Retalix 20-F 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2009
Commission file number 0-29742
10 Zarhin Street, Ra’anana 43000, Israel
Hugo Goldman, CFO, +972-9-776-6696, email@example.com,
10 Zarhin Street, Ra’anana 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:
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 the period covered by the annual report:
24,082,582 Ordinary Shares, nominal value NIS 1.00 per share>
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes o No x
If this report is an annual or transition report, indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
Yes o No x
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No 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. The information contained in this annual report, including, without limitation, the description of our products is correct as of the date hereof; names and features relating to our products are subject to change from time to time.
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 May 31, 2010, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.829 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 of 1995 and other U.S. Federal securities laws. We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” and similar expressions are intended to identify forward-looking-statements. 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 3.D. – “Key Information – Risk Factors”, Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects”, as well as elsewhere in this annual report and in our other filings with the Securities and Exchange Commission, or SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.
A. Selected Financial Data
The selected consolidated statement of income (loss) data set forth below with respect to the years ended December 31, 2006, 2007, 2008 and 2009 and the selected consolidated balance sheet data set forth below as of December 31, 2006, 2007, 2008 and 2009 have been derived from our consolidated financial statements that were audited by Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited. The selected consolidated statement of income data set forth below with respect to the year ended December 31, 2005 and the selected consolidated balance sheet data set forth below as of December 31, 2005 have been derived from our consolidated financial statements that were audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated financial data set forth below should be read in conjunction with “Item 5 – Operating and Financial Review and Prospects” and our consolidated financial statements and notes to those statements for the years 2007, 2008 and 2009 included elsewhere in this annual report. Historical results are not necessarily indicative of the results to be expected in the future.
B. Capitalization and Indebtedness
C. Reasons for Offer and Use of Proceeds
D. Risk Factors
The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information. You should carefully consider the risks described below and elsewhere in 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. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
Risks Related To Our Business
The downturn in the global economy worldwide that began in 2008 has materially adversely affected the retail food industry, our primary target market, which has had a material adverse effect on our revenues and results of operations. If adverse economic conditions continue or worsen, our revenues and results of operations could be further adversely affected.>
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 provision of related services to the retail food industry worldwide, including retailers such as supermarkets, convenience stores, fuel chains and restaurants as well as wholesalers and suppliers in this industry. 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. Turmoil in the global financial and credit markets has caused liquidity problems for certain countries, for many financial institutions and for many of our customers and adversely affected investor and consumer confidence generally. This has resulted in a curtailment of capital investment by many of our existing and potential customers, which has adversely affected our revenues and results of operations. Conditions may continue to be depressed or may be subject to further deterioration, which could lead to a further reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products. A significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to previous purchases by that customer. As a result, our reserves for doubtful accounts and write-offs of accounts receivable increased in 2009 and may continue to increase. The turmoil in global markets has also resulted in sharp currency fluctuations, which has harmed and could further harm our results of operations. In addition, if we require additional funds to finance the growth of our business and are unable to raise them due to the prevailing weakness in the global financial and credit markets, our results of operations and financial condition may be adversely affected.
We recorded losses in 2007 and 2008 and may not be able to sustain profitability.
For the years ended December 31, 2007 and 2008, we recorded a net loss of $0.5 million and $51.6 million, respectively. Our 2008 results were adversely impacted by an impairment of goodwill amounting to $58.2 million. Before this impairment charge, we still would have had a net loss in 2008, were it not for a tax benefit. For the year ended December 31, 2009, we recorded net income of $5.8 million. Our ability to sustain profitability in the future depends in part on the global economy, which has adversely affected our industry. Though we recently resumed hiring, we have in the past undertaken cost cutting initiatives in response to the worldwide economic conditions, including a reduction in our worldwide workforce, which could lead to a deterioration of our competitive position. In the future, we may have to undertake additional cost reduction initiatives to achieve and sustain profitability, and to the extent we do not do so sufficiently, our cost structure could negatively impact our results of operations and cash flow in the future. We cannot assure you that we will not report losses in future periods.
The markets in which we sell our products and services are competitive, and increased competition and industry consolidation could cause us to lose market share, reduce our revenues, and adversely affect our operating results.>
The market for retail and distribution food and fuel information systems is highly competitive and is subject to continuous price pressure. A number of companies offer competitive products that address our target markets. In addition, we believe that new market entrants may attempt to develop and acquire retail and distribution food and fuel information systems, and we are likely to compete with new companies in the future. With respect to our Software-as-a-Service, or SaaS, initiatives, in particular, 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.
