Retalix 20-F 2005
SECURITIES AND EXCHANGE COMMISSION
Commission file No.0-29742
10 ZARHIN STREET, RAANANA 43000, ISRAEL
Securities registered or to be registered pursuant to section 12(b) of the Act:
Securities registered or to be registered pursuant to section 12(g) of the Act:
Ordinary Shares, nominal value NIS 1.0 per share
Securities for which there is a reporting obligation pursuant to section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of
the close of
17,577,432 Ordinary Shares, nominal value NIS 1.0 par value per share
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by section 13
or 15(d) of
YES x NO o
Indicate by checkmark which financial statements the registrant has elected to follow:
ITEM 17 o ITEM 18 x
TABLE OF CONTENTS
Unless the context otherwise requires, all references in this annual report to Retalix, us, we, and our refer to Retalix Ltd. and its consolidated subsidiaries.
Our consolidated financial statements are prepared in United States dollars and in accordance with generally accepted accounting principles in the United States. All references to dollars or $ in this annual report are to United States dollars, and all references to Shekels or NIS are to New Israeli Shekels. On March 21, 2005, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 4.318 to $1.00.
Statements in this annual report concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are forward-looking statements as that term is defined under the Private Securities Litigation Reform Act and U.S. Federal Securities Laws. Forward-looking statements address matters that are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those in these statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Item 3D Risk Factors in this annual report as well as those discussed elsewhere in this annual report and in our other filings with the Securities and Exchange Commission, or SEC.
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3 KEY INFORMATION
A. Selected Financial
B. Capitalization and Indebtedness
C. Reasons for Offer and Use of Proceeds
D. Risk Factors
You should carefully consider the risks described below and in the documents we have incorporated by reference into this annual report before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment.
Risks Related To Our Business
A continuation of the general deterioration of the economy worldwide could materially adversely affect the retail food industry, our primary target market, more intensely than other sectors, which would have a material adverse effect on our results of operations.
Our future growth is critically dependent on increased sales to customers in the retail food industry. We derive the substantial majority of our revenues from the sale of software products and the performance of related services to the retail food industry worldwide, including supermarkets, convenience stores and restaurants. The success of our customers is directly linked to economic conditions in the retail food industry, which in turn are subject to intense competitive pressures and are affected by overall economic conditions. The general deterioration of the economy worldwide has resulted in a curtailment of capital investment by our existing and potential customers. The attacks on the United States on September 11, 2001 and subsequent terror attacks worldwide have caused a further decline in the global economy. As a result, many companies, including our existing and potential customers, have indicated that they plan to postpone or decrease further capital investment. A continued decline in capital expenditures by our existing and potential customers would reduce our sales and could result in pressure on our product prices, each of which would have a material adverse effect on our operating results.
Our business is subject to fluctuations in operating results, which could cause the price of our ordinary shares to decline.
Our quarterly operating results have varied in the past and may fluctuate in the future because of a variety of factors, many of which are outside of our control. These factors include, among others:
Based upon these and other factors, our quarterly operating results could fluctuate significantly in the future. This fluctuation might cause our quarterly operating results in future periods to be below the expectations of securities analysts and investors. If that occurs, the market price of our ordinary shares could decline.
Sales to large chains represent a significant portion of our revenues, and a significant reduction in project sales to these customers could significantly reduce our revenues.
Although in 2004, none of our customers accounted for more then 5% of our revenues, sales to national supermarket and convenience store chains typically are large in size and represent a significant portion of our revenues. Two of our customers each accounted for more than 5% each of our revenues during 2002. Two of our customers (including one of the two mentioned in regard to 2002) accounted for more than 5% each of our revenues during 2003. We anticipate that sales to a few customers in any given reporting period will continue to contribute materially to our revenues in the foreseeable future. A significant reduction in sales to these large chains could significantly reduce our revenues.
Our gross margins may vary significantly or decline, adversely affecting our operating results.
Because the gross margins on product revenues are significantly greater than the gross margins on services and project revenues, our combined gross margin has fluctuated from quarter to quarter, and it may continue to fluctuate significantly based on our revenue mix between product revenues and services and project revenues. Our operating results in any given quarter may be adversely affected to the extent our gross margins decline due to our generating in that quarter a greater percentage than average of services and project revenues.
Our business will suffer to the extent that relatively new platforms such as the .Net platform or the J2EE platform or our products based on these platforms do not achieve market acceptance.
In 2003 and 2004, we began developing new versions of our products based on new platforms such as the Microsoft .Net platform and the J2EE platform. The risks of our commitment to these relatively new platforms include the following:
There can be no assurances that our efforts to develop new products using the new platforms will be successful. If the new platforms or the products we develop for these platforms do not achieve market acceptance, it likely will have a material adverse effect on our business, operating results and financial condition.
Our software products might not be compatible with all major hardware and software platforms, which could inhibit sales and harm our business.
Any changes to third-party hardware and software platforms and applications that our products work with could require us to modify our products and could cause us to delay releasing a product until the updated version of that hardware and software platform or application has been released. As a result, customers could delay purchases until they determine how our products will operate with these updated platforms or applications, which could inhibit sales of our products and harm our business. In addition, developing and maintaining consistent software product performance across various technology platforms could place a significant strain on our resources and software product release schedules, which could adversely affect our results of operations. We must continually evaluate new technologies and implement into our products advanced technology. For example, in 2001 and 2002, we modified our software products to work with Windows XP Embedded and Linux open source operating systems and in 2003 and 2004, we began investing in developing versions of our products based on the Microsoft .Net platform and the J2EE platform. Many existing and potential customers have not yet acquired these operating systems and we cannot assure you that these modifications will be successful. Moreover, if we fail in our product development efforts to accurately address in a timely manner, evolving industry standards, new technology advancements or important third-party interfaces or product architectures, sales of our products and services will suffer.
We may have difficulty implementing our products, which could damage our reputation and our ability to generate new business.
Implementation of our software products can be a lengthy process, and commitment of resources by our clients is subject to a number of significant risks over which we have little or no control. In particular, we believe that the implementation of our enterprise management application suite can be longer and more complicated than our other applications as they typically:
Delays in the implementations of any of our software products, whether by our business partners or us, may result in client dissatisfaction, disputes with our customers, or damage to our reputation. Significant problems implementing our software therefore, can cause delays or prevent us from collecting fees for our software and can damage our ability to generate new business.
Our failure to integrate businesses that we acquire could disrupt our business, dilute your holdings in us and harm our financial condition and operating results.
In January 2004, we acquired OMI International, Inc., or OMI based in the United.States, as well as DemandX Ltd., an Israeli corporation. Shortly thereafter we acquired the supply chain management distribution activities of OMI International Ltd. based in the United Kingdom. In August 2004, we acquired UNIT S.p.A. based in Italy. We intend to make future strategic acquisitions of complementary companies, products or technologies. These acquisitions could disrupt our business. In addition, your holdings in our company would be diluted if we issue equity securities in connection with any acquisition, as we did in the transactions involving OMI and the activities of OMI International Ltd. Acquisitions involve numerous risks, including:
Further, products that we acquire from third parties often require significant expenditures of time and resources to upgrade and integrate with our existing product suite. Specifically, if we fail to integrate OMIs applications into our ReMA platform or develop a web-based version of OMIs applications in a timely manner, we may be unable to fully realize the expected benefits of our acquisition of OMI. We may not be able to successfully integrate any business, technologies or personnel that we have acquired or that we might acquire in the future, and this could harm our financial condition and operating results.
If we fail to successfully introduce new or enhanced products to the market, our business and operating results may suffer.
If we are unable to successfully identify and develop new products and new features for our existing products that are acceptable to our existing and target customers, our business and operating results will suffer. The application software market is characterized by:
In addition, new product introductions and enhancements require a high level of expenditures for research and development, which adversely affects our operating results. Any products or enhancements we develop may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to successfully develop new products or enhance and improve our existing products or if we fail to position and/or price our products to meet market demand, our business and operating results will be adversely affected.
The markets in which we sell our products and services are competitive and increased competition could cause us to lose market share, reduce our revenues and adversely affect our operating results.
The market for retail food information systems is highly competitive. A number of companies offer competitive products that address our target markets. In addition, we believe that new market entrants may attempt to develop retail food information systems, and we are likely to compete with new companies in the future. With respect to our e-marketplace initiatives, the barriers are relatively low and competition from other established and emerging companies may develop in the future. Some of our existing or potential competitors have greater financial, technical and marketing resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. We also expect to encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by these competitors. As a result, competitive pressures could cause us to lose market share and require us to reduce our prices and profit margins. This could cause a decline in our revenues and adversely affect our operating results.
The long sales cycle for certain of our products could cause revenues and operating results to vary from quarter to quarter, which could cause volatility in our stock price.
We could incur substantial sales and marketing and research and development expenses while customers are evaluating our products and before they place an order with us, if they ever make a purchase at all. Purchases of our solutions are often part of larger information technology infrastructure initiatives on the part of our customers. As a result, these customers typically expend significant effort in evaluating, testing and qualifying our software products. This evaluation process is frequently lengthy and can range from two months to one year or more. Even after this evaluation process, a potential customer may not purchase our products. In addition, the time required to implement our products can vary significantly with the needs of our customers and generally lasts for several months. The implementation process is also subject to delay. We cannot control these delays. As a result, we cannot predict the length of these sales cycles and we cannot control the timing of our sales revenue. Long sales cycles also subject us to risks not usually encountered by companies whose products have short sales cycles. These risks include:
These factors could cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could cause volatility in our stock price.
Our ASP business model is in an early stage of development and, if unsuccessful, our revenue growth could be adversely affected.
We are in the early stages of rolling-out our ASP application services to small chains and single store retailers through our two StoreNext joint ventures, StoreNext Retail Technology LLC, which we refer to as StoreNext USA, and Store Alliance.com Ltd., which we refer to as StoreNext Israel. These applications have not been traditionally used by smaller retailers and if they do not accept them, our ASP initiatives may not succeed. Our services include head-office and back-office applications delivered via the Internet based on an ASP subscription fee pricing model. We have only recently begun charging users of our ASP services a subscription fee for reporting, analysis and merchandising services. In the future, we plan to offer additional services for a fee. We cannot be assured that these users will accept our pricing model. If we are unsuccessful in selling and marketing our ASP services to these retailers, our revenue growth could be adversely affected.
Insufficient or slower than anticipated demand for our ASP services could adversely affect our revenue growth.
We have incurred significant research and development expenses in connection with the development of our ASP initiatives. If significant demand fails to develop or develops more slowly than we anticipate, we may be unable to recover the expenses we have incurred and expect to incur in the further development of these initiatives. Any delay in or failure of the development of significant demand for our ASP services could cause our new business initiatives to fail. Even if significant demand does develop for our ASP services, the growth of our ASP services may erode parts of existing software sales revenue. Any of these factors could adversely affect our revenue growth.
If we are unsuccessful in establishing an e-marketplace, our revenue growth could be adversely affected.
In order for us to establish an e-marketplace for our ASP initiatives, we will need to generate a community of participating retailers sufficiently large to support such a marketplace. Even if we successfully establish such a community, we may not be able to establish an e-marketplace without partnering with strategic players in the supply chain arena. We cannot assure you that we will be able to establish such partnerships on terms that are commercially favorable to us, if at all. Even if we establish successful strategic partnerships, we will need to attract wholesalers and suppliers to our e-marketplaces. We cannot assure you that wholesalers and suppliers will choose to participate in our e-marketplaces. In addition, this is a new and unproven business model, and we cannot assure you that potential users of the e-market applications will use them. If we are unsuccessful in establishing an e-marketplace, our revenue growth could be adversely affected.
Our undertaking of joint management for the indirect sales channel for our software to Tier 3 and Tier 4 grocers in the U.S. market may prove less successful than the previous management by Fujitsu USA, which could adversely affect our revenues and operating results.
In 2002, we and Fujitsu USA established StoreNext USA, a joint venture to sell our software and Fujitsu hardware to the Tier 3 and Tier 4 grocery sector in the United States. Sales to grocery stores in this sector are primarily made indirectly through regional dealers. We previously targeted this market segment by selling our software to Fujitsu USA, which then resold it to regional dealers and managed the dealer channel. As a result of the joint venture, we have jointly undertaken with Fujitsu USA direct responsibility for managing the dealer channel for this market segment. If our direct involvement in the management of the dealer channel proves less successful than the previous sole management of this channel by Fujitsu USA, our revenues could be adversely affected and our operating results may suffer.
Disruption of our ASP servers due to security breaches and system failures could harm our business and result in the loss of customers.
Our ASP infrastructure is vulnerable to security breaches, computer viruses or similar disruptive problems. Our ASP servers provide access to and distribution of many of our enterprise software solutions, products and services to our ASP customers. Providing unimpeded access to our ASP servers is critical to servicing our ASP customers and providing superior customer service to them. These systems are also subject to telecommunications failures, power loss and various other system failures. Any of these occurrences, whether intentional or accidental, could lead to interruptions, delays or cessation of operation of our ASP servers. Our inability to provide continuous access to our ASP servers could cause some of our customers to discontinue subscribing to our ASP and e-market applications and harm our business reputation.
We could be exposed to possible liability for supplying inaccurate information to our e-marketplace and ASP customers, which could result in significant costs, damage our reputation and decreased demand for our products.
The information provided in our e-market and ASP applications could contain inaccuracies . Dissatisfaction of the providers of this information or our customers with inaccuracies could materially adversely affect our ability to attract suppliers and new customers and retain existing customers. In addition, we may face potential liability for inaccurate information under a variety of legal theories, including defamation, negligence, copyright or trademark infringement and other legal theories based upon the nature, publication or distribution of this information. Claims of this kind could divert management time and attention and could result in significant cost to investigate and defend, regardless of the merits of any of these claims. The filing of any claims of this kind may also damage our reputation and decrease demand for our products.
If our ASP products are unable to support multiple enterprises, our business could be harmed.
We might not succeed in adapting our software to support multiple enterprises as the number of users of our ASP services increase. As part of our strategy to sell our software products and services to small chains and single store food retailers, we recently rolled-out our ASP initiatives and we are in the process of adapting our software products to a browser-based environment in order to reduce the costs associated with our enterprise software solutions. As we add customers to our ASP initiatives, our software will need to be robust enough to support, from a single data center, our growing customer base. The failure of our ASP service to support multiple enterprises could harm our business and operating results.
Errors or defects in our software products could diminish demand for our products, injure our reputation and reduce our operating results.
Our software products are complex and may contain errors that could be detected at any point in the life of the product. We cannot assure you that errors will not be found in new products or releases after shipment. This could result in diminished demand for our products, delays in market acceptance and sales, diversion of development resources, injury to our reputation or increased service and warranty costs. If any of these were to occur, our operating results could be adversely affected.
Errors or defects in our software products or other vendors products with which our products are integrated could adversely affect the market acceptance of our products and expose us to product liability claims from our customers.
Because our products are generally used in systems with other vendors products, they must integrate successfully with these existing systems. As a result, when problems occur in a system, it may be difficult to identify the product that caused the problem. System errors, whether caused by our products or those of another vendor, could adversely affect the market acceptance of our products, and any necessary revisions could cause us to incur significant expenses. Regardless of the source of these errors or defects, we will need to divert the attention of engineering personnel from our product development efforts to address the detection of the errors or defects. These errors or defects could cause us to incur warranty or repair costs, liability claims or lags or delays. In addition, if software errors or design defects in our products cause damage to our customers data, we could be subject to liability based on product liability claims. Our agreements with customers that attempt to limit our exposure to product liability claims may not be enforceable in jurisdictions where we operate. Our insurance policies may not provide sufficient protection should a claim be asserted against us. Moreover, the occurrence of errors or defects, whether caused by our products or the products of another vendor, may significantly harm our relations with customers, or result in the loss of customers, injure our reputation and impair market acceptance of our products.
If we fail to manage our growth effectively, our business could be disrupted, which could harm our operating results.
Our rapid expansion has placed, and is likely to continue to place, a strain on our senior management team and other resources, such as our management information systems and operating, administrative, financial and accounting systems. We are undergoing rapid growth in the number of our employees, the size of our physical facilities and the scope of our operations, due, in part, to several acquisitions we made in 1999, 2000, 2001 and 2004. For example, we had 178 employees on January 1, 1999 and 920 employees on December 31, 2004. As a result of our 2004 acquisitions, we have added an additional 160 employees. Any failure to manage growth effectively could disrupt our business and harm operating results.
We are dependent on key personnel to manage our business, the loss of whom could negatively affect our business.
Our future success depends upon the continued services of our executive officers, and other key sales, marketing, manufacturing and support personnel. In particular, we are dependent on the services of Barry Shaked, our President, Chief Executive Officer and Chairman of our Board of Directors. We do not have key person life insurance policies covering any of our employees. Any loss of the services of Mr. Shaked, our executive officers or other key personnel could adversely affect our business.
If we are unable to attract, assimilate or retain qualified personnel, our ability to manufacture, sell and market our products could be adversely impacted.
The success of our business depends on our ability to attract and retain highly qualified engineers and sales and marketing personnel. Competition for highly-skilled engineers and sales and marketing personnel is intense in our industry, and we may not be successful in attracting, assimilating or retaining qualified engineers and sales and marketing personnel to fulfill our current or future needs. This could adversely impact our ability to manufacture, sell and market our products.
Antitrust scrutiny of e-marketplace initiatives may adversely affect our business.
The establishment and operation of e-marketplace initiatives may raise issues under various countries antitrust laws. To the extent that antitrust regulators take adverse action with respect to business-to-business e-commerce exchanges or establish rules or regulations governing these exchanges, or that there is a perception that regulators may do any of the foregoing, the establishment and growth of our e-marketplace initiatives may be delayed, which may adversely affect our business.
Because we operate in international markets, we are subject to additional risks.
We currently sell our software products and ASP services in a number of countries and we intend to enter additional geographic markets. Our business is subject to risks, which often characterize international markets, including:
Our business and operating results could be harmed if we fail to protect and enforce our intellectual property rights.
The laws of some countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights, increasing the possibility of piracy of our technology and products. We currently have no patents or patent applications pending. We rely on a combination of trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. Our competitors could also independently develop technologies that are substantially equivalent or superior to our technology.
It may be necessary to litigate to enforce our copyrights and other intellectual property rights, to protect our trade secrets or to determine the validity of and scope of the proprietary rights of others. Such litigation can be time consuming, distracting to management, expensive and difficult to predict. Our failure to protect or enforce our intellectual property could have an adverse effect on our business and results of operation.
Our technology may infringe on the intellectual property rights of third parties and we may lose our rights to it, which would harm our business.
We may be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlap. It is possible that we will inadvertently violate the intellectual property rights of other parties and that other parties will assert infringement claims against us. If we violate the intellectual property rights of other parties, we may be required to modify our products or intellectual property or obtain a license to permit their continued use. Any future litigation to defend ourselves against allegations that we have infringed the rights of others could result in substantial cost to us, even if we ultimately prevail, and a determination against us in any such litigation could subject us to significant liabilities to other parties and could prevent us from manufacturing, selling or using our products. If we lose any of our rights to our proprietary technology, we may not be able to continue our business.
We have not yet evaluated our internal controls over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.
We are required to comply with internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act by no later then the end of our 2006 fiscal year. We have only recently begun to evaluate whether our existing internal controls over financial reporting systems is compliant with Section 404. As a result of this evaluation, we may be required to implement new internal control procedures over financial reporting. We estimate that this process may take between six to twelve months to complete. We may experience higher then anticipated operating expenses and fees in this context and we may need to hire additional qualified personnel in order to achieve compliance with Section 404. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in our being unable to obtain an unqualified report on internal controls from our independent auditors.
Risks Related To Our Location In Israel
Potential political, economic and military instability in Israel may adversely affect our results of operations.
Our principal offices are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been an increase in hostilities between Israel and the Palestinians, which has negatively influenced Israels relationship with its Arab citizens and several Arab countries. Such ongoing hostilities may hinder Israels international trade relations and may limit the geographic markets where we can sell our products. Furthermore, certain parties with whom we do business have declined to travel to Israel during this period, forcing us to make alternative arrangements where necessary, and the United States Department of State has issued advisories regarding travel to Israel, impeding the ability of travelers to attain travel insurance. Any hostilities involving Israel or threatening Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could adversely affect our operations.
Our results of operations could be negatively affected by the obligations of our personnel to perform military service.
Our operations could be disrupted by the absence for significant periods of one or more of our executive officers, key employees or a significant number of other employees because of military service. Some of our executive officers and the majority of our male employees in Israel are obligated to perform military reserve duty, which could accumulate annually from several days to up to two months in special cases and circumstances. The length of such reserve duty depends, among other factors, on an individuals age and prior position in the army. In addition, if a military conflict or war occurs, these persons could be required to serve in the military for extended periods of time. Any disruption in our operations as the result of military service by key personnel could harm our business.
Because some of our financial assets and liabilities are denominated in non-dollar currencies such as the New Israeli Shekel, the British Pound Sterling or the Euro, and because our financial results are measured in dollars, our results of operations could be harmed, as a result of strengthening or weakening of the dollar compared to these other currencies.
We generate a majority of our revenues in dollars or in dollar-linked currencies, but some of our revenues are generated in other currencies such as the New Israeli Shekel, the British Pound Sterling and the Euro. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses are generated in dollars or in dollar-linked currencies, but some of our expenses such as salaries or hardware costs are generated in other currencies such as the New Israeli Shekel, the British Pound Sterling or the Euro. In addition to our operations in Israel, we are expanding our international operations. Accordingly, we incur and expect to continue to incur additional expenses in non-dollar currencies. As a result, some of our financial liabilities are denominated in these non-dollar currencies.
In addition, some of our bank credit is linked to these non-dollar currencies. Most of the time our non-dollar assets are not totally offset by non-dollar liabilities. Due to the fact that our financial results are measured in dollars, our results could be harmed as a result of strengthening or weakening of the dollar compared to these other currencies. Our results could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS or other currencies. These measures, however, may not adequately protect us from future currency fluctuations.
The dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the dollar, which would harm our results of operations.
Since a considerable portion of our expenses such as employees salaries are linked to an extent to the rate of inflation in Israel, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. In 2001 and 2002, the inflation adjusted NIS devalued against the dollar, which lowered the dollar cost of our Israeli operations. During 2003 and 2004, however, the inflation adjusted NIS appreciated against the dollar, which raised the dollar cost of our Israeli operations. We cannot predict whether in the future the NIS will appreciate against the dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and harm our results of operations.
