UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER 333-10882
JACADA LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
11 GALGALEI HAPLADA ST.
P.O. BOX 12175
HERZLIYA 46722, ISRAEL
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act:
5,175,000 ORDINARY SHARES
(TITLE OF CLASS)
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Indicate the number of outstanding shares of each of the registrant's classes of
capital or common stock as of the close of the period covered by the Annual
Report:
ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE 18,528,027SHARES
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
-------------
Indicate by check mark which financial statement item the registrant
has elected to follow.
[ ] Item 17 [X] Item 18
TABLE OF CONTENTS
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS........................................ 4
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE....................................................... 4
Item 3. KEY INFORMATION............................................................................... 4
Item 4. INFORMATION ON THE COMPANY.................................................................... 13
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................................................. 25
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................................... 34
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............................................. 40
Item 8. FINANCIAL INFORMATION ........................................................................ 42
Item 9. THE OFFER AND LISTING......................................................................... 43
Item 10. ADDITIONAL INFORMATION........................................................................ 45
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................... 58
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................................ 58
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................... 58
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.................. 59
Item 18. FINANCIAL STATEMENTS.......................................................................... F-1
Item 19. EXHIBITS
2
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements. These
statements include all statements that are not statements of historical fact
regarding the intent, belief, or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the Company's
financing plans; (ii) trends affecting the Company's financial condition or
results of operations; and (iii) the Company's growth strategy and operating
strategy (including the development of its products and services). The words
"may," "could," "would," "will," "believe," "anticipate," "estimate," "expect,"
"intend," "plan" and similar expressions or variations thereof are intended to
identify forward-looking statements. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward-looking statements as a result of various factors. The
information contained in this Annual Report identifies important factors that
could cause such differences.
We have prepared our consolidated financial statements in U.S. dollars
and in accordance with U.S. generally accepted accounting principles (GAAP). All
references in this Annual Report to "dollars" or "$" are to U.S. dollars and all
references to "NIS" are to New Israeli Shekels.
Amounts and percentages appearing in this Annual Report may not total
due to rounding.
3
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
Not applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3: KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following table sets forth our consolidated selected statements of
operations, balance sheets and other data for the periods indicated. The
selected consolidated statement of operations data for the years ended December
31, 2001, 2000 and 1999 and the selected consolidated balance sheet data as of
December 31, 2001 and 2000 have been derived from our audited consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report. These financial statements have been prepared in accordance with GAAP.
The consolidated statements of operations data for the years ended December 31,
1998 and 1997, and the selected consolidated balance sheet data as of December
31, 1999, 1998 and 1997 are derived from audited consolidated financial
statements that are not included herein. The following selected financial data
are qualified by reference to and should be read in conjunction with the
sections entitled "Item 5: Operating and Financial Review and Prospects" and
"Item 11: Quantitative and Qualitative Disclosure about Market Risks" and our
consolidated financial statements and the notes thereto included elsewhere in
the Annual Report.
4
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In thousands, except per share and share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses ...................................... $ 10,930 $ 15,506 $ 8,831 $ 6,469 $ 3,432
Services ............................................... 8,986 6,070 3,362 1,874 1,455
Maintenance .......................................... 5,630 3,540 2406 1,145 714
----------- ----------- ----------- ----------- -----------
Total revenues ....................................... 25,546 25,116 14,599 9,488 5,601
Cost of revenues:
Software licenses ...................................... 520 725 639 342 276
Services ............................................... 4,859 3,636 1,619 1,735 1,148
Maintenance ............................................ 1,705 1,574 1,121 823 618
----------- ----------- ----------- ----------- -----------
Total cost of revenues ............................... 7,084 5,935 3,379 2,900 2,042
----------- ----------- ----------- ----------- -----------
Gross profit ............................................. 18,462 19,181 11,220 6,588 3,559
Operating expenses:
Research and development, net .......................... 6,446 4,979 3,267 2,440 1,515
Sales and marketing .................................... 14,619 12,873 6,529 5,411 4,464
General and administrative ............................. 5,679 3,624 1,960 1,637 1,033
Non-recurring charges .................................... 2,846 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses ............................. 29,590 21,476 11,756 9,488 7,012
----------- ----------- ----------- ----------- -----------
Operating loss ........................................... (11,128) (2,295) (536) (2,900) (3,453)
Financial income (expense), net ......................... 2,330 3,082 530 (20) 24
Income (loss) before income taxes ........................ (8,798) 787 (6) (2,920) (3,429)
Income taxes ............................................. 7 (10) -- -- (6)
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................................ $ (8,791 $ 777 $ (6) $ (2,920) $ (3,423)
=========== =========== =========== =========== ===========
Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share ...................... $ (0.48) $ 0.04 $ (0.00) $ (0.81) $ (0.92)
Weighted average number of shares used in computing
basic net earnings (loss) per share ................... 18,465,127 18,141,223 6,572,476 3,615,143 3,704,298
Diluted net earnings (loss) per share .................... $ (0.48) $ 0.04 $ (00.0) $ (0.81) $ (0.92)
Weighted average number of shares used in computing
diluted net earnings (loss) per hare ................ 18,465,127 19,503,971 6,572,476 3,615,143 3,704,298
DECEMBER 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................................ $ 5,982 $ 9,360 $ 5,141 $ 5,613 $ 3,044
Working capital .......................................... 39,625 46,740 53,315 1,148 727
Total assets ............................................. 56,459 64,797 62,435 11,131 7,185
Long-term debt, net of current portion ................... -- -- 186 90 92
Shareholders' equity ..................................... 48,588 56,646 54,854 2,939 2,066
EXCHANGE RATES
Not applicable.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
5
D. RISK FACTORS
Readers are cautioned that an investment in Jacada is subject to a
number of risks. Readers should consider carefully all information set forth
herein and in particular the following risks in connection with an investment in
Jacada:
Fiscal year 2000 was our only profitable year, and we may not again
achieve profitability. Prior to 2000, we incurred net losses in each fiscal year
since our inception. We also incurred a net loss for 2001. To achieve and
maintain profitability, we will need to increase revenues and contain expenses.
We cannot assure you that our revenues will grow or that we will achieve or
maintain profitability in the future. Our ability to increase revenues and
maintain profitability will be affected by the other risks and uncertainties
described in this section and in the sections entitled "Item 5: Operating and
Financial Review and Prospects" and "Item 11: Quantitative and Qualitative
Disclosure about Market Risks."
Our eBusiness enabling products may not be widely adopted. If eBusiness
enabling products such as ours are not widely adopted, our business could
suffer. Our products are complex and generally involve significant capital
expenditures by our customers. We do not have a long history of selling our
products and we will have to devote substantial resources to educate prospective
customers about the benefits of our products. Many prospective customers have
made significant investments in internally-developed or customized systems and
would incur significant costs in switching to third-party products such as ours.
Even if our products are effective, our target customers may not choose them for
technical, cost, support or other reasons. If the market for our products fails
to grow or grows more slowly than we anticipate, our business could suffer.
Competition in the market for eBusiness enabling software is intense.
If we are unable to compete effectively, the demand for, or the prices of, our
products may be reduced. The market for eBusiness enabling software is extremely
competitive and subject to rapid change. We compete in that market with
companies that utilize varying approaches to enable host-centric software
applications to be utilized over the Internet. These companies include,
Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO Software, Inc., Vitria
Technology, Inc., WRQ, Inc. and webMethods, Inc. We expect additional
competition from other established and emerging companies. Furthermore, our
competitors may combine with each other and other companies may enter our
markets by acquiring or entering into strategic relationships with our
competitors.
In addition, many companies choose to deploy their own information
technology personnel or utilize system integrators to write new code or rewrite
existing applications in an effort to develop their own eBusiness enabling
solutions. As a result, prospective clients may decide against purchasing and
implementing externally-developed and produced solutions such as ours.
Many of our current and potential competitors have significantly
greater financial, technical and marketing resources, greater name recognition
and larger customer bases
6
than we do. Our present or future competitors may be able to develop products
comparable or superior to ours; adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements; or devote
greater resources than we do to the development, promotion and sale of products.
Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.
Our software license revenues result from a relatively small number of
sales. In addition, our sales cycle is lengthy. Sales of our products are also
subject to seasonality. These factors may cause our revenues to fluctuate
materially from period to period. If we fail to meet market expectations in any
individual period, our stock price could decline significantly. Our sales
typically involve significant capital investment decisions by prospective
customers, as well as a significant amount of time to educate them as to the
benefits of our products. As a result, before purchasing our products, companies
spend a substantial amount of time performing internal reviews and obtaining
capital expenditure approvals. It may take up to six months or more from the
time we first contact a prospective customer before receiving an initial order.
This cycle may lengthen in the future.
Sales of our products and services tend to be lower in our first
quarter, and higher in our fourth quarter, due to the capital budgeting and
purchasing cycles of our current and prospective customers. It is difficult for
us to evaluate the degree to which this seasonality may affect our business
because our growth may have largely overshadowed this seasonality in recent
periods.
Because of these and other factors, our quarterly revenues may
fluctuate materially and may not meet market expectations in any individual
period. This would likely cause our stock price to decline. Further,
period-to-period comparisons of our revenues will not necessarily be meaningful.
As a result, you should not rely upon them as an indication of future
performance.
We must expand our sales and marketing efforts in order to increase
market awareness of our products and to generate increased revenues. Expansion
of our sales and marketing efforts is essential to increase market awareness of
our products and to generate increased revenue. In addition to increasing our
direct sales and marketing efforts, we believe that our future success is
dependent upon the expansion of our indirect distribution channels, consisting
of our relationships with independent software vendors, software distributors
and system integrators. We currently have relationships with only a limited
number of these indirect distribution channels. Nevertheless, we have derived,
and we anticipate that we will continue to derive, a significant portion of our
revenues from these relationships.
Our future growth will be limited if:
- we fail to work effectively with our indirect distribution
channels;
7
- we fail to increase the number of indirect distribution
channels with which we have relationships;
- the business of one or more of our indirect distribution
channels fails; or
- there is a decrease in the willingness and ability of our
indirect distribution channels to devote sufficient resources
and efforts to marketing and supporting our products.
If any of these circumstances occurs, we will have to devote
substantially more resources to the sales, marketing, distribution,
implementation and support of our products than we otherwise would, and our own
efforts may not be as effective as those of our indirect distribution channels.
Our growth could be limited if we fail to retain consultants and sales
implementation personnel. We rely on our staff of professional consultants and
other technical service personnel to implement our solutions after purchases by
our customers. Unless we are able to retain consultants and sales implementation
personnel or hire and train qualified consultants and sales implementation
personnel to replace anyone who leaves the Company, it will be difficult for us
to increase or possibly maintain our present level of sales due to constraints
on our capacity to implement additional sales.
Rapid changes and developments in the eBusiness enabling software
market could cause our products to become obsolete or require us to redesign our
products. The eBusiness enabling software market is characterized by rapid
technological change, frequent new product introductions and emerging industry
standards. We also expect that the rapid evolution of Internet-based
applications and standards, as well as general technology trends such as changes
in or introductions of operating systems, will require us to adapt our products
to remain competitive. Our products could become obsolete and unmarketable if we
are unable to quickly adapt to new technologies or standards. To be successful,
we will need to develop and introduce, in a timely manner and on a
cost-effective basis, new products and product enhancements that respond to
technological changes, evolving industry standards and other market changes and
developments. Although we plan to continue to spend substantial amounts for
research and development in the future, we cannot assure you that we will
develop new products and product enhancements successfully or that our products
will achieve broad market acceptance. Our failure to respond in a timely and
cost-effective manner to new and evolving technologies and other market changes
and developments could adversely impact our business.
We rely on our key personnel, whose knowledge of our business and
technical expertise would be extremely difficult to replace. Our future success
depends, to a significant degree, on the continued services of our CEO, Gideon
Hollander, as well as other key management, sales and technical personnel. The
loss of services of any of our key management for any reason could have a
material adverse effect on our business, financial condition and results of
operations. We are also dependent on our ability to attract, retain and motivate
highly skilled personnel. In the markets in which we recruit,
8
competition for qualified personnel is extremely intense. As a result, our
ability to recruit and retain qualified candidates may be limited.
We expect to be increasingly subject to risks of international
operations. We currently market and sell our products and services primarily in
North America, from which we received approximately 90% of our total revenues
for the year ended December 31, 2001. However, we plan to increase our
international operations, particularly in Europe. This expansion will require
significant management attention and financial resources. Further, we currently
have limited experience in marketing and distributing our products
internationally. Our inability to successfully increase our international
operations could adversely impact our business. In addition, exchange rate
fluctuation between the dollar and European or other foreign currencies may
adversely affect us. To date, we have not used risk management techniques or
"hedged" the risks associated with fluctuations in foreign exchange rates.
Our products may contain unknown defects that could harm our
reputation, result in product liability or decrease market acceptance of our
products. Our products may contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. Although we have
not experienced any material software defects to date, defects could cause our
customers to experience system failures. Our customers depend on our software
for their critical systems and business functions. Any interruptions could:
- damage our reputation;
- increase our product development costs;
- divert our product development resources;
- cause us to lose future sales; or
- delay or diminish market acceptance of our products.
Although we conduct extensive testing, we may not discover software
defects that affect our products or enhancements until after they are sold.
Furthermore, we are unable to test our products in each of the applications in
which they are designed to work.
Our products are integrated with our customers' networks and software
applications. The sale and support of our products may entail the risk of
product liability or warranty claims based on damage to these networks or
applications. In addition, the failure of our products to perform to customer
expectations could give rise to warranty or other claims. Any of these claims,
even if not meritorious, could result in costly litigation or divert
management's attention and resources. We may not have sufficient funds or
insurance coverage to satisfy any or all liability that may be imposed upon us
with respect to these claims.
9
Our technology may be subject to infringement claims or may be
infringed upon. Our success and ability to compete are substantially dependent
upon our internally developed technology. Most of our intellectual property,
other than our trademarks, consists of proprietary or confidential information
that is not subject to patent or similar protection. Despite our efforts to
protect our intellectual property rights, unauthorized third parties may attempt
to copy or otherwise obtain and use the technology protected by those rights.
Any infringement of our intellectual property could have a material adverse
effect on our business, financial condition and results of operations.
Furthermore, policing unauthorized use of our products is difficult and costly,
particularly in countries where the laws may not protect our proprietary rights
as fully as in the United States.
Although we do not believe that we infringe upon any patent, trademark
or other intellectual property rights of others, we cannot be certain that one
or more persons will not make a claim of infringement against us. Any claims,
with or without merit, could:
- be expensive and time-consuming to defend;
- cause product shipment and installation delays;
- divert management's attention and resources; or
- require us to enter into royalty or licensing agreements, which may not
be available on acceptable terms, or may not be available at all.
A successful claim of product infringement against us or our failure or
inability to license the infringed or similar technology could have a material
adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OUR LOCATION IN ISRAEL
Israeli courts might not enforce judgments rendered outside of Israel.
We are incorporated under the laws of the State of Israel and we maintain
significant operations in Israel. Certain of our officers and directors and our
Israeli accountants and counsel reside outside of the United States. Therefore,
you might not be able to enforce any judgment obtained in the United States
against us or any of such persons. Additionally, you might not be able to bring
civil actions under United States securities laws if you file a lawsuit in
Israel. We have been advised by our Israeli counsel that, subject to certain
limitations, Israeli courts may enforce a final executory judgment of a United
States court for liquidated amounts in civil matters after a hearing in Israel,
provided that certain conditions are met. If a foreign judgment is enforced by
an Israeli court, it will be payable in Israeli currency.
Conditions in Israel could adversely affect our operations. . Because
our principal research and development facilities are located in Israel. We are
therefore directly influenced by the political, economic and military conditions
affecting Israel. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab
neighbors. Any major hostilities involving Israel or the
10
interruption or curtailment of trade between Israel and its present trading
partners could materially adversely affect our operations. Despite the
negotiations towards peace between Israel and certain of its Arab neighbors, the
future of these peace efforts is uncertain. Since October 2000, there has been a
significant increase in violence primarily in the West Bank and the Gaza Strip
and negotiations between Israel and the Palestinian representatives have ceased
for periods of time. . In addition, during 2002 both Israel and the Palestinians
have intensified their military actions and Israel has undertaken certain
military actions in the West Bank and the Gaza Strip. In connection with these
actions the Israeli military has instituted a partial mobilization of its
reserve forces. There can be no assurance that ongoing or revived hostilities or
other factors related to Israel will not have a material adverse effect on us or
on our business or adversely affect our share price.
Some of our officers and employees in Israel are obligated to perform
up to 39 days of military reserve duty annually and in some cases may be called
upon to serve upon short notice. In addition, in some cases such reserve duty
may exceed the above mentioned 39 days. The absence of these employees for
significant periods during the work week may cause certain operating
difficulties during these periods. Additionally, a number of countries continue
to restrict or ban business with Israel or Israeli companies, which may limit
our ability to make sales in those countries.
Exchange rate fluctuations between the dollar and the NIS may
negatively affect our earnings. A substantial majority of our revenues and a
substantial portion of our expenses are denominated in dollars. However, a
significant portion of the expenses associated with our Israeli operations,
including personnel and facilities related expenses, are incurred in NIS.
Consequently, inflation in Israel will have the effect of increasing the dollar
cost of our operations in Israel, unless it is offset on a timely basis by a
devaluation of the NIS relative to the dollar. We cannot predict any future
trends in the rate of inflation in Israel or the rate of valuation of the NIS
against the dollar. If the dollar cost of our operations in Israel increases,
our dollar-measured results of operations will be adversely affected.
Any failure to obtain the tax benefits from the State of Israel that we
anticipate receiving could adversely affect our plans and prospects. Pursuant to
the Law for the Encouragement of Capital Investments, 1959, the Israeli
government has granted "Approved Enterprise" status to our existing capital
investment programs. Consequently, we are eligible for certain tax benefits for
the first several years in which we generate taxable income. However, we have
not yet begun to generate taxable income for purposes of this law. Once we begin
to generate taxable income, our financial results could suffer if our tax
benefits were significantly reduced.
In order to receive tax benefits, we must comply with a number of
conditions and criteria. If we fail to comply in whole or in part with these
conditions and criteria, the tax benefits that we receive could be partially or
fully canceled and we could be forced to refund the amount of the benefits we
received, adjusted for inflation and interest. Although we believe that we have
operated and will continue to operate in compliance with the required
conditions, we cannot guarantee that this will continue.
11
In May 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance issued a report recommending a reform in the Israeli system
of taxation. The proposed reform would significantly alter the taxation of
individuals, and would also affect corporate taxation. In particular, the
proposed reform would reduce, but not eliminate, the tax benefits available to
Approved Enterprises such as ours. The Israeli cabinet approved the
recommendations in principle, but implementation of the reform requires
legislation by Israel's Knesset (parliament). The Israeli government has set up
a new committee to examine tax reform issues and the Israeli government has
indicated that it may eliminate significant aspects of the proposed reform. We
cannot be certain whether the proposed reform will be adopted, when it will be
adopted or what form any reform will ultimately take.
We cannot assure you that these tax benefits will be continued in the
future at their current levels or at all. The termination or reduction of tax
benefits could have a material adverse effect on our business, financial
condition and results of operations. In addition, in the event that we increase
our activities outside the State of Israel due to, for example, future
acquisitions, these activities generally will not be eligible for inclusion in
Israeli tax benefit programs. Accordingly, our effective corporate tax rate
could increase significantly in the future.
The government grants we have received for research and development
expenditures restrict our ability to manufacture products and transfer
technologies outside of Israel and require us to satisfy specified conditions.
From time to time we have received royalty-bearing grants from the Office of the
Chief Scientist of the Ministry of Industry and Trade of the Government of
Israel. The terms of these grants prohibit us from manufacturing products or
transferring technologies developed using these grants outside of Israel without
special approvals. Even if we receive approval to manufacture these products
outside of Israel, we may be required to pay increased royalties, up to 300% of
the grant amount plus interest, depending on the manufacturing volume that is
performed outside of Israel. The technology developed with these grants may not
be transferred to third parties without the prior approval of a governmental
committee under the Research and Development Law, and may not be transferred to
non-residents of Israel. These restrictions may impair our ability to outsource
manufacturing or engage in similar arrangements for those products or
technologies. In addition, if we fail to comply with any of the conditions
imposed by the Office of the Chief Scientist, we may be required to refund any
grants previously received, together with interest and penalties. Recently a
committee for review of government support in research and development proposed
certain amendments to the Research and Development Law, including amendments
aimed to relax restrictions on transfer of technology or manufacturing abroad
subject to making certain payments. A formal bill containing these amendments
has been submitted to Israel's Knesset (Parliament). There is no assurance as to
whether or when such proposals will be enacted and what effect they may have on
us.
Certain provisions of our articles of association and of Israeli law
could delay, hinder or prevent a change in our control. Our articles of
association contain provisions which could make it more difficult for a third
party to acquire control of us, even if that
12
change would be beneficial to our shareholders.For example, our articles of
association provide that our board of directors is divided into three classes,
each serving three-year terms. In addition, certain provisions of the Israeli
Companies Law, which came into effect in February 2000, could also delay or
otherwise make more difficult a change in our control. The provision of the
Israeli Companies Law relating to mergers and acquisitions are discussed in
greater detail in "Item 10: Memorandum and Articles of Association."
