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, 2006
Commission file number 000-30342
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:
Ordinary shares, par value
NIS 0.01 per share
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the registrant's classes of
capital or common stock as of the close of the period covered by the Annual
Report:
20,132,164 Ordinary Shares, par value NIS 0.01 per share
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Indicate by check mark if the registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer: [ ] Accelerated filer: [ ] Non-accelerated filer: [X]
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
i
TABLE OF CONTENTS
Item 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS AND AUDITORS .............................2
Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE .....................................................2
Item 3: KEY INFORMATION .............................................................................2
Item 4: INFORMATION ON THE COMPANY .................................................................12
Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS ...............................................24
Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPOYEES ..................................................36
Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ..........................................43
Item 8: FINANCIAL INFORMATION ......................................................................44
Item 9: THE OFFER AND LISTING ......................................................................45
Item 10: ADDITIONAL INFORMATION .....................................................................47
Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................62
Item 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES .....................................62
Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ............................................63
Item 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS ...............63
Item 15: CONTROLS AND PROCEDURES ....................................................................63
Item 15T: CONTROLS AND PROCEDURES ....................................................................63
Item 16A: AUDIT COMMITTEE FINANCIAL EXPERT ...........................................................63
Item 16B: CODE OF ETHICS .............................................................................64
Item 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES .....................................................64
Item 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES ...............................65
Item 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS ...................65
Item 17: FINANCIAL STATEMENTS .......................................................................66
Item 18: FINANCIAL STATEMENTS .......................................................................66
Item 19: EXHIBITS ...................................................................................67
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, many of which are beyond the Company's ability
to control and that actual results may differ materially from those in the
forward-looking statements as a result of various factors and other information
contained in this Annual Report, including the performance and continued
acceptance of our products, general economic conditions and other risk factors
identified under the heading "Risk Factors" including "Our introduction of
Jacada Fusion and Jacada WorkSpace represents an attempt to enter a new market
in which we have limited experience and failure to successfully penetrate this
market would harm our results of operations", "We must continue our significant
investment in our sales and marketing efforts, including our indirect
distribution channels, in order to increase market awareness of our products and
to generate increased revenues", "We do not have a proven business model for the
contact center market; if our business model is inappropriate for this market
and our estimations regarding the sales cycle for this market are incorrect, our
efforts to successfully commercialize Jacada Fusion and Jacada WorkSpace may be
harmed or we will experience a further delay in generating revenues from these
products", "Revenues from Jacada Fusion and Jacada Workspace, our contact center
products, might be concentrated in a few large orders and a small number of
customers, meaning that the loss of a significant customer or a failure to make
even a small number of such sales could harm our results of operations",
"Competition in the markets in which we operate is intense. If we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced", "We rely on our key personnel and key management members, whose
knowledge of our business and technical expertise would be extremely difficult
to replace", "The revenue associated with our traditional products has declined
and we expect that it may continue to decline. Since it has taken longer than we
expected to generate increased revenue from our new Jacada Fusion and Jacada
WorkSpace products, failure to increase revenues will result in increased losses
and a material adverse effect on our business".
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.
Item 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS AND AUDITORS
Not applicable.
Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Item 3: KEY INFORMATION
A. Selected Financial Data
The following table sets forth selected financial data from our
consolidated statements of operations and balance sheets for the periods
indicated. The selected consolidated statement of operations data for the years
ended December 31, 2006, 2005 and 2004 and the selected consolidated balance
sheet data as of December 31, 2006 and 2005 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 US GAAP. The consolidated statements of operations data for the year ended
December 31, 2003 and 2002, and the selected consolidated balance sheet data as
of December 31, 2004, 2003 and 2002 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 Disclosures about Market
Risk" and our consolidated financial statements and the notes thereto included
elsewhere in the Annual Report.
2
Year ended December 31,
2006 2005 2004 2003 2002
(in thousands)
Consolidated Statement of Operations Data:
Revenues:
Software licenses*) $6,568 $6,674 $5,420 $8,354 $9,783
Services*) 4,810 3,701 5,810 4,704 4,518
Maintenance 9,303 9,567 8,554 7,504 7,235
--------------- --------------- --------------- ---------------- ---------------
Total revenues 20,681 19,942 19,784 20,562 21,536
--------------- --------------- --------------- ---------------- ---------------
Cost of revenues:
Software licenses*) 527 648 547 846 534
Services*) 3,671 3,365 3,425 2,384 3,115
Maintenance 864 865 1,143 1,110 1,247
--------------- --------------- --------------- ---------------- ---------------
Total cost of revenues 5,062 4,878 5,115 4,340 4,896
--------------- --------------- --------------- ---------------- ---------------
Gross profit 15,619 15,064 14,669 16,222 16,640
--------------- --------------- --------------- ---------------- ---------------
Operating expenses:
Research and development 4,067 4,094 5,278 5,308 5,905
Sales and marketing 10,144 11,035 10,507 9,386 9,450
General and administrative*) 5,098 5,681 4,724 4,645 4,502
Non-recurring charges - - 525 - 501
--------------- --------------- --------------- ---------------- ---------------
Total operating
expenses 19,309 20,810 21, 034 19,339 20,358
--------------- --------------- --------------- ---------------- ---------------
Operating loss (3,690) (5,746) (6,365) (3,117) (3,718)
Financial income, net 1,372 830 786 1,037 909
--------------- --------------- --------------- ---------------- ---------------
Net loss before taxes on income (2,318) (4,916) (5,579) (2,080) (2,809)
Taxes on income*) 254 42 34 69 100
=============== =============== =============== ================ ===============
Net loss $(2,572) $(4,958) $(5,613) $(2,149) $(2,909)
=============== =============== =============== ================ ===============
Basic net loss per share $(0.13) $(0.25) $(0.29) $(0.11) $(0.16)
=============== =============== =============== ================ ===============
Weighted average number of shares
used in computing basic
net loss per share 19,827,852 19,497,726 19,282,800 19,011,435 18,710,105
Diluted net loss per share $(0.13) $(0.25) $(0.29) $(0.11) $(0.16)
=============== =============== =============== ================ ===============
Weighted average number of shares
used in computing diluted
net loss per share 19,827,852 19,497,726 19,282,800 19,011,435 18,710,105
*Certain amounts in prior years' results have been reclassified in order to conform to our 2006 clasifications.
Year ended December 31
2006 2005 2004 2003 2002
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $4,735 $3,461 $3,552 $9,845 $15,319
Cash and investments 35,922 35,651 37,613 41,793 41,382
Working capital 9,158 10,748 17,726 12,170 34,448
Total assets 45,710 45,612 49,230 53,387 54,018
Shareholders' equity 33,395 34,475 39,089 44,504 46,464
Dividends per share - - - - -
Exchange Rates
Not applicable.
B. Capitalization and Indebtedness
Not applicable.
3
C. Reasons for the Offer and Use of Proceeds
Not applicable.
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:
Risks Related to Our Business
Our introduction of Jacada Fusion and Jacada WorkSpace represents an
attempt to enter a new market in which we have limited experience and failure to
successfully penetrate this market would harm our results of operations. In the
second quarter of 2004, we introduced Jacada Fusion, our solution that is
designed to integrate different applications residing on host, Windows and
Web-based platforms, and allow non-invasive access to those applications through
a single user interface. In the third quarter of 2005, we introduced Jacada
WorkSpace, a solution designed to be a single agent console that unifies
customer interaction tools with a single access point to all the
mission-critical applications required by the customer service representative to
effectively complete a customer interaction. We have elected to target corporate
customer call centers, which we refer to as contact centers, for sales of these
products as we believe there is a need for these products in this market.
However, we have limited experience in this market. Our limited experience and
knowledge regarding the contact center market may impede our ability to sell
Jacada Fusion and Jacada Workspace products and result in decreased revenues and
increased losses.
We must continue our significant investment in our sales and marketing
efforts, including our indirect distribution channels, in order to increase
market awareness of our products and to generate increased revenues. We believe
that our future success is dependent upon the expansion of our indirect
distribution channels, consisting of our relationships with partners, resellers,
distributors, system integrators and independent software vendors. Significant
continued investment in indirect distribution channels and in our direct sales
and marketing efforts is essential to increase market awareness of our contact
center market products and to generate increased revenues, in relation to such
products. We currently have relationships with only a limited number of these
parties.
Our future growth will be limited if:
o we fail to increase the number of indirect distribution partners
with which we have relationships
o we fail to work effectively with our indirect distribution
partners;; or
o there is a decrease in the willingness or ability of our indirect
distribution partners 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, customization
and support of our products than we otherwise would. However, our own efforts,
limited resources and relative lack of contacts within this market in comparison
with some of our potential indirect distribution channels, may not be as
effective as those of our indirect distribution channels.
4
We do not have a proven business model for the contact center market;
if our business model is inappropriate for this market and our estimations
regarding the sales cycle for this market are incorrect, our efforts to
successfully commercialize Jacada Fusion and Jacada WorkSpace may be harmed or
we will experience a further delay in generating revenues from these products.
Our business model for selling Jacada Fusion and Jacada WorkSpace products is
different than the business model we have used for our traditional products. To
date we have had few deals in which we sold Jacada Fusion and Jacada WorkSpace
and therefore we do not have enough experience to determine if our business
model is correct and is appropriate for the generation either of new sales or
follow-on sales. In the event that our chosen business model is inappropriate,
we may need to modify our business model and adjust the manner in which we sell
Jacada Fusion and Jacada WorkSpace in order to close subsequent transactions. If
our business model is incorrect and must be adjusted, our revenues and expense
levels may be adversely affected.
Revenues from Jacada Fusion and Jacada Workspace, our contact center
products, might be concentrated in a few large orders and a small number of
customers, meaning that the loss of a significant customer or a failure to make
even a small number of such sales could harm our results of operations.
Historically, revenues from our traditional products were generated from a
relatively large number of sales to a wide number of customers. During 2005 and
2006 revenues from the Jacada Fusion and Jacada WorkSpace products derived from
large orders from a small number of customers. To the extent that this trend
continues, our revenues from Jacada Fusion and Jacada WorkSpace products, which
we anticipate will comprise a significant portion of our future revenues, will
be dependent on a relatively small number of significant customers. In 2006 and
2005, a sale to one customer accounted for approximately 10% and 22%
respectively of our total revenues. Currently we do not expect to make repeat
sales to this customer. We also cannot assure you that new customers will
purchase our products and services in the future. The failure to secure new key
customers, the loss of key customers or the occurrence of significant reductions
in sales from a key customer would cause our revenues to significantly decrease
and make it significantly more difficult for us to become profitable.
Competition in the markets in which we operate is intense. If we are
unable to compete effectively, the demand for, or the prices of, our products
may be reduced. The markets in which we operate are extremely competitive and
subject to rapid changes. In our traditional business, we compete with companies
that enable businesses to Web-enable, modernize and integrate their existing
software applications to better serve the needs of their users, customers and
partners. These companies include AttachmateWRQ Corporation, IBM, Seagull, TIBCO
Software and webMethods. Our Jacada Fusion and Jacada WorkSpace products compete
with other contact center solutions offered by Microsoft, Corizon and Graham
Technology. 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 application integration
or contact center solutions. As a result, prospective clients may decide against
purchasing and implementing externally-developed 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 than we do. Our 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
5
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.
We rely on our key personnel and key management members, whose
knowledge of our business and technical expertise would be extremely difficult
to replace. Our future success depends, to a certain degree, on the continued
services of key management, as well as on our 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. Competition for qualified personnel is intense in the
markets in which we recruit. As a result, our ability to recruit and retain
qualified candidates may be limited. In addition, our relatively flat revenues
in 2006 in relation to 2005 may cause current employees to leave our company,
which may have a material adverse effect on our business.
Our revenues could be adversely affected if we fail to recruit and
retain consultants and other technical service personnel. Sales of our Jacada
Fusion and Jacada WorkSpace products require in some cases advance sales
activity involving consultants and post-sale implementation and customization.
We rely on our staff of professional consultants, other technical service
personnel and subcontractors to implement our solutions after being purchased by
our customers. Unless we are able to recruit and retain professional
consultants, other technical service personnel and subcontractors or hire and
train such personnel and subcontractors to replace those who leave us, it will
be difficult for us to implement our solutions and obtain customer acceptance
and to increase or possibly even maintain our present level of sales due to
constraints on our capacity to implement sales. In addition, a growing number of
our transactions require implementation of our solutions. In these transactions,
the implementation and customization services performed by these personnel are
especially important. If we are unable to hire and retain these personnel, it
may adversely impact our ability to successfully close such transactions.
The revenue associated with our traditional products has declined and
we expect that it may continue to decline. Therefore, failure to generate
increased revenue from our Jacada Fusion and Jacada WorkSpace products will
result in increased losses and a material adverse effect on our business. Our
revenues are derived from sales of our traditional products, Jacada Interface
Server and Jacada HostFuse, and our new products, Jacada Fusion and Jacada
WorkSpace, and related maintenance and professional services. The revenue
associated with our traditional products has been declining over the past years
due to increased competition in this market as well as our decreased sales
efforts in this market. We believe that this trend will continue in future
years. In addition, it has taken longer than we anticipated to generate
increased sales of our contact center market products. To the extent that these
trends continue, we will suffer increased losses. To the extent that these
trends continue for a prolonged period, we may suffer a material adverse effect.
Our future growth will be adversely affected and our future operating
results may be adversely affected if we fail to develop and introduce new
functionality for our contact center products and new products that address new
markets or if our new products fail to achieve market acceptance. In order to
achieve sales growth we will need to develop and introduce new functionality for
our contact center products and new products for new markets. Our ability to
develop and introduce new functionality for our contact center products and new
products requires us to invest significant resources in research and development
and in the sales and marketing of a new product. If we fail to develop and
market new products in new markets successfully, we may not be able to recover
6
our research and development expenditures or our sales and marketing
expenditures, which would adversely impact our operating results.
Because our products are complex and generally involve significant
capital expenditures by customers, we may invest significant time and expense in
trying to make a sale to a potential customer that ultimately chooses not to
purchase our products. Our sales typically involve significant capital
investment decisions by prospective customers, and often require us to expend a
significant amount of time to educate prospective customers 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 approvals.
Even if our products are effective, our target customers may not choose them for
technical, cost, support or other reasons.
In previous years, we experienced fluctuations in our annual and
quarterly results of operations, which resulted, and may continue to result, in
volatility in our share price. In previous years we have experienced, and may
continue to experience, fluctuations in our quarterly results of operations, and
we may likewise experience significant fluctuations in our annual results of
operations. Factors which have contributed and may in the future contribute to
fluctuations in our results of operations include: general economic conditions,
the size and timing of orders, including order deferrals, and subsequent
shipments, market awareness and acceptance of our products, the capital spending
patterns of our customers, customer concentration and the timing of our product
introductions or enhancements or that of our competitors or providers of
complementary products. Because of these and other factors, our quarterly
revenues may fluctuate materially. Therefore, the results of past periods should
not be relied upon as an indication of our future performance. It is likely that
in some future periods, our operating results may again be below expectations of
public market analysts or investors, which may cause our share price to decline.
Fiscal year 2000 was our only profitable year, and we may not again
achieve profitability. We have incurred net losses in each fiscal year since our
inception except for fiscal 2000. 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 Disclosures about Market Risk."
The market price of our shares is volatile and the volume of the daily
trading of our shares is very low; therefore you may not be able to resell your
shares at or above the price you paid, or at all. The risks described in this
Item 3.D may adversely affect our share price. Our share price, like that of
many technology companies, may be subject to volatility. If our share price
decreases to below $1.00 per share and remains there for 30 consecutive trading
days, Nasdaq could initiate procedures to de-list our shares from the Nasdaq
National Market and onto either the Nasdaq Small Cap Market or the OTC Bulletin
Board. Furthermore, because of the low volume of daily trading in our shares,
you may be unable to sell your shares in the market due to low or no demand for
such shares.
We expect to be subject to increasing risks of international
operations. Currently we market and sell our products and services primarily in
North America and Europe, from which areas we received approximately 98% of our
total revenues for the year ended December 31, 2006. In 2006 we continued to
expand our international operations in Europe. Managing these expanded
operations requires significant management attention and financial resources.
Further, we currently have limited experience in marketing and distributing our
products in regions other than North America and Europe. Our inability to
increase our worldwide operations successfully could adversely impact our
7
business. In addition, exchange rate fluctuations between the dollar and foreign
currencies may adversely affect us. Although we utilize currency exchange
forward contracts to hedge the payments from our material Euro and Grate Britain
Pound (GBP) - denominated transactions, some of our foreign currency-denominated
revenues are still not hedged. Accordingly, we are still exposed to the risk
that our revenues will decrease in the event that those foreign currencies
strengthen against the dollar. See "-Exchange rate fluctuations between the
dollar and the NIS may negatively affect our earnings" for a discussion of risks
associated with fluctuations in the dollar-NIS exchange rate.
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 errors or defects could:
o damage our reputation;
o increase our product development costs;
o divert our product development resources;
o expose us to monetary damages;
o cause us to lose future sales; or
o 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.
Certain of our products, contain technology that we acquired or
licensed from third parties. Because we did not develop the technology
ourselves, there may be errors in the technology of which we are not aware. In
addition, our products are integrated with our customers' networks and software
applications. The sale and support of our products may expose us to the risk of
product liability or warranty claims based on damage to these networks or
applications caused by the technology we developed or the technology developed
by a third party and acquired by us. 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.
Our technology may be subject to infringement claims or may be
infringed upon. Our success and ability to compete are substantially dependent
upon our 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,
8
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 our products 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:
o be expensive and time-consuming to defend;
o cause product shipment and installation delays;
o divert management's attention and resources; or
o require us to enter into royalty or licensing agreements, which
may not be available on acceptable terms, or may not be available
at all.
We incorporate open source technology in our products which may expose
us to liability and have a material impact on our product development and sales.
Some of our products utilize open source technologies. These technologies are
licensed to us on varying license structures but include the general public
license. This license and others like it pose a potential risk to products that
are integrated with these technologies. For example, in the event we integrate
into one of our products a technology covered under the general public license,
we may be required to disclose our source code for the integrated product.
Disclosing our source code could enable our competitors to eliminate any
technological advantage our products may have over theirs, and therefore
materially adversely affect our competitive advantage and impact our business
results of operations and financial condition. In addition, from time to time
there have been claims challenging the ownership of open source software against
companies that incorporate open source software into their products. We use a
limited amount of open source software in our products and may use more open
source software in the future. As a result, we could be subject to suits by
parties claiming ownership of what we believe to be open source software.
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.
We may fail to maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
imposes certain duties on us and our executives and directors. Our efforts to
comply with the requirements of Section 404 may result in increased general and
administrative expense and a diversion of management time and attention. If we
fail to maintain the adequacy of our internal controls, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting. In the Future we may identify material
weaknesses or significant deficiencies in our controls over financial reporting.
Failure to maintain effective internal controls over financial reporting could
result in investigation or sanctions by regulatory authorities, and could have a
material adverse effect on our operating results, investor confidence in our
reported financial information, and the market price of our ordinary shares.
9
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 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 and around Israel could adversely affect our operations.
Because our research and development facilities are located in Israel, we are
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.
From October 2000 until recently, there was a significant increase in violence
primarily in the West Bank and the Gaza Strip and negotiations between Israel
and Palestinian representatives have ceased for periods of time. In January
2006, Hamas, the Islamic Resistance Movement, won the majority of the seats in
the Parliament of the Palestinian Authority. The election of a majority of
Hamas-supported candidates in the Palestinian Parliament and the tension among
the different Palestinian factions may create additional unrest and uncertainty.
Hamas does not recognize Israel's right to exist as a state and Israel considers
Hamas to be a terrorist organization. Accordingly, there can be no assurance
that the recent calm and renewal of negotiations between Israel and Palestinian
representatives will endure. During the summer of 2006, Israel was engaged in an
armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and
political party. This conflict involved missile strikes against civilian targets
in northern Israel, and negatively affected business conditions in Israel. Any
renewed hostilities or other factors related to Israel could have a material
adverse effect on us or on our business or adversely affect our share price.
Generally, all non-exempt male adult citizens and permanent residents
of Israel under the age of 45 (or older, for citizens with certain occupations),
including some of our officers, directors and employees, are obligated to
perform military reserve duty annually, and are subject to being called to
active duty at any time under emergency circumstances.. The absence of these
employees for significant periods may cause us to experience operating
difficulties. 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 U.S. dollars. However, a
significant portion of the expenses associated with our Israeli operations,
including personnel and facilities-related expenses, are incurred in New Israeli
Shekels (NIS). Consequently, inflation in Israel will have the effect of
increasing the U.S. dollar cost of our operations in Israel, unless it is offset
on a timely basis by a devaluation of the NIS relative to the U.S. dollar. We
cannot predict any future trends in the rate of inflation in Israel or the rate
of valuation of the NIS against the U.S. dollar. Although we hedge partially
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against risks associated with fluctuations in the dollar-NIS exchange rate, if
the dollar cost of our operations in Israel increases, our U.S. dollar-measured
results of operations will still 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 under the Alternative Benefits Program. 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 are 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 assure you that this will continue.