We currently participate in or receive tax benefits from government programs. These programs require us to meet certain conditions and these programs and benefits could be terminated or reduced in the future, which could harm our results of operations.
We receive tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959, in respect of our production facilities that are designated as Approved Enterprises, the cessation of which could adversely affect our results of operations. Our cumulative tax benefits resulting from our Approved Enterprises for the years 2002, 2003 and 2004, net of other tax effects, were approximately $443,000, $365,000 and $592,000, respectively. For more information on this law and our Approved Enterprises, see Item 10E Taxation of this annual report under the caption Israeli Taxation Law for the Encouragement of Capital Investments, 1959. To maintain our eligibility for these tax benefits, we must continue to meet several conditions, including among others, making required investments in property, plant and equipment, and continuing to manufacture in Israel. If we fail to comply with these conditions in the future, the tax benefits we received could be cancelled or reduced and we could be required to pay increased taxes or refund the amounts of the benefits received with interest and penalties. In addition, an increase in our manufacturing outside of Israel may be construed as a failure to comply with these conditions. The Israeli government has reduced the benefits available under this program in recent years and has indicated that it may reduce or eliminate these benefits in the future. These tax benefits may not continue in the future at their current levels or at any level. The applicable law regarding Approved Enterprise programs will expire on March 31, 2005. Accordingly, requests for new programs or expansions that are not approved on or before March 31, 2005 will not confer any tax benefits, unless the term of the law will be extended beyond March 31, 2005. On January 12, 2005, a bill was submitted to the Israeli parliament providing for certain changes to the applicable law regarding Approved Enterprise programs. Among others, the bill proposes certain changes to both the criteria and procedure for obtaining Approved Enterprise status for an investment program, and changes to the grants and tax benefits afforded in certain circumstances to Approved Enterprises under such law. The proposed amendment is expected to apply to new investment programs following the enactment of the bill into law. In order to enact the bill as legislation, the bill must be approved by the Israeli parliament and published. We cannot predict whether the bill will eventually be enacted into law and what changes it might implement. From time to time, we submit requests for expansion of our Approved Enterprise programs or for new programs. These requests might not be approved in the future. The termination or reduction of these tax benefits could harm our results of operations, or our inability to get approvals for expanded or new programs, could adversely affect our results of operations.
We may be required to pay stamp duty on agreements executed by us on or after June 1, 2003. This would increase our taxes.
The Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that most documents signed by Israeli companies are subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter of such document. It has been common practice in Israel not to pay such stamp duty unless a document is filed with a governmental authority or with the courts. As a result of an amendment to the Stamp Duty Law that came into effect on June 1, 2003, the Israeli tax authorities have approached many companies in Israel and requested disclosure of all agreements signed after June 1, 2003 with the aim of collecting stamp duty on such agreements. The legitimacy of this amendment to the Stamp Duty Law and of the actions by the Israeli tax authorities are currently under review by the Israeli High Court of Justice. Based on advice from our Israeli counsel, we believe that we may only be required to pay stamp duty on documents signed on or after August 2004. However, we cannot assure you that the tax authorities or the courts will accept such view. Although it is not yet possible to evaluate the effect, if any, on us of the amendment to the Stamp Duty Law, there could be a material adverse affect on our results of operations.
In January 2005, an order was signed that cancelled the requirement to pay stamp duty as of January 1, 2008. Furthermore, pursuant to such order, as of January 1, 2005, stamp duty is no longer chargeable on, among others, loan agreements.
Because we have received grants from the Office of the Chief Scientist, we are subject to ongoing restrictions that limit the transferability of our technology and of our right to manufacture outside of Israel, and certain of our large shareholders are required to undertake to observe such restrictions.
We have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the Government of Israel in an aggregate amount of approximately $4.1 million through December 31, 2004. According to Israeli law, any products developed with grants from the Office of the Chief Scientist are required to be manufactured in Israel, unless we obtain prior approval of a governmental committee. As a condition to obtaining this approval, we may be required to pay the Office of the Chief Scientist up to 300% of the grants we received and to repay such grants at a quicker rate. In addition, we are prohibited from transferring to third parties in Israel the technology developed with these grants without the prior approval of a governmental committee and we are prohibited from transferring such technology to third parties outside Israel. Any non-Israeli who becomes a holder of 5% or more of our outstanding ordinary shares will be required to notify the Office of the Chief Scientist and to undertake to observe the law governing the grant programs of the Office of the Chief Scientist, the principal restrictions of which are the transferability limits described above in this paragraph.
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
Israeli courts have required employers seeking to enforce non-compete undertakings against former employees to demonstrate that the former employee breached an obligation to the employer and thereby caused harm to one of a limited number of legitimate interests of the employer recognized by the courts such as, the confidentiality of certain commercial information or a companys intellectual property. We currently have non-competition clauses in the employment agreements of most of our employees. The provisions of such clauses prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. In the event that any of our employees chooses to work for one of our competitors, we may be unable to prevent our competitors from benefiting from the expertise of our former employees obtained from us, if we cannot demonstrate to the court that a former employee breached a legitimate interest recognized by a court and that we suffered damage thereby.
It could be difficult to enforce a U.S. judgment against our officers, our directors and us.
We are incorporated in the State of Israel. A substantial number of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it could be difficult to enforce a judgment obtained in the United States against us or any of these persons.
Service of process upon us, upon our directors and officers and upon our independent auditors, a substantial number of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because our principal assets and a substantial number of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
It is not clear whether civil liabilities under the Securities Act of 1933 and the Securities Exchange Act of 1934, or the Exchange Act, can be enforced in original actions instituted in Israel. However, subject to specified time limitations, Israeli courts may enforce a U.S. final executory judgment in a civil matter, including a monetary or compensatory judgment in a non-civil matter, obtained after due process before a court of competent jurisdiction according to the laws of the state in which the judgment is given and the rules of private international law currently prevailing in Israel. The rules of private international law currently prevailing in Israel do not prohibit the enforcement of a judgment by Israeli courts provided that:
Provisions of Israeli law could delay, prevent or make difficult a change of control, and therefore depress the price of our shares.
Provisions of Israeli corporate law may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, us. The Israeli Companies Law 1999, or the Companies Law, generally provides that a merger be approved by the board of directors and a majority of the shares present and voting on the proposed merger at a meeting called upon at least 21 days notice. A merger may not be completed unless at least 70 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies. The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company, unless there is already another 25% or greater shareholder of the company. Similarly, an acquisition of shares must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, unless there is already a majority shareholder of the company. In any event, if as a result of an acquisition of shares the acquirer will hold more than 90% of a companys shares, the acquisition must be made by means of a tender offer for all of the shares. Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
Risks Related to Our Ordinary Shares
Our stock price has fluctuated and could continue to fluctuate significantly.
The market price for our ordinary shares, as well as the price of shares of other technology companies, has been volatile. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as:
In addition, trading in shares of companies listed on The Nasdaq National Market in general and trading in shares of technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market and industry factors may depress our share price, regardless of our actual operating results. In addition, if we issue additional shares in financings or acquisitions, our shareholders will experience additional dilution and the existence of more shares could decrease the amount of purchasers that are willing to pay for our ordinary shares.
Substantial future sales of our ordinary shares may depress our share price.
If our shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding employee options, or if the perception exists that we or our shareholders may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall. In April 2004, we registered on a shelf registration statement with the SEC 4,100,000 of our ordinary shares, of which we sold 3,450,000 in a public offering in May 2004. Any substantial sales of our ordinary shares in the public market also might make it more difficult for us to sell equity or equity related securities in the future at a time and in a place we deem appropriate.
Our ordinary shares are traded on more than one market and this may result in price variations.
Our ordinary shares are traded primarily on the Nasdaq National Market and on the Tel Aviv Stock Exchange. Trading in our ordinary shares on these markets is effected in different currencies (dollars on the Nasdaq National Market, and New Israeli Shekels on the Tel Aviv Stock Exchange) and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ, resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States and Israel. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
We may need additional financing, which could be difficult to obtain on acceptable terms or at all, and which if not obtained may have an adverse effect on our business.
In addition to the proceeds of our May 2004 any offering of ordinary shares, we may need to raise additional funds in the future and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. From time to time, we may decide to raise additional funds through public or private debt or equity financings to fund our activities. If we issue additional equity securities, our shareholders will experience additional dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our ordinary shares. In addition, if we raise funds through debt financings, we will have to pay interest and may be subject to restrictive and other covenants, which could adversely impact our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could have a material adverse effect on our business.
ITEM 4 INFORMATION ON THE COMPANY
A. History and Development of the Company
Both our legal and commercial name is Retalix Ltd. During 2000, we changed our name from Point of Sale Ltd. to our current name. We were incorporated on March 5, 1982, under the laws of the State of Israel. We are domiciled in Israel. Our legal form is a company limited by shares. We operate under the laws of the State of Israel. Our registered office is located at 10 Zarhin Street, Raanana 43000, Israel, and our telephone number is +972-9-776-6677. Our agent in the United States is Retalix USA Inc. Its address is 6100 Tennyson Parkway, Suite 150, Plano, TX 75024.
We have grown through a combination of internal expansion and strategic acquisitions of companies with related businesses and technologies. Our principal recent acquisitions are as follows:
B. Business Overview
We are an independent provider of integrated enterprise-wide software solutions for the global retail food and fuel industries. Spanning the retail supply chain from the warehouse to the point of sale, our suite of software solutions integrates retail information flow across a retailers entire operations, encompassing its stores, headquarters and warehouses. Our comprehensive integrated solution suite enables food and fuel retailers to manage their retail operations more efficiently, reduce infrastructure costs and closely collaborate with suppliers. Our software solutions also enable retailers to capture and analyze consumer behavior data, and to use that data to more effectively devise and implement targeted promotions to stimulate demand. We believe that our extensive knowledge and accumulated experience in developing software solutions for the retail food and fuel industries enables us to provide solutions to retailers that are better integrated and more tailored for our target markets than competing solutions. Through our January 2004 acquisition of OMI International, we further extended the scope of our software suite to include supply chain execution and warehouse management. With this enhanced suite of software solutions, we now provide retailers with the ability to manage, track and report the movement of goods throughout the entire scope of their operations, from the order, through the initial receipt of goods at the warehouse, and to the final sale at the checkout counter.
We market our software solutions primarily to large and mid-sized supermarket and convenience store chains, major fuel retailers and independent grocers. In the supermarket and grocery sector, we market our solutions to four tiers of food retailers that are typically characterized primarily by revenue levels:
We market our solutions to Tier 1 and Tier 2 food retailers, large convenience store chains and major fuel retailers through a direct sales force in the United States, Europe, Australia, Asia, The Far East and Israel, augmented by a combination of channel partners and resellers. Sales to Tier 1 and Tier 2 food retailers, large convenience store chains and major fuel retailers have historically represented a substantial majority of our revenues. We target Tier 3 and Tier 4 food retailers through our StoreNext joint ventures in the United States and Israel, which sell their solutions directly (in Israel) or through regional dealers. For larger supermarket and convenience store chains and major fuel retailers, our professional services personnel provide our customers with project management, implementation, application training and technical services. We also provide development services to customize our applications to meet specific requirements of our customers and ongoing support and product maintenance services.
We believe that we are unique within the retail food software industry as we offer software solutions that can serve the needs of the entire range of food retailers, from multi-national supermarket and major convenience store chains to independent grocers. We are able to serve such a diverse customer base because we have designed our applications to include multiple levels of functionality that can be adapted to the various sizes and forms of retail operations of our customers. To date, our software solutions have been installed in more than 33,000 supermarkets and grocers, convenience stores and major fuel retailers in 50 countries, serving more than 260,000 checkout lanes. Our customers include leading supermarket and grocery chains such as Albertsons, Hy-Vee and Publix in the United States, Delhaize, Sainsburys and Tesco in Europe, and large convenience stores and major fuel retailers such as Alon Fina, Caseys and Pilot Oil in the United States and Husky Oil in Canada. In addition, we estimate that our software is currently installed at approximately 11,000 independent grocers out of the total U.S. market of approximately 20,000 independent grocers. Our sales have grown from $36.1 million in 2000 to $124.4 million in 2004.
On January 2, 2004, we acquired OMI, a provider of supply chain execution and warehouse management systems for the retail food industry. Warehouse management systems manage the various fulfillment processes that take place in retailers warehouses and distribution centers. We believe the acquisition of OMI enables us to enter the supply chain execution and warehouse management systems market for retailers, broaden our customer base and expand our suite of products. The addition of OMIs integrated applications to our suite of retail solutions enables us to provide customers with end-to-end supply chain management, facilitating enterprise-wide procurement, merchandising, warehouse management and order management for multi-warehouse, multi-facility retailers and wholesalers. Moreover, the integration of our in-store solutions with OMIs warehouse management solution will significantly improve the replenishment decisions made at the warehouse. Warehouse management systems typically base replenishment decisions upon the movement of goods from the warehouse to the store, without considering inventory and sales at the store. We believe that the combination of our in-store solutions with OMIs applications will enable retailers to optimize their replenishment decisions based on point of sale data, thereby reducing lost sales due to out-of-stock, on the one hand, and, on the other hand, reducing additional costs of surplus inventory.
Our Market Opportunity
The customer retention battle
The retail food and fuel industries today are characterized by intense competition, resulting in increased pricing pressure and narrowing operating margins. Retailers are losing customers to their larger competitors who offer aggressive pricing as well as greater shopping convenience and superior customer service. The largest retailers, such as WalMart, are increasingly using their size and scale to realize cost savings and operating efficiencies from their supply chain, which they then pass on to the consumer in the form of lower prices. This trend creates an industry dynamic whereby more and more consumers are attracted to these price-cutting retailers, thus accelerating these retailers revenue growth and allowing them to further increase their economies of scale.
At the same time, large food retailers are expanding their operations beyond their traditional focus on food supermarkets to encompass additional retail formats, such as convenience stores, fuel stations and quick service restaurants. This has increased the competition in the convenience store market sector, which historically has been served by smaller chains and independent retailers. These small and independent operators are finding it increasingly difficult to compete effectively with the aggressive pricing and associated lower margins resulting from increasing competition. Similarly, competition has reduced margins at the fuel pump, causing large fuel retailers to add convenience store and quick service restaurant formats in an effort to increase their overall margins. This has further increased competition in the convenience store and fuel station market sectors, which further favors the large retailers who can leverage their size and scale to realize operating efficiencies in their supply chain, thereby lowering their cost base and allowing them to deliver lower prices.
One of the primary factors that allows such large retailers to realize supply chain operating efficiencies is their use of sophisticated retail information systems, often developed in-house, that provide them with comprehensive visibility into their extended supply chain. Armed with such visibility, these retailers can more efficiently execute and track all of their supply chain tasks, such as order optimization, inventory management, merchandising and pricebook management. In addition, this supply chain visibility also allows retailers to optimize their pricing and promotion decisions in order to increase demand and sales.
The information system needs of food and fuel retailers
In order to compete more effectively, food and fuel retailers need retail information systems comparable to those used by the largest food retailers and major fuel chains in order to be able to realize additional operating efficiencies from their supply chains. In particular, retailers require robust retail information systems that can:
However, in order to deter customers from shifting their patronage to the largest chains, smaller retailers require more than increased operating efficiencies and competitive pricing. In order to compete effectively with these larger chains, smaller retailers need to provide consumers with an improved shopping experience through diverse retail formats and better customer service and to incentivize their customer base to increase their patronage of their stores through customer loyalty and other promotion strategies. As a result, in an effort to increase customer retention and influence customer spending habits, retailers are increasingly seeking retail information systems that can, in addition to achieving operating efficiencies, also:
The retail food and fuel software opportunity
Many food and fuel retailers have historically relied upon a complex set of fragmented and poorly integrated legacy information systems. Such systems are the byproduct of years of delaying implementation of a coherent enterprise-wide IT strategy, favoring patchwork upgrades over comprehensive system revitalization. As a result, most food and fuel retailers operate retail information systems that are difficult to adapt to todays intensely competitive retail industry. Typically, these retailers existing information systems consist of stand-alone POS systems with little or no integration with their back-office and with no enterprise-wide information system. These systems generally cannot be easily modified to provide cross-enterprise visibility, collaboration and integration, nor can they support the information capture and analysis necessary for reliable forecasting and coordinated purchasing decisions. In addition, in continuing to rely on these legacy systems, retailers face an increasing frequency of breakdowns and system failures, exposing them to the ongoing cost of expensive maintenance.
In order to remain competitive and avoid the ongoing costs associated with maintaining their legacy systems, many retailers are seeking to replace their legacy systems with modern, integrated retail information systems that can provide them with visibility across the entire scope of their retail operations, support collaboration with their suppliers, allow enterprise-wide information flow and enable implementation of sophisticated customer loyalty and promotion strategies. We believe that these replacement systems typically will be based upon a modular, open-systems architecture, or non-proprietary software that can be easily integrated into a retailers existing IT infrastructure. Systems meeting such criteria provide retailers with the flexibility to modify their information systems to respond to and manage their changing business environment. Based on data compiled by IBM, North American retailers across all industries continue to rely upon legacy POS systems that have an average age of eight years, with some retailers using systems that are as much as 10 to 20 years old. Consequently, many retailers are considering replacing their outdated legacy systems in the near to medium term. In a 2003 retail industry IT spending survey conducted by IBM, 76% of the respondents stated that they planned to deploy POS upgrades or replacements in the next five years. This replacement cycle is expected to contribute to growth in retail IT spending, including in the retail food sector. Recent industry data published by International Data Corporation, or IDC, a market research firm, forecasts that IT spending in the U.S. retail food industry will increase at a compound annual growth rate of approximately 6.2%, with the market reaching approximately $4.6 billion by 2007.
Our software solutions provide a robust and comprehensive suite of applications for the retail food and fuel industries addressing all three principal divisions of a retailers operations its retail stores, its headquarters (also called the enterprise level), and its warehouses and distribution centers. We believe our solutions differentiate us from other providers of software solutions to the retail food and fuel industries because they combine the following attributes:
Our integrated solutions span the retailers entire retail organization
Our software solutions provide a robust and comprehensive suite of applications for the retail food and fuel industries addressing all three principal divisions of a retailers organization its retail stores, its enterprise level and its warehouses and distribution centers. We believe that our integrated suite of software solutions is unique among retail food software solutions, in that it combines all essential elements for an enterprise-wide retail information system stores, headquarters and warehouses in a well-synchronized suite of solutions. Our Retalix Enterprise Management Applications, or ReMA, solution tightly integrates our enterprise solution with our in-store back-office solutions and synchronizes the flow of information between the two. Such an integrated solution permits retailers to generate substantial supply chain operating efficiencies and cost savings through efficient management of inventory, purchasing and merchandising. We are in the process of integrating our acquired supply chain management solutions into the ReMA suite in order to provide retailers with a fully integrated solution spanning their entire retail organization.
Our solutions provide for both retail operations management and customer management
While retail enterprise solutions have traditionally focused exclusively on retail operations management principally supply chain and merchandising processes our enterprise solutions also include sophisticated customer management tools. Our customer management tools, Retalix Loyalty and Retalix 1-to-1, focus on influencing consumer spending habits through the use of personalized promotions and other loyalty card-based marketing techniques. Our in-store systems provide full support for promotions and loyalty programs at the checkout lane, and are integrated with our enterprise applications. This feature enables retailers to devise a wide variety of loyalty programs and promotions on a chain-wide level that can be easily implemented at the store level. Moreover, our integrated data mining capabilities enable retailers to explore and analyze detailed customer transactions, allowing them to closely monitor customer spending patterns and to target promotions to their loyalty program members.
Our next generation thin client architecture reduces the cost and physical footprint of IT systems
In response to retailers increasing demand for software solutions that are easier to use and cheaper to maintain, we have developed our ReMA solution based on a thin client architecture, using the Microsoft .Net platform. Our thin client solutions allow our applications to run on remote servers with the users accessing the applications through a standard browser. These solutions reduce the need for expensive, bulky hardware and software installations at each store location, lower an enterprises IT maintenance costs and facilitate enterprise-wide integration. In addition, thin client architecture makes it easier and more cost-effective to upgrade software as and when required. In addition to our ReMA solution, we are developing a next-generation version of our existing StoreLine in-store solution, called StoreLine.net, which is based on a thin client architecture using the Microsoft .Net platform. This capability to provide for a thin POS and a thin back office solution allows a choice of additional flexibility and cost savings, as part of our product suite.
Our robust solutions provide system resiliency and data redundancy
The retail food industry is characterized by a very high volume of customer transactions that retailers are required to process quickly and efficiently. We believe that retailers view their POS systems as mission-critical to their operations, as these systems must be continuously functioning to process customer transactions. The malfunction or failure of a retailers POS systems for even a few minutes could result in substantial lost sales, as well as significant customer dissatisfaction. Moreover, the data generated in these transactions are equally mission-critical, the loss of which could significantly impair a retailers internal reporting and accounting systems. As a result, retailers require highly robust and resilient POS solutions that will allow them to continue to operate despite system failures, as well as to avoid the risk of being unable to process customer transactions as well as the risk of data loss. We have developed a software architecture designed to support the high volume, multiple retail format environments of the largest food retailers and major fuel retailers, capable of supporting very high volumes of stores and checkout lanes without risk of significant malfunction or failure. Equally important, our software architecture protects critical data through its duplication at the server level. In case of system failures, each POS terminal can continue to operate despite the interruption of communications with the back-office or headquarters, storing all transactions locally, to be transferred to the server level when communications are restored. We believe the adoption of our in-store solutions in such large supermarket chains as Albertsons, Sainsburys and Tesco is a strong testament to the robustness and resilience of our in-store solutions.
Our in-store solutions support multiple retail formats and customer service points
Our in-store solutions offer retailers the ability to support multiple retail formats and customer service points at a single retail site. This enables retailers to use a single software solution to operate different retailing formats such as grocery, fuel, convenience store, car wash and Quick Service (or QSRs), and to support a variety of consumer service points, such as self-scanning, self-weigh and self-checkout. This assists retailers in attracting new customers and in improving existing customer retention by providing consistency across the consumer touch-points and enhancing the overall in-store consumer experience.
We provide independent and small chain food retailers with access to sophisticated software solutions at an affordable price
Independent and small chain food retailers have many of the same needs and face many of the same challenges as do larger retailers, but lack the managerial, financial and technological capacity to implement the necessary systems to meet them. Our StoreNext joint venture operations in the United States and Israel operate our enterprise-level applications, such as pricebook, promotions, loyalty and information services, on an ASP basis, meaning that the application is remotely hosted on our centralized servers and accessed by the independent retailer over the web or private data lines. These ASP solutions, which we refer to as Connected Services, allow independent retailers and small chains, in return for a monthly subscription fee, to gain access to applications that would otherwise be too expensive for them to procure and manage in-house. With access to these applications, smaller retailers can derive operating efficiencies that are similar to those enjoyed by their larger competitors and thereby compete with them more effectively.