Our stock is traded on more than one stock exchange and this may result
in price variations. Our stock is traded on the Nasdaq National Market and on
the Tel Aviv Stock Exchange. Our stock is traded on these markets in different
currencies (US dollars on the Nasdaq and New Israeli Shekels on the Tel Aviv
Stock Exchange) and at different opening times (notably, different time zones
and public holidays; in addition, the Tel Aviv Stock Exchange is closed on
Friday and open on Sunday, while the Nasdaq is open on Fridays and closed on
Sundays). This means that our stock is often traded at a price differential on
these two markets resulting, among other factors, from the different trading
times and the differences in exchange rates. In addition, we are subject to the
regulatory rules of the Tel Aviv Stock Exchange. We have no control over these
issues, but our shareholders may be affected by them.
ITEM 4: INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated in Israel in December 1990 as a limited liability
company. On August 9, 1999 we changed our name from Client/Server Technology
Ltd. to Jacada Ltd. Our commercial name is Jacada.
Our registered office in Israel is 11 Galgalei Haplada Street, Herzliya
46722 Israel and our telephone number is 972-9-952-5900. Our agent in the United
States is Robert C. Aldworth, whose address is 400 Perimeter Center Terrace,
Suite 195, Atlanta, Georgia 30346. Our address on the Internet is
http://www.jacada.com. The information on our website is not incorporated into
this Annual Report.
Since October 1999, the Company's Ordinary Shares have been quoted on
the NASDAQ National Market under the symbol "JCDA." In addition, the Company's
Ordinary Shares have been quoted on the Tel Aviv Stock Exchange under the same
symbol or its Hebrew equivalent since June 18, 2001. Jacada develops, markets
and supports software that enables businesses to web-enable, modernize and
integrate their existing host-centric software applications to better serve the
needs of their users, customers, and partners. We also provide related
professional services, including training, consulting, support and maintenance.
Our products and services provide our end users with comprehensive eBusiness
enabling solutions.
Typical users of our products and services are medium to large
businesses with sophisticated technology requirements. Some of the companies
that have implemented or
13
are implementing our solutions include AIG, Bank of America, Caterpillar, Delta
Air Lines, U.S. Department of Interior, The Federal Reserve Bank, Harrahs,
Liberty Mutual, Her Majesty's Land Registry, Lockheed Martin, Manpower, Porsche
Cars North America, Prudential Life Insurance Company and Saab Cars.
See Items 5 and 18 for a description of capital expenditures by the
Company for the past three fiscal years. The Company has made no divestitures
during the same time period.
We are not aware of any public takeover offers by third parties in
respect of our shares, and we have made no public takeover offers in respect of
other companies' shares during fiscal years 2000 and 2001.
B. BUSINESS OVERVIEW
INDUSTRY OVERVIEW
The Internet has fundamentally changed the way companies think about
their business strategies. It has created opportunities for companies to make
their applications and data accessible to their employees, customers, suppliers
and other third parties quickly and cost-effectively. The strategic importance
of eBusiness is driving the demand for solutions that can provide the necessary
infrastructure to extend existing applications and data to browser-enabled
desktops and to the Internet.
A significant number of the applications that are critical to companies
in operating their businesses, such as customer account information
applications, sales and inventory management applications, customer order
information applications and manufacturing enterprise resource planning
applications, are currently held in host-centric environments such as those
based on mainframes and mini-computers. According to META Group, an independent
research organization, more than 70% of corporate data still resides in the
mainframe environment alone. Applications for host-centric systems are typically
complex and proprietary and tailored to the needs of a specific company. These
applications were originally designed to be accessible only by a fixed network
of users, principally employees. Furthermore, these applications have
complicated text-based user interfaces, which lack the flexibility and
intuitiveness of today's graphical user interfaces. Companies continue to rely
heavily on and invest a significant amount of resources in host-centric
applications and data.
Companies are increasingly seeking to circumvent the limitations of
their existing host-centric systems by utilizing the broad distribution
potential of browser-enabled desktops and the Internet to grant employees,
customers, suppliers and corporate partners easy access to applications and
data. Additionally, as newer applications are implemented, such as Customer
Relationship Management software (CRM), there is an increasing need to easily
integrate existing host-centric applications with these new systems.
Web-enabling or integrating existing host-centric applications may be
accomplished by either completely rewriting the existing applications or by
using
14
technologies like ours to leverage those applications that exist today.
Rewriting an application involves significant time and expense, as well as
uncertain scheduling, budgeting and results. It may also render the skills and
knowledge of a company's information technology staff obsolete. Companies' large
investments in existing host-centric applications have created the need for a
solution that enables application re-use without the costs, risks, and time
required to rewrite the application. Gartner Group, an independent research
organization, expects that, by the year 2003, 80% of application development
organizations, which include internal application development departments and
independent software vendors, will extend some or all of their applications to
the Internet. Extending or integrating host-centric applications with products
like ours allows companies to utilize their existing applications and data and
can typically be accomplished more quickly than rewriting applications.
An effective solution to extend and integrate existing applications
should:
- be able to be implemented rapidly;
- enable the deployment of a comprehensive solution that does not require
extensive custom programming;
- provide a flexible architecture that allows for the efficient
incorporation of evolving technologies; and
- be able to operate on multiple platforms and support a variety of
applications.
OUR SOLUTIONS
We develop, market and support software that enables businesses to
web-enable, modernize, and integrate their existing host-centric applications to
better serve the needs of their users, customers, and partners. Our solutions
provide the following benefits:
- Leverage Existing Information Technology Resources. Our solutions
permit companies to access their existing host-centric applications
through browser-enabled desktops or over the Internet, and can
integrate these existing applications with newer software
implementations such as CRM solutions from companies such as Siebel
Systems, Inc. This eliminates the need to replace existing applications
through time-consuming and expensive custom programming. Additionally,
our solutions allow programmers trained in various languages to program
in their native software languages and to deliver applications that are
web-enabled.
- Allow Rapid Implementation. We design our solutions to be implemented
rapidly and to require minimal customization. Consequently, our
solutions can typically be implemented more rapidly than
internally-developed solutions.
15
- Provide a Complete eBusiness Enabling Solution. Our comprehensive
solutions allow companies to conduct eBusiness to the same extent as
available by direct connection with the host computer, without
purchasing any other products.
Our solutions have been or are being implemented by hundreds of companies
worldwide. Our customers receive the following advantages:
- Flexibility to Adapt to Evolving Business Needs. We design our
solutions to work effectively even as companies modify existing and add
new applications in response to their evolving business needs. As
companies program changes into their applications, our solutions
automate the changes in the graphical user interface.
- Reliability and Scalability. Our solutions are designed to provide the
reliability required for applications that are critical to the
operation of businesses, and are easily scalable to accommodate
additional users in response to the evolving business needs of our
customers.
- Programming Language Independence. Our solutions protect our customers
from changes in interface development trends by generating multiple
interface language standards from the same interface design.
- Platform Independence. Our Java-based solution provides customers with
the flexibility to run our products on any Java-enabled platform,
including IBM S/390 (zSeries), AS/400 (iSeries), Sun Solaris, HP UX,
IBM AIX, Microsoft Windows NT and Microsoft Windows 2000.
PRODUCTS AND TECHNOLOGY
Our products and services provide our customers with a comprehensive
eBusiness enabling solution. Our products include:
Jacada(R) Interface Server. Jacada Interface Server generates graphical
user interfaces for mainframe and midrange software applications without
requiring any change to the host applications. By generating Java or HTML
graphical interfaces, Jacada Interface Server enables our customers to
extend their host-centric applications and data to the Internet and their
intranets without rewriting these applications. In addition, Jacada
Interface Server provides the modern graphical features users expect from
today's applications. Jacada Interface Server also allows customers to
enhance their applications to add functionality, integrate with other data
sources and link to other Internet applications.
Jacada Interface Server also provides an ability to modernize the
architecture of some host-centric applications. Developed in cooperation
with IBM, the Jacada Interface Server's DDS Bridge and Jacada Interface
Server for New Development contain innovative technology which enables new
or existing applications written in COBOL or RPG to leverage the Jacada
presentation technology to deliver graphical "thin
16
client" user screens, replacing the text-based," green screen" architecture
found in legacy applications. Any software developer can utilize the Jacada
Interface Server without any special knowledge of any other programming
language. This allows organizations to leverage their existing software
skills and resources to build modern applications. We have full ownership
rights in these Jacada Interface Server products.
Jacada(R) Integrator. Jacada Integrator is a software solution for
integrating core host-centric business systems, including the data and
processes in those systems, with multiple packaged applications,
frameworks, and client environments.
Jacada has established sales and marketing relationships with Siebel
Systems and SeeBeyond, Inc. to utilize Jacada Integrator where a real-time,
non-intrusive solution is required to integrate a host-centric application
with its CRM or EAI solutions, respectively. Our customers get the benefits
of on-line, real-time integration with back-office applications without
rewriting any of their existing systems.
Some of Jacada Integrator's key features include:
- Automated tools for capturing screens and navigation, minimizing the
amount of code to be written;
- Support for a wide range of client front-ends, including Java, Windows
APIs (such as ActiveX), and C-language libraries;
- Special adapters and validation with Siebel eBusiness Solutions (CRM);
- Special adapter and validation with SeeBeyond (EAI);
- Special adapter for IBM MQSeries;
- Support for XML;
- Support for Application Servers, including WebSphere and WebLogic; and
- Support for a wide range of back-end host-centric systems, including
IBM mainframes (S/390 or zSeries) presenting 3270 screens, IBM AS/400s
or iSeries presenting a 5250 interface, and a variety of UNIX, VMS,
and other systems presenting a Telnet (VT100/220) interface.
Jacada Interface Server and Jacada Integrator are based on our following core
technology components:
- - Jacada KnowledgeBase. The Jacada KnowledgeBase is a set of sophisticated
algorithms for analyzing and interpreting host-centric applications and
converting patterns on those text-based applications into graphical user
interface components. During the conversion process, the Automated
Conversion Environment automatically matches all the patterns identified on
the screen with pattern definitions
17
in the KnowledgeBase. The KnowledgeBase then generates a new graphical user
interface based on these pattern definitions.
- - Jacada Automated Conversion Environment (ACE). In combination with the
Jacada KnowledgeBase, ACE forms the powerful core of a solution that can
quickly and easily generate graphical user interfaces for mainframe and
midrange software applications. This allows companies to extend their
host-centric applications to the Internet through user interfaces that are
graphical in nature and intuitive, as opposed to user interfaces that are
comprised solely of text. Graphical user interfaces may be created using
Java, HTML or ActiveX/Visual Basic. ACE allows users to customize the
graphical user interface by changing colors, fonts, sizes and layout, as
well as by adding or deleting functions or graphics.
- - MapMaker. Jacada Integrator includes our MapMaker graphical integration
environment that enables the development of complex application integration
solutions in an easy to use and understand modeling environment. It employs
a rapid, component-based approach to legacy integration that requires no
changes to the existing systems, saving time and eliminating complexity.
MapMaker creates a map of the host application that consists of the
application screens, the navigational information required to traverse
through a sequence of screens, and the tags and fields included on each
host application screen. This information is stored in Java class files
produced within MapMaker that are implemented as Java services. Jacada
Integrator also provides a means for packaging MapMaker services as
Enterprise Java Beans.
PROFESSIONAL SERVICES
Our professional services include training, consulting, support and
maintenance services. Support and maintenance services are provided to our
customers through agreements under which we provide technical support by
telephone, fax, email and the Internet and provide updates, upgrades and fixes
to our software products. We require our customers to purchase support and
maintenance services at a fixed annual fee for 12 months after the initial
purchase of a software license, renewable annually thereafter. In addition,
customers can elect optional services such as emergency coverage on a 24 hours
per day, seven days per week basis and dedicated technical account managers. We
also provide customer training at our Atlanta, Georgia facility and other
locations, with coursework related to various aspects of our products.
We provide our direct customers with training services to assist them
in learning how to use our products. We also provide our direct customers with
consulting services to assist them with installing our products and integrating
our products into their systems, and to assist them with managing and enhancing
their utilization of our products on an ongoing basis.
We bill for consulting services by the hour plus out of pocket expenses
and for training services by the day plus out of pocket expenses. We typically
enter into commitments with customers to provide blocks of training and
consulting services.
18
However, customers are not obligated to utilize the entire blocks of time and
are permitted to pay only for the services that are actually rendered. The
majority of our trainers and consultants are located in the United States. Our
distributors and other resellers typically provide training and consulting
services directly to their customers, assisted by us as necessary.
PRINCIPAL MARKETS
Our principal markets are North America and Europe. We generate
revenues from licensing our software products to customers and providing
customers with such services as training, consulting, support and maintenance.
Software license revenues constituted approximately 42.8%, 61.7% and 60.5% of
our total revenues for the years ended December 31, 2001, 2000 and 1999,
respectively, while service and maintenance revenues constituted approximately
57.2%, 38.3% and 39.5% of our total revenues, respectively, for the same
periods. Software license revenues generated from North American customers
constituted approximately 37.3%, 55.6% and 46.2% of our total revenues for the
years ended December 31, 2001, 2000 and 1999, respectively, while service and
maintenance revenues generated from North American customers constituted
approximately 54.5%, 36.9% and 35.2% of our total revenues, respectively, for
the same periods. Software license revenues generated from European customers
constituted approximately 5.5%, 6.1% and 14.2% of our total revenues for the
years ended December 31, 2001, 2000 and 1999, respectively, while service and
maintenance revenues generated from European customers constituted approximately
2.7%, 1.4% and 4.4% of our total revenues, respectively, for the same periods.
The percentage of our revenues derived from the provision of services and
maintenance increased during 2001 primarily because a growing base of customers
utilized training and consulting services and support and from the effects of
economic conditions which resulted in a decline in software license revenues.
Our gross margins on software license revenues have historically been higher
than our gross margins on service and maintenance revenues.
Seasonality
Sales of our products and services tend to be lower in our first
quarter, and higher in our fourth quarter, due to the capital budgeting and
purchasing cycles of our current and prospective customers. It is difficult for
us to evaluate the degree to which this seasonality may affect our business in
the future.
RAW MATERIALS
Not applicable.
SALES AND MARKETING
We sell our products through our direct sales force in North America
and Europe, as well as through our indirect distribution channels, consisting of
software distributors, independent software vendors and system integrators, in
North America and Europe, as
19
well as in countries where we have no direct sales operations. As of December
31, 2001, we had 53 people in our sales and marketing organization.
Our indirect distribution channels have capabilities that complement
and augment our eBusiness solution and extend our market reach. In particular,
independent software vendors often contribute industry-specific and
application-specific expertise as well as large scale project management
capabilities that enable us to address a broad range of vertical markets.
Independent software vendors and system integrators often package or incorporate
our products with their products or solutions. This enables us to create
combined offerings that address specific needs, particularly for specific
vertical markets, and provide more complete and tailored offerings.
Our marketing efforts are focused on developing greater awareness among
our target customers of our solution and the benefits it can provide. We market
our products and services online and through tradeshows and public relations
activities. We have developed a wide range of collateral materials and sales
tools that are used by our direct sales force and our indirect distribution
channels. These materials include brochures, white papers, case studies, press
releases and our Web site.
CUSTOMERS
Our customers include both end users to whom we sell our products and
services directly and distributors and other intermediaries who either resell
our products to end users or incorporate our products into their own product
offerings. Typical end users of our products and services are medium to large
businesses with sophisticated technology requirements.
These companies are using our solutions to rapidly deploy eBusiness
applications. Some examples of our customers include:
- - Insurance companies are using our solutions to modernize their call center
applications, web-enable access to these applications for customers to
update account information via the Internet, and integrate their customer
information systems with customer relationship management applications.
- - Financial institutions are using our solutions to provide real-time
integration between Siebel eBusiness Solutions (CRM) and existing
back-office systems, eliminating redundant data entry, providing real-time
data access and processing, and enhancing customer service and service
levels.
- - Automotive companies are using our solutions to enhance the quality of
their services by enabling dealers in their networks to utilize previously
centralized sales and inventory management systems to locate and order cars
and parts inventory.
- - Retailers are using our solutions to enable existing back-office software
applications to be used to receive and process orders from customers and to
send orders to suppliers via the Internet.
20
- - A car rental company is utilizing our solutions to permit employees of an
insurance company to check availability and order cars for their insured
customers via the Internet.
- - Enterprise resource planning software vendors are utilizing our solutions
in concert with their manufacturing applications software to enable their
customers to manage the customers' manufacturing and inventory processes
via the Internet.
RESEARCH AND DEVELOPMENT
We believe that strong product development capabilities are essential
to our strategy of continuing to enhance and expand the capabilities of our
products in order to continue to provide our customers with eBusiness enabling
solutions. We have invested significant time and resources in creating a
structured process for undertaking all product development. This process
involves several functional groups at all levels within our organization and is
designed to provide a framework for defining and addressing the activities
required to bring product concepts and development projects to market
successfully. In addition, we have recruited key software engineers and
developers with experience in Java, communications, expert systems and Internet
technologies.
Our research and development efforts have been primarily focused on
enhancing and adding functionality to our existing products and adding new
products based on our expectations of future technologies and industry trends.
Our research and development expenses were $6.4 million for the year
ended December 31, 2001, $5.0 million for the year ended December 31, 2000, and
$3.3 million for the year ended December 31, 1999. As of December 31, 2001, 62
professionals were engaged in research and development activities.
DEPENDENCE ON PATENTS AND LICENSES
We are the owner of our core technology and the software products we
license to customers. We are not dependent on any third party license or patent
with respect to such technology or products. While we have two patents pending
for our technology, we believe that the failure to obtain such patents would not
diminish our ownership rights in our technology or our software products.
COMPETITION
The eBusiness enabling software market is extremely competitive and
subject to rapid change. We believe that the competitive factors affecting the
market for our products and services include:
- product functionality and features;
- availability of global support;
- incumbency of vendors;
21
- ease of product implementation;
- quality of customer support services;
- product reputation; and
- financial stability of vendors.
The relative importance of each of these factors depends upon the
specific customer environment. Although we believe that our products and
services currently compete favorably with respect to these factors, we may not
be able to maintain our competitive position against current and potential
competitors. In addition, many companies choose to deploy their own information
technology personnel or utilize system integrators to write new code or rewrite
existing applications in an effort to develop eBusiness solutions. As a result,
prospective clients may decide against purchasing and implementing externally
developed and produced solutions such as ours.
We compete with companies that utilize varying approaches to enable
host-centric software applications to be utilized over the Internet. These
companies include Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO
Software Inc., Vitria Technology, Inc., WRQ, Inc. and webMethods, Inc. We expect
additional competition from other established and emerging companies.
Furthermore, our competitors may combine with each other, or other companies may
enter our markets by acquiring or entering into strategic relationships with our
competitors.
MATERIAL EFFECTS OF GOVERNMENT REGULATION IN ISRAEL
Our principal research and development facilities are located in
Israel. We are therefore directly influenced by the political, economic and
military conditions affecting Israel. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and
its Arab neighbors. Any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
materially adversely affect our operations. Despite the negotiations towards
peace between Israel and certain of its Arab neighbors, the future of these
peace efforts is uncertain. Since October 2000, there has been a significant
increase in violence primarily in the West Bank and in the Gaza Strip and
negotiations between Israel and the Palestinian representatives have ceased for
periods of time. There can be no assurance that ongoing or revived hostilities
or other factors related to Israel will not have a material adverse effect on us
or on our business or adversely affect our share price.
Some of our officers and employees in Israel are obligated to perform
up to 39 days of military reserve duty annually. The absence of these employees
for significant periods during the work week may cause certain operating
difficulties during these periods. Additionally, a number of countries continue
to restrict or ban business with Israel or Israeli companies, which may limit
our ability to make sales in those countries.
22
A substantial majority of our revenues and a substantial portion of our
expenses are denominated in dollars. However, a significant portion of the
expenses associated with our Israeli operations, including personnel and
facilities related expenses, is incurred in NIS. Consequently, inflation in
Israel will have the effect of increasing the dollar cost of our operations in
Israel, unless it is offset on a timely basis by a devaluation of the NIS
relative to the dollar. We cannot predict future trends in the rate of inflation
in Israel or the rate of valuation of the NIS against the dollar. If the dollar
cost of our operations in Israel increases, our dollar-measured results of
operations will be adversely affected.
Pursuant to the Law for the Encouragement of Capital Investments, 1959,
the Israeli government has granted "Approved Enterprise" status to our existing
capital investment programs. Consequently, we are eligible for certain tax
benefits for the first several years in which we generate taxable income.
However, we have not yet begun to generate taxable income for purposes of this
law. Once we begin to generate taxable income, our financial results could
suffer if our tax benefits were significantly reduced.
In order to receive tax benefits, we must comply with a number of
conditions and criteria. If we fail to comply in whole or in part with these
conditions and criteria, the tax benefits that we receive could be partially or
fully canceled and we could be forced to refund the amount of the benefits we
received, adjusted for inflation and interest. Although we believe that we have
operated and will continue to operate in compliance with the required
conditions, we cannot guarantee that this will continue.
