% for the 2013 tax year, and are subject to corporate tax at the rate of 26.5% for the 2014 tax year. The corporate tax rate is scheduled to remain at 26.5% for future tax years. Israeli companies are generally subject to capital gains tax at the corporate tax rate.
Taxation of Non-Israeli Shareholders
Dividends
Our shareholders who are non-residents of Israel (both individuals and corporations) will be subject to Israeli income withholding at the rate of 25% on dividends that they receive from us that is not attributed to the Approved Enterprise income. If the recipient is a significant shareholder at any time during the 12 month period preceding the distribution the applicable tax rate will be 30%This tax will be withheld at the source. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of our ordinary shares who is a U.S. resident is 25%. Under the tax treaty, dividends received by a United States company that holds at least 10% of our voting rights will be subject to reduced withholding tax at the rate of 12.5%, provided certain other conditions in the tax treaty are met. Dividends paid from income attributable to an Approved Enterprise (as described below) are subject to tax, which is withheld at the source, at the rate of 15%.
Capital Gains
Israeli law imposes a capital gains tax on the sale of capital assets by an Israeli resident, and on the sale by non-residents of Israel of capital assets located in Israel (or of direct or indirect rights to assets located in Israel). The Israeli Income Tax Ordinance distinguishes between “Real Gain” and “Inflationary Surplus.” Inflationary Surplus is the portion of the gain attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale, or if an individual holds a security that are stated in a foreign currency, then the change in such currency between the date of purchase and the date of sale should be considered as the Inflationary Surplus. Real Gain is the excess of the total capital gain over the Inflationary Surplus. Inflationary Surplus that accrued after December 31, 1993 is exempt from tax.
Our shareholders who are non-residents of Israel will be exempt from Israeli taxation on capital gains from the sale of our ordinary shares, provided that our ordinary shares are publicly traded on a recognized stock exchange or regulated market outside of Israel, such as the NASDAQ Global Market, and provided that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. In addition, the U.S.-Israel Tax Treaty exempts U.S. residents who, in general, hold an interest of less than 10% of the voting rights in an Israeli company from Israeli capital gains tax in connection with such sale, provided that their holdings did not equal or exceed 10% at any time in the 12 months prior to a sale of their shares.
Law for the Encouragement of Capital Investments, 1959
The Law for the Encouragement of Capital Investments, 1959, known as the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). An investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an “Approved Enterprise,” is entitled to benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the election of the grantee.
A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed at the rate that would have been applicable had the company not elected the alternative benefits program (generally 10% to 25%). If the dividend is distributed during the benefit period or within the following 12 years (the 12-year limitation does not apply to a foreign investor’s company), the dividend recipient is taxed at the reduced withholding tax rate of 15%. After this period, the withholding tax rate is up to 25%.
We were granted in 2006 an “Approved Enterprise” status under the Investment Law for our contemplated expansion of export revenues in the taxable years 2006 to 2012 as compared to our revenues in 2005. Under the terms of our Approved Enterprise program, our income from that Approved Enterprise will be subject to a reduced tax rate of 25% for a period of up to a total of seven years, to be calculated on the portion of our taxable income associated to the expansion (calculated on a pro rated basis to the additional revenues for the taxable year compared to the base year, which is 2005). Under the terms of the program, which relates to our export of communications services to television channels and television operators via satellites, we are required, among other things, to increase the export of our services by at least $100 thousand annually and maintain arms’ length terms for all related party transactions. In 2011, 2012 and 2013 the corporate tax rate was 24%, 25% and 25%, respectively, and therefore there was no tax benefit resulting from the Approved Enterprise program.
In January 2011, the Law for Encouragement of Capital Investments, 1959 (“Amendment No. 68”) was passed by the Knesset. In accordance with the Amendment the tax rate that may apply to income generated by certain enterprises that meet various conditions and elect to be taxed pursuant to Amendment No. 68 (each, a “Preferred Enterprise”) will be as follows: 15% during 2011 and 2012 for Preferred Enterprises located in certain areas (i.e., center of Israel). In 2013 and 2014 the tax rate will be 12.5%, and from 2015 onward the tax rate will be 12%. In July 2013, the “Knesset” approved the Economic Arrangement Law for the years 2013 and 2014, which prescribes, among others, amendments to the Law. The amendment became effective as of January 1, 2014. According to the amendment, the uniform tax rate will be 16%.