We are currently in the process of making an ongoing assessment of our business strategy, which may result in increased expenses and may not provide anticipated benefits.
Our management is currently in the process of an ongoing assessment of our strategy, which is being conducted over a number of months and which may result in changes to product and service offerings and our short and long term strategic focus and may impact the allocation of our sales force, research and development efforts and other areas of operations. Implementing new strategies is expected to consume significant time and resources and may include incurring expenses. Such a new strategy may not achieve the anticipated improvements to our business and could create operational problems that we do not currently have. This could cause a decline in our revenues and adversely affect our operating results.
If we fail to manage changes in personnel effectively, our business could be disrupted, which could harm our operating results.
In November 2009, upon the consummation of the private placement transaction by Boaz Dotan, Eli Gelman, Nehemia Lemelbaum, Avinoam Naor and Mario Segal (individually and via a wholly-owned company), who are referred to collectively as the Alpha Group, six new directors joined our board of directors, which is comprised of 11 members. Following the closing of this transaction, a new chairman of the board, a new chief executive officer and a new head of corporate development and alliances took office. These personnel changes could disrupt our business and harm our operating results.
In addition, in the past, there were periods in which we experienced rapid growth in the number of our employees, the size and locations of our physical facilities and the scope of our operations. Any failure to manage growth effectively could disrupt our business and harm operating results. Although in 2008 and 2009 we reduced the size of our workforce in response to the prevailing adverse economic conditions, we have resumed hiring and may experience additional growth in the future. Reductions or increases in personnel also entail risks of business disruption and potential adverse effects on our sales and marketing efforts, customer service and research and development activities. These adverse effects could harm our 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, develop or otherwise obtain new products, new features and new services to adequately meet the dynamic needs of our 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. Our workforce reduction in 2008 and 2009 may also harm or delay our research and development efforts. 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.
If we encounter problems with our new enterprise resource planning system, this could disrupt our internal operations, increase our costs and adversely affect our financial results or our ability to report our financial results. >
We are in the process of implementing a new enterprise resource management, or ERP, system to improve our internal management of our financial operations. This is intended to result in a more centralized, streamlined planning system featuring more transparent and efficient use of real-time data. We have incurred significant expenses in implementing such system. Investments in new technology are complex and time consuming. Such a new system may not achieve the anticipated improvements to our enterprise resource management and could create problems with our planning, integration of data or compatibility with other internal systems, thereby increasing our costs and adversely affecting our financial results or our ability to report our financial results in a timely and accurate manner.
Sales to large customers represent a significant portion of our revenues, and a significant reduction in sales or services to these customers could significantly reduce our revenues.>
During 2008 and 2009, none of our customers accounted for 5% or more of our revenues. During 2007, one customer accounted for 5% or more of our revenues. Sales to large supermarket, convenience store and fuel chains as well as large distributors are typically large in size and represent a significant portion of our revenues. A significant reduction in sales and services to any of our large customers could significantly reduce our revenues. This has already occurred in 2008 and 2009, and it could continue or worsen. We anticipate that sales and services to large customers in any given reporting period will continue to contribute materially to our revenues in the foreseeable future.
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. We have found that this process is even longer during periods of economic uncertainty. Even after the 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, and therefore our quarterly operating results have varied in the past and may vary in the future. Long sales cycles also subject us to risks not usually encountered by companies whose products have short sales cycles. These factors 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.
Because the gross margins on product revenues from license sales are significantly greater than the gross margins on product revenues from hardware sales and on services 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 revenues. In addition, since our product revenues are typically comprised of both software license and hardware elements and since the gross margins on license revenues are significantly higher than the gross margins on hardware revenues, our combined gross margin on products revenues in any particular quarter will also depend on our revenue mix between license and hardware 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 revenues or a greater percentage than average of hardware revenues. In addition, fixed price contracts for services we provide may expose us to additional risk if the actual costs in connection with such contracts are higher than expected, and therefore reduce our gross margins.