Our solutions provide retailers with the ability to collaborate on-line with their suppliers
As the retail supply chain becomes increasingly more complex, with retailers working with an increasing number of suppliers and partners and stocking an increasing number of products, retailers require the ability to collaborate across their supply chain in a swift and effective manner. Our applications provide retailers with the ability to collaborate with their suppliers and partners, either on a private network with our applications hosted on the retailers internal servers or through our Connected Services. This collaboration provides both retailers and suppliers with real time visibility into work flow processes, new product introductions, price changes and promotions in order to enhance coordination and eliminate errors and inefficiencies.
Our software solutions can support the multi-national operations of leading Tier 1 food and major fuel retailers
Our software solutions provide extensive support for the international market, such as support of multiple languages, currencies, taxes and local certifications etc., enabling multi-national Tier 1 food and major fuel retailers to standardize their operations by using one Retalix product across their global operations. We believe that these capabilities provide us with a competitive advantage with retailers that are located in multi-lingual countries or have stores near national borders, as well as multi-national retailers that prefer licensing software from a single vendor for all their locations.
Our enterprise solutions can be easily integrated with existing IT infrastructures
The modular nature of our architecture and our tools for building open interfaces to external systems, including software protocol standards such as XML and web services, streamlines the introduction of our enterprise and in-store solutions into existing IT environments. Retailers can purchase systems that fit their current needs and budgets, and then add additional modules as their business needs evolve over time. Our open architecture means that our solutions are hardware neutral, capable of working with systems from most major hardware vendors, including IBM, NCR, Fujitsu, Epson, Dell and Wincor-Nixdorf. This modular and open architecture decreases the software integration risks associated with migrating from a retailers existing systems to our enterprise and in-store solutions, thereby ensuring quicker time to market. This feature also allows the retailer to make separate purchasing decisions for the hardware, thus realizing great savings in hardware costs by buying the hardware as a standard market commodity.
Our Growth Strategy
The principal elements of our strategy to achieve our growth objectives are as follows:
Leverage our integrated suite of products to become the leading provider of retail software solutions to the retail food and fuel industries
We offer our customers enterprise-wide software solutions that allow them to collect, manage and analyze information across their entire retail enterprise, from the warehouse to the checkout counter. With the introduction of ReMA in 2003, we extended our product offering from in-store solutions to include integrated enterprise level and head office applications. Our in-store back-office and enterprise systems are closely integrated, both sharing and drawing upon the same central data repository. With our acquisition of OMI, we have further expanded our product offering to include supply chain execution and warehouse management systems. We are progressing as planned in migrating our acquired supply chain execution and warehouse management systems into new technology and integrating them into our existing suite of solutions to create a synchronized suite of solutions from warehouse to checkout. We believe that with our integrated solutions, we will be well positioned to leverage our large customer base to become the leading provider of retail solutions to the retail food and fuel industries.
Continue to target Tier 1 and Tier 2 retail food and major fuel chains operating legacy IT systems
The majority of Tier 1 and Tier 2 retail food and major fuel chains continue to operate outdated legacy in-store systems that do not provide the functionality required by a retailer to implement and support the new applications and workflow processes that are necessary to compete effectively in todays retail food and fuel industries. We believe that our solutions are well positioned to capitalize on this market opportunity because they are:
Enable food and fuel retailers to differentiate themselves from their competitors through sophisticated customer management tools
We believe that our ability to offer sophisticated customer management tools, often referred to as customer loyalty programs, provides us with a significant advantage over our competitors in an area that is becoming of increasing strategic importance to retailers. Our customer management tools are tightly integrated with our in-store solutions. This allows the establishment at the enterprise level and the implementation at the store level of a wide variety of broad-based, personalized promotions and loyalty card-based marketing programs. We believe that our integrated customer management tools differentiate our solutions from competing retail solutions, which generally focus on customer management to a lesser degree.
Continue to develop new products and enhance existing products to address a broader set of food and fuel retailers needs
We strive to develop innovative products and solutions that meet the needs of our customers based on our extensive knowledge and accumulated experience in the development of software solutions for the retail food and fuel industries. In order to address a broader set of retailers needs, we continue to expand the breadth and depth of our product lines by developing and introducing new products and enhancing the functionality of our existing products. In 2003, we introduced our ReMA platform and suite of applications and our thin client StoreLine.net application. Our continuous technological development represents an important part of our value proposition to our customers, as it provides them with access to advanced solutions that meet their changing needs, as well as with a road map for the development of products designed to meet their anticipated future needs. As part of this strategy, we announced the first installation of our new StoreLine.net thin-client POS software solution built on the Microsoft .Net platform. In addition, we are progressing as planned with the upgrade of our supply chain execution and warehouse management systems to the new J2EE, .NET and web-based platforms, as well as with the integration of these solutions with our ReMA enterprise solution.
Continue to penetrate the Tier 3 and Tier 4 retail food markets through the provision of Connected Services
In the past, our sales to smaller chains and independent grocers were primarily limited to POS applications. Leveraging the ability of ReMA to support multiple enterprises from a single data center, we are now able to offer our enterprise level applications, such as product and price management, sales analysis, promotions, loyalty and information services, to Tier 3 and Tier 4 retailers on an ASP basis. We provide these Connected Services through our StoreNext joint ventures in return for a monthly subscription fee. These Connected Services enable Tier 3 and Tier 4 retailers to enjoy many of the benefits of enterprise and back-office applications that were originally designed for Tier 1 and Tier 2 retailers, without the need to make a significant upfront investment in the systems and personnel required to run these applications in-house. To date, our StoreNext USA had signed up over 1,000 retailers and StoreNext Israel has signed up over 700 retailers. We intend to continue to market Connected Services to this retail sector in an effort to increase the revenues we generate from our Tier 3 and Tier 4 customer base.
Leverage our Connected Services customer base to build collaborative retailer-supplier communities
Through the collection of sales and inventory data obtained in providing Connected Services to Tier 3 and Tier 4 retailers, we are able to provide suppliers with aggregated Tier 3 and Tier 4 sales data, including visibility into inventory movement, and aggregated market share information. This data enables suppliers to better understand market trends and changing consumer demands, which previously had been difficult to gauge because of the large number of independent retailers and the fragmented nature of the market, thereby enabling suppliers to optimize their supply replenishment strategy. As we add more retailers to our Connected Services, we are able to offer suppliers an increasingly more valuable service as we are able to provide them with access to data from a wider group of retailers and, as a result, a more detailed and accurate view of the marketplace. We first established a community, or e-marketplace, for suppliers in the retail food industry in Israel, where the number of retailer subscribers to our Connected Services through our StoreNext Israel venture has reached a critical mass. We have further expanded this community to enable collaboration between retailers and suppliers in Israel to allow them to share with each other inventory and pricing information. We intend to provide similar e-marketplace and collaboration services through our StoreNext USA venture as the number of subscribers to our Connected Services in the United States grows. We further intend to continue to leverage our Connected Services to increase the value of the community to suppliers and to provide us with an additional source of revenue.
Continue broadening market penetration through strategic acquisitions
Historically, we have grown through a combination of internal expansion and strategic acquisitions of companies with related businesses and technologies. Over the past few years, we have made a number of strategic acquisitions to further expand our product offerings and market position, including the acquisition of PalmPoint, BASS, OMI and UNIT. We continue to evaluate opportunities to acquire complementary businesses and technologies in the retail information systems market in order to better serve our customers, complement our product offerings, increase market share, advance our technology, expand distribution capabilities or penetrate new targeted markets.
Continue to expand into new geographic markets and additional retail market sectors
Currently our primary geographic markets are North America, Israel and Europe, particularly the United Kingdom and Scandinavia. In 2004, we have announced significant new sales, viewed as market entries in new markets, such as France and Italy in Europe, and China, Japan and India in Asia. We plan to continue to establish our presence in these new markets, as well as expand into new countries in Europe, Asia and Latin America. In addition, we are beginning to expand into other types of retail sectors, such as health and beauty and pharmacy, that have similar retail characteristics to the food and fuel retail market sectors, in an effort to broaden our addressable market.
We have a broad portfolio of software solutions that are designed to meet the retail operations and customer management needs of food and fuel retailers, ranging from multi-national supermarket chains and major fuel retailers to local, independent grocers. We offer our customers a full suite of software products to address all the principal elements of their retail operations:
In-Store Solutions: Suite of software solutions that provide supermarkets, convenience stores, fuel retailers and quick service restaurants with business applications supporting multiple types of customer service points, such as regular checkout, self-scanning and self-checkout, providing comprehensive in-store operational and management tools for POS, front-office and back-office operations and allowing mobile applications that enable in-store personnel to carry out back-office tasks using mobile computing devices. Our in-store solutions consist of our POS systems, StoreLine for the supermarket and grocery market and StorePoint for the convenience store and fuel retail market, as well as additional back-office modules, Retalix Pocket Office and Retalix Back Office. In terms of contribution of our various software solutions to our historical revenues, we have derived the substantial majority of our product sales from the sale of our in-store solutions, specifically our StoreLine and StorePoint solutions.
Enterprise Solutions: Suite of software solutions that provide large supermarket and convenience store chains and major fuel retailers with a comprehensive, modular solution which centralizes operation and management of their enterprise-wide and back-office activities such as product and price management, promotions, merchandising and reporting and analysis. Our enterprise solutions also provide sophisticated customer management tools, enabling a wider variety of personalized and targeted promotions and loyalty card-based marketing techniques. Our enterprise solutions consist of ReMA and Retalix Host. We introduced our ReMA suite of applications in 2003, and we anticipate that it will continue to account for a growing portion of our product sales in future periods.
Warehouse Management Solutions: Suite of supply chain execution and warehouse management software solutions that provide retailers and wholesalers with a range of applications designed to help them manage complex, multi-facility warehouses and distribution centers. These applications include warehouse management and optimization, automated procurement, merchandising, order management, invoice reconciliation and yard and dock management. Our supply chain execution and warehouse management systems consist of TRICEPS (Transportation, Receiving, Inventory Control and Productivity Systems) Warehouse Management, BICEPS (Buyers Inventory Control Effecting Profits and Services), Purchasing Management, PROMPT Invoice Matching, MDS Yard and Dock Management, ABS (Advanced Billing System) Advanced Billing and Order Management, and DemandAnalytX for optimized demand forecasting and order optimization. We added these solutions to our product suite in January 2004 through our acquisition of OMI.
ASP and Supplier Solutions: Our StoreNext solutions, tailored to smaller chains and independent grocers, enable smaller establishments with limited IT resources to enjoy the benefits of our ReMA and our back office applications through an ASP model, remotely hosted by us and accessible over the web or private data lines. We also offer collaborative solutions that provide retailers and their suppliers with the ability to exchange data and collaborate electronically on key supply chain and merchandising decisions in order to achieve greater efficiencies throughout the supply chain. We anticipate that revenues relating to these solutions will account for a growing portion of our overall revenues in future periods. Though the overall impact on us in the near term will be modest, we believe that revenues from these solutions will be an important source of revenues to us in the longer term.
Our product suite is organized by the three principal parts of a food retailers operations: the retail store, the headquarters or enterprise, and the warehouse and distribution center. The following table briefly describes our main products and their respective features and functions and target markets. A more detailed description is set forth below the table.
Our in-store solutions consist of a wide range of applications supporting:
We have two principal in-store solutions: StoreLine for the supermarket and grocery market and StorePoint for the convenience store and fuel retail market.
StoreLine is a fully integrated, modular, open architecture POS solution for multiple format supermarket and grocery chains. Specifically designed to cater to the larger supermarket chains that frequently add new formats and additional related services, StoreLine provides retailers with a comprehensive set of supermarket operational and management capabilities. StoreLine also offers interfaces to enterprise level systems and to third-party applications as well as to payment service providers. The StoreLine software suite supports multiple in-store retail formats, such as fuel and QSRs, and a variety of customer service points, such as self-scanning, self-weigh and self-checkout. In addition, StoreLine also provides the option of back-office functionality, such as inventory, supplier and employee management. Capable of running on either the Microsoft or Linux operating systems, StoreLines client server architecture is hardware neutral, supporting a variety of open and proprietary hardware devices, such as full-screen customer displays, color touch screens, scanners and checkout and scales, as well as hardware supplied by leading vendors, including Fujitsu, IBM, NCR, Epson, Dell and Wincor-Nixdorf.
In addition to its core POS and front-office and back-office functionality, the StoreLine software suite supports additional integrated modules, such as:
Customized versions of StoreLine software solutions include ISS45, which is distributed by StoreNext USA, and POSition, a Wincor-Nixdorf branded offering, which was adapted to meet the needs of customers in German-speaking countries and in Italy.
In addition, our ScanMaster branded solutions are Windows-based open platform POS software systems tailored to fit the needs of small chain and single store supermarkets. ScanMaster, developed by Retalix Pittsburgh, previously RCS, is tailored for the independent and small chain grocery market sector in the United States. Its configurable functionality allows retailers to preselect only the subset of functionality that fits their needs. Developed on the Microsoft platform, ScanMaster operates on multiple Microsoft Windows operating systems.
StoreLine.net is a thin client version of our StoreLine product developed based on the Microsoft .Net platform. StoreLine.net allows retailers to access StoreLine applications through a standard web browser on their in-store POS systems located on back-office or centralized servers. This reduces the total cost of ownership of retailers in-store IT infrastructure by enabling retailers to use their existing POS hardware to access next-generation retail applications. StoreLine.net was first deployed in 2003 at all Partner Communications stores in Israel (the Israeli franchisee of Orange plc, the international wireless communications operator) and is currently being developed for deployment in the grocery sector.
StorePoint is a fully integrated, modular open architecture POS solution for the multi-format convenience store and fuel sectors. StorePoint supports a variety of retail formats, such as convenience stores, fuel forecourts, quick service restaurants and self-service kiosks. By using StorePoint, convenience stores and fuel retailers can use one integrated solution for item scanning, fuel sales and quick service food sales. In addition, StorePoint also provides extensive front office and back-office functionality, such as ordering and receiving, inventory management, wet stock management, supplier and employee management, as well as specialized functionality for the food service environment, such as menu, recipe and waste management. StorePoint interfaces with various head office systems, allowing central management and decision control for the entire enterprise. Operating on a Windows platform, StorePoint is a pre-integrated, modular solution that allows for easy and cost-effective on-site installation.
In addition to its core POS and front-office and back-office functionality, the StorePoint software suite supports additional integrated modules such as:
In addition to StoreLine and StorePoint, we offer additional products for managing a retailers in-store operations that can be purchased as separate solutions or as add-on modules to our StoreLine and StorePoint solutions:
Retalix PocketOffice (RPO)
RPO is a mobile, hand-held suite of front-office and back-office applications that is designed for use on mobile computing devices such as personal digital assistants, or PDAs. RPO is designed to allow in-store employees to perform a broad array of back-office functions, such as ordering, receiving and price management, without leaving the store floor. The RPO suite of applications includes product and price management, ordering, stock receiving and counting, item maintenance and shelf audit. Operating on the Windows CE platform, RPO is integrated with our ReMA, StoreLine and StorePoint solutions. We market RPO to both the grocery and the convenience store sectors.
Retalix BackOffice (RBO)
RBO is an integrated in-store solution that provides item maintenance, inventory and pricebook management, reporting and analysis and store receiving. RBO uses an open architecture approach and is available as a suite of modular components. In addition to providing item maintenance and reporting, RBO interfaces with hand-held terminals for verification and receiving. RBO is sold primarily to Tier 3 and Tier 4 food retailers through our StoreNext joint venture, with some sales to Tier 2 retailers.
Retalix Enterprise Management Applications, or ReMA
The modern retail enterprise must rapidly collect, organize, distribute and analyze information throughout its organization. We designed our ReMA enterprise application to meet the enterprise-wide information collection and analysis needs of modern retailers. ReMA is a web-based platform and suite of applications that provides large supermarket and convenience store chains with a comprehensive, modular solution addressing their retail headquarters needs, including inventory and product management, personalized and targeted promotions and enterprise-wide reporting and analysis. Combining both head-office and back-office applications, ReMAs comprehensive suite of software solutions is integrated with our in-store solutions, allowing the synchronized flow of information between the two. In addition, ReMA enables retailers to manage all their enterprise level needs through the use of retail operations management and customer management tools. Based on a thin-client technology, our ReMA solution is remotely hosted at a retailers data center and is accessible at all of a retailers locations through a standard browser. Introduced in 2003, ReMA has already been installed with two U.S. retail chains and one Israeli chain.
ReMA is an integrated set of applications addressing a retailers supply chain operations, including:
ReMAs key modules include:
Retalix Host is an integrated enterprise solution that manages the chain-wide operations of convenience stores and fuel retailers. Retalix Host features inventory and price book management, tracking, supplier management and enterprise-wide reporting and analysis. Through the integration of Retalix Host with our StorePoint solution, convenience store and fuel retailers benefit from consistent workflow operations and synchronized databases from the point of sale to the enterprise level.
Retalix Host can be supplemented with Retalix CommPoint, a Retalix data communications product that manages bi-directional communication between stores and Retalix Host. Retalix CommPoint can also be used to distribute updates of new software versions and provide remote diagnostics and maintenance. Retalix Host can also be connected to the stores with any standard communications package.
Retalix Loyalty is a set of customer management tools that enables businesses, at the enterprise level, and the store/POS level to implement a wide variety of broad-based, personalized promotions and loyalty card-based marketing programs. Retalix Loyalty allows retailers, through the use of personalized promotions and advanced marketing techniques, to increase customer retention and spending by influencing customer shopping patterns. The solution also allows retailers to continually measure the effectiveness of promotion campaigns and to draw upon their results when setting up future campaigns.
Warehouse Management Solutions
With our acquisition in January 2004 of OMI, a provider of supply chain execution and warehouse management systems for the retail food industry, we are now able to offer a comprehensive set of warehouse management solutions designed for complex, multi-facility warehouses and distribution centers. We are progressing as planned in developing the next generation of these products with new technology and integrating them with the Retalix product suite. Our suite of supply chain management applications includes:
TRICEPS Warehouse Management
TRICEPS Warehouse Management is a warehouse management system that utilizes sophisticated wireless radio frequency, or RF, and voice activated technology to automate location and task management. Through the use of distribution control features and labor management tools, TRICEPS enables retailers to manage complex warehouse facility operations efficiently, increase warehouse service levels and reduce operating expenses. TRICEPS functionality includes optimal storage management, order fulfillment, product replenishment notification, labor forecasting, task management and advanced real-time inventory control.
BICEPS Purchasing Management
BICEPS Purchasing Management is an automated procurement system that handles just-in-time turn, promotion, forward buy and invoice/purchase order reconciliations. BICEPS enables retailers purchasing departments to identify and purchase products according to item and category criteria, and thereby to identify opportunities to improve inventory quality and profit margins. In addition, BICEPS allows retailers to view and manage deal, costing, movement and forecasting data and make immediate decisions for margin improvement. BICEPS functionality includes online continuous replenishment, inventory tracking and evaluation, recommended ordering, multiple product sourcing, forecasting and online accounts payable reconciliation.
PROMPT Invoice Matching
PROMPT Invoice Matching is a fully automated invoice reconciliation system that integrates a retailers accounts payable function with purchasing and receiving, allowing confirmation of invoices in advance of payments to suppliers. Through the use of electronic data interchange, or EDI, technology and electronic funds transfer, or EFT, technology, PROMPT enables the immediate reconciliation of invoices and allows the value of any missing items to be deducted from a vendors invoice. In this way, PROMPT allows retailers to manage invoice reconciliation electronically, thus saving the time and effort required to reconcile invoices manually and improving gross margins.
MDS Yard and Dock Management
Through the use of RF identification tags, MDS Yard and Dock Management allows retailers to monitor all yard arrivals and departures and track each trailer or container by location, movement, status and availability. This visibility into the movement of goods through their yards allows retailers to manage yard resources more efficiently, eliminate trailer wait time, improve resource and product scheduling and direct incoming goods to optimal storage locations.
ABS Billing and Order Management
ABS Billing and Order Management is an automated product ordering solution that enables retailers to process and fulfill customer orders. ABS provides retailers with the flexibility to determine the most efficient way to source products through the support of multiple shipping options.
Our DemandAnalytX software suite interprets store-level POS data, forecasts demand and determines and places optimal replenishment orders, enabling retailers, manufacturers, and distributors to optimize supply chain management. Through the use of sophisticated optimization algorithms, this solution allows retailers and suppliers to increase on-shelf availability and sales while reducing inventory levels and supply chain costs.
ASP and Supplier Solutions
We provide ASP and supplier solutions through two joint ventures, StoreNext USA and StoreNext Israel.
Independent and small chain food retailers have many of the same needs and face many of the same challenges as do larger retailers, but lack the managerial, financial and technological capacity to implement the systems necessary to meet them. Through our StoreNext joint ventures, we have leveraged the ability of ReMA to support multiple enterprises from a single platform to offer our ReMA applications to these independent and small chain food retailers on an ASP basis. These ASP solutions, or Connected Services, allow independent retailers and small chains, in return for a monthly subscription fee, to gain access to applications that would otherwise be too expensive for them to procure and manage in-house. With access to these applications, smaller retailers can enjoy greater operating efficiencies, and thereby become more competitive with the larger food retailers.
Through the collection of sales and inventory data obtained in providing Connected Services to Tier 3 and Tier 4 food retailers, we provide suppliers with aggregated Tier 3 and Tier 4 retailer data, including visibility into retail inventory movement, as well as aggregated market share information. We first established a community, or e-marketplace, for suppliers in the retail food industry in Israel, where the number of retailer subscribers to our Connected Services through our StoreNext Israel joint venture has reached a critical mass. As part of this e-marketplace, retailers and suppliers are able to collaborate and exchange data through our centralized servers, enabling the exchange of product information, pricing, ordering, inventory and other market information. We also offer this option as private collaboration exchanges where large chains can set up a collaborative workflow exchange with the chains suppliers. We intend to provide similar e-marketplace and collaboration services through our StoreNext USA venture as the number of subscribers to our Connected Services in the United States grows. In addition, we also offer EDI messaging services that enable the exchange of data between retailers and suppliers electronically using standard data format and protocols.