The provisions of the new legislation shall not apply to a company already owning "Beneficiary Enterprise" or “Approved Enterprise" which will continue to benefit from the tax benefits under the Investment Law in effect prior to the new legislation, unless such company otherwise elected to implement the new legislation
We are in the process of examining our eligibility for the preferred tax rate mentioned above, and have not yet elected Preferred Enterprise tax treatment.
U.S. Federal Income Tax Consequences
The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of ordinary shares. The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares. (See “Taxation in Israel” above.)
This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; persons subject to the alternative minimum tax; persons holding ordinary shares as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting stock; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.
This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of ordinary shares. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ordinary shares, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
This summary is directed solely to holders that hold their ordinary shares as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of ordinary shares that is any of the following:
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a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source;
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a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or
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a trust in existence on August 20, 1996 that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
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The term “Non-U.S. Holder” means a beneficial owner of ordinary shares that is not a U.S. Holder. As described in “Taxation of Non-U.S. Holders” below, the tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares, the U.S. federal income tax consequences to a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares that is a partnership and the partners in such partnership should consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership and disposition of ordinary shares.
Taxation of U.S. Holders
The discussion in “Distributions on Ordinary Shares” and “Dispositions of Ordinary Shares” below assumes that we will not be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment Company” below.
Distributions on Ordinary Shares
General
. Subject to the discussion in “Passive Foreign Investment Company” below, if you actually or constructively receive a distribution on ordinary shares, you must include the distribution in gross income as a taxable dividend on the date of your receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign (e.g., Israeli) taxes withheld. Dividends paid by us will not be eligible for the dividends-received deduction allowed to corporations with respect to dividends received from certain domestic corporations. Dividends paid by us may or may not be eligible for preferential rates applicable to qualified dividend income, as described below. Dividends received will be included in net investment income for purposes of the 3.8% Medicare tax applicable to certain non-corporate U.S. Holders, discussed below.
To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the ordinary shares, and thereafter as capital gain. Preferential tax rates for long-term capital gain may be applicable to non-corporate U.S. Holders.
We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Qualified Dividend Income
. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate (without regard to the 3.8% Medicare tax, discussed below) of 20% or 15% depending on the specific facts of the shareholder. Among other requirements, dividends generally will be treated as QDI if either (i) our ordinary shares are readily tradable on an established securities market in the United States, or (ii) we are eligible for the benefits of a comprehensive income tax treaty with the United States which includes an information exchange program and which is determined to be satisfactory by the U.S. Treasury. The IRS has determined that the United States-Israel income tax treaty is satisfactory for this purpose.
In addition, for dividends to be treated as QDI, we must not be a PFIC (as discussed below) for either the taxable year in which the dividend was paid or the preceding taxable year. We do not believe that we were a PFIC for the preceding taxable year or will be a PFIC for the current taxable year. However, please see the discussion under “Passive Foreign Investment Company” below. Additionally, in order to qualify for QDI treatment, you generally must have held the ordinary shares for more than 60 days during the 121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period during which the risk of loss is diminished.
Moreover, a dividend will not be treated as QDI to the extent you are under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, or if you elect to treat the dividend as “investment income” pursuant to section 163(d)(4) of the Code. Since the QDI rules are complex, you should consult your own tax advisor regarding the availability of the preferential tax rates for dividends paid on ordinary shares.
Foreign Currency Distributions.
A dividend paid in foreign currency (e.g., new Israeli shekel (NIS)) must be included in your income as a U.S. dollar amount based on the exchange rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you generally will not recognize a foreign currency gain or loss. However, if you convert the foreign currency into U.S. dollars on a later date, you must include in income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount you included in income when the dividend was received and (ii) the amount that you receive on the conversion of the foreign currency into U.S. dollars. Such gain or loss will generally be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.
In-Kind Distributions
. Distributions to you of new ordinary shares or rights to subscribe for new ordinary shares that are received as part of a pro rata distribution to all of our shareholders will not be subject to U.S. federal income tax. The adjusted tax basis of the new ordinary shares or rights so received will be determined by allocating your adjusted tax basis in the old ordinary shares between the old ordinary shares and the new ordinary shares or rights received, based on their relative fair market values on the date of distribution. However, in the case of a distribution of rights to subscribe for ordinary shares, the adjusted tax basis of the new rights will be zero if the fair market value of the new rights is less than 15% of the fair market value of the old ordinary shares on the date of distribution and you do not make an election to determine the adjusted tax basis of the rights by allocation as described above. Your holding period for the new ordinary shares or rights will generally include the holding period for the old ordinary shares on which the distribution was made.