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 March 2005, the law
governing these tax benefits was amended to revise the criteria for investments
that qualify for tax benefits as an approved enterprise. We cannot assure you
that we will, in the future, be eligible to receive additional tax benefits
under this law. In addition, in the event that we increase our activities
outside the State of Israel, 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, or the OCS. The transfer to a non-Israeli entity of technology developed
with OCS funding, including pursuant to a merger or similar transaction, and the
transfer of rights related to the manufacture of more than ten percent of a
product developed with OCS funding are subject to approval by an OCS committee
and to various conditions, including payment by us to the OCS of a percentage of
the consideration paid to us or our shareholders in the transaction in which the
technology is transferred. In connection with a merger or similar transaction,
the amount payable would be a fraction of the consideration equal to the
relative amount invested by the OCS in the development of the relevant
technology compared to the total investment in our company, net of financial
assets that we have at the time of the transaction, but in no event less than
the amount of the grant. In addition, in the event that the committee believes
that the consideration to be paid in a transaction requiring payment to the OCS
pursuant to the provisions of the law described above does not reflect the true
value of the technology or the company being acquired, it may determine an
alternate value to be used as the basis for calculating the requisite payments.
These restrictions may impair our ability to enter into agreements for those
products or technologies, without OCS approval. We cannot be certain that any
approval of the OCS will be obtained on terms that are acceptable to us, or at
all. Furthermore, in the event that we undertake a transaction involving the
transfer to a non-Israeli entity of technology developed with OCS funding
pursuant to a merger or similar transaction, the consideration available to our
shareholders may be reduced by the amounts we are required to pay to the OCS. In
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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.
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 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 we refer to as
the Companies Law, could also delay or otherwise make more difficult a change in
control. The provisions of the Companies Law relating to mergers and
acquisitions are discussed in greater detail in "Item 10.B: 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 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 Fridays
and open on Sundays, while 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.
Item 4: INFORMATION ON THE COMPANY
A. History and Development of the Company
Our legal and commercial name is Jacada Ltd. We were incorporated under
the laws of the State of 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 Oren Shefler, whose address is
400 Perimeter Center Terrace, Suite 100, 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. We operate under the Companies Law.
Since October 1999, our Ordinary Shares have been quoted on the Nasdaq
National Market under the symbol "JCDA." In addition, our Ordinary Shares have
been quoted on the Tel Aviv Stock Exchange under the same symbol or its Hebrew
equivalent since June 18, 2001. We develop, market and support unified service
desktop and process optimization solutions that simplify and automate customer
service processes. By bridging disconnected systems into a single, "intelligent"
workspace, our solutions create greater operational efficiency and increase
agent and customer satisfaction. Our traditional products enable businesses to
Web-enable, modernize and integrate their existing software applications to
better serve the needs of their users, customers and partners. Our new products,
Jacada Fusion and Jacada WorkSpace, introduced in May 2004 and September 2005,
respectively, target organizations that struggle to reduce operational costs and
deliver high quality customer service due to the complexity of the customer
service representative's desktop. Our solutions provide our customers with a
simplified interaction designed to improve the efficiency of the user and the
experience of the user's customer.
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Typical users of our traditional products and services are medium to
large businesses with sophisticated technology requirements. Some of the
companies that have implemented or are implementing our traditional solutions
include AIG, Bank of America, Caterpillar, Delta Air Lines, U.S. Department of
Interior, The Federal Reserve Bank, Liberty Mutual Insurance, Manpower, Porsche
Cars North America, Prudential Life Insurance Company, Raytheon, The Hartford,
and the Spanish social security authorities.
Typical users of the Jacada Fusion or Jacada WorkSpace products and
services are medium to large businesses with inbound contact centers that
typically have in excess of 100 agents (customer service representatives). Some
of the companies that have purchased Jacada Fusion and Jacada WorkSpace products
include Vodafone, West Telemarketing, Cox Communications., Capita Business
Services, Lillian Vernon Corporation, Quelle Contact Vertrieb, Embratel -
Empresa Brasileira de Telecomunicacoes, Sertel, and Omnium Worldwide.
See Items 5 and 18 for a description of our capital expenditures for
the past three fiscal years. We have made no divestitures during the same time
period. In addition, we are not currently engaged in a capital divestiture and
our current capital expenditures are for computers, software and peripheral
equipment. These capital expenditures are financed with our internal cash
resources.
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 2005 and 2006.
B. Business Overview
Industry Overview
We have been operating in the application integration and
web-enablement market for 16 years. We refer to this market as our "Traditional
Market." In 2004, we introduced Jacada Fusion and elected to target corporate
customer contact centers. In the third quarter of 2005, we introduced Jacada
WorkSpace, a solution specifically designed for the customer contact center
market. We refer to this market as the "Contact Center Market".
Traditional Market
A significant number of the applications that are critical to companies
in operating their businesses, including applications for customer account
information, sales and inventory management, customer order information and
manufacturing enterprise resource planning, are currently held in existing
application environments such as those based on mainframes and mini-computers.
Applications for existing 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 user interfaces,
which lack the flexibility and intuitiveness of today's web user interfaces.
Companies continue to rely heavily on and invest a significant amount of
resources in existing applications and data.
Companies often seek to circumvent the limitations of their existing
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, there is an increasing need to integrate existing
host-centric applications with these new systems easily.
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Web-enabling, or integrating existing host-centric applications, may be
accomplished by either completely rewriting the existing applications or by
using 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 reuse without the costs, risks and time
required to rewrite the application.
An effective solution to extend and integrate existing applications
should:
o be able to be implemented rapidly;
o enable the deployment of a comprehensive solution that does not
require extensive custom programming;
o provide a flexible architecture that allows for the efficient
incorporation of evolving technologies; and
o be able to operate on multiple platforms and support a variety of
applications.
Contact Center Market
In today's highly competitive markets, companies increasingly focus on
the provision of customer service as a means of increasing customer satisfaction
and customer retention rates. For most companies, the key organization involved
in this effort is the company's contact center, or call center, whose personnel
are directly customer-facing.
To provide quality customer service, customer service representatives
must be able to answer a customer's questions quickly, handle any request the
customer may have, and do so in an efficient and pleasant manner. One of the
significant challenges in the provision of quality customer service is the
complexity of the customer service representative desktop. This is due both to
the number of software applications on the customer service representative's
computer desktop and to the complexity of the applications used on the desktop.
Most customer service representatives must manage three or more applications on
their desktop, including billing, inventory, delivery tracking, call tracking
and customer relationship management, or CRM, applications, and many customer
service representatives have six, eight, ten or more applications they must
learn and manage.
The number of applications on the typical customer service
representative desktop is increasing due to the broader range of services that
organizations are demanding of contact centers and the desire for agents to
resolve calls during the first contact with the customer. These applications are
often a combination of Windows, web and host centric applications that are not
integrated, and many of these applications have a unique user interface that
customer service representatives must master to perform their jobs.
The complex customer service representative desktop results in:
o Long average call handle times, or AHT;
o Long and expensive training programs for the customer service
representative;
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o High customer service representative turnover; and
o Poor customer satisfaction and low customer retention.
Our Solutions
We develop, market and support unified service desktop and process
optimization solutions that simplify and automate customer service processes. By
bridging disconnected systems into a single, "intelligent" workspace, our
solutions create greater operational efficiency and increase agent and customer
satisfaction. Our traditional products enable businesses to Web-enable,
modernize and integrate their existing software applications to better serve the
needs of their users, customers and partners. Our contact center market
products, Jacada Fusion and Jacada Workspace simplify the desktop of the
customer service representatives to reduce operational costs and improve the
customer experience. Our solutions are designed to provide our customers with a
simplified interaction to improve the efficiency of the user and the experience
of the user's customer.
Benefits
Our solutions for our traditional market and contact center market
provide the following benefits:
o Leverage Existing Information Technology Resources. Our solutions
permit companies to access their existing 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 and
Amdocs. This eliminates the need to replace existing applications
through time-consuming and expensive custom programming.
o Allow Rapid Implementation. We design our solutions to be
implemented rapidly and to require minimal customization, which
results in faster implementation than internally developed
solutions.
o 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.
The access to multiple platforms through one interface also
allows companies to respond more quickly to customer demands and
changes in the marketplace as new business rules and processes
can be adopted through the single user interface without
rewriting any code or data.
o 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 evolving business
needs.
Our solutions for the contact center market provide the following
additional benefits:
o Reducing average handle times. Because Jacada Fusion and Jacada
Workspace products present users with a single interface through
which applications are accessed, they eliminate the need to
navigate through and between applications. Therefore they
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eliminate redundant data entry, cut keystrokes and streamline or
even eliminate process steps, including time consuming call
wrap-up processes, thereby generating greater efficiency. This
enables increased first call resolution and significant reduction
in average handle times.
o Significantly reducing customer service representative training
costs. By simplifying the customer service representative desktop
and reducing the number of applications with which a customer
service representative must interact, our contact center
solutions allow our customers to significantly reduce their
customer service representative training costs.
o Increasing revenue opportunities. By reducing average handle
times and making it easier for customer service representatives
to access all the data needed to answer a customer's question or
complete a customer's request, Jacada Fusion and Jacada Workspace
enable customer service representatives to perform increased
sales activities, leading to potentially greater revenue
opportunities.
o Improving user and customer experience. Reduced average handle
times and increased first call resolution enable our customers to
improve their customers' experience, helping generate increased
customer satisfaction and loyalty. The access to multiple
platforms through one user-friendly interface also improves the
experience of the customer service representative, leading to
improved customer service representative morale and productivity.
Products and Technology
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(R) HostFuse (formerly known as Jacada Integrator). Jacada
HostFuse 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. We have established
sales and marketing relationships in relation to our traditional market with
Siebel Systems, Computer Associates, Oracle, and BEA to utilize Jacada HostFuse
where a real-time, non-intrusive solution is required to integrate a
host-centric application with its CRM or EAI solutions. Our customers get the
benefits of on-line, real-time integration with back-office applications without
rewriting any of their existing systems.
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Jacada Interface Server and Jacada HostFuse are based on our following
core technology components:
o 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 in the KnowledgeBase. The
KnowledgeBase then generates a new graphical user interface based
on these pattern definitions.
o 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 mid-range 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.
o MapMaker. Jacada HostFuse includes our patented 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 HostFuse
also provides a means for packaging MapMaker services as
Enterprise JavaBeans.
Jacada(R) Fusion. Jacada Fusion, a bundling of three Jacada products:
Jacada HostFuse (described above), Jacada WinFuse and Jacada WebFuse (both
described below), is a non-invasive integration platform which can automate
processes that involve different kinds of business application - whether
traditional legacy `green screen' mainframe applications, Windows client/server
applications or newer web-based (browser-based) applications.
Jacada(R) WinFuse. Jacada WinFuse is a non-invasive integration
solution that allows companies to web-enable and integrate their Microsoft
Windows and client/server applications without modifying or changing anything in
the existing application. Jacada WinFuse enables organizations to leverage their
existing Windows client/server applications to automate business processes and
seamlessly integrate and transfer data from one application to another. Jacada
WinFuse can work with almost any 32-bit Windows application.
Jacada WinFuse web service-enables Windows client/server applications.
Without changing anything in the original application, and without needing to
access the source code, Jacada WinFuse enables organizations to automate
interactions with their applications and "drive" the system as a user would,
navigating a series of Windows forms, and inserting or retrieving data as
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required. Jacada WinFuse exposes these interactions as Web services that can be
integrated into any J2EE or .NET composite application in a scalable and secure
fashion.
By service-enabling any Windows-based application, Jacada WinFuse
provides for the rapid adoption of service-oriented architectures (SOA),
enabling IT to rapidly deliver new functionality.
Jacada(R) WebFuse. Jacada WebFuse is a non-invasive solution for
accessing and managing any HTML-based web application, for the purpose of
integrating the data and processes in the application with other business
processes. Jacada WebFuse offers an approach to integrating with Web
applications by using the Web application user interface to quickly encapsulate
the processes and data into web services, which can then be integrated with
newly developed and existing applications. Jacada WebFuse services can be
deployed in both J2EE and .NET environments.
Jacada WebFuse can be used for a wide variety of business applications
that require access to single or multiple Web-based applications, or when there
is no available means to directly access the data or business logic behind the
Web system. Business scenarios that can benefit from Jacada WebFuse include
integrating to enterprise portals, automating data collection from multiple
third party web applications, and providing bi-directional access and update
capability to internal thin-client applications from a newly implemented system
such as a CRM application.
Jacada(R) WorkSpace. Jacada WorkSpace is a single agent console that
unifies customer interaction tools and provides a single access point to all the
mission-critical applications required by the customer service representatives
to effectively complete a customer interaction. Jacada WorkSpace delivers a wide
range of capabilities that enable companies to freely implement optimal contact
center processes and maximize customer service representative productivity.
Jacada WorkSpace eliminates the inefficiency of a desktop maze by providing an
agent with a single interface to access the multitude of disparate systems and
resources needed to effectively perform his or her job. In addition, by using
dynamic, role-based desktop controls, Jacada WorkSpace enables companies to
transform product-specific or function-specific agents to `universal' agents,
maximizing agent productivity and reducing operational costs. Currently Jacada
WorkSpace operates only on the BEA WebLogic platform.
Professional Services
Our professional services include training, consulting and support and
maintenance services.
We provide our direct customers with consulting services to assist them
with installing, integrating and implementing our products into their systems,
and with managing and enhancing their utilization of our products on an ongoing
basis. We also provide customer training services to assist them in learning how
to use our products at our Atlanta, Georgia facility and other locations, with
coursework related to various aspects of our products.
We bill for consulting services either on a fixed fee basis or by the
hour plus out-of-pocket expenses, and for training services by the day plus
out-of-pocket expenses. 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.
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.
Our customers may purchase support and maintenance services for 12 months after
the initial purchase of a software license, renewable annually thereafter. In
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addition, customers can elect optional services such as emergency coverage on a
24 hours per day, seven days per week basis and on-site dedicated technical
representative.
Principal Markets
Our principal markets are North America and Europe. We generate
revenues from licensing our software products and solutions to customers and
providing customers with training, consulting, and support and maintenance
services. Software licenses revenues constituted approximately 31.8%, 33.5% and
27.4% of our total revenues for the years ended December 31, 2006, 2005 and
2004, respectively, while service and maintenance revenues constituted
approximately 68.2%, 66.5% and 72.6% of our total revenues, respectively, for
the same periods. Software licenses revenues generated from North American
customers constituted approximately 18.1%, 12.7% and 21.9% of our total revenues
for the years ended December 31, 2006, 2005 and 2004, respectively, while
service and maintenance revenues generated from North American customers
constituted approximately 49.1%, 48.9% and 58.9% of our total revenues,
respectively, for the same periods. Software license revenues generated from
European customers constituted approximately 12.1%, 20.8% and 4.9% of our total
revenues for the years ended December 31, 2006, 2005 and 2004, respectively,
while service and maintenance revenues generated from European customers
constituted approximately 18.7%, 17.2% and 13.1% of our total revenues,
respectively, for the same periods.
Seasonality
Not applicable.
Sources and Availability of 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, solution providers and
system integrators. We also use indirect distribution channels in countries
where we have no direct sales operations such as Latin America and Australia. As
of December 31, 2006, we had 48 people in our sales and marketing organization,
as we had as of December 31, 2005.
In May 2006 we recruited our new president, who is responsible for our
worldwide sales, marketing, business development and field services activities.
In addition, during 2006 we made changes in our US sales staff as we believed
that we needed persons with different skills and experience than those of our
prior sales staff in order to sell our Fusion and WorkSpace products. As part of
these changes, which were part of our effort to align our company behind our new
products, we recruited a new Vice President of Sales for the Americas markets
who made substantial changes in our North American sales team. In addition we
increased our sales force both in Israel and in the UK.
In August 2006 we recruited our new vice president for global corporate
development, who is responsible for creating partnerships and alliances with
strategic partners and indirect sales channels. During 2006 we invested
significantly in the establishment of strategic indirect sales channels such as
through alliances with major contact center infrastructure and applications
vendors, system integrators and outsourcers for the contact center market. Among
other things, we signed a joint marketing agreement with Avaya Inc., a leading
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global provider of business communications applications, systems and services
and a Software License and a Services Agreement with Capita Business Services, a
UK leading provider of integrated professional support services. It is our
expectation that our indirect distribution channels will extend our market reach
by increasing market awareness to our solution and presenting us to potential
customers. We intend to continue to invest significantly in 2007 in the
establishment of our indirect sales channels.
Our marketing efforts are focused on generating leads for potential
transactions involving our solutions and developing greater awareness among
target customers of our solutions and the benefits they 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 both our direct sales force and indirect distribution
channels. These materials include brochures, white papers, case studies, press
releases and our Web site.
Customers
Our customers include end users to whom we sell our products and
services directly, distributors and other intermediaries who either resell our
products to end users or incorporate our products into their own product
offerings and end users who purchase our products from such distributors and
other intermediaries. Typical users of our products and services are medium to
large businesses with sophisticated technology requirements.
Our customers use our solutions to rapidly and cost effectively improve
high value business processes while leveraging their existing investments in
application software. Some examples of customers' uses of our products include:
o Telecommunications providers, which use our solution to assist in
streamlining their customer retention process and improve the
productivity and efficiency of their contact center.
o Contact Center Outsourcers; which utilize our solutions to reduce
their operational costs, as well as to provide better service for
their customers and provide a differentiated service when they
compete for new business.
o Retailers, which use our solutions in their contact centers or
their back-office software applications in order to reduce their
operational costs, as well as to provide better service for their
customers, and 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.
o Financial institutions, which use our solutions to provide
real-time integration between Siebel 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.
o Insurance companies, which use our solutions to modernize their
contact center applications, Web-enable access to these
applications for customers to update account information via the
Internet, and integrate their customer information systems with
CRM applications.
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o Automotive companies, which use 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.
Research and Development
We believe that strong product development is essential to our strategy
of continuing to enhance and expand the capabilities of our products. 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 and intend in the future to recruit key software engineers and
developers with experience in Java, .Net, communications, expert systems,
Windows internals and Internet technologies. Our research and development
efforts, which include internal development as well as acquisition of technology
components, are primarily focused on enhancing and adding functionality to our
contact center products as well as adding new products based on our expectations
of future technologies and industry trends.
Our research and development expenses were $4.1 million for the year
ended December 31, 2006, $4.1 million for the year ended December 31, 2005 and
$5.3 million for the year ended December 31, 2004. As of December 31, 2006, 45
professionals were engaged in research and development activities, an increase
from 40 professionals at December 31, 2005. See also "Item 5. Operating and
Financial Review and Prospects, A. Operating Results, Total Operating Expenses."
Dependence on Patents and Licenses
We are generally not dependent on any third party license or patent
with respect to our technology or products. We hold two patents on portions of
our technology. While we have an additional patent pending with respect to our
technology, we believe that the failure to obtain such patent would not diminish
our ownership rights in our technology or our software products.
Competition
The markets in which we operate are extremely competitive and subject
to rapid change. We believe that the competitive factors affecting the markets
for our products and services include:
o product functionality and features;
o availability of global support;
o existing vendor relationships;
o ease of product implementation;
o quality of customer support services;
o product reputation;
o ability to implement our products and receive customer acceptance
therefor;
21
o relationships with key distribution partners; and
o 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, 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 new solutions. As a result, prospective customers may
decide against purchasing and implementing externally developed and produced
solutions such as ours.
In our traditional market, we compete with companies that utilize
varying approaches to modernize, web-enable and integrate existing software
applications. These companies include AttachmateWRQ, IBM, Seagull, TIBCO
Software and webMethods. Our Jacada Fusion and Jacada WorkSpace products compete
with other contact center solutions offered by Microsoft, Corizon and Graham
Technology. 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
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 under the Alternative Benefits Program.
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 are
significantly reduced.
In order to receive tax benefits, we must comply with a number of
conditions and criteria. 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. Once we generate taxable income, 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.
In March 2005, the law governing these tax benefits was amended to
revise the criteria for investments that qualify for tax benefits as an approved
enterprise.
The revised criteria include provisions generally requiring that at
least 25% of the Approved Enterprise's income will be derived from export and
that minimum qualifying investments in productive assets be made. Additionally,
this amendment enacted major changes in the manner in which tax benefits are
awarded under the Law for the Encouragement of Capital Investments, 1959, so
that companies no longer require Investment Center approval in order to qualify
for tax benefits. Rather, the year in which a company elects to commence its tax
benefits is designated as the year of election ("Year of Election"). A company
may choose its Year of Election by notifying the Israel Tax Authorities in
connection with filings of its annual tax return or within 12 months after the
end of the Year of Election, whichever is earlier, or by requesting an advance
ruling from the Israel Tax Authorities no later than within six months after the
end of the Year of Election.