Services and Projects
Our professional services personnel provide customers with expertise and assistance in planning, designing and implementing our integrated information software solutions. Professional services personnel assist retailers with initial system planning, business process definition, gap analysis, configuration, implementation, historical data conversion, training, education and project management. Our personnel build interfaces for our in-store, enterprise and warehouse management systems. Actual implementation of our solutions is generally provided to the customer by a third-party local or global systems integrator, such as Bison Systems, Accenture or IBM Global Services.
Our professional services personnel also help to customize our products to our customers needs, enhancing retailers current information systems and managing upgrades and conversions. We provide custom application development work for customers billed on a project or per diem basis. We monitor our customization projects on a regular basis to determine whether any customized requirements should become part of our product offerings. For example, we have incorporated many changes requested by our Tier 1 retail food customers into our StoreLine product offerings.
We believe that our professional services personnel facilitate a retailers early success with our products, strengthen our relationships with the retailer and enhance our industry-specific knowledge for use in future implementation and software development projects.
Our software has been deployed in over 400 retail chains worldwide, including supermarket and grocery stores, convenience stores, fuel retailers and quick service restaurants. The following list is a representative sample of companies that purchased an aggregate of at least $200,000 of our products and services in 2003 and 2004 combined.
Established in 2002 as a joint venture with Fujitsu Transaction Solutions, StoreNext Retail Technologies LLC, which we refer to as StoreNext USA, provides POS hardware and software and Connected Services to the independent and small chain grocery market sectors (Tier 3 and Tier 4 retailers). As part of this joint venture, Retalix and Fujitsu jointly own and manage the regional dealer channels for the Tier 3 and Tier 4 grocery market sectors. Retalix supplies the joint venture with POS, back office and mobile solutions software and Fujitsu supplies the joint venture with POS hardware. Retalix receives revenues from the sale of its software solutions to the joint venture and shares proportionally in the joint ventures profits. StoreNext USA has recently begun to offer Connected Services to these Tier 3 and Tier 4 food retailers. As of December 31, 2004, we estimate that StoreNext USA had approximately 11,000 sites installed, with about 1,000 retailers that have signed up to Connected Services. Retalix owns 50.01% of StoreNext USA. Distributions by StoreNext USA to its shareholders require the consent of all shareholders in certain circumstances.
Established in 1999, StoreAlliance.com Ltd., which we refer to as StoreNext Israel, provides Connected Services to food retailers and suppliers in Israel. In addition, StoreNext Israel has established an e-marketplace across the Israeli retail supply chain by building a subscriber base comprised of both retailers and suppliers. The aim of this initiative is to provide its members supply chain efficiencies by providing up-to-date aggregated data. To date, StoreNext Israel subscribers include approximately 700 retailers and 500 suppliers. StoreNext Israel is currently running an online collaboration project with Supersol, the largest supermarket chain in Israel, and several of its key suppliers, including Osem-Nestle, Strauss-Elite, Unilever Israel, Central Bottling Company Ltd. (Coca Cola Israel) and Hogla-Kimberley.
StoreNext Israel is a joint venture of Retalix with three Israeli partners: Discount Investment Corporation Ltd.; Isracard, a subsidiary of Bank Hapoalim, Israels largest bank; and Coca Cola Israel.
Sales and Marketing
We distribute our products through direct sales, distributors and local business systems dealers. We market our products to Tier 1 and Tier 2 supermarket and convenience store chains and major fuel retailers through a direct sales force in the United States, Europe, Australia and Israel, augmented by a combination of channel partners and resellers. Sales to Tier 1 and Tier 2 supermarket chains and major fuel retailers have historically represented the substantial majority of our revenues. We target Tier 3 and Tier 4 food retailers indirectly through our channel partners and through our StoreNext joint ventures in the United States and Israel. For larger supermarket and convenience store chains and fuel retailers, we also provide professional services including project management, implementation, application training and technical and documentation services. We also provide development services to customize our applications to meet specific requirements of our customers, as well as ongoing support and maintenance services.
In addition, we participate in marketing programs with several companies, including IBM and NCR. Our marketing efforts are focused on increasing our brand recognition, as well as increasing awareness of the competitive advantages of our software solutions. We participate in major trade show events and conferences and advertise in trade publications.
Our direct sales force, consisting of experienced account managers, technical pre-sales engineers and sales personnel in the field, are located in the United States, United Kingdom, South Africa, Italy, France, Australia and Israel. Our sales force sells our products directly to supermarkets, convenience stores and fuel retailers within these countries and also relies on trade shows, promotions and referrals to obtain new customers.
In 2001, we joined IBM Corporations independent software vendor, or ISV, business partner program designed to promote marketing partnerships between independent software vendors and IBM. We work with IBM on several large accounts, primarily in the U.S. convenience store market, and are evaluating possible collaborative opportunities in Europe and in the Asia-Pacific region. We are included on IBMs ISV partner list.
In October 1997, we entered into a global marketing partnership program with NCR for our convenience store products. Under this agreement, we became an NCR Global Solutions Partner, which allows our StorePoint product line to be promoted by NCR in the worldwide convenience store sector.
We have direct distribution agreements for the sale of some of our products with partners in Australia, Finland, New Zealand, Norway, the Philippines, South Africa, Switzerland, Japan and the United States. Some of these partners operate regionally in countries in addition to the country in which they are headquartered.
We believe that qualified partners can be an effective sales channel for our products in their respective markets and can help us to overcome language and cultural barriers in countries where English is not the native language. We intend to continue to recruit partners and distributors in countries where we have identified sufficient sales potential and a suitable market profile.
Our software solutions are based upon a flexible, open architecture, which enables our customers to easily integrate our software solutions with their existing IT systems. The open architecture of our solutions offers our customers the choice of directly deploying a pre-configured solution or customizing our product offerings to conform to their specific business processes. Our solutions are hardware neutral, which means that they are capable of working with systems from most major hardware vendors, including IBM, NCR, Fujitsu, Epson, Dell and Wincor-Nixdorf. In addition to supporting the Microsoft operating system, our StoreLine solution is also capable of supporting the Linux operating system.
Our StoreLine and StorePoint POS software solutions are implemented using a common three-tier architecture consisting of user interface, business logic and data and services layers. The user interface layer consists of a collection of software modules that are the basis for our graphical user interface and user input interface. The business logic layer consists of a collection of business rules and procedures that can be customized through the use of parameters. The data and services layer provides a set of modules that is designed to interface with open database management systems and unique point-of-sale hardware devices such as scanners, scales, fuel pumps and displays, as well as handle the redundancy and resiliency abilities of the system.
This three-tier architecture allows our products to be easily customized, either at the graphical user interface or the functional levels, easily translated and configured, scalable, and it provides resiliency and data redundancy. Additional users can be added to our applications, with minimal loss of performance and without significantly increasing incremental costs. This is achieved by employing a scalable, client-server architecture based on the Windows operating system and SQL and Interbase data servers. Our software architecture is designed to be resilient and provide data redundancy. Essential data are protected through duplication at the server level. Furthermore, our system design allows each POS terminal to continue to operate in situations where communications with the in-store server or central system have been lost and, through a store and forward mechanism, allows for data synchronization once communications are restored.
ReMA is based on a web-based architecture, using the Microsoft .Net platform. At the foundation of the ReMA architecture is a software platform that consists of all basic services, such as security/accessibility management, access to data warehouse and analysis services, and reporting and catalog services, used by each of ReMAs application modules. ReMAs thin-client architecture allows users to operate ReMA applications from any Internet Explorer browser.
Retalixs new SCM applications (enterprise buying, ordering, billing, invoice matching and warehouse management systems) use the industry standard J2EE and are database independent. They also offer a rich set of base services, and are built for customization to suit the specific needs of different customers. They use the IBM Websphere application server and the DB2 database server. Future releases are planned to support WebLogic, MS-SQL Server and Oracle.
Retalix Yard management system is a web-based .NET application that enables organizations to manage multiple warehouse yards from a central location.
Our principal competition in the supermarket and grocery market for in-store solutions has traditionally come from integrated IT vendors such as IBM, Fujitsu, NCR and Wincor-Nixdorf (which usually provide their software integrated with their hardware), as well as local or regional software providers. On the enterprise level, our principal competitors in the supermarket and grocery market are TCI and SoftTechniques, as well as in-house developed solutions. We also experience competition from independent software vendors such as JDA and Retek. In addition, we anticipate future competition from new market entrants that develop retail food software solutions. In the convenience store and fuel market, our competition includes Radiant Systems Inc., Pinnacle Systems, Gilbarco VeriFone Inc. and Wincor-Nixdorf. In the supply chain execution and warehouse management markets, our competition includes Manhattan Associates, Red Prairie and EXE Technologies (part of SSA Global Technologies). Some competitors, such as NCR, Wincor-Nixdorf and IBM, are also our marketing partners in several market sectors or locations.
The market for retail food and fuel information systems is highly competitive and subject to rapidly changing technology. We believe that the primary competitive factors impacting our business are as follows:
For description of our revenues by geographic segments, see Note 15 to our consolidated financial statements contained elsewhere in this annual report.
C. Organizational Structure
We have the following subsidiaries and related companies:
(1) Held through our wholly-owned
subsidiary, Retalix Holdings Inc.
D. Property, Plants and Equipment
In June 1998, we purchased the rights of third parties in a long-term lease from the Israel Lands Authority, a government agency, relating to land and approximately 2,300 square meters of office space in a building in Raanana, Israel, which houses our Israeli headquarters. Towards the end of 1999, we acquired an additional space of approximately 1,200 square meters in the same building. During recent years, we have also leased additional spaces totaling approximately 1,700 square meters in the same building to accommodate new activities and the main operations of newly acquired subsidiaries.
In addition to our corporate headquarters in Raanana, Israel, we currently lease approximately 44,400 square feet of office space in Plano, Texas which serves as our U.S. headquarters. We also lease offices in Texas, Pennsylvania, Ohio and Idaho, as well as in London, Ivrea and Rome in Italy, in Sydney, Australia and in Petah-Tikva, Israel.
We believe our facilities are adequate for our current and planned operations.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes to those financial statements included elsewhere in this annual report.
A. Operating Results
We are an independent provider of integrated enterprise-wide software solutions for the global retail food and fuel industries. Our comprehensive integrated solution suite enables food and fuel retailers to manage their retail operations more efficiently, reduce infrastructure costs and closely collaborate with suppliers. Our software solutions also enable retailers to capture and analyze consumer behavior data, and to use that data to more effectively devise and implement targeted promotions to stimulate demand.
Since inception, we have significantly increased our revenues through a combination of factors, including obtaining new customers, expanding existing customer relationships, introducing new products, expanding the features and functionality of our existing products and acquiring complementary businesses, including most recently OMI in January 2004.
We generate revenues from the sale of licenses for our software solutions, maintenance and related services, principally software modifications requested by customers. We have derived the substantial majority of our historical revenues from the sale of licenses and related services for our software solutions to large (Tier 1 and Tier 2) supermarkets and convenience store chains and major fuel retailers, primarily in the United States and Europe, and we anticipate that revenues from such customers will continue to represent the substantial majority of our revenues over the near term. Measured by contribution of our software solutions by product line, we have historically derived the substantial majority of our product sales from the sale of our in-store solutions product line, specifically our StoreLine and StorePoint solutions. In 2003, we introduced our ReMA applications as part of our enterprise solutions product line, which we anticipate will account for a growing portion of our product sales in future periods.
We also generate revenues from sales of licenses for our software solutions, maintenance and related services to Tier 3 and Tier 4 grocers in the United States and to a lesser extent in Israel. In addition, leveraging on the ability of ReMA to support multiple enterprises from a single data center, we recently began to offer Tier 3 and Tier 4 grocers in the United States and Israel a variety of ReMA applications, such as pricebook, promotions, loyalty and information services, which we refer to as Connected Services. We receive monthly subscription fees for these Connected Services. We anticipate that revenues relating to these Connected Services will account for a growing portion of our overall revenues in future periods. Though the overall impact on us in the near term will be modest, we believe that revenues from these Connected Services will be an important source of revenues to us in the longer term.
During 2004, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets, large convenience store chains and major fuel retailers. In addition, we expanded our focus on Tier 3 and Tier 4 food retailers, through our StoreNext USA joint venture with Fujitsu Transaction Solutions, through which our products are sold to such market sector. We also continued to market our Connected Services for these market sectors.
Highlights since the beginning of 2004 include:
Sources of Revenue
We derive our revenues primarily from the licensing of integrated software products, which we classify as revenues from product sales, and maintenance and other services, principally software changes requested by customers, which we classify as revenues from services and projects. In addition, we provide communication services between retailers and suppliers and data analysis and supply chain information services (including our Connected Services), which are included in revenues from services and projects. We do business through subsidiaries and joint ventures formed in the United States, Israel, the United Kingdom, South Africa and Australia.
Our relationships with our Tier 1 and Tier 2 supermarket and convenience store chains and major fuel retailers are long term in nature, as they involve the supply of products that require considerable customer commitment, attention and investment of financial and human resources. No single customer accounted for 5% or more of our revenues in 2004.
Product sales primarily consist of the sale of software through license agreements with direct customers, distributors and dealers. Sales to Tier 3 and Tier 4 retailers are occasionally bundled with hardware provided by third parties. We recognize revenues from sales of our products when delivery has occurred, when the sales price is fixed or determinable, when our ability to collect payment is probable and when we have no material obligations remaining under the sales agreements. We recognize revenues from transactions involving resellers primarily when our software products are delivered to the end-users. In addition, we recognize revenues under agreements for the sale of a specified number of software licenses over the terms specified in such arrangements.
Services and Projects
Revenues from services consist of maintenance and other services, including communication services between retailers and suppliers and the provision of data analysis and supply chain information services to suppliers and a variety of applications sold to retailers through subscription fee arrangements (principally Connected Services). Revenues from services are recognized as the services are performed or over the term of the service period, depending on the terms of the arrangement. We generally sell maintenance services, which provide customers with the right to receive technical support, on an annual basis. Maintenance revenues are recorded as deferred revenue at the time the associated license is sold or a maintenance renewal is purchased, and are recognized ratably over the term of the maintenance agreement. If maintenance services are included in the terms of a license agreement, such amounts are unbundled from the license fee at their fair market value based upon the value established by independent sales of such maintenance services to other customers or on the basis of substantive maintenance renewal arrangements.
Revenues from projects consist primarily of fixed price arrangements for the development of changes to the software code of our products at the request of a specific customer. Revenues from such projects, which are primarily short term in nature, are deferred and recognized upon completion of the development of the software changes. Projects for changes to software code requested by customers are not begun until after the software license is sold and generally take up to twelve weeks to complete. Revenues from projects for rendering significant customization, integration and development that are of a longer-term nature are recognized based on a percentage of completion method, provided that the necessary conditions are met: collection of the revenues is expected, revenues and costs can be estimated reasonably, and there is a reasonable likelihood that the project will be completed and that contractual obligations to customers will be met. Revenue recognition based on the percentage of completion method is determined by the ratio of actual labor incurred to total labor estimated to be incurred over the duration of the contract.
In addition to the foregoing revenue recognition criteria, in situations where we have a continuing obligation to the customer to provide additional products or services, we recognize revenues relating to the products or services that have already been delivered only if:
Deferred revenue primarily relates to software maintenance agreements billed to customers for whom the services have not yet been provided and advances from customers for services that have not been provided.
Because our revenue recognition differs based on contract terms and customer requirements, our revenues from services and projects may vary from period to period depending upon the mix of these arrangements that we enter into in such periods. Please refer to Application of Critical Accounting Policies and Use of Estimates Revenue recognition, for further information regarding revenue recognition.
Cost of Revenues
Cost of revenues is comprised of the cost of product sales and the cost of services and projects. In addition, we are obligated to pay the Israeli government royalties at a rate of 2% to 5% on revenues on specific products resulting from grants, up to a total of 100% or 150% of the grants received. These royalties are presented as part of our cost of revenues.
Cost of Product Sales Cost of product sales consists of costs related to product installation and the cost of hardware. Historically, our revenues from hardware sales represented a relatively small portion of our overall revenues. Beginning in July 2002, we began consolidating the results of StoreNext USA into our financial statements. As hardware sales constitute a significant portion of StoreNext USA revenues, our cost of product sales has increased, reflecting the higher costs of hardware.
Cost of Services and Projects Cost of services and projects consists of costs directly attributable to service and project sales, including compensation, travel and overhead costs for personnel providing software support, maintenance services, market information services, messaging, Connected Services and other services. Because the cost of services and projects is substantially higher, as a percentage of related revenues, than the cost of products, our overall gross margins may vary from period to period as a function of the mix of services and projects versus product revenues in such periods. As compared to our historical results, OMI has a higher percentage of revenues from services and projects than product sales, as well as lower gross margins for its service related revenues. As a result, we expect our cost of services and projects to rise as a percentage of revenues in the coming periods as a result of the inclusion of the results of OMI in our financial results.
Operating expenses consist of research and development expenses, net, selling and marketing expenses, and general and administrative expenses.
Research and Development Expenses, Net Research and development expenses, net, consist primarily of salaries, benefits and depreciation of equipment for software developers. These expenses are net of the amount of grants received from the Israeli government for research and development activities. Under Israeli law, research and development programs that meet specified criteria and are approved by the Office of the Chief Scientist are eligible for grants of up to 50% of certain approved expenditures of such programs.
Selling and Marketing Expenses Selling and marketing expenses consist primarily of salaries, travel, trade shows, public relations and promotional expenses. We compensate our sales force through salaries and incentives. As we continue to focus our efforts on selling our products directly, we also pay commissions to some of our sales personnel. Selling and marketing expenses have increased significantly over the last few years as we have increased our efforts to strengthen our marketing channels, particularly through direct sales.
General and Administrative Expenses General and administrative expenses consist primarily of compensation, professional fees, bad debt allowances and other administrative expenses. These expenses have increased in recent years due to the increase in our facilities requirements, expenses incurred as a result of the growth of our business, recent acquisitions of companies and new joint ventures. However, as a result of certain fixed costs associated with growth, general and administrative expenses as a percentage of sales have decreased. In addition, we adopted Statement of Financial Accounting Standards (FAS) No. 142 of the Financial Accounting Standards Board of the United States (FASB) Goodwill and other Intangible Assets and FAS No. 141 Business Combinations in their entirety as of January 1, 2002 except with respect to the acquisition of BASS which we completed as of September 2001, and for which we applied the provisions of FAS 141 and FAS 142 as of the acquisition date. As a result, goodwill that was previously amortized within general and administrative expenses on a straight-line basis over periods of four to seven years, is no longer being amortized to earnings, but instead is subject to periodic testing for impairment.
An additional factor which affected our general and administrative expenses in recent years, and in 2002 in particular, was the worldwide economic recession, which contributed to an increase in our bad debt write-offs and allowance for doubtful accounts and to the expenses associated with such debts. Our allowance for doubtful accounts increased from 2.6% of the gross amount of trade receivables in 2001 to 6.7% in 2002. These increases were primarily attributable to the global recession, especially the recession in Israel, where we had to increase the allowance for doubtful accounts for a number of smaller Israeli customers. In determining the allowance for doubtful accounts, we considered, among other things, our past experience with such customers, the economic environment, the industry in which such customers operate and financial information available on such customers. In addition, in 2002, one of our customers declared bankruptcy and we wrote off $650,000 in accounts receivable attributable to that customer. In light of this write-off and the continuing economic recession, we re-examined our trade receivables balances and increased our allowance for doubtful accounts. In 2003, our allowance for doubtful accounts increased by $1.4 million to 11.7% of the gross amount of trade receivables, due in part to a decrease in our bad debt write-offs from $940,000 in 2002 to $411,000 in 2003. In 2004, our allowance for doubtful accounts increased slightly, primarily due to bad debt write-offs of $0.9 million. As percentage of gross receivables our 2004 allowance for doubtful accounts amounted to 10.7% primarily due to the growth of customer balances in parallel to the growth of revenues and as a result of the bad debt write-offs in 2004.
Other General Income (Expenses), Net
In 2002, we sold a relatively small part of our dealership operations in the Tennessee area because of conflicting interests with our new StoreNext USA joint venture. Other general income (expenses), net consists primarily of the gain we realized upon this sale in 2002, as well as gains or losses with respect to ordinary course dispositions of fixed assets.
Gain Arising from Issuance of Shares by a Subsidiary and an Associated Company
In March 2003 we, through our subsidiary StoreNext Israel, together with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd. established Cell-Time Ltd.. or Cell-Time. Cell-Time is a provider of on-line services that enables retailers and cellular communication providers in Israel to sell on-line pre-paid cellular air-time at retail points of sale. Each of the three parties holds an equal share in Cell-Time.
According to the agreement between the parties, Dai has committed to invest $1.25 million in consideration for its share in Cell-Time and the other parties have committed to grant Cell-Time rights to use certain of their technologies.
During 2004, an amount of $600,000 was invested by Dai in Cell-Time. As a result we recorded a gain of $200,000 representing StoreNext Israels portion in Cell-Time.
In the fourth quarter of 2003, Isracard, a subsidiary of Bank Hapoalim, invested $2.5 million in StoreNext Israel. Gain arising from issuance of shares by a subsidiary in 2003 represents the capital gain realized as a result of that investment. After giving effect to the investment, we owned indirectly approximately 51.5% of the issued share capital of StoreNext Israel.
Financial Income (Expenses), Net
Financial income (expenses), net, consists primarily of interest earned on bank deposits and securities, interest paid on loans, credit from banks, expenses resulting from sale of receivables and losses or gains from the conversion into dollars of monetary balance sheet items denominated in non-dollar currencies.
Share in Losses of an Associated Company
Share in losses of an associated company represents our share in the losses of Cell-Time. Store Next Israel, our subsidiary, holds 33.3% of Cell-Times shares.
Minority Interests in Losses of Subsidiaries
Minority interests in losses of subsidiaries reflect the pro rata minority share attributable to the minority shareholders in losses of our subsidiaries, principally StoreNext USA and StoreNext Israel.
The following table sets forth the percentage relationship of certain statement of operations items to total revenues for the periods indicated:
Comparison of 2002, 2003 and 2004
During 2004, our revenues increase resulted from an increase in sales to U.S. and international customers in Europe and Asia, both in the grocery and convenience store sectors. The increase in revenue from sales to U.S. customers constituted 54% of the total increase in sales during 2004 in comparison to 2003. The increase in revenue from sales to international customers constituted 46% of the total increase in sales during 2004 in comparison to 2003. Revenues from sales in the Israeli market were consistent with those achieved during 2003. Our international revenues could fluctuate from period to period in the near term, as these sales are still affected to a great extent by a small number of relatively large customers.