In May 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance issued a report recommending a reform in the Israeli system
of taxation. The proposed reform would significantly alter the taxation of
individuals, and would also affect corporate taxation. In particular, the
proposed reform would reduce, but not eliminate, the tax benefits available to
Approved Enterprises such as ours. The Israeli cabinet approved the
recommendations in principle, but implementation of the reform requires
legislation by Israel's Knesset (parliament). The Israeli government has set up
a new committee to examine tax reform issues and the Israeli government has
indicated that it may eliminate significant aspects of the proposed reform. We
cannot be certain whether the proposed reform will be adopted, when it will be
adopted or what form any reform will ultimately take.
We cannot assure you that these tax benefits will be continued in the
future at their current levels or at all. The termination or reduction of tax
benefits could have a material adverse effect on our business, financial
condition and results of operations. In addition, in the event that we increase
our activities outside the State of Israel due to, for example, future
acquisitions, these activities generally will not be eligible for inclusion in
Israeli tax benefit programs. Accordingly, our effective corporate tax rate
could increase significantly in the future.
From time to time we have received royalty-bearing grants from the
Office of the Chief Scientist of the Ministry of Industry and Trade of the
Government of Israel. The terms of these grants prohibit us from manufacturing
products or transferring technologies developed using these grants outside of
Israel without special approvals.
23
Even if we receive approval to manufacture these products outside of Israel, we
may be required to pay increased royalties, up to 300% of the grant amount plus
interest, depending on the manufacturing volume that is performed outside of
Israel. The technology developed with these grants may not be transferred to
third parties without the prior approval of a governmental committee under the
Research and Development Law, and may not be transferred to non-residents of
Israel. These restrictions may impair our ability to outsource manufacturing or
engage in similar arrangements for those products or technologies. In addition,
if we fail to comply with any of the conditions imposed by the Office of the
Chief Scientist, we may be required to refund any grants previously received,
together with interest and penalties. Recently a committee for review of
government support in research and development proposed certain amendments to
the Research and Development Law, including amendments aimed to relax
restrictions on transfer of technology or manufacturing abroad subject to making
certain payments. A formal bill containing these amendments has been submitted
to Israel's Knesset (Parliament). There is no assurance as to whether or when
such proposals will be enacted and what effect they may have on us.
The Israeli Companies Law, which came into effect in February 2000, has
brought about significant changes to Israel's corporate law. Under this new law,
there may be uncertainties regarding corporate governance in some areas. These
uncertainties will persist until this law has been adequately interpreted, and
these uncertainties could inhibit takeover attempts or other transactions and
inhibit other corporate decisions.
C. ORGANIZATIONAL STRUCTURE
Jacada holds 100% of the stock in Jacada, Inc., a corporation organized
under the laws of the state of Delaware, and 100% of the stock in Jacada
(Europe) Limited, a company organized under the laws of England. Jacada, Inc.
holds 100% of the stock of Jacada Canada, Inc., a federal corporation
incorporated under the laws of Canada. Jacada (Europe) Limited holds 100% of the
stock of Jacada Deutschland GmbH, a limited liability company organized under
the laws of Germany.
D. PROPERTY AND EQUIPMENT
As of December 31, 2001, our headquarters and principal administrative,
research and development operations were located in approximately 18,000 square
feet of leased office space in Herzliya, Israel. The lease expires in September
2002 with two renewal options each for two additional years.
In the United States, we lease approximately 19,050 square feet in
Atlanta, Georgia which we utilize for administration, marketing, sales, service
and technical support. The lease expires in June 2002. In addition, we lease
approximately 5,100 square feet in Brooklyn Park, Minnesota which we use for
research and development, sales, and technical support. The lease expires in
September 2007. We also lease office space in the Washington, D.C. area and
Chicago, Illinois which we utilize for marketing and sales.
24
In addition, we currently lease approximately 1,900 square feet in
London, England which we utilize for sales, marketing and services. The London
lease expires in October 2002.
We are currently exploring options of either extending our existing
leases or leasing alternate office space in Herzliya, Israel, Atlanta, and
London.
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
We develop, market and support software that enables businesses to
utilize their existing host-centric software applications to conduct business
over the Internet. We also provide related professional services, including
training, consulting, support and maintenance.
We were incorporated in December 1990. In March 1994, we shipped our
first product, GUISys. Until that time, our operations consisted primarily of
research and development, recruiting personnel and raising capital. Since that
time, we have continued to focus on these activities, as well as on building our
sales and marketing presence, expanding and enhancing our product offerings,
building relationships with third parties, and supporting and maintaining our
product deployments in an expanding customer base.
We and our subsidiaries have adopted American Institute of Certified
Public Accountants Statement of Position (SOP) 97-2, "Software Revenue
Recognition," as amended. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair value of the elements. We and our subsidiaries have also
adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions," for all transactions entered into after
January 1, 2000. SOP 98-9 requires that revenue be recognized under the
"residual method" when Vendor Specific Objective Evidence (VSOE) of fair value
exists for all undelivered elements and no VSOE exists for the delivered
elements.
We derive our revenues from license fees for our products, fees from
consulting and training and from maintenance and support. We sell licenses to
our products primarily through our direct sales force and indirectly through
resellers. Both our customers and our resellers are considered end users. We are
also entitled to revenues from some distributors upon the sublicensing of the
software to end users. Revenues from these sublicensing transactions are
recognized when such revenues are reported to us upon the sublicensing of the
software by the distributors.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. We do not grant a right of return
to our customers. We consider all arrangements with payment terms extending
beyond one year not to be fixed or
25
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer provided that all other revenue
recognition criteria have been met.
Maintenance and support revenue included in software licensing
transactions is deferred and recognized on a straight-line basis over the term
of the maintenance and support agreement.
Transactions that include consulting and training services are
evaluated to determine whether those services are essential to the functionality
of other elements of the transaction. When services are considered essential,
revenue under the transaction is recognized using contract accounting. When
services are not considered essential, the revenue allocable to the software
services is recognized as the services are performed. To date, we have
determined that the consulting and training services are not considered
essential to the functionality of other elements of the transaction.
Where software arrangements involve multiple elements, revenue is
allocated to each element based on VSOE of the relative fair values of each
element in the arrangement, in accordance with the "residual method" prescribed
by SOP 98-9. Our VSOE used to allocate the sales price to services, support and
maintenance is based on the price charged when these elements are sold
separately. License revenues are recorded based on the residual method. Under
the residual method, revenue is recognized for the delivered elements when (1)
there is VSOE of the fair values of all the undelivered elements, and (2) all
revenue recognition criteria of SOP 97-2, as amended, are satisfied. Under the
residual method, any discount in the arrangement is allocated to the delivered
element.
Cost of software license revenues consists of royalties, including
payments to the Office of the Chief Scientist of the State of Israel,
amortization of acquired technology, commissions, and costs of duplicating media
and documentation. Cost of service and maintenance revenues consists of
compensation expense and related overhead costs for personnel engaged in
training, consulting, support and maintenance services for our customers.
We have incurred substantial research and development costs and have
invested heavily in the expansion of our sales and marketing and professional
services organizations to build an infrastructure to support our long-term
growth strategy. Our full-time employees increased from 21 as of January 1, 1995
to 199 as of December 31, 2001. At times, the number of full-time employees
during 2001 exceeded 199 persons; however, we had two reductions in force, in
July 2001 and in October 2001, in an effort to contain our costs during the
economic downturn.
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
development costs are capitalized. Because we do not incur material costs
between the time of completion of
26
development of a software product and the point at which the product is ready
for general release, development costs are charged to the statement of
operations as incurred.
A majority of our revenues and that of our subsidiaries is generated
in United States dollars. Our management believes that the dollar is the primary
currency of the economic environment in which we and our subsidiaries operate.
Thus, our functional and reporting currency and the functional and reporting
currency of our subsidiaries is the dollar.
The effects of foreign currency exchange rate for the years ended
December 31, 2001, 2000, and 1999 were immaterial.
RESULTS OF OPERATIONS
Our historical operating results for the years ended December 31, 2001,
2000 and 1999 as a percentage of net revenues are as follows:
Year Ended December 31,
------------------------------------
2001 2000 1999
------- ------- -------
Revenues:
Software licenses ............................. 42.8% 61.7% 60.5%
Services ...................................... 35.2 24.2 23.0
Maintenance .................................. 22.0 14.1 16.5
----- ----- -----
Total revenues ............................. 100.0% 100.0% 100.0%
Cost of revenues:
Software licenses ............................. 2.0 2.9 4.4
Services ...................................... 19.0 14.4 11.1
Maintenance .................................. 6.7 6.3 7.7
----- ----- -----
Total cost of revenues ..................... 27.7 23.6 23.2
----- ----- -----
Gross profit ..................................... 72.3 76.4 76.8
Operating expenses:
Research and development ...................... 25.2 19.8 22.4
Sales and marketing ........................... 57.2 51.2 44.7
General and administrative .................... 22.2 14.4 13.4
Non Recurring Charges.......................... 11.2 0.0 0.0
----- ----- -----
Total operating expenses ................... 115.8 85.4 80.5
----- ----- -----
Operating loss ................................... (43.5) (9.0) (3.7)
Financial and other income (expense), net ........ 9.1 12.3 3.7
----- ----- -----
Income (loss) before income taxes ................ (34.4) 3.1 (0.0)
Income taxes ..................................... 0.0 (0.0) (0.0)
----- ----- -----
Net income (loss) ................................ (34.4)% 3.1% (0.0)%
===== ===== =====
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Revenues. Revenues were $25.5 million, $25.1 million and $14.6 million
for the years ended December 31, 2001, 2000 and 1999, respectively. The
increases in revenues during these periods were attributable to an increase in
the number of customers buying
27
our software products and using our services and maintenance. For the year ended
December 31, 2001, one customer represented 10% of our revenues. For each of the
years ended December 31, 2000 and 1999, revenues from two different customers
represented 10% or more of our revenues.
Software license revenues were $10.9 million, or 42.8% of revenues for
the year ended December 31, 2001, compared to $15.5 million, or 61.7% of
revenues, for the year ended December 31, 2000, and compared to $8.8 million, or
60.5% of revenues, for the year ended December 31, 1999. The reduction in
software revenues during 2001 is directly related to global economic conditions,
a period in which many customers delayed purchases and placed smaller initial
orders for our software products. The increase in software license revenues
during the 2000 and 1999 periods was primarily due to the growth of our customer
base, recurring sales to our installed base and an increase in average
transaction size.
Service revenues were $9.0 million or 35.2% of revenues for the year
ended December 31, 2001 compared to $6.1 million or 24.2% of revenues, for the
year ended December 31, 2000 and compared to $3.4 million or 23.0% of revenues
for the year ended December 31, 1999. Maintenance revenues were $5.6 million or
22.0% of revenues for the year ended December 31, 2001 compared to $3.5 million
or 14.1% of revenues, for the year ended December 31, 2000 and compared to $2.4
million or 16.5% of revenues for the year ended December 31, 1999. The increases
in service and maintenance revenues during these periods were primarily a result
of new software license sales and our expanding customer base.
Cost of Revenues. Cost of revenues was $7.1 million, or 27.7% of
revenues for the year ended December 31, 2001 compared to $5.9 million, or 23.6%
of revenues, for the year ended December 31, 2000 and compared to $3.4 million,
or 23.2% of revenues, for the year ended December 31, 1999. The increase in cost
of revenues during these periods was primarily due to the cost of providing
increased service and maintenance and support.
Cost of software license revenues was $0.5 million, or 2.0% of
revenues, for the year ended December 31, 2001 compared to $0.7 million, or 2.9%
of revenues, for the year ended December 31, 2000 and compared to $0.6 million,
or 4.4% of revenues, for the year ended December 31, 1999. The decrease in cost
of software license revenues as a percentage of revenues, in relation to the
2000 period, is due to a decrease in payment of royalties to the Office of the
Chief Scientist with respect to certain products.
Cost of service revenues was $4.9 million, or 19.0% of revenues, for
the year ended December 31, 2001, compared to $3.6 million, or 14.4% of
revenues, for the year ended December 31, 2000 and $1.6 million, or 11.1% of
revenues, for the year ended December 31, 1999. Cost of maintenance revenues was
$1.7 million, or 6.7% of revenues, for the year ended December 31, 2001,
compared to $1.6 million, or 6.3% of revenues, for the year ended December 31,
2000 and $1.1 million, or 7.7% of revenues, for the year ended December 31,
1999. The increase in cost of service and maintenance in 2001 relative to 2000
and in 2000 relative to 1999 was a result of an increase in the
28
number of employees required to support increasing customer needs and changes in
the utilization of employees.
OPERATING EXPENSES
The overall increase in total operating expenses from $21.5 million in
2000 to $26.7 million in 2001, exclusive of non-recurring expenses, was due to
an increase in manpower costs to support actual and projected business levels.
The Company experienced compounded annual growth rates in excess of 60% during
the four years prior to 2001 and had similar growth expectations built into the
2001 business plan. The impact of global economic conditions did not affect
Jacada until late in the second quarter of 2001. The early signs impacting
Jacada forced us to temper our business plan objectives and resulted in a small
staff reduction in July. We did not experience the full effect of global
economic conditions until after the September 11th disaster. Once we gained an
understanding of the impact these events would have on our business, we
implemented the restructuring plan described in Restructuring below.
Research and Development. Research and development expenses were $6.4
million, $5.0 million, and $3.3 million for the years ended December 31, 2001,
2000 and 1999, respectively. The increases during these periods were
attributable primarily to the addition of personnel in our research and
development organization associated with increased development programs, quality
assurance and documentation. As a percentage of total revenues, research and
development expenses were 25.2%, 19.8%, and 22.4% for the years ended December
31, 2001, 2000 and 1999, respectively.
Sales and Marketing. Sales and marketing expenses were $14.6 million,
$12.9 million and $6.5 million for the years ended December 31, 2001, 2000 and
1999, respectively. The increases during these periods were attributable to an
increase in our sales and marketing personnel during the periods, which were a
result of our efforts to expand our sales and marketing initiatives in Europe
and to marketing programs aimed at increasing our brand awareness. As a
percentage of total revenues, sales and marketing expenses were 57.2%, 51.2% and
44.7% for the years ended December 31, 2001, 2000 and 1999, respectively.
General and Administrative. General and administrative expenses were
$5.7 million, $3.6 million and $2.0 million for the years ended December 31,
2001, 2000 and 1999, respectively. The increases in general and administrative
expenses were in part due to increased personnel and related overhead to support
our operations and from an increase in the reserve for potential non-collectable
trade receivables associated with the changing global economy. As a percentage
of total revenues, general and administrative expenses were 22.2%, 14.4% and
13.4% of total revenues for the years ended December 31, 2001, 2000 and 1999,
respectively.
Non-Recurring Charges. During 2001, we recorded charges associated with
an arbitration award, the write-off of previously acquired technology and the
cost of our restructuring plan. The total charge was $2.8 million, or 11.2% of
revenues.
29
Arbitration Charge - In August 1999 a former distributor filed an
arbitration complaint against one of our subsidiaries, alleging, among
other things, that the subsidiary breached its agreement with such
distributor by directly selling our products to a customer which the
distributor claimed that it had the exclusive right to sell, entitling
the distributor to damages. The arbitration was held in November 2000
and a decision by the arbitrators was entered on April 3, 2001. The
arbitrators awarded the distributor a net amount of $392,000, including
costs, to date and 50% of amounts billed and collected from the
customer in the future. We had previously established a reserve for a
potential settlement of $125,000, representing an amount equal to the
limitation of liability clause in the agreement. As a result of the
award, we recorded a charge in the first quarter of 2001 of $417,000,
representing the award to date plus $150,000 for amounts billed to the
customer, less the reserve previously recorded. During the fourth
quarter of 2001, we reduced the reserve by $150,000 based on the
customer's failure to pay the amounts billed during the first quarter
of 2001.
We have appealed the decision of the arbitrators on the grounds that
the decision did not cap the subsidiary's exposure to the amount set
forth in the limitation of liability provision of the agreement. In the
interim, pursuant to the arbitrators' decision, we have provided and
will provide on a prospective basis as a selling expense an amount
equal to 50% of amounts billed and collected from the customer that
relate to the agreement that was the subject of the arbitration
proceeding.
Technology Write Off - During the third quarter of 2001 and as part of
our restructuring (see Restructuring below), we revised our product
development plan and abandoned the use of technology previously
acquired for use in the product development cycle. As a result, we
wrote off the unamortized technology in the amount of $1.2 million.
Restructuring - As a result of global economic conditions and the
related impact on our operations, we implemented a worldwide
restructuring plan during the fourth quarter of 2001. The plan included
the elimination of approximately 25% of our workforce and a general
reduction in all operating expenses. As a result of implementing the
plan, by year-end, total employment was reduced to 199, and based on
expense levels prior to the restructuring, we project a reduction in
total expenses of approximately $10 million on an annualized basis. The
cost of implementing the restructuring plan was $1.4 million and is
included in the results for the fourth quarter of 2001.
Financial Income (Expense), Net. Net financial income was $2.3 million
for the year ended December 31, 2001, $3.1 million for the year ended December
31, 2000 and $0.6 million for the year ended December 31, 1999. In October 1999,
we raised approximately $51 million, net of expenses, in an initial public
offering. We maintained most of the funds raised in the public offering
throughout the balance of 1999, 2000 and the first half of 2001. In August 2001
we used approximately $6.9 million for the acquisition of certain assets of
Propelis Software, Inc., a business unit of Computer
30
Network Technology Corporation, and related expenses. Most of the financial
income was generated from investments of our funds in certain financial
instruments, which generate interest and investment income.
Income Taxes. As of December 31, 2001, we had approximately $4.45
million of net operating loss carryforwards for Israeli tax purposes,
approximately $0.52 million of net operating loss carryforwards for German tax
purposes, approximately $5.8 million of net operating loss carryforwards for
United States federal tax purposes and approximately $3.9 million of net
operating loss carryforwards for United Kingdom tax purposes available to offset
future taxable income. The United States net operating loss carryforwards expire
in various amounts between the years 2010 and 2021. The Israeli and the United
Kingdom net operating loss carryforwards have no expiration date.
Net Income (Loss). We generated a net loss of $8.8 million in 2001, net
income of $777,000 in 2000 and a net loss of $6,000 in 1999.
B. LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded operations primarily through the
private placement and public offering of equity securities and, to a lesser
extent, borrowings from financial institutions.
As of December 31, 2001, we had $41.6 million in cash, cash equivalents
and investments, all interest bearing. During 2001, operating activities used
approximately $1.8 million in cash. The major components using cash during 2001
included the net loss of $8.8 million generated from operations and
non-recurring charges and from a reduction in trade payables of $1.6 million.
Partially offsetting the use of cash was a reduction in trade receivables of
$4.4 million at the end of 2001, the non-cash write-off of acquired technology
of $1.2 million and non-cash depreciation and amortization of $1.5 million. The
reduction in trade receivables resulted from a decline in days sales outstanding
from 74 in 2000 to 66 in 2001 and from a reduction in fourth quarter 2001
revenues in relation to fourth quarter 2000 as a result of global economic
conditions.
As of December 31, 2000, we had $52.5 million in cash, cash equivalents
and investments, all interest bearing. During 2000, operating activities used
$2.0 million in cash. The major components using cash included an increase in
trade receivables of $2.6 million in support of increased revenues, and a
decrease in deferred revenues of $2.0 million as we transitioned from selling
products and receiving cash in advance of the period in which the revenue is
earned as a means of financing operations. Partially offsetting the cash used in
operating activities was net income from operations of $0.8 million, non-cash
depreciation and amortization of $1.0 million, and increases in trade payables
of $0.3 million and accrued expenses of $1.0 million associated with increased
business levels relative to 1999.
As of December 31, 1999, we had cash and cash equivalents of $5.1
million and $50.5 million in U.S. Government debentures. Cash used in operations
includes expenditures associated with development activities and marketing
efforts related to
31
promotion of our products. For the year ended December 31, 1999, cash provided
by operations was $0.6 million, comprised of the net loss of $6,000, an increase
in trade receivables of $0.8 million, partially offset by non-cash charges of
$0.7 million, and an increase in accrued expenses of $0.9 million and a decrease
in deferred revenues of $1.1 million.
Expenditures on property and equipment were approximately $1.5 million,
$1.7 million and $1.0 million for the years ended December 31, 2001, 2000 and
1999, respectively. These expenditures include computer hardware and software
used in product development and testing, leasehold improvements relating to new
and existing facilities and office equipment in support of our operations. In
addition, during 2001 we invested approximately $6.9 million in the acquisition
of certain assets of Propelis Software, a business unit of Computer Network
Technology Corporation, and $0.7 million to license technology for use in
product development.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair value of such
assets at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired has been recorded as goodwill.
Fair value of assets acquired and liabilities assumed approximates their book
value. Fair value of technology rights was determined using the income approach,
which reflects the present value of the projected earnings to be generated by
the product which incorporates the technology. Based on the income approach,
technology rights were valued at $1.3 million and determined to have a remaining
life of five years, based on the product life cycle.
We have raised approximately $53.3 million, net of issuance costs, from
sales of equity securities and the exercise of stock options from 1999 through
December 31, 2001 consisting of $0.2 million, $1.0 million, $52.1 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
We have financed our operations and capital requirements through the
sale of equity securities (described above) and bank borrowings in past years.