22
We cannot assure you that we will, in the future, be eligible to
receive additional tax benefits under this law. In addition, 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, 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, or OCS. We have used these grants to develop portion of
our technology. The State of Israel does not own proprietary rights in
technology developed with OCS funding and there is no restriction on the export
of products manufactured using technology developed with OCS funding. The
technology developed with OCS funding is, however, subject to transfer
restrictions, as described below. These restrictions may impair our ability to
sell our technology assets or to outsource manufacturing and the restrictions
continue to apply even after we have paid the full amount of royalties payable
for the grants. In addition, the restrictions may impair our ability to
consummate a merger or similar transaction in which the surviving entity is not
an Israeli company.
The transfer to a non-Israeli entity of technology developed with OCS
funding, including pursuant to a merger or similar transaction, and the transfer
of rights related to the manufacture of more than ten percent of a product
developed with OCS funding are subject to approval by an OCS committee and to
the following conditions:
o Transfer of Technology. If the committee approves the transfer of
OCS-backed technology, such a transfer would be subject to the
payment to the OCS of a portion of the consideration we receive
for such technology. The amount payable would be a fraction of
the consideration equal to the relative amount invested by the
OCS in the development of such technology compared to our total
investment in the technology, but in no event less than the
amount of the grant. However, in the event that in consideration
for our transfer of technology out of Israel we receive
technology from a non-Israeli entity for use in Israel, we would
not be required to make payments to the OCS if the approval
committee finds that such transfer of non-Israeli technology
would significantly increase the future return to the OCS.
o Transfer of Manufacturing Rights. The committee is authorized to
approve transfers of manufacturing rights only if the transfer is
conditioned upon either (1) payment of increased aggregate
royalties, ranging from 120% to 300% of the amount of the grant
plus interest, depending on the percentage of foreign manufacture
or (2) a transfer of manufacturing rights into Israel of another
product of similar or more advanced technology.
o Merger or Acquisition. If the committee approves a merger or
similar transaction in which the surviving entity is not an
Israeli company, such a transaction would be subject to the
payment to the OCS of a portion of the consideration paid. The
amount payable would be a fraction of the consideration equal to
the relative amount invested by the OCS in the development of
such technology compared to the total investment in the company,
net of financial assets that the company has at the time of the
transaction, but in no event less than the amount of the grant.
23
In the event that the committee believes that the consideration to be
paid in a transaction requiring payment to the OCS pursuant to the provisions of
the law described above does not reflect the true value of the technology or the
company being acquired, it may determine an alternate value to be used as the
basis for calculating the requisite payments.
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. In addition, if we fail to comply with any of the conditions
imposed by the OCS, we may be required to refund any grants previously received,
together with interest and penalties.
C. Organizational structure
We own 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 (Europe) Limited
owns 100% of the stock of Jacada Deutschland GmbH, a limited liability company
organized under the laws of Germany.
D. Property, Plants and Equipment
As of December 31, 2006, our headquarters and principal administrative,
research and development operations were located in approximately 13,000 square
feet of leased office space in Herzliya, Israel. The lease expires in March
2010.
In the United States, we lease approximately 18,500 square feet in
Atlanta, Georgia, which we utilize for marketing, sales, administration, service
and technical support. The lease expires in June 2009, and we have the right to
extend the lease for an additional five-year term. We also lease office space in
Bellevue, Washington, which we utilize for marketing and sales; this lease is
not material.
In the UK, we lease approximately 800 square feet, which we utilize for
sales, marketing and services. The lease expires in August 2007. In addition, we
lease office space in Germany, which is utilized for sales and marketing
activities. The lease expires in April 2008 and is not material.
Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
We develop, market and support unified service desktop and process
optimization solutions that simplify and automate customer service processes. By
bridging disconnected systems into a single, "intelligent" workspace, our
solutions create greater operational efficiency and increase agent and customer
satisfaction. We also provide related professional services, including training,
consulting, support and maintenance.
We were incorporated in December 1990. We have been operating in the
legacy application integration and web-enablement market for 16 years. We refer
to this market as our "Traditional Market." In 2004, we introduced Jacada Fusion
and elected initially to target corporate customer contact centers. In the third
quarter of 2005, we introduced a solution specifically for customer service
representatives called Jacada WorkSpace, however Jacada Fusion may be also used
24
by our customer for back office applications. We refer to this market as the
"contact center market". Customers of our contact center market products may
also use our traditional market products.
Revenues
We derive our revenues from license fees for our software products,
including software products that require significant customization, as well as
from fees from consulting and training and from maintenance and support
services. We sell licenses to our customers primarily through our direct sales
force and indirectly through resellers. Both our customers and our resellers
are considered end users.
Major factors influencing our overall revenues include the decrease in
the revenues from our traditional market products, and the increase in
revenues from our contact center market products. The decrease in traditional
market products revenues in 2006 was primarily due to our decreased sales
efforts in this market and the increased competition in this market. The
decrease in traditional market product revenues was offset by the increase in
revenues from our contact center market products.
Cost of Revenues
Our costs of revenues are comprised of (a) costs of software licenses,
(b) costs of services and (c) costs of maintenance.
Cost of software licenses revenues consists of royalties, including
payments to the Office of the Chief Scientist of the State of Israel,
amortization of acquired technology, royalties to partners, and costs of
duplicating media and documentation.
Cost of services and maintenance revenues consists of compensation
expense, related overhead and subcontractor costs for personnel engaged in
training, consulting, support and maintenance services for our customers.
Research and Development Costs
As part of our long-term growth strategy we have incurred substantial
research and development costs.
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. Based on our product development process,
technological feasibility is established upon completion of a working model. No
costs are incurred between the completion of the working model and the point at
which the products are ready for general release. Therefore, all research and
development costs have been expensed.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
25
contingent assets and liabilities. These estimates are evaluated by us on an
ongoing basis. We base our estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying amount
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that application of the following critical accounting
policies entails the more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenues. Our revenue recognition policy is significant because our
revenues are a key component of our results of operations. Revenue results are
difficult to predict, and any shortfall in revenues or delay in recognizing
revenues could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses. We follow very specific and
detailed guidelines in measuring revenues; however, certain judgments affect the
application of our revenue policy. Our revenues are principally derived from the
licensing of our software and the provision of related services. We recognize
revenues from software license in accordance with SOP 97-2 as amended and
modified by SOP 98-9. Revenues from software license fees are recognized when
persuasive evidence of an arrangement exists, either by written agreement or a
purchase order, the software product has been delivered, the license fees are
fixed and determinable, collection of the license fees is considered probable
and no significant obligations with regard to implementation remain. License
fees from software arrangements which involve multiple elements, such as
post-contract customer support, consulting and training, are allocated to each
element of the arrangement under the "residual method" when Vendor Specific
Objective Evidence (VSOE) of fair value exists for all undelivered elements. We
determine the fair value of each undelivered element in multiple-element
arrangements based on the Vendor Specific Objective Evidence (VSOE) of fair
value of each undelivered element when sold separately.
Arrangements for the sale of software licenses that include services
are evaluated to determine whether those services are essential to the
functionality of the software. When services are not considered essential to the
functionality, the revenues allocable to the services are recognized as the
services are performed. When services are considered essential to the
functionality, contract accounting is applied
In judging the probability of collection of software license fees we
continuously monitor collection and payments from our customers and maintain a
provision for doubtful accounts based upon our historical experience and any
specific customer collection issues that we have identified. In connection with
customers with whom we have no previous experience, we may utilize independent
resources to evaluate the creditworthiness of those customers. For some
customers we may grant extended payment terms. We perform initial credit
evaluations of our customers and adjust credit limits based upon payment history
and the customer's creditworthiness, as determined by our review of their credit
information. We consider all arrangements with payment terms extending beyond
six months 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.
Our traditional software products do not require significant
customization or modification. However, in conjunction with the rollout of our
contact center market products that are designed to provide an overall solution
to customers, we began in 2005 to provide implementation and customization
services to our customers and continued to provide such services in 2006. We
26
anticipate that a growing number of our future contact center market products
deals will involve substantial customization and implementation services and
customer acceptance of our solutions.
Service revenues include post-contract customer support, consulting and
training. Post-contract customer support arrangements provide for technical
support and the right to unspecified upgrades on an if-and-when-available basis.
Revenues from those arrangements are recognized ratably over the term of the
arrangement, usually one year. Where the contractual terms include a provision
for customer acceptance, revenues are recognized either when such acceptance has
been obtained or when the acceptance provision has lapsed. Consulting services
and training are recognized either on a time and materials basis as the services
are provided or on a fixed fee basis.
Impairment of long-lived assets. Our long-lived assets and certain
identifiable intangibles are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No.144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No.144") whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of assets
may not be recoverable. Recoverability of an asset or group of assets to be held
and used is measured by a comparison of the carrying amount of an asset or group
of assets to the future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. We have performed impairment tests on our
long-lived assets and as of December 31, 2006, no impairment losses have been
identified.
Goodwill. Under Statement of Financial Accounting Standard No.142,
"Goodwill and Other Intangible Assets" ("SFAS No, 142") goodwill acquired in a
business combination which closes on or after July 1, 2001 is deemed to have
indefinite life and will not be amortized. SFAS No.142 requires goodwill to be
tested for impairment on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required. Goodwill is
tested for impairment by comparing the fair value of the reporting unit with its
carrying value. Fair value is determined using market multiples and comparative
analysis. Significant estimates used in the methodologies include future cash
flows, future short-term and long-term growth rates, weighted average cost of
capital and estimates of market multiples. We have performed impairment tests
during the third fiscal quarter and determined that our goodwill of $4.6 million
was not subject to impairment during fiscal year 2006.
Contingencies. From time to time, we are defendant or plaintiff in
various legal actions, which arise in the normal course of business. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of the
amount of reserves required for these contingencies, if any, which would be
charged to earnings, is made after careful and considered analysis of each
individual action together with our legal advisors. The required reserves may
change in the future due to new developments in each matter or changes in
circumstances, such as a change in settlement strategy. A change in the required
reserves would affect our earnings in the period the change is made.
Equity-based compensation expense. We account for equity-based
compensation in accordance with SFAS No. 123(R), "Share-Based Payment" beginning
January 1, 2006. Under the fair value recognition provisions of this statement,
share-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as an expense over the requisite service
periods. Determining the fair value of share-based awards at the grant date
requires the exercise of judgment, including the amount of share-based awards
that are expected to be forfeited. If actual results differ from these
27
estimates, equity- based compensation expense and our results of operations
could be impacted. See further discussion below under the caption "Adoption of
new accounting standard."
Our historical operating results for the years ended December 31, 2006,
2005 and 2004 as a percentage of total revenues are as follows:
Year Ended December 31,
-----------------------
2006 2005 2004
------------ ------------ -------------
Revenues:
Software Licenses*) 31.8% 33.5% 27.4%
Services*) 23.2 18.5 29.4
Maintenance 45.0 48.0 43.2
------------ ------------ -------------
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
Software Licenses*) 2.5 3.3 2.8
Services*) 17.8 16.9 17.3
Maintenance 4.2 4.3 5.8
------------ ------------ -------------
Total cost of revenues 24.5 24.5 25.9
------------ ------------ -------------
Gross profit 75.5 75.5 74.1
Operating expenses:
Research and development 19.7 20.5 26.7
Sales and marketing 49.0 55.3 53.1
General and administrative*) 23.8
Restructuring 24.6 28.5 2.7
-------------
Total operating expenses 93.3 104.3 106.3
------------ ------------ -------------
Operating loss (17.8) (28.8) (32.2)
Financial income, net 6.6 4.2 3.9
------------ ------------ -------------
Net loss before taxes on income (11.2) (24.6) (28.3)
Taxes on income*) 1.2 0.2 0.2
------------ ------------ -------------
Net loss (12.4)% (24.8)% (28.5)%
============ ============ =============
*Certain amounts in prior years' results have been reclassified in
order to conform to our 2006 clasifications.
Adoption of new accounting standard
Accounting for equity-based compensation
Effective January 1, 2006, we adopted the fair value recognition
provisions of FASB Statement No. 123(R), "Share-Based Payment", using the
modified-prospective-transition method. Under this transition method,
stock-based compensation expense for the year ended December 31, 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on grant date fair value
estimated in accordance with the original provisions of SFAS No. 123.
Stock-based compensation expenses for all stock-based compensation awards
granted subsequent to January 1, 2006 was based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Our consolidated
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R). We selected the Black-Scholes option
28
pricing model as the most appropriate fair value method for our stock-based
compensation awards based on the market value of the underlying shares at the
date of grant.
As a result of adopting Statement 123(R) on January 1, 2006, our loss
before income taxes and net loss for the year ended December 31, 2006, was $ 671
higher, than if it had continued to account for share-based compensation under
Opinion 25. Basic and diluted loss per share for the year ended December 31,
2006 was $ 0.03 higher, than if we had continued to account for share-based
compensation under Opinion 25.
Recently Issued Accounting Pronouncements
In June 2006, the FASB issued Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
an interpretation of FASB Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes"("SFAS No. 109"). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109. The interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax provision taken or expected to be taken in
a tax return. Also, the interpretation provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The adoption of FIN 48 will be effective for fiscal
periods beginning after December 15, 2006. We do not expect that the adoption of
FIN 48 will a have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standard No. 157 "Fair Value Measurments", "(SFAS No. 157"), which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not anticipate any material impact
on its consolidated financial statements upon the adoption of SFAS No. 157.
In February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently assessing the impact of SFAS No. 159 on its consolidated financial
position and results of operations.
Years Ended December 31, 2006, 2005 and 2004
Revenues and Cost of Revenues
Revenues. Revenues were $20.7 million, $19.9 million and $19.8 million for the
years ended December 31, 2006, 2005 and 2004, respectively. The increase in
total revenues in 2006 as compared to 2005 was due to the increase in revenues
from our contact center market products and services in an amount of $3.4
million which was partially offset by a decrease in traditional product and
services revenues in an amount of $2.6 million. The slight increase in total
29
revenues in 2005 as compared to 2004 was also due to the increase in revenues
from our contact center market products in an amount of $3.9 million, which
offset the decrease in traditional product revenues in an amount of $3.8
million.
For the years ended December 31, 2006 and 2005 one of our customers
represented approximately 10% and 22% respectively of our total revenues. For
the year ended December 31, 2004, no customer represented 10% or more of our
revenues.
Software licenses revenues. Software licenses revenues were $6.6
million, or 31.8 % of revenues for the year ended December 31, 2006, compared to
$6.7 million, or 33.5% of revenues for the year ended December 31, 2005, and
$5.4 million, or 27.4% of revenues for the year ended December 31, 2004. The
slight decrease in software revenues during 2006 as compared to 2005 was
primarily related to decrease in traditional product revenues which was
partially offset by the increase in revenues from our contact center market
products. The 23% increase in software revenues during 2005 as compared to 2004
was primarily related to a transaction with a major customer of our contact
center market products which was partially offset by a decrease in traditional
product revenues.
Service revenues. Service revenues were $4.8 million or 23.2% of
revenues for the year ended December 31, 2006, compared to $3.7 million or 18.5%
of revenues for the year ended December 31, 2005, and $5.8 million or 29.4% of
revenues for the year ended December 31, 2004. Service revenues are generated
primarily from implementation and customization of our software products and
from supporting customers during the implementation of projects. The 30.0%
increase in service revenues in 2006 is due to recognition of revenue from
transactions we signed in 2005 and from an increase in the implementations of
our contact center market products during 2006 which was partially offset by the
decrease in our traditional services revenues. The decrease in service revenues
in 2005 is due to the decrease in sales of our traditional software products,
which resulted in a decrease in follow-up services transactions. Furthermore, a
significant portion of our traditional software and products revenues in 2005
were due to sales to existing customers, which sales generally do not involve a
service component.
Maintenance revenues. Maintenance revenues were $9.3 million or 45.0%
of revenues for the year ended December 31, 2006, compared to $9.6 million or
48.0% of revenues for the year ended December 31, 2005 and $8.6 million or 43.2%
of revenues for the year ended December 31, 2004. The decrease in maintenance
revenues during 2006 was primarily related to non renewal of maintenance
agreements, primarily by several customers of our traditional products. The
increase in maintenance revenues during 2005 was primarily related to a
transaction with a major customer of our contact center market products.
Total Cost of Revenues. Total Cost of revenues was $5.1 million or
24.5% of revenues for the year ended December 31, 2006, compared to $4.9 million
or 24.5% of revenues for the year ended December 31, 2005 and $5.1 million or
25.9% of revenues for the year ended December 31, 2004. The increase in cost of
revenues during 2006 was primarily due to an increase in the cost of services
revenues as discussed below. The decrease in cost of revenues during 2005 was
primarily due to savings due to the reduction in manpower and related costs
which was partially offset by the allocation of research and development costs
to costs of services as explained below.
Cost of software licenses revenues was $0.5 million or 2.5% of revenues
for the year ended December 31, 2006, compared to $0.6 million or 3.3% of
revenues for the year ended December 31, 2005 and $0.5 million or 2.8% of
revenues for the year ended December 31, 2004. The changes in costs of software
licenses in 2006 and 2005 resulted from the changes in payment of royalties to
30
the OCS (See item 4b. "Material Effects of Government Regulation in Israel) and
payments to our software vendors.
Cost of service revenues was $3.7 million or 17.8% of revenues for the
year ended December 31, 2006, compared to $3.4 million or 16.9% of revenues for
the year ended December 31, 2005 and $3.4 million or 17.3% of revenues for the
year ended December 31, 2004. The increase in cost of services revenues in 2006
was due to an increase in services personnel, as we grew from 22 services
professionals at year end 2005 to 26 at year end 2006 in order to support the
increase in services revenue, and the related recruitment fees, increase in
compensation costs and the use of subcontractors for the performance of services
to some of our customers.
Cost of maintenance revenues was $0.9 million or 4.2% of revenues for
the year ended December 31, 2006, compared to $0.9 million or 4.3% of revenues
for the year ended December 31, 2005, and compared to $1.1 million or 5.8% of
revenues for the year ended December 31, 2004. The decrease in cost of
maintenance revenues in 2005 was due to the reduction in our work force as part
the realignment of our business behind Jacada Fusion in the first quarter of
2005 and the maturity of our traditional products.
Total Operating Expenses
Total operating expenses in 2006 were $19.3 million, representing a
decrease from $20.8 million in 2005. This decrease was achieved primarily by a
decrease in sales and marketing expenses in the amount of $0.9 million and a
decrease in general and administrative expenses in the amount of $0.6 million.
During the first quarter of 2005, in response to the realization that
the sales cycle of Jacada Fusion products was longer than we anticipated, we
adopted an alignment plan in an attempt to minimize the gap between our
declining traditional business revenue and the anticipated Jacada Fusion revenue
by improving operational processes. The plan included merging several
departments, aligning the marketing and sales organization to support the new
business model and implementing various expense reductions. These changes also
resulted in a 12% reduction in workforce worldwide and included the related
costs associated with this reduction.
Total operating expenses in 2005 were $20.8 million, representing a
slight decrease from $21.0 million in 2004, which includes a restructuring cost
in the amount of $0.5 million. This was achieved by savings from our first
quarter alignment plan resulted with a reduction of $1.2 million in research and
development expenses being offset by increases of $1.0 million in general and
administrative expenses and $0.5 in sales and marketing expenses.
Research and Development. Research and development expenses were $4.1
million, $4.1 million and $5.3 million for the years ended December 31, 2006,
2005 and 2004, respectively. The decrease from 2004 to 2005 was due to (a) the
reduction in our work force as part of our realignment of our business behind
Jacada Fusion products in the first quarter of 2005 and (b) the allocation of
salaries and other costs of development personnel involved in the provision of
customization services as part of certain software projects to costs of services
from research and development. The research and development expenses in 2004
include cost associated with an increase in hiring through the end of the year
offset by savings associated with the closing of our lab in Minneapolis and the
consolidation of all research and development activities into our facilities in
Israel. As a percentage of total revenues, research and development expenses
were 19.7%, 20.5% and 26.7% for the years ended December 31, 2006, 2005 and
2004, respectively.
31
Sales and Marketing. Sales and marketing expenses were $10.1 million,
$11.0 million and $10.5 million for the years ended December 31, 2006, 2005 and
2004, respectively. The decrease in 2006 compared to 2005 was primarily due to
decrease in commission and incentive payments, which was slightly offset by
stock based compensation expenses resulted from the adoption of SFAS 123(R). The
increase in 2005 compared to 2004 was primarily due to compensation costs
related to new hiring in our sales organization, and to increases in commission
and incentive payments. The increase in sales expenses was partially offset by a
reduction in marketing expenses due to a reduction in marketing personnel as
part of the realignment of our business behind Jacada Fusion products in the
first quarter of 2005 and an overall reduction in our marketing budget. As a
percentage of total revenues, sales and marketing expenses were 49%, 55.3% and
53.1% for the years ended December 31, 2006, 2005 and 2004, respectively.