During 2003, our revenue increase resulted primarily from an increase in sales to customers in the United States in both the supermarket and convenience store sectors, where revenues increased from $48.8 million in 2002 to $62.6 million in 2003, an increase of approximately 28%. Revenues from international customers, including those in Europe, South Africa, Canada, Australia and the Far East, amounted to $18.0 million in both 2002 and 2003. International sales in 2002 consisted, in significant part, of several large sales.
Cost of Revenues
The increase in cost of product sales as a percentage of product sales in 2004, 2003 and 2002, resulted primarily from an increase in hardware associated sales attributable to our StoreNext USA initiative. In July of 2002, we began to consolidate the results of StoreNext USA into our financial statements. Although historically we generated revenues primarily from the sale of software and related services, StoreNext USA also generates revenues from the sale of third party POS hardware, which generally has a higher associated cost of revenues and lower gross margins. As a result, our gross margins in 2004 and 2003, each including four quarters of results of StoreNext USA, were lower than our gross margins in 2002, which included only two quarters of results of StoreNext USA. We expect our gross margins for future periods to be lower than our historical gross margins as a result of both the consolidation of the StoreNext USA results and our acquisition of OMI , which generates a larger portion of revenues from services, with a lower associated gross margin.
Research and Development Expenses, Net. During 2004, we increased our research and development expenses by 86% in comparison to 2003. As a percentage of revenues, these expenses rose to 27% in 2004 compared to 20% and 22% in 2003 and 2002, respectively. This significant growth reflects our considerable investments in integrating our recently acquired warehouse management systems into the ReMA suite of applications, and in developing next-generation applications and web-based architectures targeted to the needs of large supermarket and convenience store chains as well as independent retailers. This increase is also a result of our efforts in developing new versions of our products and solutions based on new platforms such as the Microsoft .Net platform and the J2EE platform. In 2003 and 2002 the growth of these expenses was primarily attributable to the development of our new ReMA applications. Although we believe that in 2004 our research and development expenses were relatively high in comparison to what we expect in the long run as a percentage of revenues, we intend to continue to invest considerable resources in research and development as we believe that this is essential to enable us to establish ourselves as a market leader in our fields of operation. We view our research and development efforts as essential to our ability to successfully develop innovative products that address the needs of our customers as the market for enterprise-wide retail software solutions evolves.
Selling and Marketing Expenses. During 2004, we invested significant marketing efforts in increasing awareness of our new offerings in the supply chain management area and in establishing a presence in new markets in Europe and Asia. During 2002 and 2003, we focused primarily on the strengthening of our sales and marketing force in the United States by recruiting highly experienced industry personnel, in order to better target the U.S. grocery sector. We anticipate that selling and marketing expenses will continue to increase in absolute dollars as we expand our operations.
General and Administrative Expenses. In 2004, our general and administrative expenses continued to decrease as a percentage of sales, continuing the trend from 2003 and 2002, largely because we were able to rely on our existing infrastructure to support our growth in revenues.
Financial Expenses, Net
Financial income (expenses), net, totaled income of $ 85,000 for 2004, compared to expenses of $95,000 for 2003 and $ 499,000 for 2002. The net income in 2004 resulted primarily from interest earned on deposits and securities, net of financial expenses incurred on bank loans, expenses resulting from sale of receivables and other bank charges. The net expense in 2003 and 2002 resulted primarily from financial expenses incurred on bank loans used to finance acquisitions of fixed assets, and in 2002 in particular, from the devaluation of net financial non-dollar assets as a result of the strengthening of the U.S. dollar compared to the NIS and the British Pound Sterling.
Corporate Tax Rate
The general corporate tax rate in Israel is 35% for the 2004 tax year, 34% for the 2005 tax year, 32% for the 2006 tax year and 30% for the 2007 tax year and thereafter. Our effective tax rate, however, was 23.9% in 2004, 24.6% in 2003, and 28.9% in 2002. We enjoy these lower effective tax rates primarily because of tax reductions to which we are entitled under Israels Law for Encouragement of Capital Investments, 1959, with respect to our investment programs that were granted the status of approved enterprise under this law. Under our approved enterprise investment programs, we are entitled to reductions in the tax rate normally applicable to Israeli companies with respect to income generated from our approved enterprise investment programs. We expect to continue to derive a portion of our income from our approved enterprise investment programs. We are also entitled to certain tax exemptions in connection with our approved enterprise investment programs. We cannot assure you that such tax benefits will be available to us in the future at their current levels or at all.
B. Liquidity and Capital Resources
We had cash and cash equivalents of approximately $91.4 million, $46.1 million and $28.4 million, as of December 31, 2004, 2003 and 2002, respectively. Our total cash and cash equivalents, short-term bank deposits and short- and long-term marketable securities amounted to approximately $111.9 million as of December 31, 2004, compared to $54.6 million as of December 31, 2003 and $34.0 million as of December 31, 2002. This increase of financial resources is primarily attributable to approximately $58.9 million of proceeds we received from a public offering of 3,450,000 of our ordinary shares, which we completed in May 2004. In January 2004, we acquired OMI for approximately $19.1 million, including related transaction expenses, of which approximately $13.7 million was paid in cash and the balance was paid in the form of our ordinary shares. In addition, during 2004 we acquired UNIT S.p.A. in Italy, DemandX Ltd., the distributor of OMIs products in Israel, and the operations of OMIs European distributor. Total cash spent on these additional acquisitions amounted to approximately $2.6 million.
Net Cash Provided by Operating Activities. Net cash provided by operating activities was approximately $6.2 million in 2004, primarily the result of net income of $6.0. Net cash provided by operating activities was approximately $11.7 million in 2003, primarily the result of net income of $8.3 million and an increase of $5.0 million in accounts payable and accruals, offset by a $2.9 million increase in accounts receivable due to growing sales and a $2.4 million decrease in deferred income taxes. Net cash provided by operating activities in 2002, was approximately $10.1 million, primarily the result of net income of $5.7 million and an increase of $4.5 million in accounts payable and accruals.
Net Cash Provided by/Used in Investing Activities. Net cash used in investing activities in 2004 was approximately $28.5 million, primarily attributable to cash spent on acquisitions of subsidiaries which amounted to approximately $16.3 million as well as investments in marketable debt securities held to maturity, net of maturity of such securities which amounted to approximately $10.0 million. Net cash used in investing activities in 2003 was approximately $3.2 million, primarily attributable to investments in marketable securities and acquisitions of fixed assets. Net cash provided by investing activities in 2002 was approximately $11.1, primarily attributable to the maturity of short-term bank deposits and proceeds from the sale of a portion of the dealership activity of one of our subsidiaries in the United States, net of investments in marketable securities and acquisitions of fixed assets.
Our capital expenditures (consisting of the purchase of fixed assets) were $1.8 million, $1.0 million and $1.7 in 2004, 2003 and 2002, respectively.
Net Cash Provided by/Used in Financing Activities. Net cash provided by financing activities in 2004 amounted approximately $67.4 million, primarily attributable to our public equity offering completed in May 2004, which yielded approximately $58.9 million in proceeds. An additional factor was the issuance of ordinary shares upon the exercise of options by employees, the proceeds from which amounted to $10.1 million. Net cash provided by financing activities in 2003 was approximately $9.2 million, primarily attributable to the issuance of ordinary shares upon the exercise of options by employees, long-term bank loans and short-term bank credit received and proceeds from the investment of Isracard in StoreNext Israel, net of the repayment of long-term bank loans. Net cash used in financing activities in 2002 was approximately $1.9 million, primarily attributable to the repayment of long-term bank loans net of proceeds from the issuance of ordinary shares upon the exercise of options by employees.
Public Offering in May 2004
We completed a public offering of 3,450,000 of our ordinary shares at a price to the public of $18.00 per share in May 2004. The proceeds of the offering, net of underwriting discount and other related expenses, amounted to approximately $58.9 million. To date, these proceeds have been invested in short-term bank deposits and investment-grade, interest-bearing securities.
As of December 31, 2004, we had the following outstanding bank debt obligations, most of the proceeds of which were incurred to finance acquisitions:
Subsidiaries Short-Term Bank Credit. As of December 31, 2004, one of our subsidiaries in the United States had unsecured lines of credit totaling $3.0 million from which, at that date, it had drawn down $2.0 million. The funds borrowed under this line of credit bear interest at the prime rate (5.25% as of December 31, 2004).
Other than the foreign currency forward contracts described below, we have no significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. We may be subject to concentrations of credit risk from financial balances, consisting principally of cash and cash equivalents, short-term bank deposits, trade and unbilled receivables and investments in marketable securities. We invest our cash and cash equivalents and marketable securities in U.S. dollar deposits with major Israeli and U.S. banks. We believe that the financial institutions that hold our investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.
Most of our revenue has historically been generated from a large number of customers. Consequently, the exposure to credit risks relating to trade receivables is limited. We perform ongoing credit evaluations of our customers and we generally do not require collateral. An appropriate allowance for doubtful accounts is included in our accounts receivable.
The fair value of the financial instruments included in our working capital is usually identical or close to their carrying value. The fair value of long-term receivables and long-term loans and other long-term liabilities also approximates the carrying value, since they bear interest at rates close to the prevailing market rates.
We have only limited involvement with derivative financial instruments. We carry out transactions involving foreign exchange derivative financial instruments (forward exchange contracts). These transactions do not qualify for hedge accounting under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
During 2003, we entered into one foreign currency forward contract for conversion of British Pounds Sterling into a notional amount of U.S. dollars of approximately $2.9 million. We renewed this contract three times during 2003 and four times during 2004. This contract was still outstanding as of December 31, 2004. During 2004, we entered into two foreign currency forward contracts for conversion of Euros into a notional amount of U.S. dollars of approximately $500,000 each. One of these two contracts was renewed and was still outstanding as of December 31, 2004. In addition, during 2004, we entered into a foreign currency forward contract for conversion of New Israeli Shekels into a notional amount of U.S. dollars of approximately $2.5 million, which was still outstanding as of December 31, 2004. The fair value of these outstanding contracts as of December 31, 2004 reflects a liability in the amount of $130,000, which was charged to financial expenses.
Our management believes that our financial reserves will be sufficient to fund our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, and the continuing market acceptance of our products. To the extent that our existing financial reserves and cash generated from operations are insufficient to fund our future activities, including investments in, or acquisitions of, complementary businesses, products or technologies, we may need to raise additional funds through public or private equity or debt financing.
Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets
Most of our sales are denominated in U.S. dollars or are dollar linked. However, a significant portion of our expenses, primarily expenses associated with employee compensation, is denominated in NIS unlinked to the dollar. A devaluation of the NIS in relation to the dollar has the effect of decreasing the dollar value of any asset of ours that consists of NIS or receivables payable in NIS, unless such receivables are linked to the dollar. Such devaluation also has the effect of reducing the dollar amount of any of our expenses or liabilities which are payable in NIS, unless such expenses or payables are linked to the dollar. Conversely, any increase in the value of the NIS in relation to the dollar has the effect of increasing the dollar value of any of our unlinked NIS assets and the dollar amounts of any of our unlinked NIS liabilities and expenses. In addition, some of our expenses, such as salaries for our Israeli based employees, are linked to some extent to the rate of inflation in Israel. An increase in the rate of inflation in Israel that is not offset by a devaluation of the NIS relative to the U.S. dollar can cause the dollar amount of our expenses to increase.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
Because exchange rates between the NIS and the dollar fluctuate continuously, albeit with a historically declining trend in the value of the NIS, exchange rate fluctuations and, in particular, larger periodic devaluations may have an impact on our profitability and period-to-period comparisons of our results. We believe that inflation in Israel and exchange rate fluctuations between the NIS and the dollar have not had a material effect on our results of operations.
Application of Critical Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles and does not require managements judgment in its application, while in other cases, managements judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to our financial results and to understanding our historical and future performance, as these policies relate to the more significant areas involving managements judgments and estimates.
Our revenue recognition policy is critical because our revenue is a key component of our results of operations. In addition, our revenue recognition policy determines the timing of certain expenses, such as commissions and royalties. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Should changes in conditions cause management to determine that these guidelines are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected (see Note 1.k to our consolidated financial statements included elsewhere in this annual report).
Bad debt and allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of certain of our customers to make required payments. We regularly evaluate the adequacy of our allowance for doubtful accounts by taking into account variables such as past experience, age of the receivable balance and current economic conditions of the party owing the receivable balance. If the financial conditions of certain of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowance for doubtful accounts may be required.
We operate in a number of countries and, as such, fall under the jurisdiction of a number of tax authorities. We are subject to income taxes in these jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on our balance sheet. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is provided for if it is more likely than not that some portion of the deferred tax assets will not be recognized. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business. In our opinion, sufficient tax provisions have been included in our consolidated financial statements in respect of the years that have not yet been assessed by tax authorities. On a quarterly basis, we also reassess the amounts recorded for deferred taxes and examine whether any amounts need to be added or released.
Our Functional Currency
Our consolidated financial statements are prepared in U.S. dollars in accordance with U.S. generally accepted accounting principles. The currency of the primary environment in which we operate is the U.S. dollar. We generally generate revenues in dollars or in NIS linked to the dollar. Our financing is also comprised primarily of dollar denominated loans. As a result, the dollar is our functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (stated below) reflected in the statements of income (loss), the following exchange rates are used: (1) for transactions exchange rates at transaction dates or average rates of the period reported and (2) for other items (derived from non-monetary balance sheet items such as depreciation and amortization, changes in inventories, etc.) historical exchange rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate.
The functional currency of UNIT and Cell-Time is their local currency (Euro and New Israeli Shekel, respectively). The financial statements of UNIT are included in our consolidated financial statements translated into dollars in accordance with FAS 52 Foreign Currency Translation of the FASB, or FAS 52. Accordingly, assets and liabilities are translated at year end exchange rates, while operating results items are translated at average exchange rates during the year. Differences resulting from translation are presented in shareholders equity under accumulated other comprehensive income (loss)".
The financial statements of Cell-Time are included in our financial statements under the equity method, based on translation into dollars in accordance with FAS 52; the resulting translation adjustments are presented under shareholders equity, in the item Accumulated other comprehensive income.
C. Research and Development, Patents and Licenses, Etc.
Research and Development
We believe that our research and development efforts are essential to our ability to successfully develop innovative products that address the needs of our customers as the market for enterprise-wide software solutions evolves. In particular, we intend to continue to invest significant resources in developing new ReMA applications for use in our enterprise solution as well as our growing ASP and e-marketplace initiatives, in upgrading our existing applications to be web-browser enabled based on a thin client architecture, similar to our StoreLine.Net solution, and in developing a next generation, web-based version of OMIs warehouse management applications and integrating these applications with ReMA. As of December 31, 2004, our research and development staff consisted of 424 employees, of whom 246 were located in Israel and the remaining 178 primarily in the United States.
We have no patents or patent applications pending. Our success and ability to compete are dependent in part on our proprietary technology. We rely on a combination of copyright, trademark and trade secret laws and non-disclosure agreements to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property.
The protective steps we have taken may be inadequate to deter misappropriation of our technology and information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Any licenses for any intellectual property that might be required for our software solutions may not be available on reasonable terms.
Grants from the Office of the Chief Scientist
From time to time we receive grants under programs of the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the Government of Israel. The amount of grants of the Office of the Chief Scientist recognized in our statement of operations for the year ended December 31, 2004 was approximately $298,000. This governmental support is conditioned upon our ability to comply with certain applicable requirements and conditions specified in the Chief Scientists program and with the provisions of the Law for the Encouragement of Research and Development in the Industry, 1984, and the regulations promulgated thereunder, or the Research and Development Law.
Under the Research and Development Law, research and development programs that meet specified criteria and are approved by the research committee of the Office of the Chief Scientist are eligible for grants of up to 50% of certain approved expenditures of such programs, as determined by said committee.
In exchange, the recipient of such grants is required to pay the Office of the Chief Scientist royalties from the revenues derived from products incorporating know-how developed within the framework of each such program or derived therefrom (including ancillary services in connection therewith), up to an aggregate of 100% of the dollar-linked value of the total grants received in respect of such program, plus interest, or up to 150% thereof in the case of some of our earliest programs. The royalty rates applicable to our programs range from 3% to 5%.
The Research and Development Law generally requires that the product developed under a program be manufactured in Israel. However, upon the approval of the Chief Scientist, some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased to 120%, 150% or 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. Effective April 1, 2003, the Research and Development Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the Office of Chief Scientist whether to approve a program and the amount and other terms of benefits to be granted. For example, the increased royalty rate and repayment amount might be required in such cases.
The Research and Development Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the research committee. Such approval is not required for the sale or export of any products resulting from such research or development. The Research and Development Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel.
The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the Office of the Chief Scientist of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the Office of the Chief Scientist to comply with the Research and Development Law. In addition, the rules of the Office of the Chief Scientist require prior approval (and not only notification) in respect of certain of such events. For this purpose, control is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. Means of control refers to voting rights or the right to appoint directors or the chief executive officer. An interested party of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the Office of the Chief Scientist that it has become an interested party and to sign an undertaking to comply with the Research and Development Law.
Draft legislation was submitted in December 2004 by the Israeli government proposing an amendment to the Research and Development Law to make it more compatible with the global business environment by, among other things, relaxing restrictions on the transfer of manufacturing rights outside Israel and on the transfer of Chief Scientist funded know-how outside of Israel. As described above, currently, the Research and Development Law permits the Chief Scientist to approve the transfer of manufacturing rights outside Israel, in consideration of payment of higher royalties. The proposed amendments further permit the Chief Scientist, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for substitute manufacturing of other products being performed in Israel, in lieu of the increased royalties. The proposed amendment further enables, under certain circumstances and subject to the Chief Scientists prior approval, the transfer of Chief Scientist-funded know-how outside Israel, in consideration of payment of a portion of the sale price (according to a formula calculated in proportion to the Chief Scientists investment in the grantee minus depreciation), or in exchange for know-how and cooperation in research and development with non-Israeli companies, without any additional payment to the Chief Scientist. Currently, the proposed amendment is awaiting discussion in the Finance Committee of the Israeli parliament and there can be no certainty as to if and when such proposed legislation will actually be finalized into law and what provisions will be contained in any law that is adopted.
The funds available for Office of the Chief Scientist grants out of the annual budget of the State of Israel were reduced in 1998, and the Israeli authorities have indicated in the past that the government may further reduce or abolish Office of the Chief Scientist grants in the future. Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
D. Trend Information
Other than as discussed elsewhere in Item 4.B and this Item 5, we do not have relevant trend information.
E. Off Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
The following table presents further information relating to our liquidity as of December 31, 2004:
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below is information concerning our executive officers and directors as of December 31, 2004.
Barry Shaked is one of our founders and has served as our President, Chief Executive Officer and Chairman of the Board since our inception in April 1982. From August 1975 to February 1979, Mr. Shaked served as an officer in the Israeli Defense Forces. He attended the Computer Science School of Bar-Ilan University from 1980 to 1983.
Danny Moshaioff has served as an Executive Vice President and our Chief Financial Officer since December 1999. From July 1997 to December 1999, Mr. Moshaioff served as Chief Financial Officer of Blue Square ISR and from September 1995 to June 1997, he served as General Manager of Mashbir Mazon. Mr. Moshaioff has served as a director in Neviot Ltd. since January 2004. Mr. Moshaioff received a B.A. in Economics and Statistics from the Hebrew University in 1970 and an M.B.A. from New York University in 1972.
Avinoam Bloch has served as our Executive Vice President, Chief Operations Officer International Business since January 2005. From January 2002 until January 2005, Mr. Bloch served as Executive Vice President, Products. From January 2000 until January 2002, Mr. Bloch served as Executive Vice President, Operations. From February 1993 to January 2000, Mr. Bloch served as Vice President, Engineering responsible for Israeli markets and new technology software development. From December 1988 to January 1993, Mr. Bloch served as a Product Manager for Wincor-Nixdorf and Wincor-Nixdorf Italy. He served as a Programmer and Product Manager from January 1986 to December 1998. Mr. Bloch served as an officer in the Israeli Defense Forces from 1975 to 1979. Mr. Bloch received a B.Sc. in Computer Science and Mathematics from the Hebrew University in 1993.
Yoni Stutzen has served as our Executive Vice President, International Sales since January 2004, and served as our Vice President, International Sales from December 1998 until December 2003. He served as our Vice President, Marketing from August 1994 through December 1998. Mr. Stutzen served as a Marketing Manager for Manof Communications from January 1985 to July 1994 and as international SWIFT systems manager for Bank Hapoalim from January 1980 until December 1984. Mr. Stutzen received a B.Sc. in Industrial and Management Engineering from the Technion, Israel Institute of Technology in 1974.
Saul Simon has served as our Vice President, Business Development and CRM Products since January 2004, and served as our Vice President, Business Development from November 1997 until December 2003. Mr. Simon served as Vice President, U.S. Activities for Adapt Technologies from March 1993 to June 1997. Mr. Simon received a B.Sc. in Computer Science and Mathematics from Tel Aviv University in 1982.
Elhanan (Elli) Streit has served as an external director since March 2000. Since January 1999, Mr. Streit has been a managing director of PFM International Access Limited. Mr. Streit served as the Director of the Friends Association at the Israel Museum from July 1996 through July 1998 and as a managing director at Dizengoff West Africa from August 1991 through January 1996. Mr. Streit served as an independent director in Advantech Ltd. from April 2000 to December 2002 and as a director of Primode Ltd. from September 2000 to December 2004. He received a B.A. in Economics and Political Science from the Hebrew University in 1963 and an M.B.A. from the Wharton School at the University of Pennsylvania in 1965.
Ilan Horesh has served as an external director since March 2000. Since November 1998, Mr. Horesh has been a director of system projects at Pelephone Communications Ltd. From December 1997 to November 1998, Mr. Horesh was Chief Executive Officer at Shefa The Customers Club of Maccabi Health Services and, from January 1994 to December 1997, Mr. Horesh was a planning and development executive at PAZ Oil Corporation. He received a B.A. in History from Tel Aviv University in 1984, an M.A. in Political Science from Haifa University in 1990 and an M.A. in Business Management from Tel Aviv Management College in 1996.
Sigal Hoffman has served as a director since May 2004. Ms. Hoffman has worked as an attorney in private practice since 1995. Ms. Hoffman has a B.A. degree in Social Work, an M.B.A. in Educational Consulting and an LL.B. in law from Tel-Aviv University.