Foreign Tax Credits.
Subject to certain conditions and limitations, including potential limitations under the United States-Israel treaty, any foreign (e.g., Israeli) taxes paid on or withheld from distributions from us and not refundable to you may be credited against your U.S. federal income tax liability or, alternatively, may be deducted from your taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by you or withheld from you that year.
Distributions characterized as dividends distributed by us will constitute foreign source income for foreign tax credit limitation purposes. The foreign tax credit limitation is calculated separately with respect to specific classes of income. For this purpose, distributions characterized as dividends distributed by us will generally constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).
Since the rules governing foreign tax credits are complex, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances.
Dispositions of Ordinary Shares
Subject to the discussion in “Passive Foreign Investment Company” below, you generally will recognize taxable gain or loss realized on the sale or other taxable disposition of ordinary shares equal to the difference between the U.S. dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the ordinary shares. Such gain or loss will be capital gain or loss. Gains recognized will be included in net investment income for purposes of the 3.8% Medicare tax applicable to certain non-corporate U.S. Holders, discussed below.
If you have held the ordinary shares for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax rates for long-term capital gain (currently, with a maximum rate (without regard to the 3.8% Medicare tax, discussed below) of 20% or 15%) will apply to non-corporate U.S. Holders. If you have held the ordinary shares for one year or less, such capital gain or loss will be short-term capital gain or loss taxable as ordinary income at your marginal income tax rate. The deductibility of capital losses is subject to limitations.
Generally, any gain or loss recognized will not give rise to foreign source income for U.S. foreign tax credit purposes, unless a different result is achieved under the United States-Israel income tax treaty. You should consult your own tax advisor regarding the effect of such treaty on the source of income.
You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the disposition of ordinary shares.
Passive Foreign Investment Company
We generally will be a PFIC under Section 1297 of the Code if, for a taxable year, either (a) 75% or more of our gross income for such taxable year is passive income (the “income test”) or (b) 50% or more of the average percentage, generally determined by fair market value, of our assets during such taxable year either produce passive income or are held for the production of passive income (the “asset test”). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.
Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income. In addition, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to income of such related person that is not passive income.
Under the income and asset tests, whether or not we are a PFIC will be determined annually based upon the composition of our income and the composition and valuation of our assets, all of which are subject to change. In determining that we are not a PFIC, we are relying on our projected revenues and projected capital expenditures. If our actual revenues and capital expenditures do not match our projections, we may become a PFIC. For example, if we do not spend enough of the cash (a passive asset) we raise from any financing transactions we may undertake, the relative percentage of our passive assets will increase. In addition, our determination is based on a current valuation of our assets, including goodwill (generally an active asset). In calculating goodwill, we have valued our total assets based on our market capitalization, determined using the market price of our ordinary shares. Such market price may fluctuate, and may be especially volatile for a technology company such as us. If our market capitalization is less than anticipated or subsequently declines, this will decrease the value of our goodwill and we may become a PFIC. Furthermore, we have made a number of assumptions regarding the amount of value allocable to goodwill. We believe our valuation approach is reasonable. However, it is possible that the IRS will challenge the valuation of our assets, including goodwill, which may result in our being a PFIC.
We do not believe that we were a PFIC for the preceding taxable year or will be a PFIC for the current taxable year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that the IRS will not challenge our determination concerning our PFIC status.
Default PFIC Rules under Section 1291 of the Code
. If we are treated as a PFIC with respect to a U.S. Holder, the U.S. federal income tax consequences to the U.S. Holder of the ownership and disposition of ordinary shares will depend on whether such U.S. Holder makes an election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder owning ordinary shares while we were or are a PFIC that has not made either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”
If you are a Non-Electing U.S. Holder, you will be subject to the default tax rules of Section 1291 of the Code with respect to:
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any “excess distribution” paid on ordinary shares, which means the excess (if any) of the total distributions received by you during the current taxable year over 125% of the average distributions received by you during the three preceding taxable years (or during the portion of your holding period for the ordinary shares prior to the current taxable year, if shorter); and
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any gain recognized on the sale or other taxable disposition (including a pledge) of ordinary shares.
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Under these default tax rules:
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any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares;
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the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the current year;
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the amount allocated to each of the other years will be treated as ordinary income and taxed at the highest applicable tax rate in effect for that year; and
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the resulting tax liability from any such prior years will be subject to the interest charge applicable to underpayments of tax.