Our business will suffer to the extent that we develop new versions of our products based on new software platforms and are not successful in detecting and fixing problems with such software and products, which could harm their ability to achieve market acceptance.>
We may develop new versions of our products based on new platforms, such as the product versions based on the Microsoft .NET platform and the J2EE platform, which we developed a number of years ago. The risks of our commitment to new platforms include the following:
There can be no assurances that our efforts to develop new products using new platforms will be successful. If the products we develop for new 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 recent years we have been developing new versions of our products based on the Microsoft .NET platform and the J2EE platform. We cannot assure you that these new versions 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 this suite 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 acquisition of businesses and our failure to successfully integrate these businesses could disrupt our business, dilute your holdings in us and harm our financial condition and operating results.>
From 2004 through 2008, we acquired and increased our investment in several businesses. We intend to make future strategic acquisitions of complementary companies, products or technologies. Such 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 the acquisition of TCI Solutions Inc., or TCI, and the acquisition of the assets of Integrated Distribution Solutions, L.L.C., or IDS. 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. 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.
Our Software-as-a-Service, or SaaS, business model is in an early stage of implementation and, if unsuccessful, our revenue growth could be adversely affected.>
We are still in the early stages of rolling-out our SaaS application services to regional chains and independent store retailers, mostly through our two StoreNext initiatives, 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 SaaS initiatives may not succeed. Our services include head-office and back-office applications delivered via the Internet based on a SaaS subscription fee pricing model. We offer our SaaS services under a subscription fee model for reporting, analysis and merchandising services. We also offer payment processing services as part of a Connected Payments program through a joint venture with our payment processing software partner, MTXEPS Inc. In the future, we plan to offer additional services for a fee. If we are unsuccessful in selling and marketing our SaaS services to retailers and distributors, our revenue growth could be adversely affected.
Our Retalix InSync products are in varying stages of development and, if unsuccessful, our revenue growth could be adversely affected.
In September 2005, we announced the introduction of Retalix InSync, our new enterprise and supply chain management portfolio. Development has taken longer than expected and, while we have begun initial pilots of certain software modules with two of our customers, we cannot assure you that this development will be successful or that many customers will purchase these new products. If we continue to experience delays in developing our Retalix InSync products or if we are unsuccessful in marketing and selling our Retalix InSync products to retailers and distributors, our revenue growth could be adversely affected.
Insufficient or slower than anticipated demand for our SaaS services could adversely affect our revenue growth.>
We have incurred expenses in connection with the development of our SaaS 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 in the development of these initiatives. Any delay in or failure of the development of significant demand for our SaaS services could cause our new business initiatives to fail. Even if significant demand does develop for our SaaS services, the growth of our SaaS services may erode parts of existing software sales revenue. Any of these factors could adversely affect our revenue growth.
Some of our products contain “open source” software, and any failure to comply with the terms of one or more associated open source licenses could negatively affect our business.
Some of our products are distributed with software licensed by its authors or other third parties under so-called “open source” licenses, including, for example, the Mozilla Public License, the BSD License and the Apache License. Some of those licenses may require as a condition of the license that we make available source code for modifications or derivative works we create based upon, incorporating, or using such open source software, that we provide various notices with our products, and/or that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. The terms of some open source licenses have not been interpreted by any U.S. court or, to our knowledge, any other court, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to market our products. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of those open source licenses, we could be required to incur legal expenses in defending against such allegations, and if our defenses were not successful, we could be enjoined from distribution of the products that contained the open source software and/or required to either make the source code for the open source software available, to grant third parties certain rights of further use of our software, or to remove the open source software from our products, which could disrupt our distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software, which could limit or eliminate our ability to commercialize such software. If an author or other third party that distributes open source software were to obtain a judgment against us based on allegations that we had not complied with the terms of any such open source licenses, we could also be subject to liability for copyright infringement damages and breach of contract for our past distribution of such open source software. Although we take steps to ensure that our programmers do not include open source software in products and technologies we intend to keep proprietary, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into products and technologies we intend to keep proprietary.
If we are unsuccessful in establishing online Business-to-Business (B2B) e-commerce exchanges, our revenue growth could be adversely affected.>
In order for us to establish business-to-business (B2B) e-commerce exchanges for our SaaS initiatives, we will need to generate a community of participating retailers sufficiently large to support such a model. Even if we successfully establish such a community, we may not be able to establish B2B exchanges without partnering with strategic participants. 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 B2B initiatives. We cannot assure you that wholesalers and suppliers will choose to participate in our B2B initiatives. In addition, this is a new and unproven business model, and we cannot assure you that potential users of the B2B applications will use them. If we are unsuccessful in establishing a B2B business model, our revenue growth could be adversely affected.