We have a $2.8 million credit facility with two banks, which is secured by
substantially all of our assets in Israel. We have borrowed under the facility
from time to time on terms that vary for each borrowing. There were no
borrowings outstanding as of December 31, 2001 under the facility.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. Over the next two years,
we expect to devote substantial capital resources to expand our sales and
marketing channels, invest in research and development activities, and increase
our professional services activities. We believe our working capital is
sufficient for our present requirements.
32
Please refer to Item 3.D and Item 10.E for certain information
regarding the possible elimination of tax benefits in Israel.
33
C. RESEARCH AND DEVELOPMENT
We believe that strong product development capabilities are essential
to our strategy of continuing to enhance and expand the capabilities of our
products in order to continue to provide our customers with enabling solutions.
We have invested significant time and resources in creating a structured process
for undertaking all product development. This process involves several
functional groups at all levels within our organization and is designed to
provide a framework for defining and addressing the activities required to bring
product concepts and development projects to market successfully. In addition,
we have recruited key software engineers and developers with experience in Java,
communications, expert systems and Internet technologies.
Our research and development efforts have been primarily focused on
enhancing and adding functionality to our existing products and adding new
products based on our expectations of future technologies and industry trends.
Our research and development expenses were $6.4 million for the year
ended December 31, 2001, $5.0 million for the year ended December 31, 2000 and
$3.3 million for the year ended December 31, 1999. As of December 31, 2001, 2000
and 1999, respectively, we had 62, 63 and 46 employees engaged in our product
development activities.
D. TREND INFORMATION
We have been affected by global economic conditions in that existing
and potential customers are closely monitoring their capital investments in
products such as ours. The early effects of these conditions on Jacada forced us
to temper our business plan objectives and resulted in a small staff reduction
in July 2001. We did not experience the full effect of global economic
conditions until after the September 11th disaster. Once we gained an
understanding of the impact these events would have on our business, we
implemented the restructuring plan described in Restructuring above. Our sales
cycle generally continues to be at least six months from the date we qualify a
prospective customer, but could be longer based on specific circumstances. We
have no backlog of orders, as backlog is not a significant factor in our
business.
34
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information regarding our
executive officers and directors as of March 31, 2002:
Name Age Position
- ------------------------ -------- --------------------------------------------------
Gideon Hollander(1)(2) 37 Chief Executive Officer and Director
Michael J. Potts 39 President
Robert C. Aldworth 48 Chief Financial Officer
Peter M. Fausel 42 President, Jacada Inc.
David Holmes 46 Senior Vice President, Marketing
Nimrod Gil-Ad 36 Vice President, Research and Technology and Chief
Technology Officer
Tzvia Broida 32 Vice President, Finance
Christian Singer 38 Managing Director, Jacada Deutschland GmbH
Michael Warner 41 Managing Director, Jacada (Europe) Limited
Yossie Hollander(1) 44 Chairman of the Board and Director
Amnon Shoham(1)(2)(3) 44 Director
Ohad Zuckerman(3) 36 Director
Naomi Atsmon(3) 49 Director
- --------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Gideon Hollander was a co-founder of Jacada in 1990 and has served as
our Chief Executive Officer since1990. From 1988 to 1990, Mr. Hollander worked
in the area of research and development at Comverse Technology. From 1982 to
1987, Mr. Hollander served in various technology and management positions in an
elite unit of the Israeli Defense Forces, where he specialized in expert systems
and user interface design. Two of the projects that Mr. Hollander managed won
the most prominent Israeli award for technological innovations.
Michael J. Potts has been President of Jacada Ltd. since January 2001.
Prior to his appointment as President, Mr. Potts served as President of Jacada,
Inc. and President of World Wide Distribution since 1998. From July 1995 to May
1998, Mr. Potts was a Senior Vice President of Jacada, Inc. From September 1987
to April 1995, Mr. Potts held various sales and sales management positions with
Dun & Bradstreet Software, a financial application software company, later
acquired by Geac Computer Corporation Limited, until his resignation as Eastern
Regional Manager. Mr. Potts holds an undergraduate degree in Marketing from the
University of Georgia.
Robert C. Aldworth has been the Chief Financial Officer of Jacada Ltd.
since January 2001. From August 1999 to July 2000, he was Chief Financial
Officer and Director of Real Estate.com, Inc., an internet service provider to
real estate professionals, and from June 1997 to March 1999 he was Chief
Financial Officer at Homestead Village
35
Inc., a provider of extended stay lodging. From January 1996 to June 1997, he
was Chief Operating Officer of LAT Sportswear Inc., a manufacturer and
distributor of sporting apparel.
Peter M. Fausel has been President of Jacada, Inc. since January 2001.
During 2000, he was the senior vice president of sales and marketing at Ross
Systems, Inc. From 1995 to 2000, Mr. Fausel held various positions at Invensys
PLC, a software company, including managing director of a business segment. From
1983 until 1995, he worked for ABB Group, holding positions in sales and general
management.
David Holmes has been Senior Vice President, Marketing since June 1998
and Vice President of Marketing since October 1995. From June 1991 to October
1995, Mr. Holmes was Marketing Director for KnowledgeWare, Inc., later acquired
by Sterling Software, Inc. From March 1984 to June 1991, Mr. Holmes was a
consultant for Deloitte & Touche. Mr. Holmes holds a masters degree in Decision
Sciences from Georgia State University and an undergraduate degree in Industrial
Economics from Union College in Schenectady, New York.
Nimrod Gil-Ad was a co-founder of Jacada in 1990 and currently serves
as our Vice President, Research and Technology and Chief Technology Officer.
From 1988 to 1990, Mr. Gil-Ad worked at Algorithmic Research Limited, later
acquired by Cylink, a world leader in the fields of cryptography, access control
and communications security. From 1983 to 1988, Mr. Gil-Ad was part of an elite
unit in the Israel Defense Forces where he specialized in systems programming
and design. Mr. Gil-Ad directed the development of new software concepts
including one of the first full client/server systems in 1985. Mr. Gil-Ad holds
an undergraduate degree in Mathematics and Computer Science from the Tel-Aviv
University, Israel.
Tzvia Broida is the Vice President, Finance of Jacada Ltd., having
served in this capacity since March 2000. Mrs. Broida has held various positions
at Jacada since August 1995. From 1994 to 1995, Mrs. Broida worked as an
accountant at the accounting firm of Yehuda Ehrlich & Partners. From 1992 to
1994, Mrs. Broida worked as an accountant at the accounting firm of Vexler,
Kodenzick & Partners. Mrs. Broida holds a BA degree in Accounting and Economics
from the Jerusalem University.
Christian Singer has been Managing Director of Jacada Deutschland GmbH
since February 2001. From April 2000 until he joined Jacada, Mr. Singer worked
as Business Unit Manager and Director Sales & Marketing for Geac Central Europe.
From 1997 to 2000, he held various positions in Baan Company in Germany and the
UK, where he successfully established the Baan Automotive Organisation. Between
1992 and 1997, Mr. Singer was employed at Zeuna Starker GmbH & Co KG, a German
Tier 1 automotive supplier with operations on three continents. Mr. Singer holds
a Business Degree from Augsburg University, Germany and an MBA from City
University Business School in London, England.
Michael Warner has been Managing Director, Jacada (Europe) Limited
since August 2001. From May 2000 until July 2001, Mr. Warner was the Director,
Worldwide
36
Channels, of Jacada Europe Limited. From 1995 to June 2000, he held various
sales management positions with Sterling Software UK Limited, later acquired by
Computer Associates Inc. until his resignation as Regional Manager, Eastern
Europe. From 1990 to 1995 he held various sales positions at McDonnell Douglas
Information Systems Ltd., an international software provider.
Yossie Hollander has been chairman of the board of directors of Jacada
since November 1995 and a director since 1990. Mr. Hollander was a founder of,
and from 1983 to 1994 served as the Chief Executive Officer of New Dimension
Software Ltd., an enterprise system and management software company that was
acquired by BMC Software in April 1999. Yossie Hollander is Gideon Hollander's
brother.
Amnon Shoham has served as a director since January 1994. Mr. Shoham is
the Managing Director of Cedar Advisors Ltd., a position he has held since 1997.
Mr. Shoham is also a partner of Cedar Fund, a venture capital firm, investing in
Israel-related, high technology companies, a position he has held since 2000.
From 1993 to 1997, Mr. Shoham served as a Managing Partner of Star Ventures, a
venture capital firm in Israel. Mr. Shoham serves on the board of directors of
several private companies. Mr. Shoham holds a law degree from the Tel-Aviv
University, Israel.
Ohad Zuckerman has been a director of Jacada since December 2000. Mr.
Zuckerman is the CEO and President of Zeraim Gedera Ltd., a position he has held
since January 2000. From 1998 to January 2000, Mr. Zuckerman served as the
Executive Vice-President of Zeraim Gedera and from 1990 to 1998 he served at the
same company as the Marketing Manager. Mr. Zuckerman served as a member of the
board of directors at Maximal Innovative Intelligence LTD. Mr. Zuckerman holds
an Executive MBA, joint degree from J.L. Kellogg, Graduate School of Management,
Northwestern University and Leon Recanati, Graduate School of Business
Administration, of Tel Aviv University and a BSc. Agriculture of the Faculty of
Agriculture, Hebrew University, Jerusalem.
Naomi Atsmon has served as a director of Jacada since June 2001. Ms.
Atsmon is a Division President of Amdocs Ltd., a position she has held since
July 1997. From 1994 until 1997, Ms. Atsmon served as a vice president at Amdocs
Ltd. Ms. Atsmon has held various positions at Amdocs since 1986. Prior to
joining Amdocs, Ms. Atsmon was a project manager at Bank Hapoalim. Ms. Atsmon
holds a degree in Management and Industrial Engineering from Haifa Technion.
B. COMPENSATION
The aggregate remuneration we paid for the year ended December 31, 2001
to all executive officers as a group (7 persons, including our former General
Manager of Israeli Operations, who resigned effective February 17, 2002), was
$1,552,729 in salaries, fees, commissions and bonuses. This amount includes
$49,765 set aside or accrued to provide for pension, retirement or similar
benefits provided to our executive officers.
37
Directors who are not executive officers do not receive compensation
for their service on the board of directors or any board of directors committee.
However, all non-management directors are entitled to be reimbursed for their
expenses for each board of directors meeting attended. Directors also receive
options to purchase our ordinary shares.
As of December 31, 2001, options to purchase 2,129,778 ordinary shares
granted to our directors and executive officers (11 persons, including our
former General Manager of Israeli Operations, who resigned effective February
17, 2002) under our option plans were outstanding. The weighted average exercise
price of these options was $3.58 per share.
C. BOARD PRACTICE
ELECTION AND TERM OF DIRECTORS
Directors are elected by an ordinary resolution at the annual general
meeting of shareholders, and by a vote of the holders of a majority of the
voting power represented at the meeting. Our ordinary shares do not have
cumulative voting rights in the election of directors. As a result, the holders
of ordinary shares that represent more than 50% of the voting power have the
power to elect all of our directors.
As of the date of filing of this form, we have authorized five
directors. In accordance with the terms of our articles of association, the
board of directors is divided into three classes, with the following terms of
office:
- Class I directors, whose terms expire at the annual meeting of
shareholders to be held in 2003;
- Class II directors, whose terms expire at the annual meeting
of shareholders to be held in 2004; and
- Class III directors, whose terms expire at the annual meeting
of shareholders to be held in 2002.
Our Class I directors are Amnon Shoham and Ohad Zuckerman. Our Class II
director is Naomi Atsmon. Our Class III directors are Gideon Hollander and
Yossie Hollander.
At each annual meeting of shareholders, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following the election. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of our
board of directors may have the effect of delaying or preventing changes in
control or management of our company.
38
Directors may be removed at any time by the holders of 75% of the
voting power at a general meeting of shareholders. Shareholders may, by a
majority vote (Ordinary Resolution), elect a director to fill the vacancy. If
the shareholders do not elect a director to fill such vacancy within 30 days
after the removal of the incumbent director, the board of directors may also
elect a director to fill such vacancy. Any director elected to fill a vacancy
will hold office for the remainder of the full term of the class of directors in
which the vacancy occurred and until such director's successor is elected and
qualified.
ALTERNATE DIRECTORS
Our articles of association provide that a director may appoint, by
written notice to us, any individual, whether or not the person is then a member
of the board of directors, to serve as an alternate director. The appointment of
an alternate director is subject to the consent of the board of directors if the
appointee is not then a member of the board of directors. Any alternate director
shall have all of the rights and obligations of the director appointing him or
her, except the power to appoint an alternate, unless otherwise specifically
provided for in the appointment of such alternate. The alternate director may
not act at any meeting at which the director appointing him or her is present.
The alternate director may act as an alternate for several directors and have
the corresponding number of votes. Unless the time period or scope of any
appointment is limited by the appointing director, the appointment is effective
for all purposes and for a period of time concurrent with the term of the
appointing director. Currently, no alternate directors have been appointed.
AUDIT COMMITTEE
We are currently subject to the provisions of the new Israeli Companies
Law which became effective on February 1, 2000 and which replaced the old
Companies Ordinance. Under the Israeli Companies Law, an audit committee is
required to be appointed by the board of directors. The audit committee must
consist of at least three members, and include our external directors. Neither
the Chairman of the board of directors, directors employed by us or granting
services to us on a permanent basis, nor any controlling shareholder or any
relative of a controlling shareholder may serve on the audit committee.
The responsibilities of the audit committee include identifying
irregularities in the management of our business and approving related-party
transactions as required by law.
Pursuant to the listing requirements of the Nasdaq National Market, we
are required to have at least two independent directors on our board of
directors and to establish an audit committee, at least a majority of whose
members are independent of management. We have appointed such audit committee.
The current members of the audit committee are: Amnon Shoham, Ohad
Zuckerman and Naomi Atsmon.
39
In addition, the new Israeli Companies Law requires the board of
directors of a public company to appoint an internal auditor nominated by the
audit committee. A person who does not satisfy certain independence requirements
may not be appointed as an internal auditor. We have appointed Fahn Kanne
Control Management Ltd. to serve as our internal auditor.
EXTERNAL DIRECTORS
Under the new Israeli Companies Law, Israeli companies that are
registered under the laws of Israel and whose shares are listed for trading on a
stock exchange outside of Israel are treated as public companies. Under this
law, a public company, like ours, is required to appoint two external directors.
This law provides that a person may not be appointed as an external director if
the person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve as
external director, or had, during the two years preceding that date, any
affiliation with the company, any entity controlling the company or any entity
controlled by the company or this controlling entity. The term "affiliation"
includes an employment relationship, a business or professional relationship
maintained on a regular basis, control and service as an office holder. External
directors are elected at a shareholders meeting, provided that either the
majority of shares voted at the meeting, including at least one third of the
shares of non-controlling shareholders voted at the meeting, vote in favor of
such election or the total number of shares voted against the election does not
exceed one percent of the aggregate voting rights in the company. External
directors do not have powers or authority that are different from those granted
to all other directors. An external director is appointed for a term of three
years.
A person may not serve as an external director if the person's position
or other business creates, or may create, conflict of interests with the
person's responsibilities as an external director. Any committee of the board of
directors must include at least one external director. An external director is
only entitled to compensation as provided in regulations to be adopted under the
new law. Amnon Shoham, Ohad Zuckerman, and Naomi Atsmon are currently serving as
our external directors.
D. EMPLOYEES
As of December 31, 2001, we had 75 employees in Israel, 114 in the
United States, and 10 in Europe. Of our 199 employees, 62 were engaged in
research and development, 53 in sales, marketing and business development, 49 in
professional services and technical support and 35 in finance, administration
and operations.
With respect to our Israeli employees, we are subject to Israeli labor
laws and regulations. These laws principally concern matters such as paid annual
vacation, paid sick days, length of the workday and work week, minimum wages,
pay for overtime, insurance for work-related accidents, severance pay and other
conditions of employment.
40
Furthermore, with respect to our Israeli employees, we are subject to
provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israeli) and the Coordination Bureau of Economic
Organizations (including the Industrialists Association) by order of the Israeli
Ministry of Labor and Welfare. These provisions principally concern cost of
living increases, recreation pay and other conditions of employment. To date, we
have not experienced any work stoppages.
E. SHARE OWNERSHIP
1. Not applicable.
2. Option Plans. We currently maintain three option plans, the
1994 Option Plan, the 1996 Option Plan and the 1999 Option Plan.
The purpose of our option plans is to afford an incentive to
officers, directors, employees and consultants of ours, or any of our
subsidiaries, to acquire a proprietary interest in us, to continue as officers,
directors, employees and consultants, to increase their efforts on behalf of us
and to promote the success of our business.
We have reserved 5,760,450 ordinary shares for issuance upon
the exercise of options to be granted to officers, directors, employees and
consultants of our subsidiaries. As of December 31, 2001, options to purchase
3,596,270 ordinary shares were outstanding under the option plans (this excludes
18,000 options to vendors). The weighted average exercise price of options
outstanding under our option plans is $4.52 as of December 31, 2001.
Our option plans are administered by our board of directors
and the compensation committee of our board of directors. Under the option
plans, options to purchase our ordinary shares may be granted to officers,
directors, employees or consultants of ours or our subsidiaries. In addition,
pursuant to the option plans, the exercise price of options shall be determined
by our compensation committee but may not be less than the par value of the
ordinary shares. The vesting schedule of the options is also determined by our
compensation committee but generally the options vest over a three to four year
period. Each option granted under the option plans is exercisable until the
earlier of ten years from the date of the grant of the option or the expiration
dates of the respective option plans. The 1994 Option Plan, the 1996 Option Plan
and the 1999 Option Plan will expire on December 31, 2003, December 31, 2005 and
December 31, 2009, respectively.
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth, to the best of our knowledge, as of
December 31, 2001, those shareholders that own 5% or more of our capital stock.
41
NAME OF BENEFICIAL OWNER (1) NUMBER OF SHARES OWNED PERCENTAGE
- ---------------------------- ---------------------- ----------
The Goldman Sachs Group, Inc.(1) 1,781,513 9.6%
Meir Barel, M.D. (2) 1,712,814 9.2%
Yossie Hollander (3) 1,311,280 7.1%
Gideon Hollander (4) 1,189,988 6.4%
Airbus Foundation (5) 1,146,300 6.2%
(1) Based on a Schedule 13G/A filed with the Commission on February 14,
2002, this amount represents 1,781,513 ordinary shares owned by certain
investment partnerships, of which affiliates of The Goldman Sachs
Group, Inc. ("GS Group") are the general partner, managing general
partner or investment manager, including (a) 1,117,763 ordinary shares
held by GS Capital Partners II, L.P.; (b) 444,368 ordinary shares held
by GS Capital Partners II Offshore, L.P.; (c) 41,227 ordinary shares
held by GS Capital Partners II (Germany) Civil Law Partnership; (d)
119,925 ordinary shares held by Stone Street Fund 1997, L.P.; and (e)
58,230 ordinary shares held by Bridge Street Fund 1997, L.P. GS Group
disclaims beneficial ownership of the shares owned by such investment
partnerships to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. Each of
such investment partnerships shares voting and investment power with
certain of its respective affiliates. We make no representation as to
the accuracy or completeness of the information reported. The address
of GS Group is 85 Broad Street, New York, NY 10004.
(2) Based on a Schedule 13G/A filed with the Commission on February 11,
2002, this amount represents ordinary shares held by the following
entities of which Dr. Barel is the sole director and primary owner: (a)
1,038,278 ordinary shares held by SVM Star Venture Capital Management
Ltd. (Star Israel) and (b) 647,242 ordinary shares held by Star
Ventures Management GmbH no. 3 (Star Germany). We make no
representation as to the accuracy or completeness of the information
reported. The address of Dr. Barel is Possartstrasse 9, D-81679,
Munich, Germany.
(3) Based on a Schedule 13G filed with the Commission on November 15, 2001.
Does not include 302,670 ordinary shares held by Dana Hollander (Yossie
Hollander's wife). Mr. Hollander disclaims any beneficial ownership in
these shares. We make no representation as to the accuracy or
completeness of the information reported. The address of Mr. Hollander
is 11 Galgalei Haplada Street, Herzliya, 46722, Israel.
(4) Based on a Schedule 13G filed with Commission on February 13, 2001. We
make no representation as to the accuracy or completeness of the
information reported. The address of Mr. Hollander is 11 Galgalei
Haplada Street, Herzliya, 46722, Israel.
(5) Based on a Schedule 13G/A filed with the Commission on January 30,
2002, this amount represents 1,146,300 ordinary shares held by Airbus
Foundation. We
42
make no representation as to the accuracy or completeness of the
information reported. The address of Airbus Foundation is c/o
Allegemeines, Treuunternehmen, P.O. Box 83, FL - 9490 Vaduz,
Liechtenstein.
As of March 11, 2002, there were 2,209 record holders of Jacada shares
in the United States, which represented 39% of the outstanding shares as of such
date.
B. RELATED PARTY TRANSACTIONS
A loan in the amount of $60,000 was made in November 2000 to Tzvia
Broida, who is our Vice President of Finance. The loan, which bears interest in
accordance with Israeli law at the rate of 4% per annum, is evidenced by a
promissory note. The loan is repayable in monthly installments of 2,000 NIS
(about $430) beginning in October 2001 (the monthly installments increased to
5,000 NIS (about $1,100) in February 2002). The amount outstanding on such loan
on December 31, 2001 was 257,978 NIS (approximately $56,082).