General and Administrative. General and administrative expenses were
$5.1 million, $5.7 million and $4.7 million for the years ended December 31,
2006, 2005 and 2004, respectively. As a percentage of total revenues, general
and administrative expenses were 24.6%, 28.5% and 23.8% of total revenues for
the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in
2006 compared to 2005 was primarily due to reduction in ordinary course of
business expenses, which was partially offset by stock based compensation
expenses in the amount of 0.1 million Dollars resulted from the adoption of SFAS
123(R) and by compensation expenses related to modification resulting from the
extension of the exercise period of outstanding options previously granted to
our directors. The increase in 2005 compared to 2004 was primarily due to
expenses incurred in connection with legal matters relating to former employees
as well as an increase in executive compensation relating to the hiring of the
former President of Jacada, Inc.
Restructuring. During 2004, we recorded a charge in the amount of $0.5
million, or 2.7% of revenues, associated with the consolidation of all research
and development operations in Minneapolis into the lab in Israel. This
consolidation was designed to improve overall development efficiency, accelerate
new product releases and reduce operating expenses.
Financial Income, Net. Financial income, net, was $1.4 million for the
year ended December 31, 2006, $0.8 million for the year ended December 31, 2005
and $0.8 million for the year ended December 31, 2004. In October 1999, we
raised approximately $51 million, net of expenses, in an initial public
offering. Most of the financial income was generated from investments of our
funds in certain financial instruments, which generate interest income. The
increase from 2005 to 2006 is primarily due to the increase in interest paid on
marketable securities.
Income Taxes. The income taxes we paid in 2006 represents US
alternative minimal federal taxes and withholding taxes.
Net Loss. As a result of the above factors, our operations resulted in
net losses of $2.6 million in 2006, $5.0 million in 2005 and $5.6 million in
2004.
B. Liquidity and Capital Resources
Since our inception, we have funded operations through the private
placement and public offering of equity securities, internal operations and, to
a lesser extent, borrowings from financial institutions.
As of December 31, 2006, we had $35.9 million in cash and investments,
all of which were interest bearing. During 2006, operating activities used
approximately $ 0.4 million in cash. The major component using cash during 2006
32
was the net loss of $2.6 million from operations. The use of cash was offset by
the non-cash depreciation and amortization of $0.9 million, the non-cash
expenses for stock compensation related to options granted to employees of $0.7,
increase in accrued expenses and other liabilities $0.4 and proceeds from
exercise of stock options of $0.6 million.
As of December 31, 2005, we had $35.7 million in cash and investments,
all of which were interest bearing. During 2005, operating activities used
approximately $2.9 million in cash. The major component using cash during 2005
was the net loss of $5.0 million from operations. Partially offsetting the use
of cash was the non-cash depreciation and amortization of $0.9 million, an
increase in deferred revenue of $1.7 million, proceeds from exercise of stock
options of $0.5 million, proceeds from sales of fixed assets of $0.1 million and
decrease in trade receivables of $0.9 million.
As of December 31, 2004, we had $37.6 million in cash and investments,
all of which were interest and dividend bearing. During 2004, operating
activities used approximately $2.6 million in cash. The major components using
cash during 2004 included the net loss of $5.6 million from operations and the
acquisition of technology in the amount of $0.9 million. Partially offsetting
the use of cash was the non-cash depreciation and amortization of $1.2 million,
an increase in deferred revenue of $0.5 million, proceeds from exercise of stock
options of $0.4 million, proceeds from sales of fixed assets of $0.3 million,
increase in trade payables of $0.5 million, and decrease in accrued interest and
amortization of premium on marketable securities of $0.6 million.
Expenditures for property and equipment were approximately $0.5
million, $0.3 million and $0.5 million for the years ended December 31, 2006,
2005 and 2004, 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.
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, acquisitions and other factors. We believe
our working capital is sufficient for our projected requirements.
Derivative Financial Instruments. Since our financial results are
reported in dollars, fluctuations in the rates of exchange between the dollar
and non-dollar currencies may have a material effect on our results of
operations. We therefore may use currency exchange forward contracts to hedge
the impact of the variability in the exchange rates on accounts receivable and
future cash flows from certain Euro-denominated transactions as well as certain
NIS-denominated expenses. The counter-parties to our forward contracts are major
financial institutions with high credit ratings. As of December 31, 2006, we had
forward contracts to sell up to $1,424,323 for a total amount of NIS 6,017,766
maturing prior to October 1, 2007.
Impact of Taxation. Please refer to Item 3.D and Item 10.E for certain
information regarding tax benefits in Israel.
C. Research and Development, Patents and Licenses, Etc.
We believe that strong product development is essential to our strategy
of continuing to enhance and expand the capabilities of our products. We have
invested significant time and resources in creating a structured process for
undertaking all product development. This process involves several functional
33
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, .Net,
communications, expert systems, Windows internals and Internet technologies. Our
research and development efforts in recent years have been primarily focused on
enhancing and adding functionality to our contact center market products and
adding new products based on our expectations of future technologies and
industry trends.
Our research and development expenses were $4.1 million for the year
ended December 31, 2006, $4.1 million for the year ended December 31, 2005 and
$5.3 million for the year ended December 31, 2004. As of December 31, 2006, 2005
and 2004, respectively, we had 45, 40 and 52 employees engaged in our product
development activities.
D. Trend Information
Our overall revenues from sales of our traditional software products
have been declining over the past years, mainly as a result of our decreased
selling efforts in this market and increased competition in this market. Our
maintenance revenues from traditional market products have declined in 2006
primarily due to non renewal of maintenance agreements, mainly by several
customers of our traditional products. See "Risk Factors - "The revenue
associated with our traditional products has declined and we expect that it may
continue to decline. Since it has taken longer than we expected to generate
increased revenue from our new Jacada Fusion and Jacada WorkSpace products,
failure to increase revenues will result in increased losses and a material
adverse effect on our business" and "Competition in the markets in which we
operate is intense. If we are unable to compete effectively, the demand for, or
the prices of, our products may be reduced" for a discussion of the potential
effects of these trends.
Our sales cycle for Jacada Fusion and Jacada WorkSpace products is
longer than we expected. Therefore, we are unable to determine if our business
model will support our forecasted revenue. See "Risk Factor "Our introduction of
Jacada Fusion and Jacada WorkSpace represents an attempt to enter a new market
in which we have limited experience and failure to successfully penetrate this
market would harm our results of operations" and "We do not have a proven
business model for the contact center market; if our business model is
inappropriate for this market and our estimations regarding the sales cycle for
this market is incorrect, our efforts to successfully commercialize Jacada
Fusion and Jacada WorkSpace may be harmed or we will experience a further delay
in generating revenues from these products" for a discussion of the potential
effects of this trend.
Our contact center market products might generate revenues from a
smaller number of deals with larger average dollar amounts compared to our
traditional market products. See "Risk Factor: "Revenues from Jacada Fusion and
Jacada Workspace our contact center products might be concentrated in a few
large orders and a small number of customers, meaning that the loss of a
significant customer or a failure to make even a small number of such sales
could harm our results of operations" for a discussion of the risks our business
and prospects for growth face in connection with our contact center market
products.
We anticipate that a growing number of our future contact center market
products deals will involve substantial customization and implementation
services of our solutions. Where the contractual terms of such deals include a
provision for customer acceptance, revenues will be recognize either when such
acceptance has been obtained or when the acceptance provision has lapsed. See
"Risk Factor: Our revenues could be adversely affected if we fail to recruit and
retain consultants and other technical service personnel".
34
E. Off-balance sheet arrangements. Aside from royalty obligations to
the OCS in connection with future sales on our products we are not party to any
off-balance sheet arrangements. See Item 4b. "Material Effects of Government
Regulation in Israel".
F. Tabular Disclosure of Contractual Obligations. The following table
summarizes our contractual obligations and commercial commitments as of December
31, 2006:
Contractual Obligations Payments due by period (in thousands)
----------------------- ---------------------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
----- ---------------- --------- --------- -----------------
Facilities $2,055 $806 $1,227 $22 -
Vehicles $562 $311 $244 $7 -
Severance pay* $1,567 - - - -
*Severance pay relates to accrued severance obligations to our Israeli employees
as required under Israeli labor laws. These obligations are payable only upon
the termination of the respective employee and may be reduced if the employee's
termination is voluntary. As of December 31, 2006, the severance pay funds were
$1.0 million and will be used to satisfy a portion of our obligations.
35
Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPOYEES
A. Directors and Senior Management
The following table sets forth certain information regarding our
executive officers and directors as of May 31, 2007:
Name Age Position
- ------------------------------------------ --------------------------------------------------------------
Gideon Hollander(1) 42 Chief Executive Officer and Director
Paul O'Callaghan 51 President
Tzvia Broida 38 Chief Financial Officer
David Holmes 52 Executive Vice President, Global Marketing
Ofer Yourvexel 43 Senior Vice President Sales and Managing Director of
Jacada EMEA & APAC
Benny Schlesinger 37 Chief Technical Officer
Yossie Hollander 50 Chairman of the Board and Director
Ohad Zuckerman(2)(1) 42 Director
Naomi Atsmon(2) 54 Director
Dan Falk (2) 62 Director
Avner Atsmon(2) 44 Director
(1) Member of the Options Committee
(2) Member of the Audit Committee
Gideon Hollander was a co-founder of Jacada in 1990 and has served as
our Chief Executive Officer and a director since 1990. 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. Gideon Hollander is Yossie Hollander's brother.
Paul O'Callaghan joined us in May 2006 as our President. Mr.
O'Callaghan has more than 25 years of executive experience in the international
software, Internet and network infrastructure markets. From February 2003 to May
2006 Mr. O'Callaghan was Senior Vice President of Worldwide Sales & Field
Services for Optio Software a provider of software solutions that enable
organizations to improve functionality and quality in their inbound and outbound
document processes. Mr. O'Callaghan also held that position from May 2001 to
November 2001. From July 2000 to February 2001 Mr. O'Callaghan was Senior Vice
President of Worldwide Sales and Services for Idapta Inc. From November 1997 to
July 2000 Mr. O'Callaghan was Vice President of Sales for XACCT Technologies
(acquired by Amdocs Limited). From December 1994 to November 1997 Mr.
O'Callaghan was Area Vice President for Southeastern Operations, Cisco Systems.
From November 1993 to December 1994 Mr. O'Callaghan was Vice President of Sales
for Network Systems Corporation. From January 1990 to November 1993 Mr.
O'Callaghan was Senior Vice President of Sales and Marketing for Imnet Systems.
From January 1982 to January 1990 Mr. O'Callaghan was Country Manager
(UK)/Southern Region Sales Vice President Network Systems Corporation (acquired
by StorageTek).
Tzvia Broida has been our Chief Financial Officer since January 2005,
having served as our Vice President, Finance 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.
36
David Holmes has been Executive Vice President of Global Marketing
since December 2002. He served as Senior Vice President, Marketing from June
1998 through December 2002 and as Vice President of Marketing from October 1995
to June 1998. 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.
Ofer Yourvexel has been our Senior Vice President Sales and Managing
Director of Jacada EMEA & APAC since March 2004. From March 2003 to March 2004,
Mr. Yourvexel was Executive Vice President of Visonic Technologies, a provider
of integrated identification solutions to enhance security, safety and
communications throughout enterprises. From September 1998 to March 2003, Mr.
Yourvexel headed the Marketing and Sales division at Elpas, a Visonic
Technologies company. From June 1996 to August 1998, Mr. Yourvexel held the
position of President at Enigma U.S.A. Inc., stationed in Boston; Enigma is a
worldwide leader in the development, implementation and marketing of electronic
publishing solutions from June 1991 to May 1996. Mr. Yourvexel began his career
in the high-tech industry at Tefen Ltd., a leading industrial engineering and
system analysis consulting firm, where he advanced to Vice President of
Operations in the Central U.S.A. region.
Benny Schlesinger has been our Chief Technical Officer since April
2005, having served as our Chief Architect since June 2001. Mr. Schlesinger has
held various R&D positions at Jacada since November 1995. Prior to that he
served for 5 years in an elite unit of the Israeli Defense Forces and was
responsible for large software development projects.
Yossie Hollander has been Chairman of the Board of Directors since
November 1995 and a director since 1990. Mr. Hollander was a founder, 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. Mr. Hollander is a member of the executive committee
of the Weizman Institute. Yossie Hollander is Gideon Hollander's brother.
Ohad Zuckerman has served as a director since December 2000. Mr.
Zuckerman is the CEO and President of Zeraim Gedera Ltd., an agricultural
company which specializes in breeding of vegetable varieties as well as in
production and marketing to the seeds of such varieties, 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, a provider of
software for extracting information from data warehouses, from 1998 to 2002.
Naomi Atsmon has served as a director since June 2001. In addition, Ms.
Atsmon has served as a director of Clicksoftware Technologies Ltd. (NASDAQ:
CKSW) since May 2003. Ms. Atsmon served as a Division President of Amdocs Ltd.,
a provider of information system solutions to communications companies, from
July 1997 to December 2002. From 1994 until 1997, Ms. Atsmon served as a vice
president at Amdocs Ltd. Ms. Atsmon held various positions at Amdocs since 1986.
Dan Falk as served as a director since August 2004. Mr. Falk serves as
a member of the boards of directors of Orbotech Ltd., Attunity Ltd., Nice System
Ltd., Orad Hi-Tech SystemsLtd., Netafim Ltd., Ormat Technologies Inc.,
ClickSoftware Technologies Ltd., Poalim Ventures 1 Ltd., Dmatek Ltd., Plastopil
Ltd. and Nova Measuring Systems Ltd. In 1999 and 2000, Mr. Falk was President
and Chief Operating Officer of Sapiens International Corporation N.V. From 1985
37
to 1999, Mr. Falk served in various positions in Orbotech Ltd., the last of
which were Chief Financial Officer and Executive Vice President. From 1973 to
1985, he served in several executive positions in the Israel Discount Bank.
Avner Atsmon joined us in October 2006 as a director. Mr. Atsmon served
as Vice President of Engineering of Starhome Ltd. from January 2000 to June
2002. From December 1993 to December 1999 Mr. Atsmon served in several positions
at Comverse Infosys including as a Chief Operating Officer. From November 1991
to November 1993 Mr. Atsmon was Fax Application Manager of National
Semi-Conductors, Palo Alto California. Naomi Atsmon and Avner Atsmon have
notified us that they are not related.
B. Compensation
The aggregate remuneration we paid for the year ended December 31, 2006
to all executive officers as a group was $1,064,171 in salaries, fees,
commissions and bonuses. This also includes $68,152 set aside or accrued to
provide for pension, retirement or similar benefits provided to our executive
officers. As of May 20, 2003, directors (except the CEO) each receive $750 for
each meeting of the board of directors attended and each meeting of a committee
of the board of directors attended. In addition, all directors are entitled to
be reimbursed for their expenses incurred in connection with the discharge of
their responsibilities as board members, including attending board of directors
meetings. Directors also receive options to purchase our ordinary shares.
As of May 31, 2007 options to purchase 2,068,250 ordinary shares
granted to our directors and executive officers (12 persons) under our option
plans were outstanding. The weighted average exercise price of these options was
$3.30 per share ranging from $1.20 to $11.00, and the expiration dates of the
options range from December 31, 2007 to July 26, 2015.
C. Board Practices
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.
At our annual meeting in August 2004, the shareholders voted to fix the
number of directors at six directors. In accordance with the terms of our
articles of association, the board of directors is divided into four classes,
with the following terms of office:
o Class I directors, whose terms expire at the annual meeting of
shareholders to be held in 2009;
o Class II directors, whose terms expire at the annual meeting of
shareholders to be held in 2007;
o Class III directors, whose terms expire at the annual meeting of
shareholders to be held in 2008; and
38
o A class of directors whose terms expire after one year, at each
annual meeting of shareholders.
Our Class I directors are Avner Atsmon and Ohad Zuckerman. Our Class II
director is Naomi Atsmon. Our Class III directors are Gideon Hollander and
Yossie Hollander. Our director with a term of one year is Dan Falk.
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, other
than the class of directors whose terms expire after one year. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the four classes. This classification of our board of
directors may have the effect of delaying or preventing changes in control or
management of our company.
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.
We do not have service contracts with any of our directors; however,
Gideon Hollander, our Chief Executive Office and a member of our board of
directors is party to an employment agreement with us.
Audit Committee
Under the 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 the two external directors we are also required to appoint
pursuant to Israeli law. 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. In addition, under its charter, our audit
committee is responsible for monitoring the integrity of our financial
statements and auditing, accounting and financial reporting processes,
appointing and evaluating the qualifications and independence of the external
auditor.
Pursuant to the current listing requirements of the Nasdaq National
Market, we are required to have at least three independent directors on our
audit committee. We have appointed such audit committee. Pursuant to the
Sarbanes-Oxley Act of 2002, the Nasdaq National Market has introduced new
listing standards requiring all members of an audit committee to comply with
tightened independence requirements. All four members of our audit committee
currently comply with those requirements.
The current members of the audit committee are: Ohad Zuckerman, Naomi
Atsmon, Dan Falk and Avner Atsmon.
39
In addition, the 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 Mr. Doron Cohen from Fahn
Kanne Control Management Ltd. to serve as our internal auditor.
Options Committee
The responsibilities of the options committee include granting of
options under our stock options plans in accordance with policies determined by
our board of directors.
The current members of the options committee are Gideon Hollander and
Ohad Zuckerman.
External Directors
Under the 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 at least 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 and may be reelected to one additional term of three years by a majority
vote at a shareholders' meeting, subject to the conditions described above for
the election of external directors. In addition, under a recent amendment to the
regulations promulgated under the Companies Law, external directors of public
companies whose shares are also registered for trading in certain stock
exchanges outside of Israel, like ours, may be elected for additional three year
terms (in excess of the original six year term) provided that in light of such
external director's expertise and special contribution to the work of the
company's board of directors and audit committee, the re-election of such
external director is for the benefit of the company.
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, except that the audit
committee must include both external directors. An external director is only
entitled to compensation as provided in regulations promulgated under the
Companies Law. Ohad Zuckerman, Naomi Atsmon and Avner Atsmon are currently
serving as our external directors. Naomi Atsmon and Avner Atsmon have notified
us that they are not related.
The Companies Law requires that at least one external director have
financial and accounting expertise and that the other external director meet
certain professional qualifications. Certain regulations promulgated under the
Companies Law set out the conditions and criteria for a director qualifying as
40
having a "financial and accounting expertise" or a "professional qualification".
A director with financial and accounting expertise is a director who, due to his
education, experience and skills, possesses capabilities relating to and an
understanding of business and accounting matters and financial statements, which
enable him to understand in depth the company's financial statements and to
initiate a debate regarding the manner in which the company's financial
information is presented. However, under a recent amendment to the regulations
promulgated under the Companies Law, a public company whose shares are also
registered for trading in certain stock exchanges outside of Israel, like ours,
is not required to appoint an external director with financial and accounting
expertise, if at such time there is another director serving on the board of
directors of such company who has financial and accounting expertise and who is
an independent director for purposes of membership on the audit committee
thereof, in accordance with the applicable laws of the state in which such
shares are registered (and the rules and regulations of such foreign stock
exchange). Our Board of Directors has determined that Mr. Dan Falk has financial
and accounting expertise. Mr. Falk also meets the requirements of the NASDAQ
Stock Market listing standards to be an "independent" director and audit
committee member. Therefore we are not required to appoint an external director,
under the Company's Law, with financial and accounting expertise. A director who
meets certain professional qualifications is a director who satisfies one of the
following requirements: (i) the director holds an academic degree in either
economics, business administration, accounting, law or public administration,
(ii) the director either holds another academic degree or has obtained other
high education in the company's primary field of business or in an area that is
relevant to his position, (iii) the director has at least five (5) years of
experience serving in one of the following capacities or an aggregate of at
least five (5) years of experience in two or more of the following capacities:
(a) a senior business management position of a company with a substantial scope
of business, (b) a senior position in the primary field of business of the
company or (c) a senior public administration position. A proposed external
director must submit to the company a declaration as to his or her compliance
with the requirements for his or her election as an external director (including
with respect to such person's financial and according expertise or professional
qualification).
Nomination Committee Charter - Exemption
As a foreign private issuer we are entitled to follow our home country
practice in lieu of compliance with the NASD rule that requires adoption of a
formal written charter or board resolution addressing the nominations process.
Under the Companies Law, the nominations process is conducted by the full board
of directors, and there is no requirement to adopt a formal written charter or
board resolution addressing a company's nomination process.
Compensation Committee - Exemption
As a foreign private issuer we are entitled to follow our home country
practice in lieu of compliance with the NASD rule that requires that the
compensation of the chief executive officer and all other executive officers of
the company be determined, or recommended to the board for determination, either
by a majority of the independent directors, or by a compensation committee
comprised solely of independent directors. Under the Companies Law, the
compensation of such officers is determined by the full board of directors, and
there is no requirement for a recommendation or determination by independent
directors or a compensation committee.