Disruption of our SaaS servers due to security breaches and system failures could harm our business and result in the loss of customers.>
Our SaaS infrastructure is vulnerable to security breaches, computer viruses or similar disruptive problems. Our SaaS servers provide access to and distribution of many of our enterprise software solutions, products and services to our SaaS customers. Providing unimpeded access to our SaaS servers is critical to servicing our SaaS 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 SaaS servers. Our inability to provide continuous access to our SaaS servers could cause some of our customers to discontinue subscribing to our SaaS and e-market applications and harm our business reputation.
We could be exposed to possible liability for supplying inaccurate information to our B2B and SaaS customers, which could result in significant costs, damage our reputation and decreased demand for our products.>
The information provided in our B2B and SaaS 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 SaaS 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 SaaS services increase. As part of our strategy to sell our software products and services to small chains and single store food retailers, we are rolling out our SaaS-based offering, and we are in the process of adapting some of our software products to a browser-based multi-tenant environment in order to reduce the costs associated with our enterprise software solutions offered through a shared SaaS environment. As we add customers to our SaaS initiatives, our software will need to be robust enough to support, from a single data center, our growing customer base. The failure of our SaaS 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, harm 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, harm to our reputation or increased service and warranty costs. 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. If any of these risks were to occur, our operating results could be adversely affected.
Errors or defects in 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, our products 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 errors or defects detected. These errors or defects could cause us to incur warranty or repair costs, liability claims or lags or delays. 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, harm our reputation and impair market acceptance of our products.
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, research and development and support personnel. We do not have “key person” life insurance policies covering any of our employees. Any loss of the services of 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 develop, 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 develop, sell and market our products.
Antitrust scrutiny of B2B initiatives may adversely affect our business.>
The establishment and operation of B2B 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 B2B initiatives may be delayed, which may adversely affect our business.
Because we operate globally, we are subject to additional risks.>
We currently sell our software products and SaaS services in a number of countries and we intend to enter additional geographic markets. Our business is subject to risks that 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, marketed 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 developing, 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 may fail to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of 2002>.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executive officers and directors. Our efforts to comply with the requirements of the Sarbanes-Oxley Act of 2002, and in particular with Section 404 under it, have resulted in increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. For example, our management determined that we had ineffective internal control over financial reporting as of December 31, 2007. While our management has determined that we had effective internal control over financial reporting as of December 31, 2008 and December 31, 2009, we cannot assure you that we will able to conclude in future years that we have effective internal control over financial reporting. In particular, we are in the process of implementing a new ERP system to improve our internal management of our financial operations. This could create problems with our planning, integration of data or compatibility with other internal systems. Controls that are considered adequate at one time may become inadequate in the future because of changes in conditions or a deterioration in the degree of compliance with policies or procedures. Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Under ASC 718 “Compensation – Stock Compensation”, we are required to record a compensation expense in connection with share-based compensation which significantly reduces our profitability.>
Accounting Standard Codification No. 718 requires all share-based payments to employees to be recognized as a compensation expense based on their fair values. During 2007, 2008 and 2009, this guidance had a material impact on our results by increasing our expenses, which lowered our reported net income by approximately $3.9 million, $4.8 million and $2.2 million, respectively. Should economic events or our business or operational characteristics change, or should there be a change in the habits of our employees with respect to stock option exercises and forfeitures, future determinations as to fair value may significantly change the value attributed to stock-based compensation and significantly impact our results of operations.
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 and headquarters 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. Since September 2000, there has been a marked increase in hostilities between Israel and the Palestinians, characterized by terrorist attacks on civilian targets, suicide bombings and military incursions by the Israeli army into areas under the control of the Palestinian Authority. Hamas, an Islamist movement responsible for many attacks against Israeli targets, won the majority of the seats in the Parliament of the Palestinian Authority in January 2006 and took control of the entire Gaza Strip by force in June 2007. Thereafter, thousands of missiles were fired from Gaza at population centers in southern Israel, leading to an armed conflict between Israel and the Hamas in January 2009. Further, in the summer of 2006, Israel engaged in a war with Hezbollah, a Lebanon-based Shiite militia group, which involved thousands of missile strikes and disrupted most day-to-day civilian activity in northern Israel.