C. INTERESTS OF EXPERT AND COUNSEL
Not applicable.
ITEM 8: FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
SEE ITEM 18 FOR AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
EXPORT SALES
The Company generated approximately 90% of its revenues in North
America and approximately 10% in Europe during the period beginning January 1,
2001 and ending December 31, 2001.
LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings which are
incidental to our business. For example, on August 31, 1999, a former
distributor filed a complaint with the American Arbitration Association against
one of our subsidiaries. The arbitration complaint alleged, among other things,
that our subsidiary breached its agreement with the former distributor by
directly selling products to a customer which the distributor claimed was in
violation of its exclusive right to sell to the customer, and that the
distributor is entitled to damages of $3.5 million. The arbitration was held in
November 2000 and a decision by the arbitrators was entered on April 3, 2001.
The arbitrators awarded the distributor a net amount of $392,000 and 50% of the
amounts of any revenue actually received from the customer in question in the
future. Our management believes that our subsidiary did not breach its agreement
with the distributor and that no damages were caused to the distributor.
Moreover, the agreement with the distributor sets a limit
43
on the subsidiary's liability under the agreement, which the arbitrators
disregarded. We have appealed the arbitrators' decision, and the matter is
currently pending before the United States District Court in the Western
District of Michigan.
In November 2001, we received a letter from Inrange Corporation
alleging that a software product we acquired from Computer Network Technology
Corporation ("CNT") as part of the Propelis Software acquisition in August 2001
infringed a United States patent which was exclusively licensed to Inrange
Corporation. Upon receipt of the letter, we made a claim for indemnification
against CNT under the purchase agreement between CNT and the Company. CNT has
denied that the software product infringes the Inrange patent in question and
therefore has informed us that it has no obligation to indemnify the Company. At
present, we have received no further communication from Inrange; however, we do
not know whether Inrange will continue to pursue this matter or the amount of
damages Inrange may claim.
We do not believe that any other legal proceeding to which we have been
or currently are a party has had, or is likely to have, a material impact upon
us.
DIVIDEND POLICY
We have no current intention of paying dividends.
B. SIGNIFICANT CHANGES
There have been no significant changes since the date of our financial
statements filed with Form 20-F/A for the year 2000.
ITEM 9: THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
SHARE HISTORY
Our ordinary shares are quoted on the NASDAQ National Market under the
symbol "JCDA" and on the Tel Aviv Stock Exchange under the same symbol or its
Hebrew equivalent.
The following table shows the high and low market prices on the NASDAQ
of our ordinary shares in the indicated years. Trading in our shares on the
NASDAQ commenced on October 14, 1999.
Year Period High Low
---- ------ ------- ------
1999 10/14/99 - 12/31/99 $37.375 $8.000
2000 01/01/00 - 12/31/00 33.375 4.375
2001 01/01/01 - 12/31/01 6.300 2.050
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The following table shows the high and low market prices on the NASDAQ
for our ordinary shares for each financial quarter since trading commenced.
Period High Low
------ ------- -------
10/14/99 - 12/31/99 $37.375 $ 8.000
01/01/00 - 03/31/00 33.375 14.625
04/01/00 - 06/30/00 17.000 7.625
07/01/00 - 09/30/00 13.500 8.625
10/01/00 - 12/31/00 8.625 4.375
01/01/01 - 03/31/01 6.250 4.375
04/01/01 - 06/30/01 6.300 3.437
07/01/01 - 09/30/01 4.240 2.250
10/01/01 - 12/31/01 3.200 2.050
01/01/02 - 03/31/02 3.740 2.820
The following table shows the high and low market prices on the NASDAQ
for our ordinary shares for the most recent six months.
Month High Low
----- ------ -----
March 2002 $3.74 $3.13
February 2002 3.25 3.01
January 2002 3.50 2.82
December 2001 3.18 2.62
November 2001 3.20 2.14
October 2001 2.40 2.05
The following table shows the high and low market prices on the Tel Aviv Stock
Exchange ("TASE") of our ordinary shares in the indicated years. Trading in our
shares on the TASE commenced on June 18, 2001. Share prices in the TASE are
denominated in New Israeli Shekels. The following prices are denominated in U.S.
Dollars in accordance with the applicable exchange rate between the U.S. Dollar
and the NIS as of December 31, 2001.
Year Period High Low
---- ------ ------ -----
2001 06/18/01 - 12/31/01 $4.16 $2.05
The following table shows the high and low market prices on the TASE
for our ordinary shares for each financial quarter since trading commenced.
45
Period High Low
------ ------ -----
06/18/01 - 06/30/01 $4.16 $3.84
07/01/01 - 09/30/01 4.07 2.50
10/01/01 - 12/31/01 3.12 2.05
01/31/02 - 03/31/02
-----
The following table shows the high and low market prices on the TASE
for our ordinary shares for the most recent six months.
Month High Low
----- ------ -----
March 2002 $____ $____
February 2002 3.25 3.01
January 2002 3.50 2.82
December 2001 3.18 2.62
November 2001 3.20 2.14
October 2001 2.40 2.05
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares are quoted on the NASDAQ National Market under the
symbol "JCDA" and on the Tel Aviv Stock Exchange under the same symbol or its
Hebrew equivalent.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10: ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
For a copy of our Memorandum of Association and our Articles of
Association, see Item 19, Exhibits 1.1 and 1.2 which have been incorporated by
reference as part of this Annual Report from our Registration Statement on Form
F-1, File No. 333-10882.
46
In addition, because we are an Israeli company, we are governed by recently
enacted provisions of the Israeli Companies Law which are described below along
with certain provisions of our governing documents.
APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS
The Israeli Companies Law imposes a duty of care and a duty of loyalty
on all of a company's office holders as defined below, including directors and
executive officers. The duty of care requires an office holder to act with the
level of care which a reasonable office holder in the same position would have
acted under the same circumstances. The duty of loyalty generally requires an
office holder to act in good faith and for the good of the company. An "office
holder" as defined in the Israeli Companies Law is a director, a general
manager, a chief executive officer, a deputy chief executive officer, a vice
chief executive officer, other managers directly subordinate to the chief
executive officer and any person who fills one of the above positions without
regard to title.
The Israeli Companies Law requires that an office holder of a company
promptly disclose any personal interest that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. Once an office holder complies with these
disclosure requirements, the board of directors may approve a transaction
between the company and the office holder, or a third party in which an office
holder has a personal interest, unless the articles of association provide
otherwise. A transaction that is adverse to the company's interest cannot be
approved. If the transaction is an extraordinary transaction under the Israeli
Companies Law, then, in addition to any approval stipulated by the articles of
association, it also requires audit committee approval before board approval
and, in specified circumstances, subsequent shareholder approval. Any
transaction between a company and one of its directors relating to the
conditions of the director's service, including in relation to exculpation,
insurance or indemnification, or in relation to the terms of the director's
service in any other capacity requires audit committee approval before board
approval and subsequent shareholder approval.
The Israeli Companies Law also provides that a director with an
interest in an extraordinary transaction brought before the board or the audit
committee for its approval may not vote on the approval and may not be present
for the discussion of the issue. However, this rule would not apply if a
majority of the directors or a majority of the members of the audit committee
also possessed an interest in the transaction.
RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES
Our Board of Directors may from time to time declare, and cause the
Company to pay, an interim dividend and final dividend for any fiscal year only
out of retained earnings, or earnings derived over the two most recent fiscal
years, whichever is higher. Our articles provide that the final dividend in
respect of any fiscal year shall be proposed by the Board of Directors and shall
be payable only after the same has been approved by a resolution of the
shareholders of the Company, approved by a simple majority. However, no such
resolution shall provide for the payment of an amount exceeding the
47
amount proposed by the Board of Directors for the payment of such final
dividend, and no such resolution or any failure to approve a final dividend
shall affect any interim dividend theretofore declared and paid. The Board of
Directors shall determine the time for payment of such dividends, both interim
and final, and the record date for determining the shareholders entitled
thereto.
Subject to the provisions of our articles of association and subject to
any rights or conditions attached at that time to any share in the capital of
the Company granting preferential, special or deferred rights or not granting
any rights with respect to dividends, the profits of the Company which shall be
declared as dividends shall be distributed according to the proportion of the
nominal value paid upon account of the shares held at the date so appointed by
the Company, without regard to the premium paid in excess of the nominal value,
if any. No amount paid or credited as paid on a share in advance of calls shall
be treated as paid on a share.
If the Company is wound up, after satisfying liabilities to creditors,
then subject to applicable law and to the rights of the holders of shares with
special rights upon winding up, the assets of the Company available for
distribution among the shareholders shall be distributed to them in proportion
to their respective holdings.
Holders of ordinary shares have one vote for each fully-paid share held
of record, on every resolution, without regard to whether the vote thereon is
conducted by a show of hands, by written ballot or by any other means.
We may, subject to applicable law, issue redeemable shares and redeem
the same. In addition, our Board of Directors may, from time to time, as it, in
its discretion, deems fit, make calls for payment upon shareholders in respect
of any sum which has not been paid up in respect of shares held by such
shareholders.
Under the Israeli Companies Law, the disclosure requirements which
apply to an office holder also apply to a controlling shareholder of a public
company. A controlling shareholder includes a shareholder that holds 25% or more
of the voting rights in a public company if no other shareholder owns more than
50% of the voting rights in the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of
directors and the shareholders of the company. The shareholder approval requires
that: (a) the majority of shares voted at the meeting, including at least one
third of the shares of disinterested shareholders voted at the meeting, vote in
favor of the transaction; or (b) the total number of shares of disinterested
shareholders voted against the transaction does not exceed one percent of the
aggregate voting rights in the company.
The Israeli Companies Law also requires a shareholder to act in good
faith towards a company in which he holds shares and towards other shareholders
and to refrain from abusing his power in the company, including in connection
with voting at a shareholders' meeting on:
48
- Any amendment to the articles of association;
- An increase in the company's authorized capital;
- A merger; or
- Approval of some of the acts and transactions which require
shareholder approval.
A shareholder has the general duty to refrain from depriving other
shareholders of their rights. Any controlling shareholder, any shareholder that
knows that it possesses the power to determine the outcome of a shareholder vote
and any shareholder that, under the provisions of the articles of associations,
has the power to appoint an office holder in the company, is under a duty to act
in fairness towards the company. The Israeli Companies Law does not describe the
substance of this duty.
AMENDMENT OF ARTICLES
Our articles require, in order to amend the articles, the approval of
the holders of at least 75% of the shares represented at a meeting, in person or
by proxy, with the right to vote on the issue ("Special Resolution"). However,
the Israeli Companies Law requires only the consent of at least 50% of the
voting power of the company represented at a meeting and voting on the change
for amendment of articles of association ("Ordinary Resolution").
SHAREHOLDERS MEETINGS AND RESOLUTIONS
We are required to hold an annual general meeting of our shareholders
once every calendar year, but no later than 15 months after the date of the
previous annual general meeting. All meetings other than the annual general
meeting of shareholders are referred to as extraordinary general meetings.
Extraordinary general meetings may be called by our board whenever it sees fit,
at such time and place, within or without the State of Israel, as it may
determine. In addition, the Israeli Companies Law provides that the board of a
public company is required to convene an extraordinary meeting upon the request
of (a) any two directors of the company or one quarter of the company's board of
directors or (b) one or more shareholders holding, in the aggregate, (i) five
percent of the outstanding shares of the company and one percent of the voting
power in the company or (ii) five percent of the voting power in the company.
The quorum required by our articles for a meeting of shareholders
consists of at least two shareholders present in person or by proxy who hold or
represent between them at least 33.3% of the voting power in our Company. Our
articles differ from the Israeli Companies Law in this respect, as under the
Israeli Companies Law only the presence of two shareholders holding at least 25%
of the voting power in the Company is required for a quorum. A meeting adjourned
for lack of quorum is adjourned to the same day in the following week at the
same time and place or any time and place as the chairman of the meeting decides
with the consent of the holders of a majority of the voting power
49
represented at such meeting. At such reconvened meeting, the required quorum
consists of any two shareholders present in person or by proxy.
Our articles enable our board to fix a record date to allow us to
determine the shareholders entitled to notice of, or to vote at, any general
meeting of our shareholders. The Israeli Companies Law provides that a record
date may not be more than 40 nor less than four days before the date of the
meeting. Each shareholder of record as of the record date determined by the
board may vote the shares then held by that shareholder unless all calls and
other sums then payable by the shareholder in respect of its shares have not
been paid.
LIMITATION ON OWNERSHIP OF SECURITIES
The ownership and voting of our ordinary shares by non-residents of
Israel are not restricted in any way by our articles or by the laws of the State
of Israel, except for shareholders who are subjects of countries that are in a
state of war with the State of Israel.
MERGERS AND ACQUISITIONS; ANTI-TAKEOVER PROVISIONS
The Israeli Companies Law includes provisions allowing corporate
mergers. These provisions require that the board of directors of each company
that is party to the merger approve the transaction. In addition, the
shareholders of each company must approve the merger by a vote of the 75% of the
company's shares, present and voting on the proposed merger at a shareholders'
meeting, provided that the merger is not objected to by a majority of the shares
represented at the meeting after excluding shares held by the other party to the
merger or any person holding at least a 25% interest in such other party,
including related parties or entities under the other party's control.
The Israeli Companies Law does not require court approval of a merger
other than in specified situations. However, upon the request of a creditor of
either party to the proposed merger, a court may delay or prevent the merger if
it concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties of the merger to their creditors.
A merger may not be completed unless at least 70 days have passed from
the time that a request for the approval of the merger has been filed with the
Israeli registrar of companies. This request may be filed once a shareholder
meeting has been called to approve the merger.
The Israeli Companies Law also provides that the acquisition of shares
in a public company on the open market must be made by means of a tender offer
if, as a result of the acquisition, the purchaser would become a 25% shareholder
of the company. The rule does not apply if there already is another 25%
shareholder of the company. Similarly, the law provides that an acquisition of
shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would
50
become a 45% shareholder of the company, unless there already is a 50%
shareholder of the company.
If, following any acquisition of shares, the purchaser would hold 90%
or more of the shares of the company, that acquisition must be made by means of
a tender offer for all of the target company's shares. An acquirer who wishes to
eliminate all minority shareholders must do so by means of a tender offer and
acquire 95% of all shares not held by or for the benefit of the acquirer prior
to the acquisition. However, in the event that the tender offer to acquire that
95% is not successful, the acquirer may not acquire tendered shares if by doing
so the acquirer would own more than 90% of the shares of the target company.
Our articles contain provisions which could delay, defer or prevent a
change in our control. These provisions include the staggered board provisions
of our articles described above under Item 6 C.
CHANGES IN CAPITAL
Our articles enable us to increase our share capital. Any such changes
are subject to the provisions of the Israeli Companies Law and must be approved
by a resolution passed by a majority of the holders of at least 75% of our
shares represented, in person or by proxy, at a general meeting voting on such
change in the capital. Our articles differ from the Israeli Companies Law in
this respect, as under the law changes in capital require approval only of a
majority of the voting power of a company represented at the relevant
shareholders meeting and voting thereon.
C. MATERIAL CONTRACTS
In May 2000, we acquired an irrevocable, paid-up, perpetual,
non-exclusive worldwide license to certain technology owned by Cortlandt Reade
Technical Corporation ("CRTR"). In accordance with the terms and conditions of
the license agreement, CRTR has provided and will continue to provide consulting
and development services to integrate the technology into Jacada's software
products. The purchase price for the license and for the consulting and
development services was $1.5 million, $1.2 million of which has been paid.
Jacada is obligated to pay CRTR the remaining balance of $300,000 three months
after the date that the Jacada software product which incorporates the licensed
technology is made generally available by Jacada. During the third quarter of
2001 and as part of our restructuring, we revised our product development plan
and abandoned the use of technology acquired from CRTR.
In August 2001, we acquired from Computer Network Technology
Corporation certain assets and assumed certain liabilities related to its
business unit known as Propelis Software pursuant to an Asset Purchase
Agreement. The purchase price for Propelis Software was $7,463,000, which
includes a warrant issued to Computer Network Technology Corporation to purchase
350,000 ordinary shares of Jacada, the fair value of which was $500,000. Among
the assets we acquired from Computer Network Technology Corporation was the
software product now known as Jacada Integrator, as
51
well as certain software license, maintenance and support, and consulting
services agreements with customers.
Other than the foregoing, we have entered into no material contracts
outside of the ordinary course of business for the two year period ending
December 31, 2001.
D. EXCHANGE CONTROLS
In 1998, the Israeli currency control regulations were liberalized
significantly, so that Israeli residents generally may freely deal in foreign
currency and foreign assets, and non-residents may freely deal in Israeli
currency and Israeli assets. There are currently no Israeli currency control
restrictions on remittances of dividends on the ordinary shares or the proceeds
from the sale of the shares provided that all taxes were paid or withheld;
however, legislation remains in effect pursuant to which currency controls can
be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities.
Neither our Memorandum of Association nor our Articles of Association nor the
laws of the State of Israel restrict in any way the ownership or voting of
ordinary shares by non-residents, except that such restrictions may exist with
respect to citizens of countries which are in a state of war with Israel.
Israeli residents are allowed to purchase our ordinary shares.
E. TAXATION
INFORMATION REGARDING TAXES TO WHICH U.S HOLDERS MAY BE SUBJECT.
The following is a summary of the principal tax laws applicable to
companies in Israel, with special reference to their effect on us, and certain
Israeli Government programs benefiting us. This section also contains a
discussion of certain Israeli tax consequences to persons acquiring ordinary
shares. This summary does not discuss all the acts of Israeli tax law that may
be relevant to a particular investor in light of his or her personal investment
circumstances or to certain types of investors subject to special treatment
under Israeli law, such as traders in securities or persons that own, directly
or indirectly, 10% or more of our outstanding voting share capital. To the
extent that the discussion is based on new tax legislation which has not been
subject to judicial or administrative interpretation, there can be no assurance
that the views expressed in this discussion will be accepted by the tax
authorities. The discussion should not be construed as legal or professional tax
advice and is not exhaustive of all possible tax considerations.
POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE
OR LOCAL TAXES.
52
GENERAL CORPORATE TAX STRUCTURE
The general corporate tax rate in Israel is currently 36%. However, the
effective tax rate payable by a company which derives income from an "Approved
Enterprise" may be considerably less.
Under the Law for the Encouragement of Industry (Taxes), 1969, which is
referred to below as the Industry Encouragement Law, a company qualifies as an
"Industrial Company" if it is resident in Israel and at least 90% of its income
in a given tax year, determined in NIS, exclusive of income from certain loans,
marketable securities, capital gains, interest and dividends, is derived from
Industrial Enterprises owned by it. An "Industrial Enterprise" is defined as an
enterprise whose major activity in a given tax year is industrial manufacturing.
We currently qualify as an Industrial Company.
Pursuant to the Industry Encouragement Law, an Industrial Company is
entitled to deduct the purchase price of know how, patents or rights over a
period of eight years beginning with the year in which such rights were first
used, and is also entitled to deduct 33.3% per annum of expenses incurred in
connection with the issuance of publicly-traded shares over a period of three
years from the time the expenses were incurred.
Moreover, Industrial Enterprises which are Approved Enterprises can
choose between the regular depreciation rates and accelerated rates of
depreciation applied on a straight-line basis in respect of property and
equipment, generally ranging from 200% in respect of equipment to 400% of the
ordinary depreciation rates in respect of buildings during the first five years
of service of the assets, subject to a ceiling of 20% per year with respect to
depreciation of buildings.
Qualification as an Industrial Company under the Industrial
Encouragement Law is not conditioned upon the receipt of prior approval from any
Israeli Government authority. No assurance can be given that we will continue to
qualify as an Industrial Company or will in the future be able to avail
ourselves of any benefits available to companies so qualifying.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for Encouragement of Capital Investments, 1959, which is
referred to below as the Capital Investments Law, provides that capital
investments in a production facility or other eligible assets may, upon
application to the Israeli Investment Center of the Ministry of Industry and
Commerce, be designated as an "Approved Enterprise." Each certificate of
approval for an Approved Enterprise relates to a specific investment program in
the Approved Enterprise, delineated both by the financial scope of the
investment and by the physical characteristics of the facility or the asset. An
Approved Enterprise is entitled to certain benefits, including Israeli
Government cash grants, state-guaranteed loans and tax benefits.
53
TAX BENEFITS
Taxable income derived from an Approved Enterprise is subject to a
reduced corporate tax rate of 25%. That income is eligible for further
reductions in tax rates depending on the percentage of the foreign investment in
our share capital conferring rights to profits, voting and appointment of
directors and the percentage of its combined share and loan capital owned by
non-Israeli residents. The tax rate is 20% if the foreign investment is 49% or
more but less than 74%, 15% if the foreign investment is 74% or more but less
than 90% and 10% if the foreign investment is 90% or more. The lowest level of
foreign investment during the year will be used to determine the relevant tax
rate for that year. These tax benefits are granted for a limited period not
exceeding seven years or 10 years for a company whose foreign investment level
exceeds 25% from the first year in which the Approved Enterprise has taxable
income. The period of benefits may in no event, however, exceed the lesser of 12
years from the year in which the production commenced or 14 years from the year
of receipt of Approved Enterprise status.