41
D. Employees
As of December 31, 2006, we had 76 employees in Israel, 67 in the
United States, 14 in Europe and 2 in Latin America. Of our 159 employees, 45
were engaged in research and development, 48 in sales, marketing and business
development, 36 in professional services and technical support and 30 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.
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 Israel) 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.
The following table sets forth for the last three financial years, the number of
our employees broken down into categories.
Period ending December 31, 2006 2005 2004
Research and Development 45 40 52
Marketing, Sales and Customer Support 84 80 88
Administration Management and Information Systems 30 25 32
Total 159 145 172
E. Share Ownership
1. Other then Gideon Hollander and Yossie Hollander, whose shareholdings
are described in Item 7 below, none of our officers and directors owns in excess
of one percent of our outstanding ordinary shares.
2. Option Plans. We currently maintain three option plans, the 1996 Option
Plan, the 1999 Option Plan and the 2003 Share 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.
As of March 31, 2007 we had 1,969,960 ordinary shares available for
future grants under these option plans to be granted to officers, directors,
employees and consultants. As of December 31, 2006, options to purchase
3,677,401 ordinary shares were outstanding under the option plans. As of
December 31, 2006, the weighted average exercise price of options outstanding
under our option plans is $3.19. Our option plans are administered by our board
of directors and the options 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. In addition, pursuant to the
option plans, the exercise price of options shall be determined by our board of
directors or our options committee but may not be less than the par value of the
ordinary shares and is typically the fair market value on the date of grant. The
vesting schedule of the options is also determined by our board of directors or
42
our options committee but generally the options vest over a four year period.
Generally, options granted under the option plans are exercisable until seven to
ten years from the date of the grant. The 1996 Option Plan expired on December
31, 2005. The 1999 Option Plan and the 2003 Share Option Plan will expire on
December 31, 2009 and December 31, 2012, 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
March 31, 2007, those shareholders that own 5% or more of our capital stock
Name of Beneficial Owner Number of Shares Owned Percentage
- ------------------------- ---------------------- ----------
Yossie Hollander (1) 2,244,010 11.07%
Gideon Hollander (2) 2,139,987 10.56%
Emancipation Capital, LP (3) 1,328,073 6.55%
(1) Based on a Directors and Officers Questionnaire submitted to us by Mr.
Hollander. Represents 1,301,280 ordinary shares owned individually by
Mr. Hollander, 302,670 ordinary shares owned by Mr. Hollander's spouse
and 500,060 ordinary shares owned individually by Dana Hollander
Settlement 1991, LLC, a Nevada limited liability company, as to which
Mr. Hollander is an income beneficiary of a trust holding a 99%
membership interest therein. Includes 140,000 ordinary shares issuable
pursuant to options held by Mr. Hollander which are exercisable within
60 days of the date hereof. Does not include 480,000 ordinary shares
owned by Mr. Hollander' mother as Mr. Hollander disclaims beneficial
ownership of such shares and an aggregate of 1,549,600 ordinary shares
owned indirectly by various trusts, as equity holders of certain
foreign entities, as to which Mr. Hollander and/or his children, as
beneficiaries of such trusts, may be deemed to have interests. Any such
interest would be in an indeterminable number of the ordinary shares
owned indirectly by such trusts. Mr. Hollander disclaims beneficial
ownership of any ordinary shares so held by such trusts. We make no
representation as to the accuracy or completeness of the information
reported. The address of Mr. Hollander is 400 Perimeter Center Terrace,
Suite 100, Atlanta, Georgia 30346.
(2) Based on a Schedule 13G filed with the Commission on February 14, 2007.
Represents 1,564,987 ordinary shares owned individually by Mr.
Hollander, and 575.000 ordinary shares issuable pursuant to options
held by Mr. Hollander which are exercisable within 60 days of the date
hereof. Does not include 480,000 ordinary shares owned by Mr.
Hollander' mother as Mr. Hollander disclaims beneficial ownership of
such 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.
(3) Based on a Schedule 13G filed with the Commission on February 14, 2007,
this amount represents ordinary shares held by the following entities,
(i) 1,169,036,ordinary shares held by Emancipation Capital, LP and (ii)
159, 037ordinary shares held by Hurley Capital, LLC, constituting, in
the aggregate, 6.55% of our outstanding capital stock. We make no
representation as to the accuracy or completeness of the information
reported. The address of Emancipation Capital, LP and of Hurley
Capital, LLC is 1120 Avenue of the Americas, Suite 1504 New York, NY
10036, USA.
Based on a Schedule 13G/A filed with the Commission on November 30,
2005, Airbus Foundation held 888,708 of our ordinary shares as of such date,
constituting 4.5% of our capital stock as of such date. Accordingly Airbus
Foundation has been removed from the above table. Based on a Schedule 13G/A
filed with the Commission on January 14, 2005, Airbus Foundation held 1,802,692
of our ordinary shares as of such date, constituting 9.3% of our capital stock
as of such date. The address of Airbus Foundation is c/o Allegemeines,
Treuunternehmen, P.O. Box 83, FL - 9490 Vaduz, Liechtenstein.
The shareholders that own 5% or more of our capital stock do not have
different voting rights.
43
Based on information available to us, as of May 1st, 2007, there were
51 record holders of our shares in the United States, which represented
approximately 43% of the outstanding shares as of such date. To our knowledge,
no corporation, foreign government or other natural or legal person directly or
indirectly controls Jacada.
B. Related Party Transactions
On October 5, 2006 our shareholders' general meeting approved the
extension of the exercise period of all outstanding options to purchase ordinary
shares previously granted to our directors, to a period of two years from the
date of termination of each such director's service.
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
We generated approximately 69% of our revenues in North and Latin
America and approximately 31% in Europe through wholly owned subsidiaries during
the period beginning January 1, 2006 and ending December 31, 2006. Our export
sales consist mainly of intercompany transactions with our subsidiaries.
Legal Proceedings
We are, from time to time, a party to legal proceedings that are
incidental to our business.
We do not believe that any legal proceeding to which we currently are a
party 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 this Annual Report for the year 2006.
44
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 ("TASE") under the same symbol
or its Hebrew equivalent.
The following table shows the high and low market prices on the Nasdaq
National Market of our ordinary shares in the indicated years. Trading in our
shares on the Nasdaq commenced on October 14, 1999.
Year Period High Low
---------- ------------------------ ------------- -----------
2002 01/01/02 - 12/31/02 3.740 1.080
2003 01/01/03 - 12/31/03 3.740 1.180
2004 01/01/04 - 12/31/04 4.730 2.120
2005 01/01/05 - 12/31/05 3.580 1.930
2006 01/01/06 - 12/31/06 3.100 2.060
The following table shows the high and low market prices on the Nasdaq National
Market for our ordinary shares for each financial quarter during our two most
recent financial years.
Period High Low
-------------------------- -------------- --------------
01/01/05 - 03/31/05 2.89 1.93
04/01/05 - 06/30/05 2.87 2.18
07/01/05 - 09/30/05 3.58 2.46
10/01/05 - 12/31/05 3.53 2.28
01/01/06 - 03/31/06 2.98 2.43
04/01/06 - 06/30/06 3.10 2.25
07/01/06 - 09/30/06 2.63 2.10
10/01/06 - 12/31/06 2.78 2.06
01/01/07 - 03/31/07 3.40 2.46
The following table shows the high and low market prices on the Nasdaq
National Market for our ordinary shares for the most recent six months.
Month High Low
------------ -------------- -------------
12/06 2.70 2.35
01/07 3.20 2.46
02/07 3.30 2.62
03/07 3.40 2.75
04/07 3.59 3.12
05/07 3.98 3.41
The following table shows the high and low market prices on the 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 (NIS). The following prices are denominated in U.S. Dollars in
accordance with the applicable exchange rate between the U.S. Dollar and the
NIS.
45
Year Period High Low
---------- ------------------------ ------------- -----------
2002 01/01/02 - 12/31/02 3.48 1.21
2003 01/01/03 - 12/31/03 3.87 1.59
2004 01/01/04 - 12/31/04 4.73 2.12
2005 01/01/05 - 12/31/05 3.37 1.86
2006 01/01/06 - 12/31/06 3.11 2.19
The following table shows the high and low market prices on the TASE
for our ordinary shares for each financial quarter during our two most recent
financial years. Share prices in the TASE are denominated in New Israeli Shekels
(NIS). The following prices are denominated in U.S. Dollars in accordance with
the applicable exchange rates between the U.S. Dollar and the NIS.
Period High Low
-------------------------- -------------- --------------
01/01/05 - 03/31/05 2.63 1.86
04/01/05 - 06/30/05 2.8 2.15
07/01/05 - 09/30/05 3.37 2.6
10/01/05 - 12/31/05 3.50 2.42
01/01/06 - 03/31/06 2.94 2.43
04/01/06 - 06/30/06 3.11 2.35
07/01/06 - 09/30/06 2.37 2.19
10/01/06 - 12/31/06 2.78 2.29
01/01/07 - 03/31/07 3.34 2.48
The following table shows the high and low market prices on the TASE
for our ordinary shares for the most recent six months. Share prices in the TASE
are denominated in New Israeli Shekels (NIS). The following prices are
denominated in U.S. Dollars in accordance with the applicable exchange rates
between the U.S. Dollar and the NIS.
Month High Low
------------ -------------- -------------
12/06 2.67 2.42
01/07 2.98 2.48
02/07 3.27 2.86
03/07 3.34 2.89
04/07 3.52 3.27
05/07 3.80 3.38
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 TASE under the same symbol or its Hebrew equivalent.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
46
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, as well as Exhibit 1.3 (incorporated by reference to
Exhibit 1.3 to the our Annual Report on Form 20-F for the year ended December
31, 2003) and Exhibit 1.4 (incorporated by reference to Exhibit 1.4 to our
Annual Report on Form 20-F for the year ended December 31, 2004). In addition,
because we are an Israeli company, we are governed by the provisions of the
Companies Law, which are described below along with certain provisions of our
governing documents.
Objects and Purposes
The objects and purposes of our company appear in our Memorandum of
Association and include engaging in all businesses of trade, finance, import,
export, distribution, services, economic initiatives and capital investments;
production, processing and development of any kind; engaging in any activities
of initiators, founders, and managers of plants, companies, corporations, and
real estate; serving as brokers and agents for any person, business or
corporation in Israel and abroad; and engaging in research, exploration, and
development.
Approval of Specified Related Party Transactions
The Companies Law imposes a duty of care and a duty of loyalty on all
of the 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 that 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 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 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 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
47
company and one of its directors relating to the conditions of the director's
service, including in relation to compensation 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 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.
Under our articles of association, our board can, among other things,
determine our plans of activity and the principles of financing such plans,
examine our financial situation and set the framework of credit which we may
take and decide to issue a series of debentures.
Our directors are not subject to any age limit requirement, nor are
they disqualified from serving on our board of directors because of a failure to
own our shares.
Insurance, Indemnification, and Exculpation of Directors and Officers
Under the Companies Law, an Israeli company may not exculpate an office
holder from liability for a breach of the duty of loyalty of the office holder.
However, the company may approve an act performed in breach of the duty of
loyalty of an office holder provided that the office holder acted in good faith,
the act or its approval does not harm the company, and the office holder
discloses the nature of his or her personal interest in the act and all material
facts and documents a reasonable time before discussion of the approval. An
Israeli company may exculpate an office holder in advance from liability to the
company, in whole or in part, for a breach of duty of care but only if a
provision authorizing such exculpation is inserted in its articles of
association. Our articles of association include such a provision. An Israeli
company may not exculpate a director for liability arising out of a prohibited
dividend or distribution to shareholders.
An Israeli company may indemnify an office holder in respect of certain
liabilities either in advance of an event or following an event provided a
provision authorizing such indemnification is inserted in its articles of
association. Our articles of association contain such an authorization. An
undertaking provided in advance by an Israeli company to indemnify an office
holder with respect to a financial liability imposed on him or her in favor of
another person pursuant to a judgment, settlement or arbitrator's award approved
by a court must be limited to events which in the opinion of the board of
directors can be foreseen based on the company's activities when the undertaking
to indemnify is given, and to an amount or according to criteria determined by
the board of directors as reasonable under the circumstances, and such
undertaking shall detail the abovementioned events and amount or criteria. In
addition, a company may undertake in advance to indemnify an office holder
against the following liabilities incurred for acts performed as an office
holder:
o reasonable litigation expenses, including attorneys' fees,
incurred by the office holder as a result of an investigation or
proceeding instituted against him or her by an authority
authorized to conduct such investigation or proceeding, provided
that (i) no indictment was filed against such office holder as a
result of such investigation or proceeding; and (ii) no financial
liability, such as a criminal penalty, was imposed upon him or
her as a substitute for the criminal proceeding as a result of
such investigation or proceeding or, if such financial liability
was imposed, it was imposed with respect to an offense that does
not require proof of criminal intent; and
48
o reasonable litigation expenses, including attorneys' fees, incurred by
the office holder or imposed by a court in proceedings instituted
against him or her by the company, on its behalf or by a third party or
in connection with criminal proceedings in which the office holder was
acquitted or as a result of a conviction for a crime that does not
require proof of criminal intent.
An Israeli company may insure an office holder against the following
liabilities incurred for acts performed as an office holder:
o a breach of duty of loyalty to the company, to the extent that
the office holder acted in good faith and had a reasonable basis
to believe that the act would not prejudice the company;
o a breach of duty of care to the company or to a third party,
including a breach arising out of the negligent conduct of the
office holder; and
o a financial liability imposed on the office holder in favor of a
third party.
An Israeli company may not indemnify or insure an office holder against
any of the following:
o a breach of duty of loyalty, except to the extent that the office
holder acted in good faith and had a reasonable basis to believe
that the act would not prejudice the company;
o a breach of duty of care committed intentionally or recklessly,
excluding a breach arising out of the negligent conduct of the
office holder;
o an act or omission committed with intent to derive illegal
personal benefit; or
o a fine levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of
office holders must be approved by our audit committee and our board of
directors and, in respect of our directors, by our shareholders.
Our articles of association, provide that, subject to the provisions
of the Companies Law, we may enter into a contract for the insurance of all or
part of the liability of any of our office holders with respect to:
o a breach of his duty of care to us or to another person;
o a breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume
that his act would not prejudice our interests; or
o a financial liability imposed upon such office holder in favor of
another person concerning an act performed by the office in
his/her capacity as an office holder.
Our articles of association also provide that we may indemnify an
office holder against:
o a financial liability imposed on him in favor of another
person by a court judgment, including a compromise judgment
or an arbitrator's award which has been confirmed by a
court; and
o reasonable litigation expenses, including attorneys' fees,
expended by the office holder or which were imposed on the
office holder by a court in proceedings instituted against
the office holder by us or in our name or by any other
person or in a criminal charge from which the office holder
was acquitted or in a criminal proceeding in which the
office holder was convicted for a criminal offense that does
not require proof of criminal intent.
49
Required Approvals
Under the Companies Law, indemnification of, and procurement of
insurance coverage for office holders must be approved by the audit committee
and board of directors and, in specified circumstances, by the shareholders of a
company. In August 2003, August 2004 and October 2006, our shareholders approved
indemnification agreements with our directors under which we have undertaken to
indemnify our directors to the fullest extent permitted under the Companies Law.
In July 2005, our audit committee and board of directors approved an
indemnification agreement with our chief financial officer under which we have
undertaken to indemnify our chief financial officer to the fullest extent
permitted under the Companies Law.
Rights, Preferences and Restrictions upon Shares
Our Board of Directors may from time to time declare, and cause us 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 our shareholders,
approved by a majority of the shares voting thereon. However, no such resolution
shall provide for the payment of an amount exceeding the 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 of our shares granting
preferential, special or deferred rights or not granting any rights with respect
to dividends, profits 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 us, 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 we are 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, our assets 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 Companies Law, the disclosure requirements that 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
50
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 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:
o Any amendment to the articles of association;
o An increase in the company's authorized capital;
o A merger; or
o 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 association,
has the power to appoint an office holder in the company, is under a duty to act
in fairness towards the company. The Companies Law does not describe the
substance of this duty except to state that the remedies generally available
upon a breach of contract will apply also in the event of a breach of the duty
to act with fairness.
Amendment of Articles of Association
Our Articles of Association 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. Our
articles differ from the Companies Law in this respect as the 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.
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 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.
51
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 Companies Law in this respect, as under the 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 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 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 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 our Company
must approve a merger involving our company by a vote of the 75% of our 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. Our articles differ from
the Companies Law in this respect, as under the law mergers require approval
only of a majority of the voting power of a company represented at the relevant
shareholders meeting and voting thereon 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 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 50 days have passed from
the date that a request for the approval of the merger was filed with the
Israeli registrar of companies and 30 days from the date that shareholder
approval of both merging companies was obtained. The request for the approval of
a merger may be filed once a shareholder meeting has been called to approve the
merger.
52
The 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 become a 45% shareholder of the company, unless
there already is another 45% 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, the acquirer may not acquire in such tender offer
any tendered shares to the extent that the acquisition of those shares would
bring the acquirer's ownership to more than 90% but less than 95% of the shares
of the target company. In addition, 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 6C.
Changes in Capital
Our articles enable us to increase our share capital. Any such changes
are subject to the provisions of the 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 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
None.
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 nonresidents 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.
Nonresidents 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 nonresidents, 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.
53
E. Taxation
The following discussion sets forth the material United States and
Israeli tax consequences of the ownership of ordinary shares by a holder that
holds our ordinary shares, as capital assets.
The following discussion does not address the tax consequences to
holders of ordinary shares to which special tax rules may apply, such as
tax-exempt entities, certain insurance companies, broker-dealers, traders in
securities that elect to mark to market, holders liable for alternative minimum
tax, holders that actually or constructively own 10% or more of our voting
stock, holders that hold ordinary shares as part of a straddle or a hedging or
conversion transaction or holders whose functional currency is not the U.S.
dollar. This discussion also does not apply to holders who acquired their
ordinary shares pursuant to the exercise of employee stock options or otherwise
as compensation or through a tax-qualified retirement plan. This discussion is
based on the tax laws of Israel and the United States, including the Internal
Revenue Code of 1986, as amended, its legislative history, existing and proposed
regulations under the Internal Revenue Code, published rulings and court
decisions, as in effect on the date of this document, as well as the Income Tax
Treaty Between the United States of America and Israel, as amended (the
"Treaty"), all of which are subject to change or change in interpretation,
possibly with retroactive effect.
For purposes of this discussion, a "U.S. holder" is any beneficial
owner of ordinary shares that is:
a citizen or resident of the United States;
a corporation or other entity taxable as a corporation organized under
the laws of the United states or any political subdivision of the United States;
an estate the income of which is subject to United States federal
income taxation without regard to its source; or
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
This discussion does not address any aspects of United States taxation
other than federal income taxation. Holders are urged to consult their tax
advisors regarding the United States federal, state and local and the Israeli
and other tax consequences of owning and disposing of ordinary shares.
Information Reporting and Backup Withholding
U.S. information reporting requirements and backup withholding tax
generally will apply to payments to some U.S non-corporate holders of ordinary
shares. Information reporting generally will apply to payments of dividends on,
and to proceeds from the sale or redemption of, ordinary shares by a payor
within the United States to a holder of ordinary shares other than an "exempt
recipient," including a corporation and any payee that is not a U.S. holder that
provides an appropriate certification.
A payor within the United States will be required to withhold at the
fourth lowest rate of tax applicable to single individual taxpayers (currently
28%) on any payments of dividends on, or proceeds from the sale of, ordinary
54
shares within the United States to a holder, other than an "exempt recipient,"
if the holder fails to furnish its correct taxpayer identification number or
otherwise fails to comply with, or establish an exemption from, backup
withholding tax requirements.
United States Federal Income Taxation of Owning and Selling Ordinary
Shares.
Dividends and Distributions
U.S. Holders
Subject to the passive foreign investment company rules discussed
below, U.S. holders will include in gross income the gross amount of any
dividend paid, before reduction of Israeli withholding taxes, by us out of
current or accumulated earnings and profits, as determined for Untied States
federal income tax purposes, as ordinary income when the dividend is actually or
constructively received by the U.S. holder. Dividends will be income from
sources outside the United States for foreign tax credit limitation purposes,
but generally will be "passive income" which are treated separately from other
types of income for foreign tax credit limitation purposes. Dividends will not
be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution included in income of a
U.S. holder will be the U.S. dollar value of the NIS payments made, determined
at the spot NIS/U.S. dollar rate on the date such dividend distribution is
included in the income of the U.S. holder, regardless of whether the payment is
in fact converted into U.S. dollars. Generally, any gain or loss resulting from
currency exchange fluctuations during the period from the date the dividend
distribution is included in income to the date such dividend distribution is
converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States for
foreign tax credit limitation purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal income
tax purposes, will be treated as a return of capital to the extent of the U.S.
holder's basis in the ordinary shares and thereafter as capital gain. We will
notify our shareholders of any distribution in excess of current and accumulated
earnings and profits at the time of such distribution in accordance with the
requirements of the Internal Revenue Code.