Brian Cooper has served as a director since August 1984. From December 1999 to June 2001, Mr. Cooper served as our Vice President, Israeli operations. Mr. Cooper also served as our Chief Financial Officer from August 1984 until December 1999. From 1979 to 1984, Mr. Cooper served as an officer in the Israeli Defense Forces as an economist and programmer. Mr. Cooper has been a director of YCD Multimedia Ltd. since June 2003. Mr. Cooper received a B.A. in Economics from Haifa University in 1977.
Ian OReilly has served as a director since November 2000. Mr. OReilly serves as a director of e-Daily and the Cambridge Building Society and served as a Group IT Manager at Tesco Stores Ltd. between 1991 and 2000. He received a British Computer Society Qualification from the Cambridge College of Arts and Technology in 1972.
Amnon Lipkin-Shahak has served as a director since April 2002. Since May 2001, Mr. Lipkin-Shahak has served as the chairman of the board in the TAHAL Group, and as a director in the Kardan Group, Granit Hacarmel and NILIT, and as the chairman of the Bountiful Israel Council. Between May 1999 and March 2001, Mr. Lipkin-Shahak served as a member of the Israeli parliament (the Knesset). During most of this period, Mr. Lipkin-Shahak served as a cabinet minister in charge of transport (between July 2000 and March 2001) and in charge of tourism (between July 1999 and July 2000). In December 1998, Mr. Lipkin-Shahak retired from his position as the Chief of Staff of the Israeli Defense Forces after thirty-six years of service in the Israeli army.
The aggregate accrued compensation of all the persons as a group who served in the capacity of a director or an executive officer during the year ended December 31, 2004, was approximately $1.5 million. This amount includes pension, retirement and similar benefits in the aggregate amount of $99,000. This does not include amounts expensed by us for business travel, professional and business associated dues and business expense reimbursements.
Under our articles of association, no director may be paid any remuneration by us for his services as director except as may be approved pursuant to the provisions of the Companies Law, which require the approval of our audit committee, followed by the approval of our board of directors and then the approval of our shareholders.
Our external directors receive annual compensation of approximately $7,600 each and in addition $280 per board meeting or per board committee meeting in which they participate, and $170 per such meeting by telephone in which they participate.
In addition, Mr. Barry Shaked, our Chairman and Chief Executive Officer, is entitled to receive a bonus based on our attainment of certain performance milestones. For the first million dollars of our net income earned, he is entitled to receive a bonus of $65,000. For each subsequent million dollars of our net income, he is entitled to receive an additional bonus, which is to be $5,000 less than the prior bonus level, down to $35,000 for seven million dollars of net income and for each million dollars earned thereafter.
As compensation for his services to us, Mr. Shaked is entitled to receive, at the beginning of each calendar year, options to purchase a number of our ordinary shares equal to 1.0% of our then outstanding ordinary shares. One-third of these options will become exercisable on each of the first three anniversaries of the date of grant. According to this arrangement, in January of 2004 and January 2005, Mr. Shaked was granted options to purchase a total of up to 129,767 and 176,556 of our ordinary shares, respectively, at exercise prices of $23.19 and $21.86 per share, respectively. One-third of the options granted in 2004 became exercisable on January 1, 2005, and the remaining two-thirds will be exercisable in two equal portions from January 1st of each of the years 2006 and 2007. Similarly, one-third of the options granted in 2005 will be exercisable from January 1st of each of the years of 2006, 2007 and 2008. The expiration dates of these options are December 31, 2007 and 2008, respectively.
According to our employment agreement with Mr. Shaked, he is entitled to severance pay equal to one months salary for every year of employment. In addition, he is entitled to full compensation and benefits during the first three month period following termination of employment in exchange for post-termination cooperation during such period, and to full compensation and benefits also during the second three month period following termination of employment in exchange for post employment consulting during such period, and an additional payment equal to five months salary in the event of termination of employment, other than by us for cause.
In October 2002, the shareholders of the Company approved the replacement of the employment agreement with Mr. Shaked, with a management agreement with a private company controlled by Mr. Shaked. This arrangement has not changed in any material respect the previous terms of employment, including the terms described above.
Our employment agreements with most of our employees located in Israel, including executive officers and those that are also members of our board of directors, provide for standard Israeli benefits, such as managers insurance and an educational fund. We make payments under these programs as follows: pension 5.0% of gross salary; severance pay 8.33% of gross salary; disability insurance up to 2.5% of gross salary (all of which are considered part of managers insurance); and educational fund 7.5% of gross salary. The total amount we expensed in 2004 under these arrangements for all executive officers as a group was approximately $95,000.
During 2004, all our directors and executive officers as a group, were granted options to purchase an aggregate of 246,434 shares under our stock option plans. The exercise prices of these options range from $16.52 to $23.19, and their expiration dates range from December 31, 2007 to June 30, 2008. Of these options, 50,000 became exercisable prior to December 31, 2004, 43,256 became exercisable on January 1, 2005, 22,223 will become exercisable on December 31, 2005, 43,256 will become exercisable on January 1, 2006, 22,222 will become exercisable on December 31, 2006, 43,255 will become exercisable on January 1, 2007 and 22,222 will become exercisable on December 31, 2007.
C. Board Practices
Our articles of association provide for a board of directors of not less than three and not more than ten directors. Each director is elected at the annual general meeting of shareholders and holds office until the election of his successor at the next annual general meeting, except for external directors, who, subject to the provisions of the Companies Law, hold office for one or two three-year terms. In addition, any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may be filled by a vote of a simple majority of the directors then in office. A director elected thereby may serve on the board of directors until the next annual general meeting. Our officers serve at the discretion of the board of directors. There are no family relationships among our directors and executive officers.
According to the Companies Law, a companys chairman of the board may not serve as its chief executive officer, unless otherwise approved by the shareholders for periods of up to three years. The required shareholder approval is a majority of the shares voted on the matter, including at least two-thirds of the shares of non-controlling shareholders voted on the matter. Barry Shaked, one of our founders, has served as our president, chief executive officer and chairman of the board since our inception in 1982. His most recently approved three-year period expires in 2007.
The Companies Law and Nasdaq listing requirements require us to appoint an audit committee of the board and permit the creation of other committees. Currently, the audit committee and an investment committee are our only board committees.
A majority of the members of our board of directors and all of the members of our audit committee are independent directors, as defined under the rules of Nasdaq.
Our articles of association provide that any director may appoint, by written notice to the Company, an alternative director for himself, provided that such person satisfies the applicable requirements of the Companies Law. A person may not act as an alternate director for more than one director, and a person serving as a director may not serve as an alternate director. Any alternate director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint an alternate. The alternate director may not act at any meeting at which the director appointing him or her is present. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes and for an indefinite time, but expires upon the expiration of the appointing directors term. To our knowledge, no director currently intends to appoint any person as an alternate director, except if the director is unable to attend a meeting of the board of directors.
Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint two individuals as external directors. Any individual who is eligible to be appointed as a director may be appointed as an external director, provided that such person, or the persons relative, partner, employer or any entity under the persons control does not have at the date of appointment, or has not had during the two years preceding the date of appointment, any affiliation with:
The term affiliation means any of:
No person can serve as an external director if the persons position or other business creates or may create a conflict of interest with the persons responsibilities as an external director, or if it may adversely affect his ability to serve as a director. Until the lapse of two years from termination of office, a company may not engage an external director to serve as an office holder, employee or service provider, either directly or indirectly, including through a corporation controlled by that person.
External directors are elected by a majority vote at a shareholders meeting, provided that either:
The initial term of an external director is three years and such director may be reappointed for an additional three years. Each committee of a companys board of directors that is authorized to carry out a power of the board of directors is required to include at least one external director. Pursuant to the provisions of the Companies Law, we elected two external directors, Elli Streit and Ilan Horesh.
An external director is entitled to compensation as provided in regulations under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly from us. We do not have, nor do our subsidiaries have, any directors service contracts granting to the directors any benefits upon termination of their service in their capacity as directors, except for Mr. Shaked who would be entitled to certain benefits upon termination of his agreement with us as described above in Item 6B Compensation.
Under the Companies Law, the board of directors of a public company must appoint an audit committee, comprised of at least three directors, including all of the external directors, but excluding the chairman of the board of directors and a controlling shareholder or a relative of a controlling shareholder and any director employed by the company or who provides services to the company on a regular basis. The role of the audit committee under Israeli law is to examine flaws in the management of the companys business, including by consultation with the internal auditor and the companys independent accountants, and recommend remedial action. In addition, the approval of the audit committee is required to effect certain related party transactions.
Under the Companies Law, an audit committee may not approve an action or a transaction with a related party or with an office holder unless at the time of approval the two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which any approval was granted.
Under Nasdaq rules, our audit committee, operatory under a written charter, assists the board in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. Our audit committee also has the authority and responsibility to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees. Under Israeli law, our shareholders have the authority to appoint and remove our independent auditors.
The members of our audit committee are Ian OReilly, Elli Streit, Ilan Horesh and Brian Cooper.
On February 11, 2004, our board of directors established an investment committee. The investment committee is authorized to determine policies with respect to investing our financial reserves based on prevailing financial and economic conditions and our ongoing needs. The members of our investment committee are Ilan Horesh and Brian Cooper.
Under the Companies Law, our board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine whether the companys actions comply with the law, integrity and orderly business procedure. The internal auditor has the right to request that the chairman of the audit committee convene an audit committee meeting, and the latter shall convene such a meeting if he believes that there are grounds to do so. The internal auditor may participate in all audit committee meetings. Under the Companies Law, the internal auditor may not be an interested party, an office holder, or a relative of either, nor may the internal auditor be the companys independent accountant or its representative. The internal auditor may not be dismissed without the approval of the board of directors after it has received the position of the audit committee and after the internal auditor has been given a reasonable opportunity to be heard by the board of directors and the audit committee. Our internal auditor since June 2004 is Pahn Kanne Management and Control Ltd. (Grant Thornton), which replaced Moshe Avraham, our former internal auditor since 1994.
Set forth are tables presenting breakdowns of the total amount our employees according to category of activity and according to main geographical locations of employment:
None of our employees are represented by unions. We consider our relationship with our employees to be good and have not experienced any interruptions due to labor disputes.
E. Share Ownership
Mr. Barry Shaked, our President, Chief Executive Officer and Chairman of our board of directors, holds, as of February 28, 2005, 1,021,248 of our ordinary shares, which equals approximately 5.8% of our issued share capital.
Mr. Brian Cooper, a director and our former Vice President, holds, as of February 28, 2005, 885,287 of our ordinary shares, which equals approximately 5.0% of our issued share capital.
No other director or executive officer beneficially owns 1% or more of our issued share capital.
Other of our directors and executive officers hold as of February 28, 2005, a total of 37,538 of our ordinary shares, which equals approximately 0.2% of our issued share capital.
In addition, as of February 28, 2005, Mr. Shaked held options to purchase a total of up to 425,360 of our ordinary shares granted to him on January 1, 2002, January 1, 2003, January 1, 2004 and January 1, 2005 pursuant to a shareholders resolution dated May 28, 1998, authorizing the grant to him, on January 1 of each year, of options to purchase one percent of our issued capital. The exercise price for each share according to this resolution is the Nasdaq closing price on December 31 of the year ending just before the date of grant. These options are exercisable as follows: 33% starting one year following the date of grant; 33% starting two years following the date of grant; and 34% starting three years following the date of grant.
The above options held by Mr. Shaked were granted on the following principal terms:
Our Share Option Plans
Second 1998 Share Option Plan
Our Second 1998 Share Option Plan, or Second 1998 Plan, provides for the granting of incentive share options to employees, and for the granting of non-statutory options to employees, directors and consultants. Unless terminated sooner, the Second 1998 Plan will terminate automatically in May 2008. As of February 28, 2005, options to purchase 5,158,552 ordinary shares have been granted under the Second 1998 Plan, out of which options to purchase 2,148,989 (excluding options already exercised or expired) ordinary shares were exercisable, and 609,600 ordinary shares remained available for future grants. These figures include options to purchase 400,000 ordinary shares granted under our Second 1998 Plan in May 2004, at an exercise price of $18.56 of which one third vested on December 31, 2004, and the remaining two thirds shell vest in three equal portions on December 31, 2005, December 31, 2006 and December 31, 2007. These options will expire on June 30, 2008. As of February 28, 2005, 2,241,411 options granted under our Second 1998 Plan have been exercised.
The Second 1998 Plan may be administered by our board of directors or by one or more committees of our board of directors. Under Section 112 of the Companies Law, a committee of the board of directors may only advise our board of directors with regard to the grant of options, and the actual grant must be carried out by our board of directors. The committee will, in the case of options intended to qualify as performance-based compensation within the meaning of Section 162(m) of the U.S. Internal Revenue Code, consist of two or more outside directors within the meaning of Section 162(m) of the Code. The plan administrator has the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the exercisability of the option and the form of consideration payable upon such exercise. Our board of directors has the authority to amend, suspend or terminate the Second 1998 Plan, provided that no such action may affect any ordinary share previously issued and sold or any option previously granted under the Second 1998 Plan.
Options granted under our Second 1998 Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the Second 1998 Plan must generally be exercised within three months of the end of the optionees status as our employee or consultant or within twelve months after such optionees termination by death or disability, but in no event later than the expiration of the options term. The exercise price of all incentive and nonstatutory share options granted under the Second 1998 Plan must be at least equal to the fair market value of our ordinary shares on the date of grant, except in the event of options granted in connection with certain merger and acquisition transactions. With respect to any participant who owns shares possessing more than 10% of the voting power of all classes of our outstanding share capital, the exercise price of any incentive share option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive share option must not exceed five years. The term of all other options granted under the Second 1998 Plan may not exceed ten years. Some holders of share options granted under the Second 1998 Plan are entitled to participate in rights offerings that may be made by us to our shareholders.
Our Second 1998 Plan provides that in the event we merge with or into another corporation or sale of substantially all of our assets, each outstanding option will be assumed or an equivalent option will be substituted by the successor corporation. If the successor corporation refuses to assume or substitute for our options as described in the preceding sentence, the options will terminate as of the closing.
2004 Israeli Share Option Plan
Our 2004 Israeli Share Option Plan provides for the granting of options to employees, directors and consultants under either Section 102 or Section 3(9) of the Israeli Income Tax Ordinance. As of February 28, 2005, options to purchase 600,000 ordinary shares had been granted under the 2004 Israeli Share Option Plan at an exercise price of $18.56, of which one-third vested on December 31, 2004 and the remaining two-thirds will vest in three equal portions on December 31, 2005, December 31, 2006 and December 31, 2007. These options will expire on June 30, 2008. These granted options are all subject to the capital gains taxation route under Section 102 of the Income Tax Ordinance [New Version], 1961 , which generally provides, subject to the fulfillment of certain procedures and conditions for a reduced tax rate of 25% on gains realized upon the exercise of options. As of February 28, 2005, 2,066 options granted under our 2004 Israeli Share Option Plan have been exercised.
The 2004 Israeli Share Option Plan is administered by our board of directors or by a share incentive committee or other committee of the board, subject to applicable law. Under Section 112 of the Companies Law, a committee of the board of directors may only advise our board of directors with regard to the grant of options, and the actual grant must be carried out by our board of directors. The plan administrator has the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the exercisability of the option and the form of consideration payable upon such exercise. In the event of a merger or sale of substantially all of our assets or stock, our board or a committee administrating the plan has discretion as to whether to cause outstanding options to be assumed by the successor company, substituted for successor company options or automatically vested in full. Subject to applicable law and regulations, our board of directors has the authority to amend, suspend or terminate the 2004 Israeli Share Option Plan, provided that no such action may affect any ordinary share previously issued and sold or any option previously granted under the plan.
Options granted under our 2004 Israeli Share Option Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 2004 Israeli Share Option Plan may generally be exercised in circumstances of termination by the grantee until the termination date and in certain circumstances in which the termination was initiated by the employer, within a period of fifteen days following termination, or within six months after such optionees termination by death or disability, but in no event later than the expiration of the options term and all to the extent that such options are vested at such dates. The term of other options granted under the 2004 Israeli Share Option Plan may not exceed ten years.
Stock Option Plan of a Subsidiaries
On December 4, 2000, the board of directors of one of our subsidiaries, StoreAlliance.com Ltd., approved an employee stock option plan. Pursuant to this subsidiary plan, as of February 28, 2005, 270,000 ordinary shares, or approximately 7.7% of the issued and outstanding share capital of the subsidiary as of such date, are reserved for issuance upon the exercise of options granted to some of our and the subsidiarys employees. In addition, in connection with an investment agreement signed on December 31, 2000, options to purchase 90,000 ordinary shares, were granted to one of the minority shareholders of this subsidiary. The options vest as follows: 33.33% after the first year after their grant, another 33.33% after the second year and another 33.33% after the third year, but only during the period the employee is employed either by us or by the subsidiary. In addition, the options are not exercisable prior to the earliest of the following events: (1) the consummation of a public offering of the subsidiarys securities, (2) a merger of the subsidiary and (3) seven years from the date of grant. Any vested options not exercised within the later of 90 days of (a) the end of the optionees status as our or the subsidiarys employee, or (b) the first to occur of such exerciseability events, will expire. The rights of ordinary shares obtained upon exercise of the options will be identical to those of the other ordinary shares of the subsidiary. Any option not exercised within 10 years of the grant date thereof will expire. Some of the options under the subsidiary plan are subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance. Among other things, the Ordinance provides that the subsidiary will be allowed to claim as an expense for tax purposes the amounts credited to the employees as a benefit, when the related tax is payable by the employee. As of February 28, 2005, options to purchase 323,922 ordinary shares of the subsidiary were outstanding under the subsidiary plan, at exercise prices ranging from NIS0.01 per share to $5.55 per share. The rest of the above options were forfeited.
On November 23, 2004, the board of directors of StoreAlliance.com Ltd. approved an additional employee stock option plan. Pursuant to this Plan, options to purchase 36,000 ordinary shares, NIS 0.01 par value, were granted on December 31, 2004, to certain employees of the subsidiary all subject to the capital gains taxation route under Section 102 of the Income Tax Ordinance [New Version], 1961. All options granted under this plan bear an exercise price of $5.55 per share and vest as follows: 33.33% after the first year, another 33.33% after the second year and another 33.33% after the third year (in cases where the optionee is an employee of Retalix or its subsidiary provided that the employee is still employed by Retalix or its subsidiary at the date of vesting). In addition, the options are not exercisable prior to: (1) the consummation of an initial public offering of the subsidiarys securities; (2) a merger of the subsidiary; or (3) seven years from the date of grant.
On December 1, 2004, the board of directors of our subsidiary StoreNext USA approved an employee stock option plan. Pursuant to this plan, options to purchase up to 1,500,000 shares, of StoreNext USA, may be granted to employees and service providers of the subsidiary or any affiliate. In addition, the plan stipulates that options, may not be exercised prior to: (1) the conversion of the corporate entity of StoreNext USA from a limited liability company, to a C-corporation; or (2) the consummation of an initial public offering of StoreNext USAs securities; or (3) a merger or a significant change of control in StoreNext USA; or (4) five years from the date of grant.
On December 14, 2004, StoreNext USA granted options to acquire 1,169,000 of its shares, of which 639,000 options were granted to its employees and 530,000 options were granted to employees of affiliates. These options bear an exercise price of $0.3748 per share, which reflects the market value according to an independent valuation. These options will fully vest seven years from grant or upon an initial public offering or change of control or, in the option committees discretion, accelerated vesting in the event of a merger, a sale or a disposition. In addition, these options will vest upon an initial public offering of the majority interest of StoreNext USA. The options will terminate and expire ten years from grant.
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTION
A. Major Shareholders
The following table sets forth, as of February 28, 2005, certain information known to us with respect to beneficial ownership of our ordinary shares by (1) each shareholder known by us to be the beneficial owner of five percent or more of our ordinary shares and (2) all of our executive officers and directors as a group. As of February 28, 2005, 17,655,584 of our ordinary shares were outstanding.
As of February 28, 2005, 6,246,235 of our ordinary shares were held in the United States, by 2 record holders with mailing addresses in the United States, owning an aggregate of approximately 35.4% of our outstanding ordinary shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
B. Related Party Transactions
C. Interests of Expert and Counsel
ITEM 8 FINANCIAL INFORMATION
See Item 18.
P.O.S. Restaurant Solutions Ltd.
In August 2000, we, together with our subsidiary P.O.S. (Restaurant Solutions) Ltd., or PRS, filed a claim with the Tel-Aviv District Court for injunctions, accounting records and damages (evaluated, for the purpose of computing court fees, at NIS 3,000,000, or approximately $660,000) against two former employees and directors of PRS who currently own the minority interest in PRS. This claim alleges that the defendants caused us and PRS severe damages due to the manner of their conduct as employees and directors of PRS and by developing software that infringed on our rights. On November 2004, the Supreme Court ruled that some of the causes of action in the claim are under the Tel-Aviv District Courts jurisdiction and some are under the Tel-Aviv District Labor Courts jurisdiction
The parties have agreed on a joint proceeding arrangement according to which the abovementioned suits would be filed only after a decision of the Tel-Aviv District Court will be granted as to whether to recognize the claim described below as a derivative claim.
In April 2001, these minority shareholders of PRS filed a claim in the Tel-Aviv District Court against PRS and against usin the amount of approximately $500,000 in respect of sums they claim they are entitled to as shareholders of PRS. In addition, they filed a motion that the claim be recognized as a derivative claim of PRS against us for payment of an alleged debt in the amount of approximately $3,500,000. In March 2003, we filed an amended statement of defense as well as a counterclaim. This claim and this motion are pending.
In March 2005, the Tel-Aviv District Court has ruled that the above claim will not be recognized as a derivative claim.
In July 2002, directors of PRS appointed by the minority shareholders filed a motion in the Tel-Aviv District Court against PRS and its other directors, requesting a court order to disclose certain information that will enable them to establish the sum of a debt claimed by us from PRS. After being added as a party, we filed a motion to dismiss the suit, which is pending.
Another claim filed by one of the minority shareholders in August 2000, in regard to compensation and leave redemption is still pending in the Tel-Aviv District Labor Court.
We believe that we have meritorious defenses against these claims.
Retail Control Systems Inc.
In 1998, prior to our acquisition of RCS, a legal claim was filed in the Court of Common Pleas of Allegheny, Pennsylvania, against RCS by a customer for an amount of approximately $1,300,000, including consequential damages and loss of revenue. The claim alleges that RCS breached its contractual obligation to the claimant and fraudulently misrepresented facts concerning the product sold to the claimant.