Ongoing violence between Israel and the Palestinians, as well as tension between Israel and the neighboring Syria and Lebanon, may have a material adverse effect on our business, financial conditions and results of operations. In addition, in recent years Iran has been stepping up its efforts to achieve nuclear capability. This move is seen by many as a worldwide threat to peace. This situation may potentially escalate in the future to violent events which may affect Israel and us.
We cannot predict the effect on us of any increase in the degree of violence by the Palestinians or others against Israel or the effect of military action elsewhere in the Middle East. The future of peace efforts between Israel and its Arab neighbors remains uncertain. Any armed conflicts or political instability in the region would likely negatively affect business conditions and adversely affect our results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to make sales in those countries.
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 individual’s 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 a 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, or NIS, 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 a significant portion of our expenses such as salaries or hardware costs are generated in other currencies such as the NIS, 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 foregoing and to the fact that our financial results are measured in dollars, our results could be adversely affected as a result of a strengthening or weakening of the dollar compared to these other currencies. During 2007, 2008 and 2009, the dollar depreciated in relation to the NIS, which raised the dollar cost of our Israeli based operations and adversely affected our financial results. Our results could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we have entered and may continue to 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 and, even if they do protect us, involve financing costs we would not otherwise incur.
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 2009, the value of the dollar decreased in relation to the NIS by 0.7%, while inflation increased by 3.9%. 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, or the Investments Law, with respect to our production facilities that are designated as “Approved Enterprises”. See “Operating Results— Corporate Tax Rate” under Item 5.A of this annual report for additional information concerning our effective corporate tax rate. In order to receive these tax benefits, we are required to comply with certain requirements, including: adhering to the submitted business plan; continuing operations in the relevant geographic area; equity financing of at least 30% of the investment in property, plant and equipment; immediate reporting of material changes to business, operations, results and ability to perform the Approved Enterprise; filing regular reports with the Investment Center; obtaining approval for changes in our ownership; complying with Israeli intellectual property laws; and obtaining approval for changes in the approved plan. See “Israel Taxation—Law for the Encouragement of Capital Investments, 1959” under Item 10.E of this annual report for additional information. We believe that we are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund historical tax benefits of up to approximately $9.4 million, with interest and adjustments for inflation based on the Israeli consumer price index. In addition, an increase in our development activities outside of Israel may be construed as a failure to comply with the Investments Law conditions. There can be no assurance that new benefits will be available, or that existing benefits will be available in the future, at their current level or at any level.
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, or OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel. We must pay royalties to the OCS on the revenue derived from the sale of products and technologies, and related services, which incorporate or are based on know-how developed with the grants from the OCS. As of December 31, 2009, our total contingent liability to the OCS in this respect amounted to $5 million. The OCS budget has been subject to reductions, which may affect the availability of funds for grants in the future. As a result, we cannot be certain that we will continue to receive grants at the same rate, or at all. In addition, the terms of any future grant may be less favorable than our past grant. According to Israeli law, any products which incorporate or are based on know-how developed with grants from the OCS are usually 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 OCS 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 the technology developed with these grants without the prior approval of a governmental committee. Any non-Israeli who becomes a direct holder of 5% or more of our outstanding ordinary shares will be required to notify the OCS and to undertake to observe the law governing the grant programs of the OCS, the principal restrictions of which are the transferability limits described above in this paragraph.
In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of Israel about our Israeli operations. If we fail to meet the conditions related to the grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the Israeli government, we might be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future. The inability to receive these grants would result in an increase in our research and development expenses.
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 and officers.>
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 company’s intellectual property. We currently have non-competition clauses in the employment agreements of most of our employees, including with Mr. Barry Shaked, our former chief executive officer and director. 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 that competitor from benefiting from the expertise such former employee obtained from us, if we cannot demonstrate to the court that such former employee breached a legitimate interest of ours recognized by a court and that we suffered damage thereby.
Service of process upon us, upon our directors and officers, 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.
Additionally, it may be difficult for you to enforce civil liabilities under the Securities Act of 1933 and the Securities Exchange Act of 1934, or the Exchange Act, in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
However, subject to specified time limitations and other conditions, 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.