Subject to certain limitations, the Israeli tax withheld in accordance
with the Treaty and paid over to Israel will be creditable against the U.S.
holder's United States federal income tax liability. To the extent a refund of
the tax withheld is available to a U.S. holder under the laws of Israel or under
the Treaty, the amount of tax withheld that is refundable will not be eligible
for credit against the U.S. holder's United States federal income tax liability,
whether or not the refund is actually obtained.
Non-U.S. Holders
A non-U.S. holder is not subject to United States federal income tax
with respect to dividends paid on ordinary shares unless (i) the dividends are
"effectively connected" with that non-U.S. holder's conduct of a trade or
business in the United States, and attributable to a permanent establishment
maintained in the United States (if that is required by an applicable income tax
treaty as a condition for subjecting that non-U.S. holder to United States
taxation on a net income basis), or (ii) that non-U.S. holder is an individual
present in the United States for at least 183 days in the taxable year of the
dividend distribution and certain other conditions are met. In such cases, a
non-U.S. holder will be taxed in the same manner as a U.S. holder. A corporate
non-U.S. holder may also, under certain circumstances, be subject to an
additional branch profits tax at a 30% rate, or at a lower rate if that
corporate non-U.S. holder is eligible for the benefits of an income tax treaty
55
providing for a lower rate, with respect to gains that are "effectively
connected" with its conduct of a trade or business in the United States.
Sale or Exchange of Ordinary Shares
U.S. Holders
Subject to the passive foreign investment company rules discussed
below, a U.S. holder that sells or otherwise disposes of ordinary shares
generally will recognize capital gain or loss for United States federal income
tax purposes equal to the difference between the U.S. dollar value of the amount
realized on the sale or disposition and the tax basis, determined in U.S.
dollars, in the ordinary shares. Capital gain of a non-corporate U.S. holder is
generally taxed at a maximum rate of 15% if the ordinary shares were held for
more than one year. The gain or loss will generally be income or loss from
sources within the United States for foreign tax credit limitation purposes.
Non-U.S. Holders
A non-U.S. holder will not be subject to United States federal income
tax on gain recognized on the sale or other disposition of ordinary shares
unless (i) the gain is "effectively connected" with the non-U.S. holder's
conduct of a trade or business in the United States, and the gain is
attributable to a permanent establishment maintained in the United States (if
that is required by an applicable income tax treaty as a condition for
subjecting that non-U.S. holder to United States taxation on a net income
basis), or (ii) the non-U.S. holder is an individual and present in the United
States for at least 183 days in the taxable year of the sale and certain other
conditions are met. In such cases, a non-U.S. holder will be taxed in the same
manner as a U.S. holder. A corporate non-U.S. holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate,
or at a lower rate if eligible for the benefits of an income tax treaty that
provides for a lower rate, on "effectively connected" gains recognized.
Passive Foreign Investment Company Rules
We believe that our ordinary shares should not be treated as stock of a
passive foreign investment company for United States federal income tax
purposes, but this conclusion is a factual determination made annually and may
be subject to change. In general, we will be a passive foreign investment
company with respect to a U.S. holder if, for any taxable year in which the U.S.
holder held ordinary shares, either at least 75% of our gross income for the
taxable year is passive income or at least 50% of the value, determined on the
basis of a quarterly average, of our assets is attributable to assets that
produce or are held for the production of passive income. If we were to be
treated as a passive foreign investment company, then unless a U.S. holder makes
a mark-to-market election, gain realized on the sale or other disposition of our
ordinary shares would in general not be treated as capital gain. Instead, a U.S.
holder would be treated as if the holder had realized such gain and certain
"excess distributions" ratably over the holder's holding period for the shares
and would be taxed at the highest tax rate in effect for each such year to which
the gain was allocated, together with an interest charge in respect of the tax
attributable to each such year.
Israeli Taxation
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
56
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. This 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.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax at the rate
of 31% on taxable income and are subject to real capital gains tax at a rate of
25% on capital gains (other than gains derived from the sale of listed
securities that are taxed at the prevailing corporate tax rates) derived after
January 1, 2003. The corporate tax rate was reduced in June 2004, from 36% to
35% for the 2004 tax year, 34% for the 2005 tax year, 31% for the 2006 tax year,
29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year
and 25% for the 2010 tax year and thereafter. However, the effective tax rate
payable by a company that derives income from an approved enterprise (as
discussed below) may be considerably less.
Tax Benefits under the Law for the Encouragement of Industry (Taxes),
1969
The Law for the Encouragement of Industry (Taxes), 1969, generally
referred to as the Industry Encouragement Law, provides several tax benefits for
industrial companies. 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 specified sources), is
derived from Industrial Enterprises owned by that company. An "Industrial
Enterprise" is defined as an enterprise whose major activity in a particular tax
year is industrial manufacturing activity. Industrial Companies are entitled to
the following preferred corporate tax benefits, among others:
o Deduction of purchases of know-how and patents over an eight-year
period for tax purposes;
o Right to elect, under specified conditions, to file a consolidated tax
return with additional related Israeli Industrial Companies;
o Accelerated depreciation rates on equipment and buildings; and
o Deductions over a three-year period of expenses involved with the
issuance and listing of shares on the Tel Aviv Stock Exchange or, on
or after January 1, 2003, on a recognized stock market outside of
Israel.
Under some tax laws and regulations, an industrial enterprise may be
eligible for special depreciation rates for machinery, equipment and buildings.
These rates differ based on various factors, including the date the operations
begin and the number of work shifts. An industrial company owning an approved
enterprise may choose between these special depreciation rates and the
depreciation rates available to the approved enterprise.
57
Eligibility for benefits under the Industry Encouragement Law is not
contingent upon the approval of any Government agency. No assurance can be given
that we will continue to qualify as an Industrial Company, or will be able to
avail us of any benefits under the Industry Encouragement Law in the future.
We believe that we currently qualify as an industrial company within the
definition of the Industry Encouragement Law. We cannot assure you that the
Israeli tax authorities will agree that we qualify, or, if we qualify, that we
will continue to qualify as an industrial company or that the benefits described
above will be available to us in the future.
Law for the Encouragement of Capital Investments, 1959
Tax benefits prior March 2005 Amendment
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.
Tax Benefits
Taxable income derived from an Approved Enterprise under the Capital
Investments Law grants program 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. 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, after the year in which
production commenced (as determined by the Israeli Investment Center of the
Ministry of Industry and Commerce, or the Investment Center). The period of
benefits may in no event, however, exceed the lesser of 12 years from the year
in which the production commenced (as determined by the Investment Center) or 14
years from the year of receipt of Approved Enterprise status.
An Approved Enterprise 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 the
Alternative Benefits Program, a company's undistributed income derived from an
Approved Enterprise will be exempt from company tax for a period of between two
and ten years from the first year of taxable income, depending on the geographic
location of the Approved Enterprise within Israel, and the company will be
eligible for a reduced tax rate of 10%-25% for the remainder of the 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.
58
Tax benefits Subsequent to the March 2005 Amendment
In March 2005, the government of Israel passed an amendment to the
Investment Law in which it revised the criteria for investments qualified to
receive tax benefits as an Approved Enterprise. Among other things, companies
that meet the criteria of the alternate package of tax benefits will receive
those benefits without prior approval. We believe that our capital investments
qualify to receive tax benefits as an Approved Enterprise, however no
assurance can be given that such investments will be approved as in fact
qualifying for such tax benefits by the Israeli tax authorities. Additionally,
no assurance can be given that we will, in the future, be eligible to receive
additional tax benefits under this law. See "Risk Factors, and specifically -
"Any failure to obtain the tax benefits from the State of Israel that we
anticipate receiving could adversely affect our plans and prospects" and "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" for a discussion of
the risks our business and prospects for growth face in connection with Tax
benefits under Israeli law.
We currently have Approved Enterprise programs under the Capital
Investments Law, which to our belief, entitle us to certain tax benefits. The
tax benefit period for these programs has not yet commenced. We have elected the
Alternative Benefits Program which provides for the waiver of grants in return
for tax exemption. Accordingly, our income is tax exempt for a period of two
years commencing with the year we first earn taxable income relating to each
expansion program, and is subject to corporate taxes at the reduced rate of 10%
to 25%, for an additional period of five years to eight years, depending on the
percentage of the company's ordinary shares held by foreign shareholders in each
taxable year. The exact rate reduction is based on the percentage of foreign
ownership in each tax year. See note 9 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 gross 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 subject to withholding tax at the reduced rate of 15%, applicable
to dividends from Approved Enterprises if the dividend is distributed within 12
years 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 the 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.
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.
59
Foreign investor's Company ("FIC")
A company that has an approved enterprise program is eligible for
further tax benefits if it qualifies as a foreign investors' company. A foreign
investors company is a company of which more than 25% of its share capital and
combined share and loan capital is owned by non-Israeli residents. A company
that qualifies as a foreign investors' company and has an approved enterprise
program is eligible for tax benefits for a ten-year benefit period. As specified
above, depending on the geographic location of the approved enterprise within
Israel, income derived from the approved enterprise program may be entitled to
the following: o Exemption from tax on its undistributed income up to ten years.
o An additional period of reduced corporate tax liability at rates
ranging between 10% and 25%, depending on the level of foreign (i.e.,
non-Israeli) ownership of our shares.
o The twelve years limitation period for reduced tax rate of 15% on
dividend from the approved enterprise does not apply to Foreign
Investor's Company.
Measurement of Taxable Income
Results for tax purposes are measured in real terms, in accordance with
the changes in the Israeli Consumer Price Index, or changes in exchange rate of
the NIS against the dollar, for a "foreign investors" company. Until taxable
year 2002, we measured our results for tax purposes in accordance with changes
in the Israeli consumer price index. Commencing with taxable year 2003, we have
elected to measure its results for tax purposes on the basis of the changes in
the exchange rate of NIS against the dollar.
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. 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 20% on all distributions of dividends, although, with respect to
U.S. taxpayers, if the dividend recipient holds 10% or more of our voting stock
for a certain period prior to the declaration and payment of the dividend, we
are only required to withhold at a 12.5% rate. Notwithstanding the foregoing,
with regard to dividends generated by an Approved Enterprise, we are required to
withhold income tax at the rate of 15%.
60
Israeli law generally imposes a capital gains tax on the sale of
publicly traded securities. Pursuant to changes made to the Israeli Income Tax
Ordinance in January 2006, capital gains on the sale of our ordinary shares will
be subject to Israeli capital gains tax, generally at a rate of 20% unless the
holder holds 10% or more of our voting power during the 12 months preceding the
sale, in which case it will be subject to a 25% capital gains tax. However, as
of January 1, 2003, nonresidents of Israel are exempt from capital gains tax in
relation to the sale of our ordinary shares for so long as (a) our ordinary
shares are listed for trading on a stock exchange outside of Israel, (b) the
capital gains are not accrued or derived by the nonresident shareholder's
permanent enterprise in Israel, (c) the ordinary shares in relation to which the
capital gains are accrued or derived were acquired by the nonresident
shareholder after the initial listing of the ordinary shares on a stock exchange
outside of Israel, and (d) neither the shareholder nor the particular capital
gain is otherwise subject to certain sections of the Israeli Income Tax
Ordinance. As of January 1, 2003, nonresidents of Israel are also exempt from
Israeli capital gains tax resulting from the sale of securities traded on a
recognized stock exchange; provided that the capital gains are not accrued or
derived by the nonresident shareholder's permanent enterprise in Israel.
In addition, under the income tax treaty between the United States and
Israel, a United States resident holder of ordinary shares which are not listed
for trading on a stock exchange outside of Israel 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 during the 12 months preceding such sale, exchange or other disposition.
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.
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 our 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 EDGAR filings may
be accessed.
61
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.
I. Subsidiary Information
Not applicable.
Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Israel and sell them worldwide. 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. The
foreign currency exchange rate effects for the years ended December 31, 2006,
2005 and 2004 were immaterial.
In addition, since our financial results are reported in dollars,
fluctuations in the rates of exchange between the dollar and non-dollar
currencies may have a material effect on our results of operations. We therefore
use currency exchange forward contracts to hedge the impact of the variability
in the exchange rates on accounts receivable and future cash flows from certain
Euro and GBP - denominated transactions as well as certain NIS-denominated
expenses. The counter-parties to our forward contracts are major financial
institutions with high credit ratings. Our hedging program reduces, but does not
eliminate, the impact of foreign currency rate movements. We have, based on our
past experience, concluded that there is no material foreign exchange rate
exposure. As of December 31, 2006, we had forward contracts to sell up to
$1,424,323 for a total amount of NIS 6,017,766that matured prior to October 1,
2007.
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. Our exposure to market risk for changes in interest rates
relates primarily to our investment in marketable securities. Our marketable
securities portfolio includes US government debt instruments and corporate debt
instruments. The fair value of our long and short-term securities is based upon
their market values as of December 31, 2006.
As of December 31, 2006, 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.
62
PART II
Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
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, par value NIS 0.01 per
share, 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 these 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, 2006, 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 in August 2001
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 15: CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. We performed an evaluation
under the supervision and with the participation of our management, including
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of December 31, 2006. Following that
evaluation, our management, including the CEO and CFO, concluded that based on
the evaluation, the design and operation of our disclosure controls and
procedures were effective at that time. Since the evaluation, there have been no
significant changes in our internal controls or in factors that could
significantly affect internal controls, including, because we have not
identified any significant deficiencies or material weaknesses in our internal
controls, any corrective actions with regard to significant deficiencies and
material weaknesses.
(b) Not yet applicable
(c) Not yet applicable
(d) Changes in Internal Control Over Financial Reporting. There has
been no change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during 2006, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 15T: CONTROLS AND PROCEDURES
Not applicable
Item 16A: AUDIT COMMITTEE FINANCIAL EXPERT
At our annual shareholders meeting in October 2006, the shareholders
re-elected Dan Falk to the Company's Board of Directors to serve for a one year
term. Our Board of Directors has determined that Mr. Falk qualifies as an audit
committee financial expert, and Mr. Falk was appointed by the Board to serve on
63
the audit committee. Mr. Falk also meets the requirements of the NASDAQ Stock
Market listing standards to be an "independent" director and audit committee
member.
Item 16B: CODE OF ETHICS
In March 2003, our Board of Directors adopted a Code of Ethics relating
to, among others, our principal executive officer, principal financial officer
and principal accounting officer. The code was filed as exhibit 11 to our Annual
Report for the year ended December 31, 2003 and is incorporated by reference to
that filing, which is available and can be reached through the Investor
Relations link on our website, www.jacada.com. Pursuant to new requirements of
the Nasdaq Stock Market, we adopted, in May 2004, a Code of Business Conduct and
Ethics that is applicable to all our directors, officers and employees. This
code is also available on our website.
Item 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
- ---------------------------------------- ---------------------------------------
2005 $102,500
- ---------------------------------------- ---------------------------------------
2006 $115,000
- ---------------------------------------- ---------------------------------------
Audit Related Fees
- ---------------------------------------- ---------------------------------------
2005 $2,000
- ---------------------------------------- ---------------------------------------
2006 $10,000
- ---------------------------------------- ---------------------------------------
Tax Fees
- ---------------------------------------- ---------------------------------------
2005 $46,000
- ---------------------------------------- ---------------------------------------
2006 $24,000
- ---------------------------------------- ---------------------------------------
Other Fees
- ---------------------------------------- ---------------------------------------
2005 $0
- ---------------------------------------- ---------------------------------------
2006 $0
- ---------------------------------------- ---------------------------------------
The Audit Related Fees we incurred in 2005 and 2006 are related to on
going consultations.
The tax fees we incurred in 2005 and 2006 are related to tax returns
and consultations regarding international tax.
64
Our audit committee is responsible for the appointment and oversight of
our independent auditors' work. Pursuant to its charter, the audit committee
also has the sole authority to review in advance, and grant any appropriate
pre-approvals of, (a) all auditing services to be provided by our independent
auditors; (b) all non-audit services to be provided by our independent auditors
as permitted by Section 10A of the U.S. Securities Exchange Act of 1934; and (c)
all fees and other terms of engagement. The audit committee's policy is to
specifically pre-approve all annual services provided by our independent
auditors in connection with the preparation of their audit, which may include
audit services, audit-related services, tax services and other services. The
audit committee sets forth the basis for its pre-approval in detail, listing the
particular services or categories of services which are pre-approved, and
setting a specific budget for such services. Additional services may be
commissioned on the basis of a pre-approval by the audit committee for
non-annual audit related services up to a specified amount. Once such services
have been pre-approved and performed, the independent auditors and our
management report to the audit committee on a periodic basis regarding the
extent of services actually provided in accordance with the applicable
pre-approval, and regarding the fees for the services performed.
Item 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
65
PART III
Item 17: FINANCIAL STATEMENTS
See Item 18.
Item 18: FINANCIAL STATEMENTS
66
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
U.S. DOLLARS IN THOUSANDS
INDEX
Page
------------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-31
- - - - - - - - - - - - - - - - - - -
Ernst & Young
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
JACADA LTD.
We have audited the accompanying consolidated balance sheets of Jacada
Ltd. and its subsidiaries ("the Company") as of December 31, 2006 and 2005 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, 2006. 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 the standards of the Public
Company Accounting Oversight Board (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. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 as of December 31, 2006 and 2005 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 2006,
the Company adopted Financial Accounting Standard Board Statement No. 123(R),
"Share-Based Payment."
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
June 14 2007 A Member of Ernst & Young Global
F-2
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
-----------------
2006 2005
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,735 $ 3,461
Marketable securities 12,338 14,655
Trade receivables (net of allowance for doubtful accounts of
$ 62 and $ 228 at December 31, 2006 and 2005, respectively) 1,681 1,614
Other current assets 933 905
------- -------
Total current assets 19,687 20,635
- ----- ------- -------
LONG-TERM INVESTMENTS:
Marketable securities 18,849 17,535
Severance pay fund 1,040 825
------- -------
Total long-term investments 19,889 18,360
- ----- ------- -------
PROPERTY AND EQUIPMENT, NET 930 997
------- -------
OTHER ASSETS, NET:
Other intangibles, net 574 990
Goodwill 4,630 4,630
------- -------
Total other assets, net 5,204 5,620
- ----- ------- -------
Total assets $45,710 $45,612
- ----- ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
F-3
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
December 31,
--------------------
2006 2005
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 1,202 $ 981
Deferred revenues 5,514 5,533
Accrued expenses and other liabilities 3,813 3,373
-------- --------
Total current liabilities 10,529 9,887
- ----- -------- --------
LONG-TERM LIABILITIES:
Deferred revenues 219 --
Accrued severance pay 1,567 1,250
-------- --------
Total long-term liabilities 1,786 1,250
- ----- -------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 30,000,000 shares at December 31, 2006 and 2005;
Issued and outstanding: 20,132,164 and 19,619,806 shares at
December 31, 2006 and 2005, respectively 58 57
Additional paid-in capital 71,547 70,297
Accumulated other comprehensive loss (128) (369)
Accumulated deficit (38,082) (35,510)
-------- --------
Total shareholders' equity 33,395 34,475
- ----- -------- --------
Total liabilities and shareholders' equity $ 45,710 $ 45,612
- ----- ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-4
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Year ended December 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Revenues:
Software licenses $ 6,568 $ 6,674 $ 5,420
Services 4,810 3,701 5,810
Maintenance 9,303 9,567 8,554
------------ ------------ ------------
Total revenues 20,681 19,942 19,784
- ----- ------------ ------------ ------------
Cost of revenues:*)
Software licenses 527 648 547
Services 3,671 3,365 3,425
Maintenance 864 865 1,143
------------ ------------ ------------
Total cost of revenues 5,062 4,878 5,115
- ----- ------------ ------------ ------------
Gross profit 15,619 15,064 14,669
------------ ------------ ------------
Operating expenses:*)
Research and development 4,067 4,094 5,278
Sales and marketing 10,144 11,035 10,507
General and administrative 5,098 5,681 4,724
Restructuring charges -- -- 525
------------ ------------ ------------
Total operating expenses 19,309 20,810 21,034
- ----- ------------ ------------ ------------
Operating loss (3,690) (5,746) (6,365)
Financial income, net 1,372 830 786
------------ ------------ ------------
Net loss before taxes on income (2,318) (4,916) (5,579)
Taxes on income 254 42 34
------------ ------------ ------------
Net loss $ (2,572) $ (4,958) $ (5,613)
============ ============ ============
Basic and diluted net loss per share $ (0.13) $ (0.25) $ (0.29)
============ ============ ============
Weighted average number of shares used in computing basic
and diluted net loss per share 19,827,852 19,497,726 19,282,800
============ ============ ============
*)Includes stock-based compensation to employees and
directors in the following items:
Cost of revenues $ 67
Research and development 79
Sales and marketing 123
General and administrative 402
------------
Total stock-based compensation expenses $ 671
============
The accompanying notes are an integral part of the consolidated financial statements.