An Approved Enterprise approved after April 1, 1986 may elect to forego
any entitlement to the grants otherwise available under the Capital Investments
Law and, in lieu of the foregoing, may participate in an Alternative Benefits
Program, under which the undistributed income from the Approved Enterprise is
fully exempt from corporate tax for a defined period of time. The period of tax
exemption ranges between two and ten years commencing in the first year in which
the company generates taxable income, depending upon the location within Israel
of the Approved Enterprise and the type of the Approved Enterprise. On
expiration of the exemption period, the Approved Enterprise would be eligible
for the otherwise applicable beneficial tax rates under the Capital Investments
Law, ranging from 10% to 25%, for the remainder, if any, of the otherwise
applicable benefits period. There can be no assurance that the current benefit
programs will continue to be available or that we will continue to qualify for
benefits under the current programs.
We currently have Approved Enterprise programs under the Capital
Investments Law, which entitle us to certain tax benefits. The tax benefit
period for these programs has not yet commenced. We have elected to participate
in three Alternative Benefit Programs. Income derived from our Alternative
Benefit Programs is exempt from tax for a period of two years, commencing in the
first year in which we generate taxable income from the Approved Enterprise. For
the five years following this two year period of exemption, we are subject to a
reduced tax rate of up to 25% as mentioned above. See note 10 to our
consolidated financial statements.
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, including withholding tax thereon, at
the rate that would have been applicable had the company not elected the
Alternative Benefits Program, ranging from 10% to 25%. The dividend recipient is
taxed at the reduced rate of 15%, applicable to dividends from Approved
Enterprises if the dividend is distributed within 12 years
54
after the benefits period. The withholding tax rate will be 25% after such
period. In the case of a company with over 25% foreign investment level, as
defined by law, the 12-year limitation on reduced withholding tax on dividends
does not apply. This tax should be withheld by the company at source, regardless
of whether the dividend is converted into foreign currency. See "Withholdings
and Capital Gains Taxes Applicable to Non-Israeli Shareholders."
From time to time, the Israeli Government has discussed reducing the
benefits available to companies under the Capital Investments Law. The
termination or substantial reduction of any of the benefits available under the
Capital Investments Law could materially impact the cost of our future
investments.
Each application to the Investment Center is reviewed separately, and a
decision as to whether or not to approve such application is based, among other
things, on the then prevailing criteria set forth in the Capital Investments
Law, on the specific objectives of the applicant company set forth in such
application and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such application will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the Capital
Investments Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions
are violated, in whole or in part, we would be required to refund the amount of
tax benefits, together with linkage differences to the Israeli CPI and interest.
We believe that our Approved Enterprise programs operate in compliance with all
such conditions and criteria.
OTHER BENEFITS
An Approved Enterprise is also entitled to the following two other
incentives from the Israeli Government regardless of whether the Alternative
Benefits Program is elected:
- - loans to Approved Enterprises, approved prior to January 1, 1997, which
also qualify as Industrial Companies, from banks and other financial
institutions, of up to 70% of approved project expenditures, of which 75%
or in certain cases 85%, are State-guaranteed; and
- - accelerated depreciation on property and equipment, generally ranging from
200% with respect to equipment to 400% with respect to buildings of the
ordinary depreciation rates during the first five tax years of the
operation of these assets, subject to a ceiling of 20% per year with
respect to depreciation on buildings.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax (Inflationary Adjustment) Law, 1985, which is referred
to below as the Inflationary Adjustment Law, attempts to overcome some of the
problems presented to a traditional tax system by an economy experiencing rapid
inflation, which was the case in Israel at the time the law was enacted.
Generally, the Inflationary
55
Adjustments Law provides significant tax deductions and adjustments to
depreciation methods and tax loss carry forwards to compensate for loss of value
resulting from an inflationary economy. Our taxable income is subject to the
provisions of this law.
The Israeli Income Tax Ordinance and the Inflationary Adjustments Law
allow "Foreign-Invested Companies," which maintain their accounts in dollars in
compliance with regulations published by the Israeli Minister of Finance, to
base their tax returns on their operating results as reflected in the dollar
financials statements or to adjust their tax returns based on exchange rate
changes rather than changes in the Israeli CPI, in lieu of the principles set
forth by the Inflationary Adjustments Law. For these purposes, a
"Foreign-Invested Company" is a company, more than 25% of whose share capital,
in terms of rights to profits, voting and appointment of directors, and of whose
combined share and loan capital is held by persons who are not residents of
Israel. A company that elects to measure its results for tax purposes based on
the dollar exchange rate cannot change that election for a period of three years
following the election. We believe that we qualify as a Foreign Investment
Company within the meaning of the Inflationary Adjustment Law. We have not yet
elected to measure our results for tax purposes based on the dollar exchange
rate, but may do so in the future.
TAX BENEFITS OF RESEARCH AND DEVELOPMENT
Israeli tax law permits, under certain conditions, a tax deduction in
the year incurred for expenditures, including capital expenditures, in
scientific research and development projects, if the expenditures are approved
by the relevant government ministry, determined by the field of research, and if
the research and development is for the promotion of the enterprise and is
carried out by, or on behalf of, a company seeking such deduction. Expenditures
not so approved are deductible over a three year period; however, expenditures
made out of proceeds made available to us through government grants are not
deductible.
WITHHOLDING AND CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
Nonresidents of Israel are subject to income tax on income accrued or
derived from sources in Israel or received in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income from services rendered in Israel. We are generally required
to withhold income tax at the rate of 25%, or 15% for dividends generated by an
Approved Enterprise, on all distributions of dividends.
Israeli law imposes a capital gains tax on the sale of securities and
other capital assets. Under current law, however, sales of our ordinary shares
covered by this Annual Report are exempt from Israeli capital gains tax for so
long as:
- - the shares are quoted on Nasdaq or listed on a stock exchange recognized by
the Israeli Ministry of Finance,
56
- - we continue to qualify as an Industrial Company or Industrial Holding
Company, and
- - the shares are not held for business purposes.
Furthermore, under the income tax treaty between the United States and
Israel, a holder of ordinary shares who is a United States resident will be
exempt from Israeli capital gains tax on the sale, exchange or other disposition
of such ordinary shares unless the holder owns, directly or indirectly, 10% or
more of our voting power.
A nonresident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at the
source, is generally exempt from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by the taxpayer.
Israel presently has no estate or gift tax.
TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY.
We will be deemed to be a passive foreign investment company or PFIC if
75% or more of our gross income in a taxable year, including the pro rata share
of the gross income of any company, U.S. or foreign, in which we are considered
to own 25% or more of the shares by value, is passive income. Alternatively, we
will be considered to be a PFIC if 50% or more of our assets in a taxable year,
averaged over the year and ordinarily determined based on fair market value and
including the pro rata share of the assets of any company in which we are
considered to own 25% or more of the shares by value, are held for the
production of, or produce, passive income. Passive income includes amounts
derived by reason of the temporary investment of funds. We do not expect to be
treated as a PFIC for 2001. The tests for determining PFIC status, however, are
applied annually based on facts and circumstances, and it is difficult to make
accurate predictions of future income, assets and activities which are relevant
to this determination and that to some extent, may be beyond our control.
Accordingly, there can be no assurance that we will never be deemed to be a
PFIC. If we were deemed to be a PFIC, and a U.S. Holder did not make an election
to treat us as a "qualified electing fund" (as described below), U.S. Holders
could be subject to adverse tax consequences upon receipt of certain
distributions from us or upon disposition of our ordinary shares, including
denial of capital gains rates and interest charges.
The adverse tax consequences referred to above would not apply to a
U.S. Holder that makes an election to treat us as a "qualified electing fund,"
or a QEF election, in the first taxable year in which the U.S. Holder owns
ordinary shares if we comply with certain reporting requirements, which we
intend to do. A shareholder of a qualified electing fund would, however, be
required to include in income a pro rata share of the earnings of the qualified
electing fund whether or not the earnings are distributed.
As an alternative to a QEF election, you may elect to mark-to-market
your ordinary shares, recognizing as ordinary income or loss each year an amount
equal to the
57
difference as of the close of the taxable year between the fair market value of
the ordinary shares and your adjusted tax basis in such ordinary shares. Losses
would be limited to the net mark-to-market gains, if any, that you included in
income with respect to such ordinary shares in prior years.
You are urged to consult your own tax advisors regarding the
advisability of making a QEF election or a mark-to-market election in the event
we are classified as a PFIC.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting
requirements of the U.S. Securities Exchange Act of 1934, as amended, and file
periodic reports and other information with the Securities and Exchange
Commission through its electronic data gathering, analysis and retrieval (EDGAR)
system. Our securities filings, including this Annual Report and the exhibits
thereto, are available for inspection and copying at the public reference
facilities of the Securities and Exchange Commission located at Room 1024, 450
Fifth Street, NW, Washington, D.C. 20549, and the Commission's regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part
of the registration statement or other filings may be obtained from these
offices after payment of fees required by the Commission. Please call the
Commission at 1-800-SEC-0330 for further information. The Commission also
maintains a website at http://www.sec.gov from which certain filings may be
accessed.
As a foreign private issuer, we are exempt from certain rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to our shareholders. In addition, we, our directors,
and our officers are also exempt from the shortswing profit recovery and
disclosure regime of Section 16 of the Exchange Act.
58
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments for trading purposes
and, as of year end, we had no derivative financial instruments of any kind
outstanding. Accordingly, we have concluded that there is no material market
risk exposure of the type contemplated by Item 11, and that no quantitative
tabular disclosures are required. We are exposed to certain other types of
market risks, as further described below.
We develop products in Israel and sell them in North America and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As most of our sales are currently made in dollars, an increase
in the value of the dollar could make our products less competitive in foreign
markets. The foreign currency exchange rate effects for the year ended December
31, 2001, 2000, and 1999 were immaterial. Our interest expense is sensitive to
changes in LIBOR. Due to the nature and levels of our borrowings, we have
concluded that there is no material market risk exposure.
We invest in U.S. Treasury notes, investment grade U.S. corporate
securities and dollar deposits with banks. These investments typically carry
fixed interest rates. Until September 2001 our marketable securities were
designated under FAS 115 as held-to-maturity marketable securities. As a result
of unexpected events, we sold our held-to-maturity marketable securities. As of
December 31, 2001, our marketable securities were designated as available for
sale. If we hold these securities to the maturity date, financial income over
the holding period is not sensitive to changes in interest rates.
As of December 31, 2001, we had no other exposure to changes in
interest rates and had no interest rate derivative financial instruments
outstanding.
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
59
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
There have been no changes in the rights of holders of any of our
registered securities.
The effective date of the registration statement (No. 333-10882) for
our initial public offering of our ordinary shares, NIS 0.01 par value, was
October 14, 1999. The offering commenced on October 20, 1999, and terminated
after the sale of all the securities registered. The managing underwriter of the
offering was Lehman Brothers. We registered 5,175,000 ordinary shares in the
offering, including shares issued pursuant to the exercise of the underwriters'
over-allotment option. We sold 5,175,000 ordinary shares at an aggregate
offering price of $56,925,000 ($11.00 per share). Under the terms of the
offering, we incurred underwriting discounts of $3,984,750. We also incurred
expenses of $2,769,250 million in connection with the offering. None of the
amounts was paid directly or indirectly to any director, officer, general
partner of ours or to their associates, persons owing ten percent or more of any
class of our equity securities, or to any of our affiliates.
The net proceeds that we received as a result of the offering were
$50,568,390. As of December 31, 2001, the net proceeds have been used to invest
in a variety of financial instruments and for general corporate purposes. More
specifically, a portion of the proceeds, $6.9 million, was used to purchase
certain assets of Propelis Software, Inc., a business unit of Computer Network
Technology Corporation. None of the net proceeds of the offering was paid
directly or indirectly to any director, officer, general partner of ours or to
their associates, persons owning ten percent or more of any class of our equity
securities, or to any of our affiliates.
ITEM 17: FINANCIAL STATEMENTS
See Item 18.
ITEM 18: FINANCIAL STATEMENTS
ITEM 19: EXHIBITS
Exhibit Description of Document
Number -----------------------
- -------
1.1 Memorandum of Association of the Company (incorporated by
reference to Exhibit 3.1 from the Company's Registration
Statement filed on Form F-1 (file no. 333-10882)).
1.2 Articles of Association of the Company (incorporated by
reference to Exhibit 3.2 from the Company's Registration
Statement filed on Form F-1 (file no. 333-10882)).
4.2 1994 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 10.1 from the Company's Registration
Statement filed on Form F-1 (file no. 333-10882)).
60
4.3 1996 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 10.2 from the Company's Registration
Statement filed on Form F-1 (file no. 333-10882)).
4.4 1999 Share Option and Incentive Plan (incorporated by
reference to Exhibit 10.3 from the Company's Registration
Statement filed on Form F-1 (file no. 333-10882)).
4.5 Employment Agreement of Gideon Hollander with Jacada Inc.
dated March 3, 1999 (incorporated by reference to Exhibit 10.4
from the Company's Registration Statement filed on Form F-1
(file no. 333-10882)).
4.6 Employment Agreement of Michael J. Potts dated June 10, 1995
(incorporated by reference to Exhibit 10.6 from the Company's
Registration Statement filed on Form F-1 (file no.
333-10882)).
4.7 Employment Agreement of Nimrod Gil-Ad dated August 21, 1996
(incorporated by reference to Exhibit 10.10 from the Company's
Registration Statement filed on Form F-1 (file no.
333-10882)).
4.8 Technology and Product License Agreement between the Company
and Cortlandt Reade Technical Corporation dated May 25, 2000
(incorporated by reference to the Company's Annual Report on
Form 20-F for the year end December 31, 2000).
4.9 Amendment to 1999 Share Option and Incentive Plan
(incorporated by reference to Exhibit 10.2 from the Company's
Registration Statement on Form S-8 (file no. 333-73650)
4.10 Asset Purchase Agreement dated as of August 19, 2001 among the
Company and its subsidiaries and Computer Network Technology
Corporation and its subsidiaries
4.11 First Amendment to Asset Purchase Agreement among the Company
and its subsidiaries and Computer Network Technology
Corporation and its subsidiaries dated August 23, 2001
8 List of Jacada's Subsidiaries (incorporated by reference to
the Company's Annual Report on Form 20-F for the year end
December 31, 2000).
10 Consent of Kost, Forer and Gabbay, a member of Ernst & Young
International.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and it has duly caused and authorized the undersigned to
sign this Annual Report on its behalf on April 9, 2002.
JACADA LTD.
/s/ Robert C. Aldworth
------------------------------------------
By: Robert C. Aldworth
Chief Financial Officer
61
JACADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
IN U.S. DOLLARS
INDEX
PAGE
----------
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3 - F4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-31
F-1
(ERNST & YOUNG LOGO)
- KOST FORER & GABBAY Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
JACADA LTD.
We have audited the accompanying consolidated balance sheets of
Jacada Ltd. ("the Company") and its subsidiaries as of December 31, 2001 and
2000 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2001 and 2000
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 29, 2002 A Member of Ernst and Young
International
F-2
JACADA LTD.
CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
------------------------
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,982 $ 9,360
Short-term bank deposits -- 5,309
Marketable securities 35,660 32,154
Trade receivables (net of allowance for doubtful accounts of $1,022
and $ 204 at December 31, 2001 and 2000, respectively) 4,261 6,403
Other current assets 626 485
-------- --------
Total current assets 46,529 53,711
-------- --------
LONG-TERM INVESTMENTS:
Marketable securities -- 5,644
Severance pay fund 567 548
Long-term other assets 203 369
-------- --------
Total long-term investments 770 6,561
-------- --------
PROPERTY AND EQUIPMENT, NET 3,632 3,151
-------- --------
OTHER ASSETS, NET:
Technology (net of accumulated amortization of $ 95 and $ 126 at
December 31, 2001 and 2000, respectively) 1,245 1,374
Goodwill 4,283 --
-------- --------
Total other assets 5,528 1,374
-------- --------
$ 56,459 $ 64,797
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
JACADA LTD.
CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31,
------------------------
2001 2000
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ -- $ 12
Trade payables 750 2,105
Deferred revenues 2,065 1,046
Accrued expenses and other liabilities 4,089 3,808
-------- --------
Total current liabilities 6,904 6,971
-------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 967 1,036
Other long-term payable -- 144
-------- --------
Total long-term liabilities 967 1,180
-------- --------
SHAREHOLDERS' EQUITY:
Share capital:
Ordinary shares of NIS 0.01 par value:
Authorized: 30,000,000 shares as of December 31, 2001 and 2000;
Issued and outstanding: 18,537,704 and 18,428,531 shares as of
December 31, 2001 and 2000, respectively 54 54
Additional paid-in capital 68,486 67,843
Deferred stock compensation (71) (161)
Accumulated deficit (19,881) (11,090)
-------- --------
Total shareholders' equity 48,588 56,646
-------- --------
$ 56,459 $ 64,797
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
JACADA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Software licenses $ 10,930 $ 15,506 $ 8,831
Services 8,986 6,070 3,362
Maintenance 5,630 3,540 2,406
--------- --------- ---------
Total revenues 25,546 25,116 14,599
--------- --------- ---------
Cost of revenues:
Software licenses 520 725 639
Services 4,859 3,636 1,619
Maintenance 1,705 1,574 1,121
--------- --------- ---------
Total cost of revenues 7,084 5,935 3,379
--------- --------- ---------
Gross profit 18,462 19,181 11,220
--------- --------- ---------
Operating expenses:
Research and development 6,446 4,979 3,267
Sales and marketing 14,619 12,873 6,529
General and administrative 5,679 3,624 1,960
Non-recurring charges 2,846 -- --
--------- --------- ---------
Total operating expenses 29,590 21,476 11,756
--------- --------- ---------
Operating loss (11,128) (2,295) (536)
Financial expenses (209) (131) (240)
Financial income 2,539 3,213 770
--------- --------- ---------
Income (loss) before taxes on income (8,798) 787 (6)
Taxes on income (benefit) (7) 10 --
--------- --------- ---------
Net income (loss) $ (8,791) $ 777 $ (6)
========= ========= =========
Basic net earnings (loss) per share $ (0.48) $ 0.04 $ *) --
========= ========= =========
Diluted net earnings (loss) per share $ (0.48) $ 0.04 $ *) --
========= ========= =========
*) Represents an amount lower than $ 0.01
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
JACADA LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
CONVERTIBLE
PREFERRED SHARES ORDINARY SHARES ADDITIONAL
------------------------- ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ----------- ------ -----------
Balance as of January 1, 1999 8,407,635 $ 26 3,621,893 $ 12 $ 14,887
Issuance of Preferred "C" shares, net 389,490 2 -- -- 1,237
Conversion of Ordinary shares into
Preferred shares 31,155 *) -- (31,155) *) -- --
Conversion of Preferred shares into
Ordinary shares (8,828,280) (28) 8,828,280 28 --
Issuance of Ordinary shares, net -- -- 5,175,000 12 50,556
Exercise of stock options, net -- -- 16,875 *) -- 19
Deferred stock compensation -- -- -- -- 242
Amortization of deferred stock compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- ----- ----------- ----- --------
Balance as of December 31, 1999 -- -- 17,610,893 52 66,941
Exercise of stock options, net -- -- 817,638 2 958
Cancellation of deferred stock compensation -- -- -- -- (56)
Amortization of deferred stock compensation -- -- -- -- --
Net income -- -- -- -- --
---------- ----- ----------- ----- --------
Balance as of December 31, 2000 -- -- 18,428,531 54 67,843
Exercise of stock options, net -- -- 109,173 *) -- 158
Cancellation of deferred stock compensation -- -- -- -- (15)
Amortization of deferred stock compensation -- -- -- -- --
Issuance of warrant in respect of the
acquisition
of Propelis -- -- -- -- 500
Net loss -- -- -- -- --
---------- ----- ----------- ----- --------
Balance as of December 31, 2001 -- $ -- 18,537,704 $ 54 $ 68,486
========== ===== =========== ===== ========
DEFERRED TOTAL
STOCK ACCUMULATED SHAREHOLDERS'
COMPENSATION DEFICIT EQUITY
------------- ----------- ------------
Balance as of January 1, 1999 $(125) $(11,861) $ 2,939
Issuance of Preferred "C" shares, net -- -- 1,239
Conversion of Ordinary shares into
Preferred shares -- -- *) --
Conversion of Preferred shares into
Ordinary shares -- -- --
Issuance of Ordinary shares, net -- -- 50,568
Exercise of stock options, net -- -- 19
Deferred stock compensation (242) -- --
Amortization of deferred stock compensation 95 -- 95
Net loss -- (6) (6)
----- -------- --------
Balance as of December 31, 1999 (272) (11,867) 54,854
Exercise of stock options, net -- -- 960
Cancellation of deferred stock compensation 56 -- --
Amortization of deferred stock compensation 55 -- 55
Net income -- 777 777
----- -------- --------
Balance as of December 31, 2000 (161) (11,090) 56,646
Exercise of stock options, net -- -- 158
Cancellation of deferred stock compensation 15 -- --
Amortization of deferred stock compensation 75 -- 75
Issuance of warrant in respect of the
acquisition
of Propelis -- -- 500
Net loss -- (8,791) (8,791)
----- -------- --------
Balance as of December 31, 2001 $ (71) $(19,881) $ 48,588
===== ======== ========
*) Represents an amount lower than $1.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
JACADA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (8,791) $ 777 $ (6)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,474 987 724
Write-off of Old Technology 1,188 -- --
Amortization of deferred stock compensation 75 55 95
Accrued interest on short-term bank deposits 49 (92) --
Accrued interest and amortization of premium on marketable securities 329 (490) (222)
Gain on sales of held-to-maturity marketable securities (192) -- --
Decrease (increase) in accrued interest on long-term other assets 27 (20) --
Increase (decrease) in accrued severance pay, net (88) 241 85
Decrease (increase) in trade receivables 4,439 (2,643) (794)
Decrease (increase) in other current assets 188 (296) (90)
Increase (decrease) in trade payables (1,596) 340 1,006
Increase (decrease) in deferred revenues 246 (1,978) (1,128)
Increase in accrued expenses and other liabilities 877 1,047 899
Other 1 1 34
--------- --------- ---------
Net cash provided by (used in) operating activities (1,774) (2,071) 603
--------- --------- ---------
Cash flows from investing activities:
Investment in short-term bank deposits -- (5,161) (56)
Proceeds from sale of short-term bank deposits 5,260 -- --
Investment in marketable securities (58,485) (89,301) (50,297)
Redemption of held to maturity marketable securities 37,847 102,512 --
Proceeds from sale of held to maturity marketable securities 22,639 -- --
Purchase of property and equipment (b) (1,475) (1,717) (1,048)
Payment in respect of other assets (700) (500) --
Proceeds from sale of property and equipment 32 14 41
Investment in long-term other assets (91) (175) --
Payment for the acquisition of Propelis (c) (6,863) -- --
Other 86 26 19
--------- --------- ---------
Net cash provided by (used in) investing activities (1,750) 5,698 (51,341)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of shares, net 158 960 52,122
Payment of principal of long-term debt (12) (368) (202)
Proceeds from long-term debt -- -- 368
Short-term bank debt, net -- -- (2,022)
--------- --------- ---------
Net cash provided by financing activities 146 592 50,266
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (3,378) 4,219 (472)
Cash and cash equivalents at the beginning of the year 9,360 5,141 5,613
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 5,982 $ 9,360 $ 5,141
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
JACADA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
------ ------ ------
Supplemental disclosure of cash flows activities:
a. Cash paid during the year for:
Interest and charges $ 60 $ 20 $ 118
===== ====== =====
b. Non-cash activities:
Other long-term payable $ -- $ -- $ 296
===== ====== =====
Purchase of property and equipment $ 17 $ 170 $ --
===== ====== =====
Purchase of technology $ -- $1,000 $ --
===== ====== =====
c. In August 2001, the Company and its subsidiaries acquired
certain assets and assumed certain liabilities of Propelis
Software, Inc., a business unit of Computer Network Technology
Corporation. The estimated net fair value of the assets
acquired and liabilities assumed as of the date of acquisition
was as follows:
Working capital, net $1,355
Property and equipment 385
Goodwill 4,283
New technology 1,340
------
7,363
Issuance of warrant (500)
------
$6,863
======
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. Jacada Ltd. (the "Company") was incorporated, under
the laws of Israel, in December 1990.