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, other than in specified exceptions, 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 of shareholders. Upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of the surviving company. Furthermore, a merger may generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each of the parties. 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 45% or greater 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 company’s 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. These laws may have the effect of delaying or deterring a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our securities.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.>
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. See “Duties of Shareholders” under Item 10.B of this annual report for additional information concerning this duty.
Risks Related To Our Ordinary Shares
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 Stock Market (including the Nasdaq Global Select 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 that purchasers are willing to pay for our ordinary shares.
Two shareholders may be able to control us.
As of May 31, 2010, the Alpha Group holds an aggregate of 4,803,900 ordinary shares and warrants to purchase an additional 1,250,000 ordinary shares, representing beneficial ownership of 23.9% of our ordinary shares (after giving effect to the exercise of such warrants), and Ronex Holdings, Limited Partnership, or Ronex, an affiliate of the FIMI Opportunity Funds, holds 4,471,591 ordinary shares, representing beneficial ownership of 18.6% of our ordinary shares. Furthermore, the Alpha Group and Ronex are party to a shareholders agreement pursuant to which they have undertaken to elect a board of directors comprised of 11 members, of which six nominees will be designated by the Alpha Group and five nominees will be designated by Ronex. They also have agreed to meet with one another before any shareholder meeting and try to reach a unified position with respect to the principal proposals on the agenda of such meeting.
If the Alpha Group and Ronex act together, they may likely have the power to control the outcome of matters submitted for the vote of shareholders, including the approval of change in control transactions, as well as other strategic matters and the composition of our management. This may make certain transactions more difficult and result in delaying or preventing a change in control of us unless approved by one or both of them.
Commencing November 2010, the Alpha Group will be entitled to request us to register with the SEC resales of 4,803,900 ordinary shares and 1,250,000 ordinary shares underlying warrants, subject to certain conditions and limitations on its registration rights and resale rights. If the Alpha Group or other shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding warrants or 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. If we issue additional shares in financings or acquisitions, our shareholders will experience additional dilution and the existence of more outstanding shares could reduce the amount purchasers are willing to pay for our ordinary shares. Any substantial sales of our ordinary shares in the public market also might make it more difficult for us to sell equity securities.
Our ordinary shares are traded on the Nasdaq Global Select Market, or Nasdaq, and on the Tel Aviv Stock Exchange, or the TASE. Trading in our ordinary shares on these markets is effected in different currencies (dollars on Nasdaq and New Israeli Shekels on the TASE) 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.
A. History and Development of the Company
We were incorporated on March 5, 1982, under the laws of the State of Israel. Both our legal and commercial name is Retalix Ltd. In 2000, we changed our name from Point of Sale Ltd. to our current name. Our principal offices are located at 10 Zarhin Street, Ra’anana 43000, Israel, and our telephone number is (011) 972-9-776-6677. Our U.S. agent is our subsidiary, Retalix USA Inc., located at 6100 Tennyson Parkway, Suite 150, Plano, Texas 75024, and its telephone number is (469) 241-8400. Our website address is www.retalix.com. The information contained on, or linked from, our website is not a part of this annual report.
Our ordinary shares began trading on the TASE in October 1994 and on the Nasdaq National Market (now the Nasdaq Global Select Market) in July 1998.
During our initial years of operation in the 1980s and the early 1990s we focused on the development and sales of store level software solutions to food retailers. During the second half of the 1990s we expanded our offerings to cover, in addition to solutions designed for the grocery retail industry, also solutions for the fuel and convenience retail industries as well as solutions covering the management of sales operations at the chain level. During this period we also significantly increased our sales internationally and in particular in the United States. During the period from 1999 through 2003, we strengthened our presence internationally, formed our StoreNext initiatives in Israel and the United States, which are designed to create collaborative communities of small retailers, suppliers and manufacturers, and we enriched our offerings with the introduction of web based and mobile solutions. During 2004 and 2005, with the acquisitions of OMI International Inc., or OMI International, and IDS, we significantly widened our offerings to include supply-chain management solutions for retailers as well as for suppliers and manufacturers. In 2005, we introduced new sophisticated solutions complementing industry focuses and needs, such as customer loyalty and optimization of ordering. Over the last few years we have been developing a Java-based, thin-client, next-generation supply chain management application suite, which we refer to as Retalix InSync, and are continuing to work on enhancing our store-based offerings.