F-5
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Acc-
umulated
other
Add- compre- Total Total
Ordinary shares itional hensive Acc- compre- share-
-------------------- paid-in income umulated hensive holders'
Shares Amount capital (loss) deficit loss equity
---------- ------- --------- --------- --------- --------- ---------
Balance as of January 1, 2004 19,033,778 $ 55 $ 69,277 $ 111 $ (24,939) $ 44,504
Exercise of stock options 292,232 1 435 -- -- 436
Stock compensation related to options
granted to non-employees -- -- 73 -- -- 73
Comprehensive loss:
Net loss -- -- -- -- (5,613) $ (5,613) (5,613)
Unrealized loss from available-for-
sale marketable securities -- -- -- (326) -- (326) (326)
Unrealized income from derivatives -- -- -- 15 -- 15 15
---------- ------- --------- --------- --------- --------- ---------
Total comprehensive loss $ (5,924)
- ----- =========
Balance as of December 31, 2004 19,326,010 56 69,785 (200) (30,552) 39,089
Exercise of stock options 293,796 1 484 -- -- 485
Stock compensation related to options
granted to non-employees -- -- 28 -- -- 28
Comprehensive loss:
Net loss -- -- -- -- (4,958) $ (4,958) (4,958)
Unrealized loss from available-for-
sale marketable securities -- -- -- (125) -- (125) (125)
Unrealized loss from derivatives -- -- -- (44) -- (44) (44)
---------- ------- --------- --------- --------- --------- ---------
Total comprehensive loss $ (5,127)
- ----- =========
Balance as of December 31, 2005 19,619,806 57 70,297 (369) (35,510) 34,475
Exercise of stock options 512,358 1 572 573
Stock-based compensation related to
options granted to employees and
directors -- -- 671 -- -- 671
Stock compensation related to options
granted to non-employees -- -- 7 -- -- 7
Comprehensive loss: -- --
Net loss -- -- -- -- (2,572) (2,572) (2,572)
Unrealized income from available-for-
sale marketable securities -- -- -- 227 -- 227 227
Unrealized income from derivatives -- -- -- 14 -- 14 14
---------- ------- --------- --------- --------- --------- ---------
Total comprehensive loss $ (2,331)
- ----- =========
Balance as of December 31, 2006 20,132,164 $ 58 $ 71,547 $ (128) $ (38,082) $ 33,395
========== ======= ========= ========= ========= =========
Accumulated other comprehensive income
- --------------------------------------
(loss) as of December 31, 2006:
-------------------------------
Accumulated unrealized income from
derivatives $ 26
Accumulated unrealized loss from
available-for-sale securities (154)
---------
$ (128)
=========
The accompanying notes are an integral part of the consolidated financial statements.
F-6
JACADA LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
Cash flows from operating activities:
- -------------------------------------
Net loss $ (2,572) $ (4,958) $ (5,613)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 877 935 1,226
Stock-based compensation related to options granted to employees and directors 671 -- --
Stock-based compensation expenses related to options granted to non-employees 7 28 73
Accrued interest and amortization of premium on marketable securities (302) (675) 562
Increase (decrease) in accrued severance pay, net 102 (85) 79
Decrease (increase) in trade receivables, net (67) 858 287
Decrease (increase) in other current assets (14) (158) (154)
Increase (decrease) in trade payables 221 (15) 481
Increase in deferred revenues 200 1,711 474
Increase (decrease) in accrued expenses and other liabilities 440 (443) 40
Decrease in long-term accrued expenses -- -- (55)
Other 48 (52) (31)
-------- -------- --------
Net cash used in operating activities (389) (2,854) (2,631)
-------- -------- --------
Cash flows from investing activities:
- -------------------------------------
Investment in available-for-sale marketable securities (16,748) (27,536) (18,416)
Proceeds from redemption of available-for-sale marketable securities 18,280 29,957 15,415
Purchase of property and equipment (a) (461) (258) (512)
Purchase of technology -- -- (900)
Proceeds from sale of property and equipment 19 115 315
-------- -------- --------
Net cash provided by (used in) investing activities 1,090 2,278 (4,098)
-------- -------- --------
Cash flows from financing activities:
- -------------------------------------
Proceeds from exercise of stock options 573 485 436
-------- -------- --------
Net cash provided by financing activities 573 485 436
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,274 (91) (6,293)
Cash and cash equivalents at the beginning of the year 3,461 3,552 9,845
-------- -------- --------
Cash and cash equivalents at the end of the year $ 4,735 $ 3,461 $ 3,552
======== ======== ========
Supplemental disclosure of cash flows activities:
- -------------------------------------------------
(a) Non-cash activities:
--------------------
Purchase of property and equipment $ -- $ -- $ 28
======== ======== ========
(b) Cash paid during the year:
--------------------------
Taxes on income $ 130 $ 18 $ 5
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-7
JACADA LTD. AND ITS SUBSIDIARIES
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.
The Company develops, markets and supports unified service
desktop and process optimization solutions that simplify
and automate customer service processes. The Company
generates revenues from licensing its software products and
from services such as maintenance, support, consulting and
training.
The majority of the Company's sales are made in North
America and Europe.
b. Restructuring charges:
In February 2004, the Company consolidated all its research
and development activities into its lab in Israel. As part
of this plan, the Company shut down research and
development operations in Minneapolis in order to improve
overall development efficiency, accelerate new product
release and reduce operating expenses. The Company
completed the plan in June 2004.
The plan consisted of the involuntary termination of 10
research and development employees, termination of the
lease agreement for the Company's premises in Minneapolis
and other expenses that consisted of shipment, relocation
costs and travel costs.
In connection with the 2004 restructuring plan, the Company
incurred expenses of $ 525, which were composed of $ 373
from employee termination benefits, $ 108 from facility
closures and $ 44 in other expenses. As of December 31,
2004, all amounts were paid.
c. As for major customers see Note 10b.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles
("U.S. 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 and expenses of the Company and
its subsidiaries are generated in United States dollars
("dollars"). The Company's management believes that the
dollar is the currency of the primary economic environment
in which the Company and its subsidiaries operate. Thus,
the functional and reporting currency of the Company is the
dollar.
F-8
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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.
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 at acquisition.
e. Investments in marketable securities:
The Company accounts for investments in marketable
securities in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of its
investments at the time of purchase and reevaluates such
determinations at each balance sheet date.
The Company classifies all of its securities as available
for sale. Available for sale securities are carried at fair
value, with the unrealized gains and losses, net of tax,
reported in "accumulated other comprehensive income (loss)"
in shareholders' equity.
The amortized cost of marketable securities is adjusted for
amortization of premiums and accretion of discounts to
maturity. Such amortization is included in financial
income, net. Interest on securities is included in
financial income, net.
F-9
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. 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 - 15
Motor vehicles 15
Leasehold improvements Over the shorter of the
related lease period or
the life of the asset
g. Other intangible assets:
Intangible assets are amortized using the straight-line
method over their estimated economic life which is three to
five years.
h. Impairment of long-lived assets:
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. During 2006, 2005 and 2004, no
impairment losses have been identified.
i. Goodwill:
Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net assets acquired in
the acquisition.
SFAS 142 No. prescribes a two-phase process for impairment
testing of goodwill. The first phase screens for
impairment, while the second phase (if necessary) measures
impairment.
F-10
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In the first phase of impairment testing, goodwill
attributable to each of the reporting units is tested for
impairment by comparing the fair value of each reporting
unit with its carrying value. If the carrying value of the
reporting unit exceeds its fair value, the second phase is
then performed. The second phase of the goodwill impairment
test compares the implied fair value of the reporting
unit's goodwill with the carrying amount of that goodwill.
If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that
excess.
Goodwill attributable to the Company's single reporting
unit as defined under SFAS No. 142, was tested for
impairment by comparing its fair value with its carrying
value.
Estimates used in the methodologies include future cash
flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market
multiples. The Company performs the impairment tests during
the third fiscal quarter. During 2006, 2005 and 2004, no
impairment losses have been identified.
j. Research and development costs:
Research and development costs are charged to the statement
of operations as incurred. 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. No costs are incurred by the Company
between the completion of the working model and the point
at which the products are ready for general release.
Therefore, research and development costs have been
expensed.
k. Income taxes:
The Company accounts 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 provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable
value.
l. Revenue recognition:
The Company derives revenues from the sale of software
licenses, rendering services and the provision of support
and maintenance. Services include consulting services,
implementation and customization services and training.
Maintenance includes telephone support, bug fixes, and
rights to receive upgrade and enhancements to licensed
software on a when-and-if-available basis. The Company
sells its products primarily through its direct sales force
to customers and indirectly through resellers. Both the
customers and the resellers are considered end users.
F-11
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company accounts for sales of software licenses in
accordance with Statement of Position No. 97-2, "Software
Revenue Recognition", as amended ("SOP No. 97-2"). Sales of
software licenses are recognized when all criteria outlined
in Statement Of Position ("SOP") 97-2, "Software Revenue
Recognition" (as amended by SOP 98-9) are met. Accordingly,
revenue from software license fees is recognized when
persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable, and
collectibility is probable.
The Company considers all arrangements with payment terms
extending beyond six months 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. The Company does not grant a right
of return to its customers.
In transactions, where a customer's contractual terms
include a provision for customer acceptance, revenues are
recognized either when such acceptance has been obtained or
as the acceptance provision has lapsed.
With regard to software arrangements involving multiple
elements, the Company applies Statement of Position No.
98-9, "Modification of SOP No. 97-2, Software Revenue
Recognition with Respect to Certain Transactions" ("SOP No.
98-9"). According to SOP No. 98-9, revenues should be
allocated to the different elements in the arrangement
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.
Under the residual method, at the outset of the arrangement
with the customer, the Company defers revenue for the fair
value of its undelivered elements (maintenance and other
services) and recognizes revenue for the remainder of the
arrangement fee attributable to the elements initially
delivered in the arrangement (software licenses) when the
basic criteria in SOP No. 97-2 have been met. Any discount
in the arrangement is allocated to the delivered element.
VSOE of fair value for maintenance and other services is
determined based on the price charged for the undelivered
element when it sold separately.
Maintenance and support revenue is deferred and recognized
on a straight-line basis over the term of the maintenance
agreement.
Deferred revenues include unearned amounts received under
maintenance and support contracts and amounts received from
customers but not recognized as revenues.
Arrangements for the sale of software licenses that include
services are evaluated to determine whether those services
are essential to the functionality of other elements of the
arrangement. When services are not considered essential to
the functionality, the revenue allocable to the software
services is recognized as the services are performed. When
services are considered essential to the functionality,
contract accounting is applied in accordance with SOP 81-1
"Accounting for Performance of Construction-Type and
Certain Production-Type Contracts".
F-12
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands,except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Accounting for stock-based compensation:
As of December 31, 2006, the Company has three incentive
share option plans, which are described more fully in Note
8b. Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement
provisions of APB No. 25, "Accounting for Stock Issued to
Employees, and Related Interpretations", as permitted by
FASB Statement No. 123, "Accounting for Stock-Based
Compensation". No stock-based employee compensation cost
was recognized in the consolidated statement of operations
for the years ended December 31, 2005 or 2004.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R),
"Share-Based Payment", using the
modified-prospective-transition method. Under this
transition method, stock-based compensation expense for the
year ended December 31, 2006 includes compensation expense
for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on grant
date fair value estimated in accordance with the original
provisions of SFAS No. 123. Stock-based compensation
expenses for all stock-based compensation awards granted
subsequent to January 1, 2006 was based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123(R). Results for prior periods have not been
restated.
As a result of adopting Statement 123(R) on January 1,
2006, the Company's loss before income taxes and net loss
for the year ended December 31, 2006, was $ 671 higher,
than if it had continued to account for share-based
compensation under Opinion 25. Basic and diluted loss per
share for the year ended December 31, 2006 was $ 0.03
higher, than if the Company had continued to account for
share-based compensation under Opinion 25.
The following table illustrates the effect on net loss and
loss per share if the Company had applied the fair value
recognition provisions of Statement 123 to options granted
under the Company's stock option plans in all periods
presented. For purposes of this pro forma disclosure, the
value of the options is estimated using a
Black-Scholes-Merton option-pricing formula and amortized
to expense over the options' vesting period.
2005 2004
------- -------
Net loss as reported $(4,958) $(5,613)
Add: Stock-based compensation
expenses included in reported
net loss - intrinsic value -- --
Deduct: Stock-based compensation
expense determined under fair
value method for all awards (738) (1,879)
------- -------
Pro forma net loss $(5,696) $(7,492)
======= =======
Basic and diluted net loss
per share as reported $ (0.25) $ (0.29)
======= =======
Pro forma basic and diluted
net loss per share $ (0.29) $ (0.39)
======= =======
F-13
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands,except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The fair value for options granted in 2006, 2005 and 2004
is estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average
assumptions:
2006 2005 2004
---- ----- ----
Dividend yield 0% 0% 0%
Expected volatility 54% 60% 60%
Risk-free interest 4.7% 3.65% 3.5%
Expected life (years) 4.8 4 3.25
The dividend yield assumption is based on the Company's
historical and expectation not to pay a dividend in the
future and may be subject to substantial change in the
future.
The Company used its historical stock price for calculating
volatility in accordance with SFAS No. 123(R).
The risk-free interest rate assumption is based on the rate
of zero-coupon U.S. government appropriate for the expected
term of the Company's employee stock options.
The Company determined the expected life of the options
according to the simplified method, average of vesting and
the contractual term of the company's stock option.
The weighted-average estimated grant date fair value of
employee stock options granted during the years 2006, 2005
and 2004, were $ 1.4, $ 1.11 and $ 1.14 per share,
respectively. As of December 31, 2006, the total
unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $
900, which is expected to be recognized over a weighted
average period to 1.49 years. The total intrinsic value of
stock options exercised during 2006, 2005 and 2004 were $
600, $ 280 and $ 310, respectively. The Company received
cash from the exercise of stock options in the amount of $
573 during the year ended December 31, 2006
The Company recognized aggregate compensation cost in the
amount of $ 671 for the year ended December 31, 2006.
F-14
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands,except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Advertising expenses:
Advertising expenses are charged to the statement of
operations, as incurred. Advertising expenses for the years
ended December 31, 2006, 2005 and 2004 were $ 488, $ 653
and $ 468, respectively.
o. Severance pay:
The Company's liability for severance pay for its Israeli
employees is calculated pursuant to Israel's 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
severance equal 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
Israel's Severance Pay Law or labor agreements. The value
of the deposited funds is based on the cash surrendered
value of these policies.
The severance pay expense for the years ended December 31,
2006, 2005 and 2004 amounted to $ 512, $ 744 and $ 499,
respectively.
p. Fair value of financial instruments:
The estimated fair value of financial instruments has been
determined by the Company using available market
information and valuation methodologies. Considerable
judgment is required in estimating fair values.
Accordingly, the estimates may not be indicative of the
amounts the Company could realize in a current market
exchange.
The carrying amounts of cash and cash equivalents, trade
receivables, other current assets, trade payables and
accrued expenses and other liabilities approximate their
fair value due to the short-term maturities of such
instruments.
The fair value of marketable securities is based on the
quoted market prices and does not differ significantly from
the carrying amount (see Note 3).
The fair value of derivative instruments is estimated by
obtaining current quotes from banks.
F-15
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands,except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Derivative instruments:
Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), requires companies to
recognize all of its derivative instruments as either
assets or liabilities in the statement of financial
position at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on
the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging
instruments, the Company must designate the hedging
instrument, based upon the exposure being hedged, as a fair
value hedge, cash flow hedge or a hedge of a net investment
in a foreign operation.
Derivative instruments that are designated and qualify as a
cash flow hedge (i.e., hedging the exposure to variability
in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss
on the derivative instrument is reported as a component of
other comprehensive income (loss) and reclassified into
earnings in the same line item associated with the
forecasted transaction in the same period or periods during
which the hedged transaction affects earnings.
To protect against the impairment of value of forecasted
foreign currency cash flows resulting from payroll expenses
and payment to suppliers over the next year, the Company
has instituted a foreign currency cash flow hedging
program. The Company hedges portions of its forecasted
expenses denominated in foreign currencies with forward
contracts. When the dollar strengthens significantly
against the foreign currencies, the impairment of value of
future foreign currency expenses is offset by losses in the
value of the forward contracts designated as hedges.
Conversely, when the dollar weakens, the increase in the
value of future foreign currency cash flows is offset by
gains in the value of the forward contracts.
These forward contracts are designated as cash flow hedges,
as defined by SFAS No. 133 and are all effective.
At December 31, 2006, the Company expects to reclassify $
26 of net gains on derivative instruments from accumulated
other comprehensive income to earnings during the next
year, due to actual payments to suppliers and payroll
payment.
F-16
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r. Net loss per share:
Basic net loss per share is computed based on the weighted
average number of Ordinary shares outstanding during each
year. Diluted net loss 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
Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" ("SFAS No. 128").
All outstanding stock options and warrants have been
excluded from the calculation of the diluted net loss per
Ordinary share because the securities are anti-dilutive for
all periods presented. The total weighted average number of
shares related to the outstanding stock options and
warrants excluded from the calculations of diluted net loss
per share due to their anti-dilutive effect were 3,602,673,
3,600,918 and 4,271,178 for the years ended December 31,
2006, 2005 and 2004, respectively.
s. Concentrations of credit risk:
Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of
cash and cash equivalents, marketable securities and trade
receivables.
Cash and cash equivalents are invested in U.S. dollars with
major banks in the United States, England, Germany and
Israel. Such cash and cash equivalents in the United States
may be in excess of insured limits and are not insured in
other jurisdictions. However, management believes that the
financial institutions that hold the Company's investments
are financially sound, and accordingly, minimal credit risk
exists with respect to these investments.
The Company's marketable securities include investments in
debentures of U.S corporations, U.S. government securities,
other government securities and other securities.
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's trade receivables are mainly derived from
sales to customers in North America and Europe. In
connection with customers with whom the Company does not
have previous experience, it may utilize independent
resources to evaluate the creditworthiness of those
customers. An allowance for doubtful accounts is determined
with respect to those amounts that the Company has
determined to be doubtful of collection. Adjustments to
allowance account for the years ended December 31, 2006,
2005 and 2004 were $ (97), $ 159 and $ 68, respectively.
Write-offs of bad debt for the years ended December 31,
2006, 2005 and 2004 were $ (69), $ 167 and $ 54,
respectively.
F-17
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
t. New accounting pronouncements:
In July 2006, the Financial Accounting Standards Board
("FASB") issued Financial Interpretation No. 48,
"Accounting for Uncertainly in Income Taxes" ("FIN 48"),
which applies to all tax positions related to income taxes
subject to Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes". FIN 48 requires a new
evaluation process for all tax positions taken. If the
probability for sustaining said tax position is greater
than 50%, then the tax position is recorded and recognition
should be at the highest amount that is greater than 50%
likely of being realized upon ultimate settlement. FIN 48
requires expanded disclosure at each annual reporting
period, unless a significant change occurs in an interim
period. Differences between the amount recognized in the
statements of financial position prior to the adoption of
FIN 48 and the amounts reported after adoption should be
accounted for as an adjustment to the beginning balance of
retained earnings. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not
expect that the adoption of FIN 48 will have a material
impact on its consolidated financial statement.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years.
The Company does not anticipate any material impact on its
consolidated financial statements upon the adoption of SFAS
No. 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial
Liabilities" ("SFAS No. 159"). SFAS No. 159 permits
entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159
on its consolidated financial position and results of
operations.
u. Reclassification:
Certain amounts in prior years' financial statements have
been reclassified to conform to the current year's
presentation.
F-18
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of the Company's investment in marketable securities:
December 31, 2006 December 31, 2005
----------------------------------------- -----------------------------------------
Gross Gross
Amortized un- un- Fair Gross Gross Fair
realized realized market Amortized un- un- market
cost gain losses value cost gain losses value
--------- --------- --------- --------- --------- --------- --------- ---------
Available-for-sale:
Corporate debentures $ 20,185 $ 28 $ (135) $ 20,072 $ 19,474 $ -- $ (172) $ 19,302
U.S. government securities 8,897 10 (42) 8,871 8,076 *)-- (165) 7,911
States of the U.S securities 450 -- -- 450 752 -- -- 752
Other government securities 998 -- (15) 983 2,479 -- (35) 2,444
Other securities 811 -- -- 811 1,790 -- (9) 1,781
--------- --------- --------- --------- --------- --------- --------- ---------
$ 31,341 $ 38 $ (192) $ 31,187 $ 32,571 $ *)-- $ (381) $ 32,190
========= ========= ========= ========= ========= ========= ========= =========
*) Represents an amount lower than $ 1
F-19
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- MARKETABLE SECURITIES (CONT.)