An additional legal claim filed against RCS in the Circuit Court of the Seventeenth Judicial Circuit, County of Winnebago, Illinois, prior to its acquisition by us, by a dealer who sold one of RCSs products early in 1994, states that promised features and enhancements were never delivered. The damages claimed in this suit are in excess of $200,000.
These claims are handled by RCSs errors and omissions insurers. The limit of liability under the relevant errors and omissions insurance policy was $1,000,000 per claim and in aggregate. We believeRCS has meritorious defenses against these claims.
In December 2002, a legal claim for the total amount of approximately $240,000 was filed in the Magistrate Court of Beer-Sheva against our subsidiary PalmPoint, by a local customer. The claim alleges damages caused by services and products not duly provided by PalmPoint. In February 2003, PalmPoint filed a statement of defense that rejects the claim in its entirety.
The management of PalmPoint is of the opinion that PalmPoint has meritorious defenses against the claims.
In October 2003, Leumi Card Ltd. by letters addressed to StoreAlliance and its directors, complained that StoreAlliance breached an understanding it allegedly had with Leumi Card in regard to the execution of a transaction involving an investment by Leumi Card in StoreAlliance and further business cooperation between the parties. To date, no legal procedures have been instituted against StoreAlliance in connection with this claim. Based on the advice of our legal counsel, we believe that we have meritorious defenses against the claim.
In addition, in November, 2003, Leumi Card filed a legal claim in the Magistrate Court of Tel-Aviv against Cell-Time an associated company of ours, alleging that Cell-Time breached an understanding regarding business cooperation between the parties and in addition that Cell-Time conducted negotiations in regard to the above cooperation with the claimant in an improper manner. Furthermore, Leumi Card requested the court to enforce a draft contract exchanged between the parties as a binding agreement and to cancel an agreement pursuant to such business cooperation signed by Cell-Time with a third party. In January 2004, the parties agreed in court to continue negotiations in regard to further business cooperation and the claimant withdrew its claim without prejudice. To date, no additional proceedings have been exercised against Cell-Time in this context.
We are parties to several other claims filed against us by former customers and service providers. In the opinion of the management, these claims are of sums that are not material to us either individually or in the aggregate.
Since 1995, we have not paid cash dividends on our ordinary shares, and we do not intend to pay cash dividends in the foreseeable future. Our board of directors is authorized to declare dividends, subject to applicable law. Dividends may be paid only out of profits and other surplus, as defined in the Companies Law, as of the end of the most recent financial statements or as accrued over a period of two years, whichever is higher. Alternatively, if we do not have sufficient profits or other surplus, then permission to effect a distribution can be granted by order of an Israeli court. In any event, a distribution is permitted only if there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with non-Israeli currency may be freely repatriated in such non-Israeli currency.
ITEM 9 THE OFFER AND LISTING
A. Offer and Listing Details
Our ordinary shares have been quoted on the Nasdaq National Market under the symbol RTLX since July 1998. Our ordinary shares have also been quoted on the Tel Aviv Stock Exchange since November 1994.
The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares, as reported on the Nasdaq National Market.
The following table sets forth, for the periods indicated, the high and low closing prices in New Israeli Shekels, or NIS, of our ordinary shares on the Tel Aviv Stock Exchange.
B. Plan of Distribution
Our ordinary shares are quoted on the Nasdaq National Market under the symbol RTLX, and are quoted on the Tel Aviv Stock Exchange under the symbol RETALIX.
D. Selling Shareholders
F. Expenses of the Issue
ITEM 10 ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
Our memorandum of association and articles of association were amended on May 10, 2001. The following is a summary description of certain provisions of our amended memorandum of association and articles of association, and certain relevant provisions of the Israel Companies Law which apply to us:
We were first registered with the Israeli Registrar of Companies on March 5, 1982, as a private company. On November 7, 1994, we became a public company, and were assigned Public Company Number 520042029.
Objects and Purposes
Our objects and purposes include a wide variety of business purposes, and are set forth in detail in Section 2 of our memorandum of association, previously filed with the Securities and Exchange Commission.
We are authorized to issue 25,000,000 ordinary shares par value NIS 1.0 per share, of which 17,655,584 ordinary shares were outstanding as of February 28, 2005.
According to our articles of association, our board of directors is to consist of not less than three and not more than ten directors, such number to be determined by a resolution of our shareholders.
Election of Directors
Directors, other than external directors, are elected by our shareholders at our annual general meeting of shareholders, or, in the event of vacancies, by our board of directors. In the event that any directors are appointed by our board of directors, their appointment is required to be ratified by the shareholders at the next shareholders meeting following the appointment. Our shareholders may remove a director from office. There is no requirement that a director own any of our shares or retire at a certain age.
Remuneration of Directors
Remuneration of directors is subject to the approvals required under the Companies Law.
Powers of the Board of Directors
Our board of directors may resolve to take action by a resolution approved by a vote of a simple majority of the directors then in office and lawfully entitled to participate in the meeting and vote on the matter and who are present when such resolutions is put to a vote and voting thereon, provided that a quorum is constituted at the meeting. A quorum at a meeting of our board of directors requires the presence, in person or by any other means of communication by which the directors can hear each other simultaneously, of at least three of the directors then in office and who are lawfully entitled to participate in the meeting and vote on the matters brought before the meeting. Our board of directors may elect one director to serve as the Chairman of the board of directors to preside at the meetings of the board of directors, and may also remove such director or a chairman.
The oversight of the management of our business is vested in our board of directors, which may exercise all such powers and do all such acts as we are authorized to exercise and do, and are not, by the provisions of our articles of association or by law, required to be exercised or done by our shareholders. Our board of directors may, in its discretion, cause our company to borrow or secure the payment of any sum or sums of money for the purposes of our company, at such times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the our property, both present and future, including our uncalled or called but unpaid capital for the time being.
Dividend and Liquidation Rights
Our board of directors is authorized to declare dividends, subject to applicable law. Dividends on our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of the end of the most recent financial statements or as accrued over a period of two years, whichever is higher. Alternatively, if we do not have sufficient profits or other surplus, then permission to effect a distribution can be granted by order of an Israeli court. In any event, a distribution is permitted only if there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Dividends may be paid in cash or other property.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. Dividends and liquidation rights may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Our articles of association allow us to create redeemable shares, but at the present time, we do not have any redeemable shares.
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances.
The duty of care of an office holder includes a duty to use reasonable means to obtain:
The duty of loyalty of an office holder includes a duty to:
Under the Companies Law, the approval of the board of directors is required for all compensation arrangements of office holders who are not directors. Under the Companies Law, directors compensation arrangements require the approval of the audit committee, the board of directors and the shareholders, in that order.
Conflict of Interest
The Companies Law requires that an office holder of a company disclose to the company, promptly and in any event no later than the board of directors meeting in which the transaction is first discussed, any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes an interest of a company in which the office holder is, directly or indirectly, a 5% or greater shareholder, director or general manager or in which the office holder has the right to appoint at least one director or the general manager. In the case of an extraordinary transaction, the office holders duty to disclose applies also to a personal interest of the office holders relative, which term is defined in the Companies Law as the persons spouse, siblings, parents, grandparents, descendants, spouses descendants and the spouses of any of the foregoing.
Under Israeli law, an extraordinary transaction is a transaction:
Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse to the companys interest may not be approved.
If the transaction is an extraordinary transaction, approval of both the audit committee and the board of directors is required. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in an extraordinary transaction that is considered at a meeting of the board of directors or the audit committee generally may not be present at this meeting or vote on this matter, unless a majority of members of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the members of the board of directors has a personal interest, shareholder approval is also required.
Based on the foregoing provisions of Israeli law, which differ from the requirements under Nasdaq rules, we received an exemption from the Nasdaq listing requirement requiring shareholder approval for the issuance of securities in certain circumstances.
Changing the Rights Attached to Shares
We may only change the rights of shares with the approval of the holders of a majority of that class of shares present and voting at the separate general meeting called for that class of shares. An enlargement of a class of shares is not considered changing the rights of such class of shares.
We have two types of shareholders meetings: the annual general meetings and special general meetings. An annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting. Our board of directors may (and, under the Companies Law, shall, at the request of (1) at least two directors or one quarter of the directors then serving or (2) any one or more shareholders holding at least five percent (5%) of our outstanding ordinary shares) convene a special general meeting whenever it sees fit, at any place within or outside of the State of Israel.
We have received an exemption from the Nasdaq listing requirement to send proxy statements to shareholders in connection with our shareholders meetings, based on the common practice in Israel not to send proxy statements. Instead, pursuant to Israeli law, we publish a notice of each shareholders meeting in two newspapers in Israel at least 21 days prior to the meeting. The notice sets forth, among other information, the time and place of the meeting, the record date, the agenda items and the requisite voting threshold for each.
A quorum in a general meeting consists of two or more holders of ordinary shares, present in person or by proxy, and holding shares conferring in the aggregate twenty-five percent (25%) or more of the voting power in our company (or any higher percentage which may be required under applicable rules and regulations). Nasdaq requires a quorum of at least 33-1/3% of our ordinary shares. If there is no quorum within half an hour of the time set, the meeting is postponed until the following week, or any other time that the chairman of the board of directors and the shareholders present agree to. At the postponed meeting, any two shareholders present in person or by proxy will constitute a quorum. We have received an exemption from Nasdaq permitting us to have this quorum under common Israeli practice for postponed meetings.
Every ordinary share entitles the holder thereof to one vote. A shareholder may vote in person or by proxy, or if the shareholder is a corporate body, by its representative. No cumulative voting is permitted.
Duties of Shareholders
Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, but excluding a shareholder whose power derives solely from his or her position as a director of the company or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. The shareholder approval must be by a majority vote, provided that either:
In addition, under the Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the company and other shareholders and to refrain from abusing his power in the company, such as in certain shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder or any other power toward the company. However, the Companies Law does not define the substance of this duty of fairness.
Exculpation, Insurance and Indemnification of Office Holders
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care, provided that the articles of association of the company allow it to do so. Our articles of association allow us to exempt our office holders to the fullest extent permitted by law.
Insurance of Office Holders
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to an act performed in his capacity of an office holder, for:
Indemnification of Office Holders
Our articles of association provide that we may indemnify an office holder with respect to an act performed in his capacity of an office holder against:
Limitations on Exculpation, Insurance and Indemnification
The Companies Law provides that a company may not exculpate or indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and board of directors and, if the beneficiary is a director, by our shareholders. We have obtained directors and officers liability insurance.
Anti-Takeover Provisions; Mergers and Acquisitions
The Companies Law provides for mergers, provided that each party to the transaction obtains the approval of its board of directors and shareholders. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares not held by the other party, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party, have voted against the merger. Upon the request of a creditor of either party to the proposed merger, the 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 that party. Finally, a merger may not be completed unless at least 70 days have passed from the time that the requisite proposals for approval of the merger have been filed with the Israeli Registrar of Companies.
In addition, provisions of the Companies Law that deal with arrangements between a company and its shareholders may be used to effect squeeze-out transactions or other types of transactions, including mergers. These provisions generally require that the transaction be approved by a majority of the participating shareholders holding at least 75% of the shares voted on the matter. In addition to shareholder approval, court approval of the transaction is required, which entails further delay.
The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company, unless there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% shareholder of the company, unless there is already a majority shareholder of the company. These requirements do not apply if the acquisition is made in a private placement. The tender offer must be extended to all shareholders, but the offerer is not required to purchase more than 5% of the companys outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (1) at least 5% of the companys outstanding shares will be acquired by the offerer and (2) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If as a result of an acquisition of shares the acquirer will hold more than 90% of a companys outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding share
Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and other company, less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation, to taxation prior to the sale of the shares received in such stock-for-stock swap.
C. Material Contracts
Other then in the ordinary course of business, we did not enter into any material contracts in the past two years.
D. Exchange Controls
Exchange Controls and Other Limitations Affecting Security Holders
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However, legislation remains in effect under which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. Holders of our ordinary shares should consult their own tax advisors as to the U.S., Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any federal, foreign, state or local taxes.
Subject to the limitations described in the next paragraph, the following discussion describes the material U.S. federal income tax consequences to a U.S. holder arising from the purchase, ownership and disposition of our ordinary shares. A U.S. holder is a holder of ordinary shares that is: (1) an individual citizen or resident of the United States, (2) a corporation (or other entity treated as a corporation for U.S. federal tax purposes) or partnership (other than a partnership that is not treated as a United States person under any applicable Treasury regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof, (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source, (4) 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 U.S. persons have the authority to control all substantial decisions of the trust, or (5) a trust that has a valid election in effect to be treated as a U.S. person. This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our ordinary shares. This summary generally considers only U.S. holders that will own our ordinary shares as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. tax consequences to a person that is not a U.S. holder, nor does it describe the rules applicable to determine a taxpayers status as a U.S. holder.
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, existing and proposed Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly on a retroactive basis and open to differing interpretations. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular shareholder based on such shareholders particular circumstances. In particular, this discussion does not address the tax treatment of a U.S. holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or financial services entity; (2) a broker or dealer in securities or foreign currency; (3) a person who acquires our ordinary shares in connection with employment or other performance of services; (4) a U.S. holder that is subject to the alternative minimum tax; (5) a U.S. holder that holds the ordinary shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction; (6) a tax-exempt entity; (7) real estate investments; (8) a U.S. holder that expatriates out of the United States; and (9) a person having a functional currency other then U.S. dollar. This discussion does not address the tax treatment of a U.S. holder that owns, directly or constructively, at any time, shares representing 10% or more of our voting power. Additionally, the tax treatment of persons who hold ordinary shares through a partnership or other pass-through entity are not considered, nor are the possible application of U.S. federal gift or estate taxes or alternative minimum tax or any aspect of state, local or non-U.S. tax laws. Each prospective investor is advised to consult such persons own tax advisor with respect to the specific U.S. federal and state income tax consequences to such person of purchasing, holding or disposing of the ordinary shares.
Distributions on Ordinary Shares
Since 1995, we have not paid cash dividends on our ordinary shares, and we do not intend to pay cash dividends in the foreseeable future. In the event that we do pay dividends, and subject to the discussion under the headings Passive Foreign Investment Companies below, a U.S. holder will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares, including the amount of any Israeli tax withheld on the date the distribution is required to be included in the U.S. holders income to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holders tax basis for the ordinary shares to the extent thereof, and then as capital gain. Corporate holders generally will not be allowed a deduction for dividends received. In general, preferential tax rates not exceeding 15% for qualified dividend income and long-term capital gains are applicable for U.S. holders that are individuals, estates or trusts. For this purpose, qualified dividend income means, inter alia, dividends received from a qualified foreign corporation. A qualified foreign corporation is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The U.S. Internal Revenue Service, or IRS, has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.
The amount of a distribution with respect to our ordinary shares will be measured by the amount of fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion below under Israeli Taxation Taxation of Non-Residents on Receipt of Dividends.) Cash distributions paid by us in NIS will be included in the income of U.S. holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. holder, and U.S. holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange income or loss.
In addition, our dividends will be qualified dividend income if our shares are readily tradable on Nasdaq or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a foreign investment company, or a passive foreign investment company, or PFIC. Due to the nature of our operations, we do not believe we are a foreign investment company; we also do not believe we are a PFIC; see the discussions below at Passive Foreign Investment Companies concerning our status as a PFIC. If our beliefs concerning our PFIC status are correct, dividend distributions with respect to our shares should be treated as qualified dividend income, subject to the U.S. holder satisfying holding period and other requirements described below. A U.S. holder will not be entitled to the preferential rate: (a) if the U.S. holder has not held the ordinary shares or ADRs for at least 61 days of the 120 day period beginning on the date which is 60 days before the ex-dividend date, or (b) to the extent the U.S. holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. holder has diminished its risk of loss on our shares are not counted towards meeting the 61-day holding period. Based on IRS News Release 2004-22, the IRS intends to give current effect to proposed legislation changing the aforementioned 120 day period to a 121 day period. Finally, U.S. holders who elect to treat the dividend income as investment income pursuant to Section 163(d)(4) of the Internal Revenue Code will not be eligible for the preferential rate of taxation.
Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Internal Revenue Code, U.S. holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of ordinary shares. In general, these rules limit the amount allowable as a foreign tax credit in any year to the amount of regular U.S. tax for the year attributable to foreign taxable income. This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individuals gross income for the tax year from non-U.S. sources consists solely of certain passive income. A U.S. holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to the ordinary shares if such U.S. holder has not held the ordinary shares for at least 16 days out of the 30-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. holder has substantially diminished its risk of loss with respect to the ordinary shares will not count toward meeting the 16-day holding period referred to above. A U.S. holder will also be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement in which the U.S. holders reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the foreign tax credit are complex, and U.S. holders should consult their own tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, provided such holders itemize their deductions.
Disposition of Shares
Except as provided under the passive foreign investment company rules, upon the sale, exchange or other disposition of ordinary shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between such U.S. holders tax basis for the ordinary shares and the amount realized on the disposition (or its U.S. dollar equivalent, determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale, exchange or other disposition of ordinary shares will be long-term capital gain or loss if the U.S. holder has a holding period of more than one year at the time of disposition.
In general, gain realized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes (see discussion below under Israeli Taxation-Application of the Israel/U.S. Tax Treaty to Capital Gains Tax.). A loss realized by a U.S. holder on the sale, exchange or other disposition of ordinary shares is generally allocated to U.S. source income. However, regulations require the loss to be allocated to foreign source income to the extent certain dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of ordinary shares is subject to limitations.
Passive Foreign Investment Companies
We would be a passive foreign investment company, or PFIC, if:
Under certain look-through rules, the assets and income of certain subsidiaries are taken into account in determining whether a foreign corporation meets the income test and/or asset test.
Passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.
If we become a PFIC, each U.S. holder who has not elected to treat us as a qualified electing fund, QEF election, or who has not elected to mark the shares to market as discussed below, would, upon receipt of certain distributions by us and upon disposition of the ordinary shares at a gain, be liable to pay tax at the then prevailing highest tax rates on ordinary income plus interest on the tax, as if the distribution or gain had been recognized ratably over the taxpayers holding period for the ordinary shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that is a U.S. holder, the tax basis of the shares does not receive a step-up to fair market value as of the date of the decedents death, but instead would be equal to the decedents basis if lower, unless all gain is recognized by the decedent. Indirect investments in a PFIC may also be subject to special tax rules.
The PFIC rules above would not apply to a U.S. holder who makes a QEF election for all taxable years that such shareholder has held the ordinary shares while we are a PFIC, provided that we comply with certain reporting requirements. Instead, each U.S. holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. Although we have no obligation to do so, we intend to notify U.S. holders if we believe we will be treated as a PFIC for any tax year in order to enable U.S. holders to consider whether to make a QEF election. In addition, we intend to comply with the applicable information reporting requirements for U.S. holders to make a QEF election. U.S. holders should consult with their own tax advisers regarding eligibility, manner and advisability of making the QEF election if we are treated as a PFIC.
A U.S. holder of PFIC shares which are publicly traded could elect to mark the shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. holders adjusted tax basis in the PFIC shares. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election for prior taxable years. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election.
We believe that we were not a PFIC for 2004 and do not anticipate being a PFIC in 2005. The tests for determining PFIC status, however, are applied annually, and it is difficult to make accurate predictions of future income and assets which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC. U.S. holders who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made a QEF or mark-to-market election. U.S. holders are strongly urged to consult their tax advisors about the PFIC rules, including the eligibility, manner and consequences to them of making a QEF or mark-to-market election with respect to our ordinary shares in the event that we qualify as a PFIC.
A U.S. holder may be subject to backup withholding (currently at a rate of 28%) with respect to cash dividend payments and proceeds from a disposition of ordinary shares. In general, backup withholding will apply only if a U.S. holder fails to comply with certain identification procedures. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, provided that the required information is timely furnished to the IRS.
Non-U.S. Holders of Ordinary Shares
Except as provided below, an individual, corporation, estate or trust that is not a U.S. holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, an ordinary share.
A non-U.S. holder may be subject to U.S. federal income or withholding tax on a dividend paid on an ordinary share or the proceeds from the disposition of an ordinary share if (1) such item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. holder, a fixed place of business in the United States; or (2) in the case of a disposition of an ordinary share, the individual non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met; or (3) the non-U.S. holder is subject to tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.
In general, non-U.S. holders will not be subject to the 28% backup withholding with respect to the payment of dividends on ordinary shares if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. holders may be subject to backup withholding, unless the non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships with the United States.
Non-U.S. holders generally may be subject to backup withholding at a rate of 28% on the payment of the proceeds from the disposition of ordinary shares to or through the U.S. office of a broker, whether domestic or foreign, or the office of a U.S. related person, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not be subject to backup withholding with respect to the payment of proceeds from the disposition of ordinary shares by a foreign office of a broker.
The amount of any backup withholding from a payment to a non-U.S. holder will be allowed as a credit against such holders U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Taxation of our U.S. Subsidiaries
The following summary describes our organizational structure in the United States and the applicable income taxes. We operate in the United States through several corporations. Retalix Holdings, Inc., or Retalix USA Holdings, is the U.S. parent, which is wholly-owned by Retalix Ltd. Retalix USA Holdings owns 100% of the stock of several U.S. corporations Retalix USA Inc., RCS and BASS (BASS through Retalix USA Inc.), OMI and 50.01% of a U.S. limited liability company StoreNext USA. StoreNext USA is treated as a partnership for U.S. federal tax purposes. As such, 50.01% of StoreNext USAs results are included in the Retalixs U.S. federal income tax return. Retalix USA Holdings and its wholly-owned subsidiaries have elected to file U.S. income tax returns on a consolidated company basis. U.S. federal income taxes are imposed on the taxable income of the U.S. consolidated group at progressive income tax rates ranging from 15% to 35%. The corporation is subject to the same U.S. income tax rates on capital gain income. The U.S. companies are subject to state income/franchise taxes in the states in which they do business. Depending on each states requirements, taxes may be imposed on a consolidated, combined or separate company basis.
The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. It also discusses Israeli tax consequences material to persons purchasing our ordinary shares. To the extent that the summary is based on new tax legislation yet to be judicially or administratively interpreted, we cannot be sure that the views expressed will accord with any future interpretation. The summary is not intended, and should not be construed, as specific professional advice and does not exhaust all possible tax considerations. Accordingly, you should consult your tax advisor as to the particular tax consequences of an investment in our ordinary shares.