On November 19, 2009, we closed a private placement transaction with the following investors: Boaz Dotan, Eli Gelman, Nehemia Lemelbaum, Avinoam Naor and Mario Segal (individually and via a wholly-owned company), who are referred to collectively as the Alpha Group. We issued to the Alpha Group 3,612,804 ordinary shares, constituting 17.7% of our outstanding share capital (prior to such issuance), and warrants to purchase up to an additional 1,250,000 ordinary shares, for gross consideration of approximately $32.9 million. Together with other shares purchased by the Alpha Group, including from Barry Shaked, one of our founders and our former President and Chief Executive Officer, following the closing the Alpha Group held an aggregate of 20% of the outstanding share capital, and the warrants represent an additional 4.95% of our outstanding share capital (after giving effect to the exercise of such warrants). See Item 6.E of this annual report for information regarding the holdings of the members of the Alpha Group, and see “Material Contracts” under Item 10.C of this annual report for additional information relating to the private placement transaction. Following the closing of the private placement transaction, five of our directors resigned and were replaced with six new directors designated by the Alpha Group, one of whom serves as our chairman of the board. We also hired a new chief executive officer and a new head of corporate development and alliances.
We had capital expenditures of $4.7 million in 2007, $5.1 million in 2008 and $3.0 million in 2009. Our capital expenditures in 2007 and 2008 consisted primarily of the purchase (in unfinished condition) and refurbishing of the 3rd floor of the building in which our corporate headquarters are located in Ra’anana, Israel, for $2.5 million and $3.4 million, respectively, and the purchase of computers and peripheral equipment. In 2008, we also started the implementation of a new ERP system for an aggregate amount of approximately $2.0 million, of which $0.1 million was invested in 2008. In 2009, we continued the purchase of software and related professional services, computers and peripheral equipment related to the ERP system to amount to approximately $1.8 million, and that our capital expenditures related to the 3rd floor refurbishment, levies, improvements and furniture to amount to up to $1.2 million. In 2010, we expect the purchase of software and related professional services, computers and peripheral equipment, office refurbishment and other expenditures of approximately $3.0 million, of which $2.5 million will be in Israel and $0.5 million will be in the United States. We have financed, and expect to continue to finance, these capital expenditures with cash generated from operations.
B. Business Overview
We are a leading provider of integrated software solutions to food and fuel retailers and to grocery, convenience store and foodservice distributors. We design, develop and deliver mission critical software and services solutions to our customers. Spanning the retail and distribution supply chain from the point of sale to the warehouse, our suite of software solutions integrates the information flow across a retailer’s or distributor’s operations, encompassing stores, headquarters and in some cases distribution centers. Our comprehensive solution suite enables retailers and distributors to understand their customers, anticipate demand, elevate customer experience, innovate and differentiate their offerings, manage their operations more efficiently, enhance customer service, reduce operating costs and collaborate more closely with suppliers. Our software solutions also enable retailers to capture and analyze consumer behavior data that can be used to devise and implement more effective targeted promotions and loyalty programs in order to stimulate demand and increase sales. At the same time, our software solutions enable retailers and distributors to reduce shrinkage, inventory and cost of sale. We believe that our deep domain expertise, accumulated experience and focus on developing software and services solutions for our customers in the retail sectors enables us to provide solutions that are better integrated and more tailored for our target markets than competing solutions. We market our software solutions to large and mid-sized supermarket and convenience store chains and major fuel retailers, as well as to large and mid-size foodservice, convenience stores and grocery distributors. In each sector, the customers are typically categorized into “tiers” based mainly on revenue, with Tier 1 referring to the largest entities.
We market our solutions through a worldwide direct sales force. Our direct selling efforts are augmented by a combination of channel partners and resellers. Sales to Tier 1 and Tier 2 food retailers, large convenience store chains, major fuel retailers and large and mid-size foodservice, convenience store and grocery distributors have historically represented a substantial majority of our revenues and we expect this to continue. We target Tier 3 and Tier 4 food retailers through our StoreNext initiatives in the United States and Israel and we may expand this to additional geographies as well. For larger supermarket and convenience store chains, major fuel retailers, and large and mid-size foodservice, convenience store and grocery distributors, 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 food and fuel retail and distribution software industries. We offer software solutions that can serve the needs of the entire range of food and fuel retailers and grocery and convenience store distributors, from multi-national supermarket chains, major food distributors and major fuel retailers to local 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 at more than 50,000 sites in 51 countries. Our customers include leading supermarket/grocery chains and food service distributors such as Big Y, Food Lion, Food Services of America, Hannaford Bros., Hy-Vee, Odom Beverage, Save-A-Lot and Save Mart in the United States, Argos, AS Watsons, Carrefour, Delhaize, Intermarche, Morrisons, Sainsbury’s and Tesco in Europe, large food distributors such as Metcash in Australia, and large convenience stores and major fuel retailers such as BP in Australia, the United Kingdom and North America, Casey’s, Husky, Irving Oil, Love’s, Pilot Travel Centers and The Pantry in the United States and Canada.