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In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates applicable to QDI (as discussed above in “Distributions on Ordinary Shares”) if we are a PFIC either in the taxable year of the distribution or the preceding taxable year, but will instead be taxable at rates applicable to ordinary income.
Special rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits with respect to foreign taxes imposed on distributions on ordinary shares.
If we are a PFIC for any taxable year during which you hold ordinary shares, we will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ordinary shares, regardless of whether we actually continue to be a PFIC.
If we are treated as a PFIC in any year with respect to you, you will be required to file an annual return on IRS Form 8621 regarding distributions received on ordinary shares and any gain realized on the disposition of ordinary shares or to report your ownership of ordinary shares if the total value of all PFIC stock that you directly or indirectly own exceeds certain thresholds.
QEF Election
. We currently do not intend to prepare or provide you with certain tax information that would permit you to make a QEF Election to avoid the adverse tax consequences associated with owning PFIC stock.
Mark-to-Market Election.
U.S. Holders may make a Mark-to-Market Election, but only if the ordinary shares are marketable stock. The ordinary shares will be “marketable stock” as long as they remain listed on the NASDAQ Global Select Market and are regularly traded. Stock is “regularly traded” for any calendar year during which it is traded (other than in de minimis quantities) on at least 15 days during each calendar quarter. There can be no assurances, however, that our ordinary shares will be treated, or continue to be treated, as regularly traded.
If you own (or owned) ordinary shares while we are (or were) a PFIC and you make a Mark-to-Market Election, you generally will not be subject to the default rules of Section 1291 of the Code discussed above. Rather, you generally will be required to recognize ordinary income for any increase in the fair market value of the ordinary shares for each taxable year that we are a PFIC. You will also be allowed to deduct as an ordinary loss any decrease in the fair market value to the extent of net marked-to-market gain previously included in prior years. Your adjusted tax basis in the ordinary shares will be adjusted to reflect the amount included or deducted.
The Mark-to-Market Election will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the ordinary shares cease to be marketable stock or the IRS consents to the revocation of the election. You should consult your own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Since the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of the ownership and disposition of ordinary shares.
Additional Medicare Tax
Certain U.S. Holders who are individuals, estates or trusts may be required to pay an additional 3.8% Medicare tax on, among other things, dividends and capital gains from the sale or other disposition of shares of common stock. For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income.
Foreign Asset Reporting
Certain U.S. Holders who are individuals may be required to report information relating to an interest in our ordinary shares, subject to certain exceptions. For example, individuals that own “specified foreign financial assets” with an aggregate value in excess of $50,000 are generally required to file Form 8938 with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-United States persons; (ii) financial instruments and contracts held for investment that have non-United States issuers or counterparties; and (iii) interests in foreign entities. Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future. In addition, a U.S. Holder should consider the possible obligation to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts, as a result of holding ordinary shares. U.S. Holders are urged to consult their tax advisors regarding the application of these and other reporting requirements that may apply to their ownership of ordinary shares.
Taxation of Non-U.S. Holders
Distributions on Ordinary Shares
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on distributions received on ordinary shares, unless the distributions are effectively connected with a trade or business that you conduct in the United States (and, if an applicable income tax treaty so requires, attributable to a permanent establishment that you maintain in the United States).
If distributions are effectively connected with a U.S. trade or business (and, if applicable, attributable to a U.S. permanent establishment), you generally will be subject to tax on such distributions in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders – Distributions on Ordinary Shares” above. In addition, any such distributions received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Dispositions of Ordinary Shares
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on any gain recognized on a sale or other taxable disposition of ordinary shares, unless (i) the gain is effectively connected with a trade or business that you conduct in the United States (and, if an applicable income tax treaty so requires, attributable to a permanent establishment that you maintain in the United States), or (ii) you are an individual and are present in the United States for at least 183 days in the taxable year of the disposition, and certain other conditions are present.
If you meet the test in clause (i) above, you generally will be subject to tax on any gain that is effectively connected with your conduct of a trade or business in the United States in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders – Dispositions of Ordinary Shares” above. Effectively connected gain realized by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
If you meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate on the amount by which your U.S. source capital gain exceeds your U.S. source capital loss, except as may be specified in an applicable income tax treaty. You may also be subject to information reporting and withholding.
Information Reporting and Backup Withholding
Generally, information reporting requirements will apply to distributions on, or proceeds from the disposition of, ordinary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Holder fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing certification of non-U.S. status on an appropriate IRS Form W-8.
Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment to you may be credited against your U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
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F. Dividends and paying agents
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Not applicable.
Not applicable.
We are subject to certain of the information reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. As a “foreign private issuer,” we are exempt from the rules and regulations under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of the ordinary shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. However, we file with the SEC an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. We also furnish quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters. We intend to post our Annual Report on Form 20-F on our website (www.rrsat.com) promptly following the filing of our Annual Report with the SEC. The reference to our website is an inactive textual reference only and the information on, or accessible through, our website is not part of this Annual Report.
This report and other information filed or to be filed by us can be inspected and copied at the public reference facilities maintained by the SEC at:
Securities and Exchange Commission
100 F Street, NE
Public Reference Room
Washington, D.C. 20549
Copies of these materials can also be obtained from the Public Reference Section of the SEC, 100 F Street, NE, Washington, D.C. 20549, at prescribed rates.
The SEC maintains a website at
www.sec.gov
that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
Additionally, documents referred to in this Annual Report may be inspected at our principal executive offices located at RRsat Building, Hanegev Street, PO Box 1056, Airport City 7019900, Israel.
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I. Subsidiary information
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Not applicable.
ITEM 11. QUANTITATIVE
AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and currency fluctuations. During 2013, 63.78% of our revenues and 54.8% of our network service providers expenses were in U.S. dollars. Although our functional currency is the U.S. dollar, approximately 26.8% of our revenues in 2013 and approximately 36.4% of our network service provider’s costs in 2013 were denominated in Euros. As a result, fluctuations in the U.S. dollar/Euro exchange rate have significant translation impact on our revenues and to a lesser extent on our gross margin and finance costs. In addition, most of our payments for salaries, facility leases and other general and administrative expenses are in NIS, as well as a small portion of our agreements with customers. As a result, we are exposed to risk to the extent that the value of the U.S. dollar decreases against the NIS. In that event, the U.S. dollar cost of our operations will increase and our U.S. dollar-measured results of operations will be adversely affected. Our financial results of operations could be adversely affected if we are unable to guard against currency fluctuations in the future. Further, if more customers or vendors will seek contracts in currencies other than the U.S. dollar, the percentage of our revenue and operating expenses in the U.S. dollar or linked to the U.S. dollar may decrease over time and our exposure to fluctuations in currency exchange rates could increase. In order to limit our exposure, we seek to engage with our customers in the currency equal to the currency of the network services contract purchased from suppliers. Our objective is to reduce exposure and fluctuations in earnings and cash flows associated with changes in interest rates and foreign currency rates. However, we are not always able to apply this policy or to match the term of the customer contract with the term of the supplier contract and may then be exposed to currency rates fluctuations. In order to reduce this exposure, we use financial instruments such as forward exchange contracts to hedge a portion, but not all, existing and forecasted foreign currency denominated transactions. The purpose of our foreign currency hedging program is to manage the effect of exchange rate fluctuations on our gross profit, operating expenses and eventual cash flows. We are exposed to credit loss in the event of non- performance by counterparties on the foreign exchange contracts the Company uses in hedging activities. These counterparties are established financial institutions and to date no such counterparty has failed to meet its financial obligations to the Company under such contracts.
As of December 31, 2013, we invested our excess cash in bank accounts and deposits located with banks located in Israel, Cyprus and in the United States. These instruments had maturities of twelve months or less when acquired. Due to the short-term nature of these investments and our practice of holding those investments until their maturity, we believe that there is no material exposure to interest rate risk arising from our investments. We invested some of the excess cash we had in longer-term financial instruments in order to achieve a higher yield. Those funds are managed by two brokerage firms located in Israel and one brokerage firm located in the United States based on our investment policy, reviewed from time to time under the supervision of the investment committee of our board of directors, and we believe that there is no material exposure to the principal amount or to interest rate risks arising from these longer-term investments. Due to the credit rate and the dispersion, we believe that there is no material exposure to the principal amount or to interest rate risks arising from these longer-term investments. However, the economic crisis and the volatility in the capital markets in the United States, Europe and in Israel may affect the financial stability of the entities in which we invested (mainly debentures of these entities), and change the credit ratings of these long-term investments, therefore triggering an increase in interest rates and losses in these investments. Because of our ability to hold these investments until maturity, we believe we reduce the risk of incurring losses in these investments provided the entity eventually pays principal and interest upon maturity.
Not applicable.