b. Jacada Ltd. and its wholly-owned subsidiaries -
Jacada (Europe) Limited. (the U.K. subsidiary) and
its wholly-owned subsidiary Jacada Deutschland GmbH,
Jacada, Inc. (the U.S. subsidiary) and its
wholly-owned subsidiary Jacada Canada, Inc. - develop
and market web application hosting and
business-to-business infrastructure software. The
Company and its subsidiaries generate revenues from
licensing their software products and from services
such as maintenance, support, consulting and
training.
The majority of the Company and its subsidiaries
sales are made in North America and Europe. As for
major customers, see also Note 13.
c. Jacada (Europe) Limited. established a wholly-owned
subsidiary in Germany during 2001.
d. Acquisition of Propelis Software Inc. ("Propelis"):
On August 23, 2001, the Company and its U.K. and U.S.
subsidiaries acquired certain assets and assumed
certain liabilities related to Propelis Software
Inc., a business unit of Computer Network Technology
Corporation, for an aggregate purchase price of
approximately $ 7,463 of which $ 6,963 in cash, and a
warrant to purchase 350,000 Ordinary shares of the
Company at a fair value of $ 500. As of December 31,
2001, $100 relating to transaction expenses remain
outstanding (see also Note 9e).
Products acquired as part of the Propelis acquisition
enable world-class organizations to leverage their
existing information assets and infrastructure in
highly collaborative e-business solutions that
integrate critical business processes, information
and people.
The operations of Propelis are included in the
consolidated statements from the date of acquisition.
The acquisition was accounted for by the purchase
method of accounting, and accordingly, the purchase
price has been allocated to the assets acquired and
the liabilities assumed based on their estimated fair
value at the date of acquisition. The excess of the
purchase price over the estimated fair value of the
net assets acquired has been recorded as goodwill.
According to Statement of Financial Accounting
Standard Board No. 142, "Goodwill and Other
Intangible Assets ("SFAS No. 142"), this goodwill
will not be amortized but will be subject to annual
impairment tests in accordance with the statement.
The allocation of the purchase price of the Propelis
acquisition is based on the estimated fair value of
assets acquired.
F-9
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
The following is a summary of the net assets
acquired:
Working capital, net $ 1,455
Property and equipment 385
Goodwill 4,283
New Technology (1) 1,340
-----
$ 7,463
=======
(1) See also Note 5.
The following represents the unaudited pro-forma
results of operations for the years ended December
31, 2001 and 2000, assuming that the Propelis
acquisition had been consummated as of January 1,
2001 and 2000, respectively:
YEAR ENDED
DECEMBER 31,
----------------------------
2001 2000
---------- ----------
Revenues $ 32,507 $ 33,451
========== ==========
Net loss $ (16,686) $ (12,743)
========== ==========
Basic and diluted net loss per share $ (0.9) $ (0.7)
========== ==========
The pro-forma financial information is not
necessarily indicative of the consolidated results
that would have been attained had the acquisition
taken place at the beginning of 2000 or 2001, nor is
it necessarily indicative of future results.
e. Restructuring charges:
In October 2001, due to recent events and a slowdown
in the software industry, the Company and its
subsidiaries made changes in their business
strategies, operations and structure in an attempt to
improve future operating results, by adopting a
restructuring plan.
The plan consisted of the involuntary termination of
56 employees (14 research and development employees,
16 professional services and support employees, 22
sales and marketing employees and 4 administrative
employees), the subletting of a portion of the
existing office space of the Company and its
subsidiaries and decreasing compensation and benefits
to the Company's employees.
In connection with the restructuring plan, EIFT 94-3
"Liability Recognition for Certain Employee
Termination Benefits and Other Cost to Exit an
Activity (including certain cost in restructuring)"
and SAB 100 "Restructuring and Impairment Charges"
were applied and accordingly, the Company and its
subsidiaries incurred expenses of $1,391, of which
$518 remain accrued, and $173 of which are for
employees termination benefits.
F-10
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
The major components of restructuring charges are as
follows:
YEAR ENDED
DECEMBER 31,
2001
------------
Employee termination benefits $ 916
Facilities closures 411
Other 64
-------
$ 1,391
=======
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in
the United States ("US GAAP").
a. Use of estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the amounts reported in the financial
statements and accompanying notes. Actual results
could differ from those estimates.
b. Financial statements in U.S. Dollars:
A majority of the revenues of the Company and its
subsidiaries is generated in United States dollars
("dollars"). The Company and its subsidiaries'
management believes that the dollar is the primary
currency of the economic environment in which the
Company and its subsidiaries operate. Thus, the
functional and reporting currency of the Company and
its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in
currencies other than the dollar are remeasured into
U.S. dollars in accordance with Statement of
Financial Accounting Standard No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All
transaction gains and losses of the remeasurement of
monetary balance sheet items are reflected in the
statement of operations as financial income or
expenses, as appropriate.
Foreign currency translation differences expenses
amounted to approximately $124, $73 and $94 for
the years ended December 31, 2001, 2000 and 1999,
respectively.
c. Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. Intercompany transactions and balances
have been eliminated upon consolidation.
F-11
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
d. Cash equivalents:
Cash equivalents are short-term, highly liquid
investments that are readily convertible to cash with
original maturities of three months or less.
e. Short-term bank deposits:
Bank deposits with maturities of more than three
months but less than one year are included in
short-term bank deposits. The short-term bank
deposits are presented at cost, including accrued
interest.
The balance of short-term bank deposits bore interest
at an annual rate of 6.5 % to 7.9 %. A part of the
balance was denominated in NIS.
f. Marketable securities:
The Company and its subsidiaries account for their
investments in marketable securities using Statement
of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115").
Management determines the appropriate classification
of its investments in debt securities at the time of
purchase and re-evaluates such determinations at each
balance sheet date. Debt securities are classified as
held-to-maturity when the Company and its
subsidiaries have the positive intent and ability to
hold the securities to maturity and are stated at
amortized cost. At December 31, 2000 all marketable
securities covered by SFAS No. 115 were designated as
held-to-maturity.
The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts
to maturity. Such amortization and interest are
included in financial expense (income). The cost of
securities sold is based on the specific
identification method.
Debt securities for which the Company and its
subsidiaries do not have the intent or ability to
hold to maturity are classified as
available-for-sale, along with any investments in
equity securities that have not been classified as
"trading securities".
At December 31, 2001 all marketable securities
covered by SFAS No. 115 were designated as available
for sale. Accordingly, these securities are stated at
fair value, with the unrealized gains and losses,
reported as a separate component of shareholders'
equity, accumulated other comprehensive income
(loss). Realized gains and losses on sales of
investments, as determined on a specific
identification basis, are included in the
consolidated statement of operations.
The Company and its subsidiaries investments in debt
securities are diversified among high-credit quality
securities in accordance with the Company and its
subsidiaries' investment policy. (See also Note 3).
F-12
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. Property and equipment:
Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated
by the straight-line method over the estimated useful
lives of the assets at the following annual rates:
%
--------------------------
Computers and peripheral equipment 20 - 33
Office furniture and equipment 6 - 12.5
Motor vehicles 15
Leasehold improvements Over the term of the lease
The Company and its subsidiaries periodically assess
the recoverability of the carrying amount of property
and equipment and provide for any possible impairment
loss based upon the difference between the carrying
amount and fair value of such assets, in accordance
with Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"). As of December 31, 2001, no
impairment losses have been identified.
h. Other assets:
1. During 2000, the Company purchased and
capitalized technology in the amount of $
1,500 ("Old Technology").
The Old Technology was amortized using the
straight line method over the estimated
economic life of the technology, which was
four years.
In August 2001, as a result of the Propelis
acquisition, the Company's U.S. subsidiary
acquired new technology ("New Technology")
in the amount of $ 1,340.
The New Technology is being amortized using
the straight-line method over the estimated
economic life of the technology rights,
which is five years.
The net realizable value of the Old
Technology and New Technology is
periodically reviewed by management, based
on the estimated future gross revenues from
the Old Technology and New Technology
reduced by the estimated future costs for
disposing of each of them. If this review
indicates that the unamortized capitalized
costs exceed the net realizable value of the
Old Technology or the New Technology, then
that amount should be reduced.
Due to the slowdown in the software industry
and to the purchase of New Technology, the
Company and its subsidiaries decided to stop
its selling and marketing efforts of the Old
Technology's Product.
Therefore, the unamortized capitalized cost
of the Old Technology exceeded the net
realizable value and the balance was written
off.
F-13
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
As of December 31, 2001, the Old
Technology's unamortized balance of
approximately $ 1,188 was charged as
expenses to the statement of operations.
(see also Note 12).
2. In August 2001, as a result of the Propelis
acquisition, the Company and its
subsidiaries recorded goodwill in the amount
of approximately $ 4,283 (see also Note 1d).
Under Statement of Financial Accounting
Statement SFAS No. 142, "Goodwill and other
Intangible Assets" ("SFAS No. 142"),
goodwill and intangible assets acquired
subsequent to June 30, 2001, are deemed to
have indefinite lives, will not be
amortized, and will be subject to annual
impairment tests in accordance with the
Statement. Other intangible assets will
continue to be amortized over their useful
lives.
The Company and its subsidiaries will
perform the first of the required impairment
tests of goodwill and indefinite lived
intangible assets during 2002.
i. Research and development costs:
Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" ("SFAS No. 86"),
requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility.
Based on the Company's product development process,
technological feasibility is established upon
completion of a working model. The Company does not
incur material costs between the completion of the
working model and the point at which the product is
ready for general release. Therefore, research and
development costs are charged to the statement of
operations as incurred.
j. Income taxes:
The Company and its subsidiaries account for income
taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This statement prescribes
the use of the liability method, whereby deferred tax
asset and liability account balances are determined
based on differences between financial reporting and
tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
The Company and its subsidiaries provide a valuation
allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
F-14
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
k. Revenue recognition:
To date, the Company and its subsidiaries
have derived their revenues from license fees for
their products, maintenance and support and rendering
of services including consulting and training. The
Company and its subsidiaries sell their products
primarily through their direct sales force to
customers and indirectly through resellers, both the
customers and the resellers are considered end users.
The Company and its subsidiaries are also entitled to
royalties from some distributors upon the
sublicensing of the software to end users.
The Company and its subsidiaries have adopted
Statement of Position (SOP) 97-2, "Software Revenue
Recognition", as amended. SOP 97-2, generally
requires revenue earned on software arrangements
involving multiple elements to be allocated to each
element based on the relative fair value of the
elements. The Company and its subsidiaries have also
adopted SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain
Transactions", for all transactions entered into
after January 1, 2000. SOP 98-9 requires that revenue
be recognized under the "residual method" when Vendor
Specific Objective Evidence ("VSOE") of fair value
exists for all undelivered elements and no VSOE
exists for the delivered elements and all other
criteria of Sop 97-2 have been met.
Revenue from license fees is recognized when
persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant
obligations with regard to implementation remain, the
fee is fixed or determinable and collectibility is
probable. The Company and its subsidiaries do not
grant a right of return to their customers. The
Company and its subsidiaries consider all
arrangements with payment terms extending beyond one
year not to be fixed or determinable. If the fee is
not fixed or determinable, revenue is recognized as
payments become due from the customer provided that
all other revenue recognition criteria have been met.
When software arrangements involve multiple elements,
revenue is allocated to each element based on VSOE of
the relative fair values of each element in the
arrangement, in accordance with the "residual method"
prescribed by SOP 98-9. The VSOE of fair value of all
undelivered elements is determined based on the price
charged for the undelivered element when sold
separately.
Revenues from royalties are recognized when such
royalties are reported to the Company and its
subsidiaries upon the sublicensing of the software by
the distributors.
Maintenance and support revenue included in software
arrangements is deferred and recognized on a
straight-line basis over the term of the maintenance
and support agreement.
F-15
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
Arrangements that include consulting and training
services are evaluated to determine whether those
services are essential to the functionality of other
elements of the arrangement. When services are
considered essential, revenue under the arrangement
is recognized using contract accounting. When
services are not considered essential, the revenue
allocable to the software services is recognized as
the services are performed. To date, the Company and
its subsidiaries had determined that the consulting
and training services are not considered essential to
the functionality of other elements of the
arrangement.
F-16
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Deferred revenue includes amounts received from
customers for which revenue has not yet been
recognized.
l. Accounting for stock-based compensation:
The Company and its subsidiaries have elected to
follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25")
and Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44")
in accounting for its employee stock option plans.
Under APB 25, when the exercise price of the
Company's stock options is less than the market price
of the underlying shares on the date of grant,
compensation expense is recognized. The pro forma
disclosures required by Statement of Financial
Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), are
provided in Note 9.
The Company and its subsidiaries apply SFAS No. 123,
EITF 96-18 "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services" and
its amendments with respect to options issued to
non-employees. SFAS No. 123 requires use of an option
valuation model to measure the fair value of the
options at the date of grant.
m. Advertising expenses:
Advertising expenses are charged to the statement of
operations, as incurred. Advertising expenses for the
years ended December 31, 2001, 2000 and 1999 were $
633, $ 329 and $ 159, respectively.
n. Severance pay:
The Company's liability for severance pay is
calculated pursuant to Israeli severance pay law
based on the most recent salary of the employees
multiplied by the number of years of employment, as
of the balance sheet date. Israeli employees are
entitled to one month's salary for each year of
employment or a portion thereof. The Company's
liability for all of its Israeli employees, is fully
provided by monthly deposits with insurance policies
and by an accrual. The value of these policies is
recorded as an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to
the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds is based
on the cash surrendered value of these policies, and
includes immaterial profits.
Severance pay expenses for the years ended December
31, 2001, 2000 and 1999, were $ 566, $ 502 and $ 332,
respectively.
F-17
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
o. Fair value of financial instruments:
The following methods and assumptions were used by
the Company and its subsidiaries in estimating their
fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents,
short-term bank deposits, trade receivables and trade
payables approximate their fair value due to the
short-term maturity of such instruments.
The fair value for marketable securities is based on
the quoted market prices (See Note 3).
The carrying amounts of the Company and its
subsidiaries' long-term other assets approximate
their fair values. The fair values were estimated
using discounted cash flow analyses, based on the
Company and its subsidiaries incremental borrowing
rates for similar types of borrowing arrangements.
p. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based
on the weighted average number of Ordinary shares
outstanding during each year. Diluted net earnings
per share is computed based on the weighted average
number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares
considered outstanding during the year, in accordance
with FASB Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" ("SFAS No. 128").
All convertible Preferred shares and outstanding
stock options and warrants have been excluded from
the calculation of the diluted net earnings (loss)
per Ordinary share because all of these securities
are anti-dilutive for all periods presented. The
total weighted average number of shares related to
the outstanding convertible Preferred shares, options
and warrants excluded from the calculations of
diluted net loss per share were 69,978, 0 and
2,604,384 for the year ended December 31, 2001, 2000
and 1999, respectively.
q. Concentrations of credit risk:
Financial instruments that potentially subject the
Company and its subsidiaries to concentrations of
credit risk consist principally of cash and cash
equivalents, marketable securities, short-term bank
deposits and trade receivables.
Cash and cash equivalents and short-term bank
deposits are deposited in U.S. dollars, Canadian
dollars, European currencies and New Israeli Shekels
with major banks in the United States, Canada,
England, Germany and Israel. Such deposits in the
United States may be in excess of insured limits and
are not insured in other jurisdictions. Management
believes that the financial institutions that hold
the Company's and its subsidiaries investments are
financially sound, and accordingly, minimal credit
risk exists.
F-18
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company and its subsidiaries' marketable
securities include investments in debentures of the
U.S government, preferred securities and U.S.
corporations. Management believes that those
corporations are financially sound, the portfolio is
well diversified, and accordingly, minimal credit
risk exists with respect to these marketable
securities.
The Company and its subsidiaries' trade receivables
are mainly derived from sales to customers in North
America and Europe. The Company and its subsidiaries
perform ongoing credit evaluations of their customers
and provide an allowance for doubtful accounts with
respect to those amounts that the Company and its
subsidiaries have determined to be doubtful of
collection. Write-offs of uncollectible accounts for
the years ended December 31, 2001, 2000 and 1999 were
$ 120, $ 0 and $ 9, respectively.
The Company and its subsidiaries have no significant
off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or
other foreign hedging arrangements.
r. Impact of recently issued accounting standards:
In August 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which
addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and
superseded SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations for a disposal
of a segment of a business". FAS 144 is effective for
fiscal years beginning after December 15, 2001, with
earlier application encouraged. The Company and its
subsidiaries expect to adopt FAS 144 as of January 1,
2002 and have not determined the effect, if any, the
adoption of FAS 144 will have on the Company and its
subsidiaries' financial position and results of
operations.
F-19
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of available-for-sale securities
and held-to-maturity securities:
DECEMBER 31,
------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
GROSS ESTIMATED GROSS ESTIMATED
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
COST LOSSES VALUE COST LOSSES VALUE
--------- ---------- --------- --------- ---------- ---------
Available-for-sale:
Preferred Securities $35,660 $ -- $35,660 $ -- $ -- $ --
======= ==== ======= ======= ==== =======
Held-to-maturity:
U.S. Government
Securities $ -- $ -- $ -- $32,280 $431 $31,849
U.S. corporate debts -- -- -- 5,518 200 5,318
------- ---- ------- ------- ---- -------
$ -- $ -- $ -- $37,798 $631 $37,167
======= ==== ======= ======= ==== =======
The amortized cost and estimated fair value of marketable
securities as of December 31, 2001 and 2000, by contractual
maturity, are shown below.
The Company did not realize any gains or losses on redemption
of held-to-maturity securities in 2000. During 2001, the
Company sold held-to-maturity securities at an amortized cost
of $22,447, and recorded realized gain in the amount of $
192. There are no realized gains or losses on sales of
available-for-sale securities, as of December 31, 2001.