The following table shows the gross unrealized losses and fair
value of the Company's investments with unrealized losses that are
not deemed to be other than temporarily impaired, aggregated by
investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December
31, 2006 and 2005:
December 31, 2006
-----------------------------------------------------------------------------------
Less than 12 months 12 months or greater Total
---------------------------- -------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
------------- -------------- ------------ ------------- ----------- ---------------
Corporate debentures $ 5,253 $ (17) $ 10,942 $ (118) $ 16,195 $ (135)
U.S. government securities 2,454 (9) 5,172 (33) 7,626 (42)
Other government securities - - 983 (15) 983 (15)
Other securities 811 - - - 811 -
------------- -------------- ------------ ------------- ----------- ---------------
$ 8,518 $ (26) $ 17,097 $ (166) $ 25,615 $ (192)
============= ============== ============ ============= =========== ===============
December 31, 2005
-----------------------------------------------------------------------------------
Less than 12 months 12 months or greater Total
---------------------------- -------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
------------- -------------- ------------ ------------- ----------- ---------------
Corporate debentures $ 12,387 $ (114) $ 6,915 $ (58) $ 19,302 $ (172)
U.S. Government securities 1,009 (9) 6,902 (156) 7,911 (165)
Other government securities 982 (16) 1,462 (19) 2,444 (35)
Other securities - - 1,781 (9) 1,781 (9)
------------- -------------- ------------ ------------- ----------- ---------------
$ 14,378 $ (139) $ 17,060 $ (242) $ 31,438 $ (381)
============= ============== ============ ============= =========== ===============
The unrealized losses in the Company's investments in
available-for-sale marketable securities were caused by interest
rate increases. The contractual cash flows of these investments
are either guaranteed by the U.S. government or an agency of the
U.S. government or were issued by highly rated corporations.
Accordingly, it is expected that the securities would not be
settled at a price less than the amortized cost of the Company's
investment. Since the Company has the ability and intent to hold
these investments until a recovery of fair value, which may be
maturity, the marketable securities were not considered to be
other than temporarily impaired at December 31, 2006.
F-20
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- MARKETABLE SECURITIES (CONT.)
The amortized cost and fair value of marketable securities as of
December 31, 2006, by contractual maturity, are shown below:
December 31, 2006
---------------------------------
Amortized cost Fair market value
--------------- -----------------
Matures in one year $ 12,416 $ 12,338
Matures after one year through
three years 18,925 18,849
--------------- ----------------
Total $ 31,341 $ 31,187
=============== ================
NOTE 4:- PROPERTY AND EQUIPMENT
Composition of property and equipment is as follows:
December 31,
-----------------------------
2006 2005
-------------- -------------
Cost:
Computers and peripheral equipment $ 4,053 $ 4,632
Office furniture and equipment 914 1,052
Motor vehicles 98 122
Leasehold improvements 518 637
-------------- -------------
5,583 6,443
Accumulated depreciation 4,653 5,446
-------------- -------------
Depreciated cost $ 930 $ 997
============== =============
Depreciation expenses for the years ended December 31, 2006, 2005
and 2004 were $ 461, $ 496 and $ 804, respectively.
F-21
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- OTHER INTANGIBLES, NET
a. Composition:
December 31,
------------------------------
2006 2005
-------------- --------------
Original amounts:
Technologies $ 2,458 $ 2,458
Accumulated amortization:
Technologies 1,884 1,468
-------------- --------------
Amortized cost $ 574 $ 990
============== ==============
b. Amortization expense for the years ended December 31, 2006,
2005 and 2004 amounted to $ 416, $ 439 and $ 422,
respectively. As of December 31, 2006, the weighted average
amortization period is 1.1 years.
c. Estimated amortization expenses for the years ended:
2007 $ 300
2008 180
2009 94
----------------------
$ 574
======================
NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
------------------------------
2006 2005
-------------- --------------
Employees and payroll accruals $ 1,709 $ 1,708
Accrued expenses 1,150 711
Liability in respect of technology 281 281
Accrued royalties (1) 673 673
-------------- --------------
$ 3,813 $ 3,373
============== ==============
(1) See also Note 7a2.
F-22
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalties:
1. The Company participated in programs sponsored by the
Israeli Government for the support of research and
development activities. Through December 31, 2006, the
Company had obtained grants from the Office of the
Chief Scientist of Israel's Ministry of Industry, Trade
and Labor ("the OCS") in the aggregate amount of $2,178
for certain of the Company's research and development
projects. The Company is obligated to pay royalties to
the OCS, amounting to 3%-5% 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 and for grants received after
January 1, 1999 also bearing interest at the rate of
LIBOR. The obligation to pay these royalties is
contingent on actual sales of the products and in the
absence of such sales no payment is required.
Through December 31, 2006, the Company has paid or
accrued royalties to the OCS in the amount of $ 1,854.
As of December 31, 2006, the aggregate contingent
liability to the OCS amounted to $ 353.
Royalties accrued or paid were recorded as part of the
cost of software licenses.
2. The Company's subsidiary is obligated to pay 50% of the
sales of a specific product to a former distributor. As
of December 31, 2006 and 2005, the Company has accrued
an amount of $ 673 and $ 673, respectively, in regard
of this obligation.
b. Lease commitments:
The Company's facilities are leased under various operating
lease agreements, which expire on various dates, the latest
of which is in 2011. Future minimum lease payments under
non-cancelable operating leases are as follows:
Year ended December 31,
-----------------------
2007 $ 806
2008 654
2009 481
2010 92
2011 22
--------------
$ 2,055
==============
Total rent expenses for the years ended December 31, 2006,
2005 and 2004 were approximately $ 898, $ 853 and $ 856,
respectively.
F-23
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:- 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 also been traded on the Tel-Aviv
Stock Exchange. Ordinary shares confer upon their holders
the right to receive notice to participate and vote in
general meetings of the Company, and the right to receive
dividends if declared.
b. Stock Option Plans:
As of December 31, 2006, the Company has three Incentive
Share Option Plans (the 1996, 1999 and 2003 plans), which
provide for the grant of options to officers, management,
other key employees, directors, consultants and others of
up to 7,760,450 of the Company's Ordinary shares. The
options granted generally become fully exercisable after
two to four years and expire between 7 to 10 years from the
grant date. Any options from 1999 and 2003 plans that are
forfeited or canceled before expiration become available
for future grants.
Pursuant to the option plans, the exercise price of options
shall be determined by the Company's Board of Directors or
the Company's option committee but may not be less than the
par value of the Ordinary shares.
As of December 31, 2006, an aggregate of 1,943,258 Ordinary
shares of the Company are still available for future grant
under the Incentive Share Option Plans.
A summary of the Company's share option activity (except
options to consultants) and related information is as
follows:
Year ended December 31,
---------------------------------------------------------------------------
2006 2005 2004
------------------------- ------------------------ ----------------------
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 3,486,168 $ 3.05 4,318,903 $ 3.07 4,326,506 $ 3.18
of the year
Granted 942,550 $ 2.72 411,125 $ 2.46 730,500 $ 2.67
Exercised (512,358) $ 1.12 (293,796) $ 1.65 (198,637) $ 2.19
Forfeited and cancelled (291,209) $ 3.65 (950,064) $ 3.30 (539,466) $ 3.74
----------- ------------ -----------
Outstanding at the end of the
year 3,625,151 $ 3.49 3,486,168 $ 3.05 4,318,903 $ 3.07
=========== =========== ============ =========== =========== ==========
Exercisable options at the
end of the year 2,420,167 $ 3.47 2,717,892 $ 3.22 2,821,881 $ 3.48
=========== =========== ============ =========== =========== ==========
Vested and expected-to-vest
at the end of the year 3,384,154 $ 3.23
=========== ===========
F-24
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:- SHAREHOLDERS' EQUITY (CONT.)
The options outstanding as of December 31, 2006 have been
classified by exercise price, as follows:
Weighted Weighted
Options Weighted Options average average
outstanding average Weighted exercisable exercise remaining
as of remaining average as of price of contractual
Exercise December 31, contractual exercise December 31, options life
price 2006 life (years) price 2006 exercisable (years)
------------------ --------------- ------------ ----------- -------------- ------------ --------------
$ 0.99 - $ 1.18 8,000 5.87 $ 1.18 8,000 $ 1.18 5.87
$ 1.20 - $ 1.40 253,000 5.49 $ 1.29 237,418 $ 1.29 5.49
$ 1.60 - $ 2.22 203,518 1.74 $ 2.09 166,018 $ 2.06 1.69
$ 2.28 - $ 3.14 2,432,069 6.01 $ 2.66 1,289,820 $ 2.68 5.32
$ 3.41 - $ 5.06 522,464 3.7 $ 4.53 512,811 $ 4.55 3.63
$ 9.00 - $ 11.00 206,100 2.74 $ 9.43 206,100 $ 9.43 2.74
--------------- --------------
3,625,151 4.82 $ 3.49 2,420,167 $ 3.47 4.11
=============== ============ =========== ============== ============ ==============
The aggregate intrinsic value in the table above represents
the total intrinsic value (the difference between the
Company's closing stock price on the last trading day of
fiscal 2006 and the exercise price, for all in-the-money
options) that would have been received by the option
holders had all option holders exercised their options on
December 31, 2006. This amount changes based on the fair
market value of the Company's stock.
The total intrinsic value of options outstanding at
December 31, 2006 was $ 574. The total intrinsic value of
exercisable options at the end of the year was
approximately $ 444. The total intrinsic value of options
vested and expected to vest at December 31, 2006 was
approximately $ 548.
c. Extension of the exercise period:
On October 5, 2006 the Company's shareholders approved the
extension of the exercise period of options to certain of
the company's directors to a period of two years from the
date of termination (instead of 90 days). As a result, the
Company recorded additional compensation cost amounted to
$96.
F-25
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 8:- SHAREHOLDERS' EQUITY (CONT.)
d. Options issued to consultants:
The Company's outstanding options to consultants as of
December 31, 2006, are as follows:
Options for Exercise
Grant date Ordinary price per Options Exercisable
shares share exercisable through
----------------- ------------------ ------------------------ ------------------ ---------------
1999 1,500 $ 11.00 1,500 2009
2000 4,750 $ 4.38 4,750 2010
2001 5,000 $ 2.89 5,000 2011
2002 11,000 $ 2.61 11,000 2012
2004 30,000 $ 2.94 30,000 2014
------------------ ------------------
Total 52,250 52,250
================== ==================
In January 2004, the Company granted, in addition to the
30,000 options shown above, another 62,500 options to a
consultant, which were exercisable for a period of 1.5
years. These options expired in 2006. 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 2006, 2005 and 2004: risk-free interest
rates were 4.8%, 4.3% and 4.2% respectively, dividend
yields of 0% for each year, volatility factors of the
expected market price of the Company's Ordinary shares were
0.62, 0.64 and 0.6 respectively and contractual life of 10
years for each year.
e. Warrants:
In connection with the acquisition of Propelis in 2001, the
Company issued a warrant to purchase 350,000 Ordinary
shares of the Company at an exercise price of $ 3.26. In
January 2004, the warrant holders preformed a cashless
exercise of their warrants and the Company issued 93,595
Ordinary shares.
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.
F-26
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the law"):
The production facilities of the Company have been granted
the status as an "Approved Enterprise" under the law, for
four separate investment programs, which were approved in
July 1994, July 1995, December 1996 and April 2002. The
investment programs expire in July 2007, July 2008,
December 2010 and 2014, respectively.
According to the provisions of the law, the Company has
elected the "alternative benefits" track - the waiver of
grants in return for a 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 to eight 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 letters
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 of December 31, 2006, management believes that the
Company is meeting all of the aforementioned conditions.
As the Company currently has no taxable income, these
benefits have not yet commenced for all programs since
inception.
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 this retained tax-exempt
income is distributed in a manner other than on 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"). As of December 31, 2006, the accumulated
deficit of the Company does not include tax-exempt income
earned by the Company's "Approved enterprise". The
Company's Board of Directors has determined that should
such tax-exempt income exist in the future, it will not be
distributed as dividends.
Income not eligible for the "Approved Enterprise" benefits
mentioned above is taxed at the regular corporate tax rate.
F-27
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- TAXES ON INCOME (CONT.)
An amendment to the law, which has been officially
published effected as of April 1, 2005 ("the Amendment")
has changed the provisions of the law. The Amendment limits
the scope of enterprises which may be approved by the
Investment Center by setting criteria for the approval of a
facility as an "Approved Enterprise", such as provisions
generally requiring that at least 25% of the "Approved
Enterprise's" income will be derived from export.
Additionally, as explained below, the Amendment enacted
major changes in the manner in which tax benefits are
awarded under the law so that companies no longer require
Investment Center approval in order to qualify for tax
benefits. However, the law provides that terms and benefits
included in any letter of approval already granted will
remain subject to the provisions of the law as they were on
the date of such approval. Therefore, the Company's
existing "Approved Enterprises" will generally not be
subject to provision of the Amendment. As of December 31,
2006, there are no income attributed to the amendment.
b. 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 intangible property
rights as a deduction for tax purposes.
c. Net operating losses carryforward:
As of December 31, 2006, the Company had a U.S. net
operating loss carryforward for income tax purposes of
approximately $ 11,000. The net operating loss carryforward
expires within 12 to 20 years.
Utilization of U.S. net operating losses may be subject to
substantial annual limitations 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.
The Israeli subsidiary has a net operating losses
carryforward for income tax purposes, as of December 31,
2006, of approximately $ 19,000 which can be carried
forward and offset against taxable income with no
expiration date.
d. Theoretical tax:
The main reconciling items between the statutory tax rate
of the Company and the effective tax rate are the
non-recognition of tax benefits from accumulated net
operating losses carries forward among the various
subsidies worldwide due to the uncertainty of the
realization of such tax benefits.
F-28
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- TAXES ON INCOME (CONT.)
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 assets are as
follows:
December 31,
--------------------------------------------------
2006 2005
---------------------- ----------------------
Deferred tax assets:
Operating loss carryforward $ 4,918 $ 6,447
Reserves and allowances 1,441 1,499
---------------------- ----------------------
Total deferred tax asset before
valuation allowance 6,359 7,946
Valuation allowance (6,359) (7,946)
---------------------- ----------------------
Net deferred tax asset $ - $ -
====================== ======================
The Company has provided valuation allowances in respect of
deferred tax assets resulting from tax loss carryforwards
and temporary differences. Management currently believes
that since the Company has a history of losses it is more
likely than not that the deferred tax regarding the loss
carryforwards will not be realized in the foreseeable
future. During fiscal 2006, the Company decreased the
valuation allowance by $ 1,587.
f. Loss before taxes is comprised as follows:
Year ended December 31,
-------------------------------------------------------------------
2006 2005 2004
------------------- ------------------- -------------------
Domestic (Israel) $ (2,791) $ (3,569) $ (4,343)
Foreign 473 (1,347) (1,236)
------------------- ------------------- -------------------
$ (2,318) $ (4,916) $ (5,579)
=================== =================== ===================
g. Changes in tax rates in Israel:
In June 2004, an amendment to the Income Tax Ordinance (No.
140 and Temporary Provision), 2004 was passed by the
"Knesset" (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax
Ordinance (No. 147) 2005, according to which the corporate
tax rate is to be progressively reduced to the following
tax rates: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%,
2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.
F-29
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- TAXES ON INCOME (CONT.)
h. Taxes on income are comprised as follows:
Year ended December 31,
-------------------------------------------------------------------
2006 2005 2004
------------------- ------------------- -------------------
Current $ 254 $ 42 $ 34
------------------- ------------------- -------------------
254 42 34
=================== =================== ===================
Domestic 33 42 34
Foreign 221 - -
------------------- ------------------- -------------------
254 42 34
=================== =================== ===================
NOTE 10:- GEOGRAPHIC INFORMATION AND PROUDCT LINES
a. Summary information about geographical areas:
The Company manages its business on a basis of one
reportable segment (see Note 1a for a brief description of
the Company's business) and follows the requirements of
Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131").
The following is a summary of operations within geographic
areas based on the end-customer's location:
Year ended December 31,
--------------------------------------------------------------------
2006 2005 2004
-------------------- --------------------- ---------------------
Revenues from sales to
unaffiliated customers:
North America $ 13,900 $ 12,274 $ 15,982
Europe and other 6,781 7,668 3,802
-------------------- --------------------- ---------------------
$ 20,681 $ 19,942 $ 19,784
==================== ===================== =====================
December 31,
--------------------------------------------------------------------
2006 2005 2004
-------------------- -------------------- --------------------
Long-lived assets:
Israel $ 5,690 $ 5,251 $ 5,935
North America 420 1,346 1,426
United Kingdom 20 20 14
Germany 4 - 10
-------------------- -------------------- --------------------
$ 6,134 $ 6,617 $ 7,385
==================== ==================== ====================
F-30
JACADA LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10:- GEOGRAPHIC INFORMATION AND PRODUCT LINES (CONT.)
b. Major customers' data as a percentage of total revenues:
Year ended December 31,
------------------------------------------
2006 2005 2004
----------- -------------- -------------
Customer A 10% 21.8% -%
=========== ============== =============
c. Total revenues from external customers divided on the basis
of the Company's product lines are as follows:
Year ended December 31,
-------------------------------------------------------------------
2006 2005 2004
------------------- -------------------- --------------------
Contact center market products $ 8,391 $ 5,024 $ 1,041
Traditional products 12,290 14,918 18,743
------------------- -------------------- --------------------
$ 20,681 $ 19,942 $ 19,784
=================== ==================== ====================
NOTE 11:- FINANCIAL INCOME, NET
Year ended December 31,
----------------------------------------------------------
2006 2005 2004
--------------- ------------------ -----------------
Financial expenses:
Bank charges $ (93) $ (96) $ (112)
Foreign currency translation adjustments - (113) -
--------------- ------------------ -----------------
(93) (209) (112)
--------------- ------------------ -----------------
Financial income:
Foreign currency translation adjustments 103 - 70
Interest on marketable securities 1,362 1,039 828
--------------- ------------------ -----------------
1,465 1,039 898
--------------- ------------------ -----------------
$ 1,372 $ 830 $ 786
=============== ================== =================
- - - - - - - - - - - - - - - - - - -
F-31
Item 19: EXHIBITS
Exhibit Number Description of Document
- -------------- -----------------------
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)).
1.3 Amendments to the Company's Articles of Association, dated
August 24, 2003 (incorporated by reference to Exhibit 1.3 to
the Company's Annual Report on Form 20-F for the year ended
December 31, 2003).
1.4 Amendments to the Company's Articles of Association, dated
August 25, 2004 (incorporated by reference to Exhibit 1.3 to
the Company's Annual Report on Form 20-F for the year ended
December 31, 2004).
4.2 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)).
4.3 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)).
4.4 Restated Employment Agreement of Gideon Hollander with
Jacada Ltd. dated as of October 1, 2001 (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on
Form 20-F for the year ended December 31, 2001
4.5 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 ended December 31, 2000).
4.6 Amendment to 1999 Share Option and Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-8 (file no. 333-73650)).
4.7 2003 Share Option Plan (incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8
(file no. 333-111303)).
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).
11 Code of Ethics of the Company (incorporated by reference to
Exhibit 11 to the Company's Annual Report on Form 20-F for
the year ended December 31, 2003).
12.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a).
12.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a).
13.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
14.1 Consent of Kost, Forer, Gabbay and Kasierer, a member of
Ernst & Young Global.
67
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 June 14, 2007.
JACADA LTD.
/s/Tzvia Broida
---------------------------------
By: Tzvia Broida
Chief Financial Officer
68
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
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)).
1.3 Amendments to the Company's Articles of Association, dated
August 24, 2003 (incorporated by reference to Exhibit 1.3 to
the Company's Annual Report on Form 20-F for the year ended
December 31, 2003)
1.4 Amendments to the Company's Articles of Association, dated
August 25, 2004 (incorporated by reference to Exhibit 1.3 to
the Company's Annual Report on Form 20-F for the year ended
December 31, 2004).
4.2 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)).
4.3 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)).
4.4 Restated Employment Agreement of Gideon Hollander with
Jacada Ltd. dated as of October 1, 2001 (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on
Form 20-F for the year ended December 31, 2001).
4.5 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 ended December 31, 2000).
4.6 Amendment to 1999 Share Option and Incentive Plan
(incorporated by reference to Exhibit 10.2 the Company's
Registration Statement on Form S-8 (file no. 333-73650)).
4.7 2003 Share Option Plan (incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8
(file no. 333-111303)
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).
11 Code of Ethics of the Company (incorporated by reference to
Exhibit 11 to the Company's Annual Report on Form 20-F for
the year ended December 31, 2003).
12.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a)
12.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a)
13.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
14.1 Consent of Kost, Forer, Gabbay and Kasierer, a member of
Ernst & Young Global.
69