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002, as amended, known as the Tax Reform, came into effect. The Tax Reform, aimed at broadening the categories of taxable income and reducing the tax rates imposed on employment income, introduced the following, among other things:
General Corporate Tax Structure in Israel
Generally, Israeli companies are subject to corporate tax at the rate of 35% of their taxable income for 2004, 34% for 2005, 32% for 2006 and 30% from 2007 onwards. In addition, Israeli companies are subject to Capital Gains Tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003. However, as in our case, the rate may be effectively reduced for companies with income derived from an Approved Enterprise, as further discussed below.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959 (the Investment Law) provides that capital investments in a production facility (or other eligible assets) may, upon approval by the Investment Center of the Israel Ministry of Industry and Trade (the Investment Center), be designated as an Approved Enterprise. The Investment Law will expire on March 31, 2005. Accordingly, requests for new programs or expansions that are not approved on or before March 31, 2005 will not confer any tax benefits, unless the term of the law is extended beyond such date. On January 12, 2005, a bill was submitted to the Israeli parliament providing for certain changes to the Investment Law. Among others, the bill proposes certain changes to both the criteria and procedure for obtaining Approved Enterprise status for an investment program, and changes to the grants and tax benefits afforded in certain circumstances to Approved Enterprises under such law. The proposed amendment is expected to apply to new investment programs following the enactment of the bill into law. In order to enact the bill as legislation, the bill must be approved by the Israeli parliament and published. We cannot predict whether the bill will eventually be enacted into law and what changes it might implement.
Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. The tax benefits from any such certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. An Approved Enterprise is entitled to benefits, including Israeli Government cash grants, which are made available if it is located in a government designated development area, and/or tax benefits. As discussed below, our production facilities have been granted Approved Enterprise status.
Taxable income derived from an Approved Enterprise within the benefit period, and subject to compliance with the conditions for approval as described below, is subject to a reduced corporate tax rate of 25% rather than the usual corporate tax rate. The benefit period is ordinarily seven years, or ten years for a company whose foreign investment level, as defined below, exceeds 25%, commencing with the year in which the Approved Enterprise first generates taxable income, and is limited to twelve years from the commencement of production or fourteen years from the date of approval, whichever is earlier.
That income is eligible for further reductions in tax rates if the company qualifies as a foreign investors company. A foreign investors company is a company in which more than 25% of its combined share capital including loans from shareholders (in terms of shares, rights to profits, voting and appointment of directors) is owned by non-Israeli residents. The tax rate is reduced to 20% if the foreign ownership of the foreign investors company is 49% or more but less than 74%; 15% if the foreign ownership of the foreign investors company is 74% or more but less than 90%; and 10% if the foreign ownership of the foreign investors company is 90% or more. The determination of foreign ownership is made on the basis of the lowest level of foreign ownership during the tax year. Such tax rates, are applicable only to a foreign investors company that submitted an application for the grant of Approved Enterprise status prior to March 31, 2005.
In the event that a company is operating under more than one approval, or that not all of its capital investments are approved, its effective corporate tax rate is the result of a weighted combination of the various applicable rates. A company may elect to forego entitlement to the grants otherwise available under the Investment Law and, in lieu thereof, participate in an alternative benefits program, referred to as the Alternative Benefits Program, under which the undistributed income from the Approved Enterprise is fully exempt from corporate tax for a period of between two and ten years, depending upon the geographic location within Israel and the type of the Approved Enterprise. Upon expiration of the exemption period, the Approved Enterprise is eligible for beneficial tax rates under the Investment Law for the remainder, if any, of the applicable benefit period. We participate in the Alternative Benefits Program. There can be no assurance that this benefit program will continue to be available or that we will continue to qualify for benefits under the current program.
Dividends paid by a company that owns an Approved Enterprise and that are attributable to income derived from that Approved Enterprise during the applicable benefits period, are taxed at a reduced rate of 15% which is withheld at source, if the dividends are paid during the benefit period or no more than twelve years thereafter; or, if the Company qualifies as a foreign investors company without any time limitations. This tax must be withheld at source by the company paying the dividend.
A dividend paid from income derived from an enterprise owned by a company that has elected the Alternative Benefits Program during the period in which it is exempt from tax causes the company to be liable for corporate tax on the amount distributed which for this purpose includes the amount of the corporate tax at the rate that would have been applicable had the company not elected the Alternative Benefits Program, of up to 25%. In addition, the company would be required to withhold at source, for the account of the dividend recipient, 15% of the amount actually distributed as a dividend, as described above.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.
Our production facilities have been granted Approved Enterprise status under the Investment Law. In respect of income derived from each of our Approved Enterprises, we are entitled to reduced tax rates during a period of seven years from the year in which such enterprises first earn taxable income (limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier). We have seven Approved Enterprises. One of our Israeli subsidiaries has two Approved Enterprises. Income derived from our Approved Enterprise is tax exempt during the first two years of the seven year tax benefit period mentioned above, and is subject to a reduced tax rate of 25% (depending on our foreign investment level, as defined above) during the remaining years of benefits. The periods of benefits relating to five of our Approved Enterprises have already expired. The periods of benefits relating to one of our Approved Enterprises will expire in 2005 and it is anticipated that the last Approved Enterprise will expire in 2009. The period of benefits for our Israeli subsidiary with Approved Enterprises has not yet commenced and, once commenced, may not continue beyond 2013.
Since we participate in the Alternative Benefits Program, in the event we distribute a dividend from income that is tax exempt, as described above, we would have to pay a tax of up to 25% (depending on our foreign investment level, as defined above) in respect of the amount distributed. The benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the regulations thereunder and the criteria set forth in the applicable certificate of approval. In the event that we do not fulfill these conditions in whole or in part, the benefits can be canceled and we may be required to refund the amount of the benefits, with the addition of the Israeli consumer price index linkage differences and interest. We believe that our Approved Enterprises currently operate in compliance with all applicable conditions and criteria, but there can be no assurance that they will continue to do so.
The investment law and regulations prescribing the benefits under it, provide for an expiration date for the grant of new benefits. The expiration date has been extended several times in the past. The expiration date currently in effect is March 31, 2005 (which may be extended by ministerial decision until June 30, 2005), and no new benefits will be granted after that expiration date. There can be no assurance that new benefits will be available after March 31, 2005 or that existing benefits will be continued in the future at their current level or at any level. A proposal has been put forth for new legislation to replace or amend the Investment Law. We are not able to predict when or if this new legislation will be enacted, nor can we predict the nature and scope of benefits that may be available under any new law.
Law for the Encouragement of Industry (Taxes), 1969
We believe that we currently qualify as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. According to the Industry Encouragement Law, an Industrial Company is a company resident in Israel, 90% or more of the income of which in any tax year, other than of income from defense loans, capital gains, interest and dividends, is derived from an Industrial Enterprise owned by it. An Industrial Enterprise is defined as an enterprise whose major activity in a given tax year is industrial production.
The following corporate tax benefits are available to Industrial Companies, among others:
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Taxation of Shareholders
Capital Gains Tax in Israel
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholders country of residence provides otherwise. The law distinguishes between the inflationary surplus and the real gain. The inflationary surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant assets purchase price attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus. A nonresident that invests in taxable assets with foreign currency may elect to calculate the inflationary amount in that foreign currency.
Prior to the tax reform, sales of our ordinary shares by individuals were generally exempt from Israeli capital gains tax so long as (1) our ordinary shares were quoted on Nasdaq or listed on a stock exchange in a country appearing on a list approved by the Controller of Foreign Currency and (2) we qualified as an Industrial Company within the definition of the Law for the Encouragement of Industry (Taxes), 5729-1969. We believe that we currently qualify as an Industrial Company, but no assurance can be given that we will continue to qualify as an Industrial Company.
Pursuant to the Tax Reform, generally, capital gains tax is imposed on Israeli residents at a rate of 15% on real gains derived on or after January 1, 2003 from the sale of shares in: (1) companies publicly listed on the Tel Aviv Stock Exchange; or (2) Israeli companies publicly listed on Nasdaq or a recognized stock exchange or a regulated market outside of Israel as defined in the Income Tax Order (Definition of Stock Exchange), 2004; or (3) companies dually listed on both the Tel Aviv Stock Exchange and Nasdaq or a recognized stock exchange or a regulated market outside of Israel (such as our company). This tax rate is contingent upon the shareholder not claiming a deduction for financing expenses (in which case the gain will generally be taxed at a rate of 25%), and does not apply to: (1) dealers in securities; or (2) shareholders that report in accordance with the Income Tax Law (Inflationary Adjustments), 1985 Law (that will be taxed at corporate tax rates for corporations and at marginal tax rates for individuals); or (3) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement); or (4) a sale to a relative (as defined in the Israeli Income Tax Ordinance).
The tax basis of shares acquired prior to January 1, 2003, is determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Beginning January 1, 2005, 15% tax rate applies to real capital gains derived from a sale of non Israeli tradable shares subject to the limitations described above. A non Israeli tradable shares are: shares traded in a recognized stock exchange outside of Israel, except for (a) Israeli companies shares; (b) non Israeli companies shares dually traded on both the Tel Aviv Stock Exchange and a foreign stock exchange or a regulated market outside of Israel. Concerning non Israeli tradable shares that were purchased before January 1, 2005, a 35% tax rate applies to real capital gain derived from the sale of the shares, which attributed to the holding period up to December 31, 2004 and 15% to reminder of the capital gain. The total real capital gain is divided to the aforementioned periods on a linear basis.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the Tel Aviv Stock Exchange, unless such gains are attributable to permanent establishment of the foreign resident in Israel, and are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on Nasdaq or a recognized stock exchange or a regulated market outside of Israel as defined in Income Tax Order (Definition Stock Exchange), 2004, provided that such capital gains are not derived by a permanent establishment of the foreign resident in Israel and that such shareholders did not acquire their shares prior to the issuers initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (1) has a controlling interest of 25% or more in such non-Israeli corporation, or (2) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Application of the Israel/U.S. Tax Treaty to Capital Gains Tax
Subject to the Israel/U.S. Tax Treaty, the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States and is entitled to claim the benefits afforded to a resident referred to as a Treaty U.S. Resident, will not be subject to Israeli capital gains tax unless (1) that Treaty U.S. Resident held, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition; or (2) the capital gains from such sale can be allocated to a permanent establishment in Israel. A sale, exchange or disposition of our ordinary shares by a Treaty U.S. Resident who held, directly or indirectly, shares representing 10% or more of our voting power at any time during the 12-month period preceding the sale, exchange or disposition will be subject to Israeli capital gains tax, to the extent applicable. However, under the Israel/U.S. Tax Treaty, this Treaty U.S. Resident would be permitted to claim credit for these taxes if required to be paid against U.S. income tax imposed with respect to such sale, exchange or disposition, subject to the limitations set in U.S. laws applicable to foreign tax credits.
Taxation of Non-Residents on Receipt of Dividends
Nonresidents of Israel will be subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless the dividends are paid from income derived from an Approved Enterprise during the applicable benefit period, in which case the rate will be 15%, or a different rate is provided in a treaty between Israel and the shareholders country of residence. Under the Israel/U.S. Tax Treaty, the maximum tax on dividends paid to a holder of our ordinary shares who is a Treaty U.S. Resident will be 25%. However, when dividends are paid from income derived during any period for which we are not entitled to the reduced tax rate applicable to an Approved Enterprise under the Investment Law, the maximum tax will be 12.5% if the holder is a U.S. company holding shares representing 10% or more of our issued voting power during the part of the tax year preceding the date of payment of dividends and during the whole of its prior tax year, if any, and provided that not more than 25% of our gross income consists of interest or dividends. When dividends are paid from income derived during any period for which we are entitled to the reduced tax rate applicable to an Approved Enterprise, then the tax will be 15% if the conditions in the preceding sentence are met.
F. Dividends and Paying Agents
G. Statements by Experts
H. Documents on Display
We are subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the SEC. You may read and copy any document we file with the SEC without charge at the SECs public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also available to the public at the SECs website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
I. Subsidiary Information
ITEM 11 QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations may result primarily from weak economic conditions in the markets in which we sell our products and from changes in exchange rates or in interest rates. We have only limited involvement with derivative financial instruments. From time to time we carry out transactions involving foreign exchange derivative financial instruments (forward exchange contracts). These transactions do not qualify for hedge accounting under FAS 133. During 2003, we entered into one foreign currency forward contract for conversion of British Pounds Sterling into a notional amount of U.S. dollars of approximately $2.9 million. We renewed this contract three times during 2003 and four times during 2004. This contract was still outstanding as of December 31, 2004. During 2004, we entered into two foreign currency forward contracts for conversion of Euros into a notional amount of U.S. dollars of approximately $ 500,000 each. One of the said contracts was renewed and was still outstanding as of December 31, 2004. In addition, during 2004, we entered into a foreign currency forward contract for conversion of New Israeli Shekels into a notional amount of U.S. dollars of approximately $2.5 million, which was still outstanding as of December 31, 2004. The fair value of these outstanding contracts as of December 31, 2004 reflects a liability in the amount of $130,000, which was charged to financial expenses. Other than foreign exchange derivative financial instruments as described above, we do not use derivative financial instruments in our investment portfolio.
The table below presents principal amounts and related weighted average rates by periods of maturity for our investments in deposits (primarily included in cash and cash equivalents in our consolidated financial reports) and marketable securities held as of December 31, 2004.
(In thousands, except percentages)
* Weighted average yield to maturity
Foreign Currency Risk
The majority of our revenues is denominated in U.S. dollars and or linked to the U.S. dollar, and our financing is mostly in U.S. dollars, and thus the U.S. dollar is our functional currency. In addition, part of our revenues is denominated in British Pounds Sterling or the Euro, and some of our expenses are denominated in New Israeli Shekels. This situation exposes us from time to time, to fluctuations between the exchange rates of the dollar and the NIS, the British Pound Sterling and the Euro. We hold most of our financial assets in dollar or dollar linked investment channels. In addition, we tend from time to time, to take NIS or British Pounds Sterling loans from banks attempting to maintain a similar level of assets and liabilities in any given currency and thus trying to offset exposures to inter-currency fluctuations.
The following table sets forth our non-dollar assets and liabilities as of December 31, 2004: (in thousands)
Interest Rate Risk
Our interest expenses and income are sensitive to changes in interest rates, as all of our cash reserves and borrowings are subject to interest rate changes. Most of our financial reserves are invested in short term interest-bearing deposits. The interest rate on these deposits as well as the interest rate on most of our borrowings is linked to the London Interbank Offered Rate.
The policies under which our exposures to currency and interest rate fluctuations are managed is reviewed and supervised by our board of directors. We manage these exposures by performing ongoing evaluations including on a timely basis.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THEN EQUITY SECURITIES
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
The net proceeds of our public offering of ordinary shares under the Securities Act of 1933 in 1998 were $12.9 million. These proceeds were invested in cash, cash equivalents and in short term bank deposits and marketable securities. Only a small portion of these proceeds was used to finance current business operations of the company.
ITEM 15 CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report, we performed an evaluation 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) of the Exchange Act). The evaluation was performed with the participation and under supervision of key corporate senior members of our management including our chief executive officer and our chief financial officer. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective.
There were no significant changes in our internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this annual report.
ITEM 16A. Audit Committee Financial Expert
Our board of directors determined that Mr. Brian Cooper is an audit committee financial expert, as defined in Item 16A of Form 20-F. Mr. Cooper is independent as defined in Nasdaq rules.
ITEM 16B. Code of Ethics
Our board of directors has adopted a Code of Ethics, which applies to all of our employees, officers and directors. We will provide a copy of our Code of Ethics, free of charge, to any person who requests one. Such requests may be sent to our offices at 10 Zarhin Street, Raanana, Israel, Attention: Controller.
ITEM 16C. Principal Accountant Fees and Services
Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, has served as our principal independent public accountants since 1997. The following table presents the aggregate fees for professional audit services and other services rendered by Kesselman & Kesselman in 2003 and 2004:
Audit Fees are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent accountant provides, such as statutory audits including audits required by the Office of the Chief Scientist and other Israeli government institutes, consents and assistance with and review of documents filed with the SEC. Audit-Related Fees are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under Audit Fees. These fees include mainly accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements, due diligence related to acquisitions and other accounting issues that occur from time to time. Tax Fees are the aggregate fees billed for professional services rendered for tax compliance and tax advice, other than in connection with the audit. Tax compliance involves preparation of original and amended tax returns, tax planning and tax advice.
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves on a specific basis non-audit services in the categories of Audit-Related Services and Tax Services and other services that may be performed by our independent accountants, and the maximum pre-approved fees that may be paid as compensation for each pre-approved service in those categories. Any proposed services exceeding the maximum pre-approved fees require specific approval by the Audit Committee.
With respect to each pre-approved service actually requested to be provided, an executive officer is required to notify the audit committee in writing and state whether, in the executive officers view, the provision of such service by the outside auditor would impair its independence. The audit committee has the ultimate authority to determine which services to pre-approve.
ITEM 16D. Exemptions from Listing Standards for Audit Committees
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ITEM 17 FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18 FINANCIAL STATEMENTS
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
ITEM 19 EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.
|REPORT OF INDEPENDENT REGISTERED PUBLIC|
|CONSOLIDATED FINANCIAL STATEMENTS:|
|Statements of income||F-5|
|Statements of changes in shareholders' equity||F-6|
|Statements of cash flows||F-7-F-9|
|Notes to financial statements||F-10-F-46|
|EXHIBIT - DETAILS OF SUBSIDIARIES AND ASSOCIATED COMPANY||F-47|
The amounts are stated in U.S. dollars ($) in thousands.
To the shareholders of
We have audited the consolidated balance sheets of Retalix Ltd. (the Company) and its subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain consolidated subsidiaries whose assets constitute approximately 25.6% and 24.1% of total consolidated assets as of December 31, 2004 and 2003, respectively, and whose revenues constitute approximately 42.8%, 31.7% and 35.2% of total consolidated revenues for the years ended December 31, 2004, 2003 and 2002, respectively. We did not audit the financial statement of a certain associated company, the companys interest in which, as reflected in the balance sheets are approximately $119,000 and $53,000 as of December 31, 2004 and 2003, respectively, and the Companys share of excess of loss over profits of which is a net amounts of approximately $ 137,000 and $90,000 for the years ended December 31, 2004 and 2003, respectively. The financial statements of the above subsidiaries and associated company were audited by other independent registered public accounting firms, whose reports have been furnished to us and our opinion, insofar as it relates to amounts included for those subsidiaries and associated company, is based solely on the reports of the other independent auditors.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), and those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Companys Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other independent auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2004 and 2003 and the consolidated results of their operations, changes in shareholders equity and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
|Tel-Aviv, Israel||/s/ Kesselman & Kesslman|
|March 21, 2005||Certified Public Accountants (Isr.)|
F - 2
CONSOLIDATED BALANCE SHEETS
|U.S. $ in thousands|
|A s s e t s|
|CURRENT ASSETS (note 11):|
|Cash and cash equivalents||91,413||46,093|
|Marketable securities (note 8c; 12b):||14,331||5,035|
|Accounts receivable (note 12a)::|
|Deferred income taxes (note 10g):||3,650||2,402|
|T o t a l current assets||139,228||77,372|
|NON-CURRENT ASSETS (note 11):|
|Marketable debt securities (note 12b):||6,125||3,519|
|Deferred income taxes (note 10g):||1,768||1,286|
|Long-term receivables (note 12d):||3,592||998|
|Amounts funded in respect of employee rights upon|
|retirement (note 7):||4,553||3,733|
|PROPERTY, PLANT AND EQUIPMENT, net (note 3):||10,407||10,129|
|GOODWILL (note 4)||39,774||19,055|
|OTHER INTANGIBLE ASSETS, net of accumulated|
|amortization (note 4):||4,653||4,079|
The accompanying notes are an integral part of the financial statements.
F - 3
|U.S. $ in thousands|
|Liabilities and shareholders' equity|
|CURRENT LIABILITIES (note 11):|
|Short-term bank credit||7,565||5,677|
|Current maturities of long-term bank loans (note 5)||4,801||3,368|
|Accounts payable and accruals:|
|Employees and employee institutions||5,122||4,882|
|Current maturities of other liabilities (note 6)||1,048||2,439|
|T o t a l current liabilities||41,175||31,586|
|LONG-TERM LIABILITIES (note 11):|
|Long-term bank loans, net of current maturities (note 5)||1,493||4,700|
|Employee rights upon retirement (note 7)||8,435||5,405|
|Other liabilities, net of current maturities (note 6)||259||1,149|
|T o t a l long-term liabilities||10,187||11,254|
|T o t a l liabilities||51,362||42,840|
|COMMITMENTS AND CONTINGENT LIABILITIES (note 8):|
|SHAREHOLDERS' EQUITY (note 9):|
|Share capital - ordinary shares of NIS 1.00|
|par value (authorized: 25,000,000|
|shares; issued and outstanding:|
|December 31, 2004 -17,577,432 shares;|
|December 31, 2003 -12,976,695 shares)||4,717||3,704|
|Additional paid in capital||116,277||41,864|
|Accumulated other comprehensive income||267||5|
|T o t a l shareholders' equity||157,292||75,646|
The accompanying notes are an integral part of the financial statements.
F - 4
CONSOLIDATED STATEMENTS OF INCOME
|U.S. $ in thousands|
(except per share data)
|REVENUES (note 14a):|
|Services and projects||45,460||33,625||29,173|
|T o t a l revenues||124,360||92,057||76,453|
|COST OF REVENUES:|
|Cost of product sales||23,246||16,576||11,970|
|Cost of services and projects||18,890||12,440||10,141|
|T o t a l cost of revenues||42,136||29,016||22,111|
|OPERATING INCOME (EXPENSES):|
|Research and development expenses - net||(34,096||)||(18,344||)||(17,036||)|
|Selling and marketing expenses||(24,798||)||(21,542||)||(18,111||)|
|General and administrative expenses (note 15a)||(15,944||)||(13,345||)||(12,455||)|
|Other general income (expenses) - net (note 15c)||15||(62||)||1,043|
|T o t a l operating expenses||(74,823||)||(53,293||)||(46,559||)|
|INCOME FROM OPERATIONS||7,401||9,748||7,783|
|FINANCIAL INCOME (EXPENSES), net (note 15b):||85||(95||)||(499||)|
|GAIN ARISING FROM ISSUANCE OF SHARES BY|
|A SUBSIDIARY AND AN ASSOCIATED|
|COMPANY (note 2f and 2g)||200||1,068|
|INCOME BEFORE TAXES ON INCOME||7,686||10,721||7,284|
|TAXES ON INCOME (note 10)||1,838||2,639|