DECEMBER 31,
------------------------------------------------------
2001 2000
--------------------- -------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------ --------- -------
Available-for-sale:
Matures in one year $35,660 $35,660 $ -- $ --
======= ======= ======= =======
Held-to-maturity:
Matures in one year $ -- $ -- $32,154 $31,457
Matures after one year through three
years -- -- 5,644 5,710
------- ------- ------- -------
Total $ -- $ -- $37,798 $37,167
======= ======= ======= =======
F-20
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Composition of property and equipment is as follows:
DECEMBER 31,
--------------------------
2001 2000
-------- --------
Cost:
Computers and peripheral equipment $ 4,263 $ 3,188
Office furniture and equipment 1,056 824
Motor vehicles 1,445 1,230
Leasehold improvements 561 459
-------- --------
7,325 5,701
Accumulated depreciation 3,693 2,550
-------- --------
Depreciated cost $ 3,632 $ 3,151
======== ========
Depreciation expenses for the years ended December 31, 2001,
2000 and 1999 were $ 1,193, $ 861 and $ 724, respectively.
As for charges, see Note 8.
NOTE 5:- OTHER ASSETS, NET
DECEMBER 31,
--------------------------
2001 2000
-------- --------
Original amounts:
Old Technology (see also Note 2h) $ -- $ 1,500
New Technology 1,340 --
Goodwill 4,283 --
-------- --------
5,623 1,500
-------- --------
Accumulated amortization:
Old Technology and New Technology 95 126
-------- --------
Amortized cost $ 5,528 $ 1,374
======== ========
Amortization expense for the years ended December 31, 2001,
2000 and 1999 amounted to $ 281, $ 126 and $ 0, respectively.
F-21
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31,
--------------------------
2001 2000
-------- --------
Employee and payroll accruals $ 1,928 $ 2,228
Accrued expenses 951 455
Restructuring accruals (1) 518 --
Old Technology 300 1,000
Accrued arbitration charges (2) 392 125
-------- --------
$ 4,089 $ 3,808
======== ========
(1) See also Note 1e.
(2) See also Note 12.
NOTE 7:- CURRENT MATURITIES OF LONG-TERM DEBT
DECEMBER 31,
LINKED INTEREST -------------------
TO RATE 2001 2000
------- -------- ----- -----
Long-term debt to financial U.S.
institutions and others Dollars 7.125% $ -- $ 12
===== =====
Aggregate maturities of long-term debt:
First year (current portion) $ -- $ 12
===== =====
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalties:
The Company participates in programs sponsored by the
Israeli Government for the support of research and
development activities. Through December 31, 2001,
the Company had obtained grants from the Office of
the Chief Scientist of the Israeli Ministry of
Industry and Trade ("the OCS") in the aggregate
amount of $ 1,976 for certain of the Company's
research and development projects. The Company is
obligated to pay royalties to the OCS, amounting to
3%-4% of the sales of the products and other related
revenues generated from such projects, up to
100%-150% of the grants received, linked to the U.S.
dollar.
Through December 31, 2001, the Company has paid or
accrued royalties to the OCS in the amount of $
1,684. As of December 31, 2001, the aggregate
contingent liability to the OCS amounted to $314.
F-22
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
b. Lease commitments:
The Company and its subsidiaries facilities are
leased under various operating lease agreements,
which expire on various dates, the latest of which is
in 2007. Future minimum lease payments under
non-cancelable operating leases are as follows:
YEAR ENDED
DECEMBER 31
-----------
2002 $ 599
2003 95
2004 96
2005 86
2006 52
2007 39
------
$ 967
======
Total rent expenses for the years ended December 31,
2001, 2000 and 1999 were approximately $ 1,164, $ 902
and $ 513, respectively.
c. Guarantees:
The Company has provided guarantees, in connection
with bank credit and in favor of a lessor, totaling $
200.
The Company had an unused credit facility in the
amount of approximately $ 2,800 as of December 31,
2001, with a renewal option at the beginning of every
year and bearing interest at the rate of Libor+1.75%.
d. Charges:
As collateral for the Company's unused credit
facilities (see also Note 8c), charges have been
placed on all of the Company's assets in Israel,
including insurance rights.
e. Litigation:
1. In August 1999, a former distributor filed
an arbitration demand against a subsidiary
of the Company. This demand alleged that the
subsidiary breached its agreement with the
distributor by directly selling products to
a customer, which the distributor had an
exclusive right to sell to said customer,
and that the distributor was entitled to
damages of $ 3,500. A decision by the
arbitration was entered during 2001. The
arbitrators awarded the distributor a net
amount of $ 392 and 50% of amounts collected
from this customer in the future.
F-23
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
The Company had previously made a provision
for a potential liability of $ 125. As a
result, the Company has recorded an
additional charge in 2001 of $ 267,
increasing the provision to the full amount
of the award to date.
On April 24, 2001, the subsidiary of the
Company filed an action to vacate the
arbitration charge. Subsequently, the
distributor filed an application for
enforcement of the arbitration award. As of
December 31, 2001, no court has addressed
any of the substantive issues in the case
(see also Note 12).
2. In November 2001, the Company received a
claim by a third party ("the claimant"),
which has arisen out of the Propelis
acquisition, regarding an alleged
infringement of a patent. The claimant
purported to be the exclusive licensee of
the patent which is used by the Company
since the Propelis acquisition.
To date, the Company has not responded to
the claimant, nor received any subsequent
correspondence from claimant. The Company's
management believes that under the
acquisition agreement CNT should indemnify
the Company for any such patent
infringement.
Since the claim is in its preliminary
stages, the Company's management and its
legal advisors is unable to estimate the
outcome of the claim.
NOTE 9:- SHAREHOLDERS' EQUITY
a. General:
Since October 1999, the Company's shares have been
traded on the NASDAQ, National Market. Since June
2001, the Company's shares have been traded on the
Tel-Aviv Stock Exchange.
All share and per share data included in these
financial statements have been retroactively adjusted
to reflect the stock split effected as stock dividend
of one Ordinary share for every two shares
outstanding effected in September 1999.
In July 1999, 31,155 Ordinary shares and 85,688
Preferred "A" shares were converted into Preferred
"C" shares on a one-for-one basis.
As part of the issuance of shares in July 1997, the
investors received warrants to purchase 389,490
additional Preferred "C" shares at a price of $ 3.21
per share. On July 24, 1999, these warrants were
exercised.
b. Composition of share capital:
In October 1999, 4,500,000 Ordinary shares were
issued in consideration of $ 49,500 (not including
issuance expenses) in an Initial Public Offering
("IPO").
F-24
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 9:- SHAREHOLDERS' EQUITY (CONT.)
The Company granted an option to the underwriters of
the IPO to purchase up to 675,000 additional Ordinary
shares on the same terms and conditions as set forth
in the IPO solely to cover over allotments, if any.
On November 4, 1999, the underwriters exercised their
option to purchase 675,000 Ordinary shares in the
amount of $ 7,425 (not including issuance expenses).
All of the Company's Preferred shares were
automatically converted into Ordinary shares on a
one-for-one basis upon completion of the IPO.
c. Stock Option Plans:
As of December 31, 2001, the Company has authorized
by several Incentive Share Option Plans (the 1994,
1996 and 1999 plans), the grant of options to
officers, management, other key employees and others
of up to 5,760,450 of the Company's Ordinary shares
(including an addition of 1,800,000 Ordinary shares
to the 1999 plan in January 2001). The options
granted generally become fully exercisable after
three to four years and expire ten years from the
approval date of the option plan under the terms of
grant. Any options which are forfeited or canceled
before expiration, become available for future
grants.
As of December 31, 2001, an aggregate of 1,211,495
Ordinary shares of the Company are still available
for future grant.
A summary of the Company's employees share option
activity, and related information is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding - at the
beginning of
the year 2,957,787 $5.02 2,594,634 $3.28 1,902,444 $1.32
Granted 1,320,750 $4.32 1,379,133 $6.53 747,840 $8.20
Exercised 109,173 $1.45 817,638 $1.18 16,875 $1.13
Forfeited and
cancelled 573,094 $7.23 198,342 $6.12 38,775 $3.05
--------- ----- --------- ----- --------- -----
Outstanding - at the
end of the year 3,596,270 $4.52 2,957,787 $5.02 2,594,634 $3.28
========= ===== ========= ===== ========= =====
Exercisable options
as of December 31, 1,832,792 $3.86 1,169,478 $2.51 1,618,308 $1.22
========= ===== ========= ===== ========= =====
F-25
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 9:- SHAREHOLDERS' EQUITY (CONT.)
The options outstanding as of December 31, 2001 have
been classified by exercise price, as follows:
WEIGHTED
OPTIONS WEIGHTED OPTIONS AVERAGE
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE
AS OF REMAINING AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, OPTIONS
PRICE 2001 LIFE (YEARS) PRICE 2001 EXERCISABLE
--------------- ------------ ------------ -------- ----------- -----------
$ 0.99 - $ 1.13 569,818 3.32 $ 1.01 569,818 $ 1.01
$ 1.60 - $ 2.22 422,283 6.83 $ 2.1 316,547 $ 2.06
$ 2.23 - $ 2.89 209,250 9.53 $ 2.89 19,125 $ 2.89
$ 4.04 - $ 5.06 1,734,444 8.25 $ 4.56 609,021 $ 4.5
$ 9 - $ 11 660,475 8.15 $ 9.52 318,281 $ 9.56
--------------- --------- ---- ------ --------- -------
$ 0.99 - $ 11 3,596,270 7.36 $ 4.52 1,832,792 $ 3.86
=============== ========= ==== ====== ========= =======
Deferred compensation expenses which represent the
excess of the market value over the exercise price
totaled $ 296 and are amortized to the statements of
operations over the vesting period which usually is
four years. Options granted to the Chief Executive
Officer in 1998 vest over an eight to ten year
period, with possible acceleration of vesting if
certain criteria are met.
Deferred compensation expenses of approximately $ 75,
$ 55 and $ 95 were recognized during the years ended
December 31, 2001, 2000 and 1999, respectively.
FOR EXERCISE PRICES ON THE DATE OF GRANT THAT
----------------------------------------------------------------------
EQUAL MARKET PRICE ARE LESS THAN MARKET PRICE
--------------------------------- ------------------------------
DECEMBER 31, DECEMBER 31,
--------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
------ ------ ------- ----- ----- ------
Weighted average exercise
prices $ 4.32 $ 6.53 $ 10.22 $ -- $ -- $ 2.22
====== ====== ======= ===== ===== ======
Weighted average fair values
on date of grant $ 2.81 $ 4.58 $ 3.67 $ -- $ -- $ 1.59
====== ====== ======= ===== ===== ======
Under SFAS 123, pro forma information regarding net
earnings (loss) and net earnings per share is
required and has been determined as if the Company
had accounted for its employee stock option under the
fair value method of that Statement. The fair value
for these options was estimated at the date of grant
using a Minimum Value Option Pricing Model for
options granted at the period commencing January 1,
1999 through the date of the IPO: risk-free interest
rates of approximately 6%, dividend yields of 0% and
an expected life of the option of approximately 4
years. As of the date of the IPO, the fair value for
options granted was estimated using the Black-Scholes
option pricing model, with the following
weighted-average assumptions for 2001, 2000 and 1999:
risk-free interest rate of 4% for the year 2001 and
6% for the years 2000 and 1999; dividend yields of 0%
for each year, volatility factor of the expected
market price of the Company's Ordinary shares of
1.14, 1.253 and 0.5, respectively; and a
weighted-average expected life of the option of 2.5
years for each year.
F-26
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 9:- SHAREHOLDERS' EQUITY (CONT.)
Pro forma information under SFAS 123:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
---------- --------- --------
Net income (loss) as reported $ (8,791) $ 777 $ (6)
========== ========= ========
Pro forma net loss $ (11,329) $ (322) $ (140)
========== ========= ========
Pro forma basic and diluted net
loss per share $ (0.61) $ (0.03) $ (0.02)
========== ========= ========
d. Options issued to consultants:
1. The Company's outstanding options to
consultants as of December 31, 2001, are as
follows:
OPTIONS FOR EXERCISE
ORDINARY PRICE OPTIONS EXERCISABLE
ISSUANCE DATE SHARES PER SHARE EXERCISABLE THROUGH
------------- ----------- --------- ----------- -----------
1996 7,500 $ 1.13 7,500 *)
1999 1,500 $ 11.00 938 *)
2000 4,000 $ 4.375 4,000 *)
2001 5,000 $ 2.89 5,000 *)
------ ------
Total 18,000 17,438
====== ======
*) 10 years from the date of grant.
2. The Company had accounted for its options to
consultants under the fair value method of
SFAS No. 123 and EITF 96-18. The fair value
for these options was estimated using a
Black-Scholes option-pricing model with the
following weighted-average assumptions for
2001, 2000 and 1999: risk-free interest
rates of 4% for 2001 and 6% for the years
2000 and 1999, dividend yields of 0% for
each year, volatility factors of the
expected market price of the Company's
Ordinary shares of 1.14, 1.253 and 0.5
respectively and a weighted-average expected
life of the options of approximately 2.5
years for each year.
3. Due to immateriality, no compensation
expenses have been recorded in the financial
statements.
F-27
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 9:- SHAREHOLDERS' EQUITY (CONT.)
e. Warrant:
During 2001, in connection with the acquisition of
Propelis, the Company issued CNT a warrant to
purchase 350,000 Ordinary shares of the Company at an
exercise price of $ 3.26. This warrant is exercisable
until August 2004.
The fair value of the warrant was included in the
purchase price determination. The fair value of the
warrant was estimated using a Black-Scholes
Option-Pricing Model with the following
weighted-average assumptions for 2001: risk-free
interest rate of 4%, dividend yields of 0%,
volatility factors of the expected market price of
the Company's Ordinary shares of 0.808 and a
weighted-average expected life of the warrant of
approximately 2 years.
f. Dividends:
In the event that cash dividends are declared in the
future, such dividends will be paid in NIS. The
Company does not intend to pay cash dividends in the
foreseeable future.
NOTE 10:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959 (the "law"):
The production facilities of Jacada Ltd. have been
granted the status of "Approved Enterprise" under the
law, for three separate investment programs, which
were approved in July 1994, July 1995 and December
1996.
According to the provisions of the law, the Company
has elected the "alternative benefits" - waiver of
grants in return for tax exemption and, accordingly,
the Company's income is tax-exempt for a period of
two years commencing with the year it first earns
taxable income relating to each expansion program,
and subject to corporate taxes at the reduced rate of
10% to 25%, for an additional period of five years,
(based on the percentage of foreign ownership in each
taxable year).
The period of tax benefits, detailed above, is
limited to the earlier of 12 years from the
commencement of production, or 14 years from the
approval date.
The entitlement to the above benefits is conditional
upon the Company's fulfilling the conditions
stipulated by the above law, regulations published
thereunder and the instruments of approval for the
specific investments in "approved enterprises". In
the event of failure to comply with these conditions,
the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in
whole or in part, including interest.
As the Company currently has no taxable income, these
benefits have not yet commenced.
F-28
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 10:- TAXES ON INCOME (CONT.)
The tax-exempt income attributable to the "Approved
Enterprises" can be distributed to shareholders,
without subjecting the Company to taxes, only upon
the complete liquidation of the Company. If these
retained tax-exempt income is distributed in a manner
other than in the complete liquidation of the
Company, it would be taxed at the corporate tax rate
applicable to such profits as if the Company had not
elected the alternative tax benefits (currently
between 10% to 25% for an "Approved Enterprise"). The
Company's board of directors has determined that such
tax exempt income will not be distributed as
dividends.
The Company expects that during the period in which
these tax losses are utilized, its income would be
substantially tax exempt. Accordingly, there will be
no tax benefit available from such losses and no
deferred income taxes have been provided in these
financial statements.
Income not eligible for the "Approved Enterprise"
benefits mentioned above, is taxed at the regular
corporate rate of 36%.
b. Measurement of taxable income under the Income Tax
(Inflationary Adjustments) Law, 1985:
Results for tax purposes of the Company are measured
and reflected in real terms in accordance with the
changes in the Israeli Customer Price Index. As
explained in Note 2b, the financial statements are
presented in U.S. dollars. The difference between the
change in the Israeli Customer Price Index and in the
NIS/U.S. dollar exchange rate causes a difference
between taxable income or loss and the income or loss
before taxes reflected in the financial statements.
In accordance with paragraph 9(f) of SFAS No. 109,
the Company has not provided deferred income taxes on
this difference between the reporting currency and
the tax bases of assets and liabilities.
c. Tax benefits under the Law for the Encouragement of
Industry (Taxation), 1969:
The Company is an "industrial company", as defined by
this law and, as such, is entitled to certain tax
benefits, mainly accelerated depreciation of
machinery and equipment, as prescribed by regulations
published under the Inflationary Adjustments Law, the
right to claim public issuance expenses and
amortization of patents and other intangible property
rights as a deduction for tax purposes.
d. Net operating losses carryforward:
As of December 31, 2001, Jacada Ltd. had
approximately $ 4,451 of Israeli net operating loss
carryforwards. The Israeli loss carryforwards have no
expiration date.
F-29
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 10:- TAXES ON INCOME (CONT.)
As of December 31, 2001, the UK subsidiary had
accumulated losses for income tax purposes in the
amount of approximately $ 3,895. These net operating
losses may be carried forward and offset against
taxable income in the future for an indefinite
period.
During 2000, the U.K. subsidiary had interest income
that cannot be offset against operating loss;
therefore, the U.K. subsidiary had provided for taxes
on income the amount of $ 10 which was offset during
2001.
F-30
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 10:- TAXES ON INCOME (CONT.)
As of December 31, 2001, the U.S. subsidiary had U.S.
federal net operating loss carryforwards for income
tax purposes in the amount of approximately $5.8
million. Net operating loss carryforwards arising in
taxable years beginning before August 6, 1997 can be
carried forward and offset against taxable income for
15 years and expire from 2010 to 2012. Net operating
loss carryforwards arising in taxable years beginning
after August 5, 1997 can be carried forward and
offset against taxable income for 20 years and expire
from 2017 to 2021.
Utilization of U.S. net operating losses may be
subject to substantial annual limitation due to the
"change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of
net operating losses before utilization.
As of December 31, 2001, the German subsidiary had
accumulated losses for income tax purposes in the
amount of approximately $515.
e. Deferred income taxes:
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting
purposes and the amounts used for income tax
purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
DECEMBER 31,
-----------------------------
2001 2000
-------- --------
Deferred tax assets:
U.S. operating loss carryforward $ 2,197 $ 1,470
U.K. operating loss carryforward 784 610
Germany operating loss carryforward 129 --
-------- --------
Total deferred tax asset before valuation allowance 3,110 2,080
Valuation allowance (3,110) (2,080)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
The U.S., U.K. and German subsidiaries have provided
valuation allowances in respect of deferred tax
assets resulting from tax loss carryforward.
Management currently believes that since the Company
and its subsidiaries have a history of losses it is
more likely than not that the deferred tax regarding
the loss carryforward and other temporary differences
will not be realized in the foreseeable future.
F-31
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
f. Pre-tax income (loss):
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---------- ------ -------
Domestic (Israel) $ 4,086 $ 76 $ 154
Foreign (12,884) 711 (160)
---------- ------ -------
$ (8,798) $ 787 $ (6)
========== ====== ========
NOTE 11:- EARNING PER SHARE
The following table sets forth the computation of basic and
diluted net earnings (loss) per share.
Numerator:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
--------- ------ -----
Net income (loss) $ (8,791) $ 777 $ (6)
========= ====== =====
Numerator for basic and diluted net earnings (loss)
per share - income available to shareholders of
Ordinary shares $ (8,791) $ 777 $ (6)
========= ====== =====
Denominator:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
---------- ---------- ---------
Denominator for basic net earnings (loss)
per share - weighted average shares 18,465,127 18,141,223 6,572,476
---------- ---------- ---------
Effect of dilutive securities:
Employee stock options and options to
consultants *) -- 1,362,748 *) --
---------- ---------- ---------
Dilutive potential Ordinary shares *) -- 1,362,748 *) --
---------- ---------- ---------
Denominator for diluted net earnings (loss)
per share 18,465,127 19,503,971 6,572,476
========== ========== =========
*) Antidilutive.
F-32
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
NOTE 12:- NON-RECURRING CHARGES
Arbitration charge (1) $ 267
Restructuring charges (2) 1,391
Write-off of Old Technology (3) 1,188
--------
$ 2,846
========
(1) See also Note 8e.
(2) See also Note 1e.
(3) See also Note 2h.
NOTE 13:- GEOGRAPHIC AND OTHER OPERATING INFORMATION
Summary information about geographical areas:
The Company and its subsidiaries manage their business on a
basis of one reportable segment (see Note 1 for a brief
description of the Company's business) and follows the
requirements of SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information".
The following is a summary of operations within geographic
areas based on customer's location.
DECEMBER 31,
-----------------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues from sales to unaffiliated customers:
United States $ 22,619 $ 23,030 $ 11,894
United Kingdom 1,050 1,582 2,193
Canada 445 195 --
Israel and others 1,432 309 512
--------- --------- ---------
$ 25,546 $ 25,116 $ 14,599
========= ========= =========
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
--------- -------- --------
Long-lived assets:
Israel $ 1,980 $ 3,403 $ 1,516
United States 7,016 1,021 617
United Kingdom 136 101 7
Germany 28 -- --
--------- -------- --------
$ 9,160 $ 4,525 $ 2,140
========= ======== ========
F-33
JACADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA
Major customer data as a percentage of total revenues:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Customer A 10% 12% *) --
Customer B *) -- *) -- 13%
Customer C *) -- *) -- 10%
Customer D *) -- 14% --
*) Less than 10% of total revenues.
F-34