Our management is currently in the process of an ongoing assessment of our strategy, which is being conducted over a number of months and which may result in changes to product and service offerings and our short and long term strategic focus and may impact the allocation of our sales force, research and development efforts and other areas of operations.
Our Market Opportunity
The retail food and fuel industries today are characterized by intense competition, resulting in increased pricing pressure and narrowing operating margins. Small retailers are losing customers to their larger competitors that offer aggressive pricing as well as greater shopping convenience and superior customer service. The largest retailers, 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. The distributors that supply many of these retailers are facing the same market trends, as they are asked to become more efficient, to offer better products at lower costs, to consolidate services, to provide visibility into the supply chain and to facilitate the competitive capabilities of their customers – the retailers.
The competition as well as changing shopper dynamics are impacting the market and causing it to transform. Large food retailers and distributors are expanding their operations beyond their traditional focus on food supermarkets to encompass additional retail formats, such as convenience stores, food service, fuel stations and quick service restaurants, or QSRs. 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. Additional blurring of traditional retail sectors also includes grocery stores increasing their offering of non-food products and non-food retailers entering into the food business. Similarly, competition has reduced margins at the fuel pump, causing large fuel retailers to add convenience store and QSR formats in an effort to increase their overall margins. This has further increased competition in the convenience store and fuel station market sectors, which in turn favors the large retailers and distributors that can leverage their size and scale to realize operating efficiencies, thereby lowering their cost base and allowing them to deliver lower prices. Globalization also plays an important factor in how the market is shaped, with major retailers who are well established in their developed core markets globalizing their operations in order to seek new growth engines. All of the above factors create an increased focus to enable customers to have a superior consumer experience. We are uniquely positioned to address these challenges.
In addition to these revenue driving opportunities, retailers use sophisticated retail information systems, often developed in-house, that provide them with comprehensive visibility into their supply chain. Armed with such visibility, these retailers and distributors can more efficiently execute and track all of their operational tasks, such as order optimization, inventory management, merchandising and pricebook management. In addition, this 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 and distributors
In order to compete more effectively, food and fuel retailers and distributors need information systems comparable to those used by the largest food retailers, distributors and major fuel chains in order to be able to realize additional operating efficiencies. In particular, retailers and distributors require robust information systems that can:
However, in order to deter customers from shifting their patronage to the largest chains, smaller retailers and distributors 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 enhanced 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 and distributors are increasingly seeking information systems that can, in addition to achieving operating efficiencies, also:
The food and fuel software opportunity
Many food and fuel retailers and distributors 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 and distributors operate information systems that are difficult to adapt to today’s intensely competitive retail and distribution industries. Typically, these retailers’ and distributors’ existing information systems consist of stand-alone Point-of-Sale, or POS, systems with little 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 and distributors 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 and distributors 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 operations, support collaboration among retailers, distributors and 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 retailer’s existing IT infrastructure. Systems meeting such criteria provide retailers and distributors with the flexibility to modify their information systems to respond to and manage their changing business environment.
Our software solutions provide a robust and comprehensive suite of applications for retailers and distributors, addressing all three principal divisions of the retail and distribution channel – retail stores, headquarters (also called the enterprise level), and warehouses and distribution centers, and enhancing the close relationship and collaboration between retailers and distributors. Our solutions are designed to deliver “synchronized retail” where data and applications are communicating seamlessly between the point-of-sale and supply chain to deliver the greatest cost advantages and revenue generation capabilities to our customers. We believe that our solutions differentiate us from other providers of software solutions to the retail and distribution food and fuel industries because they combine the following attributes:
Our integrated solutions span the retailers’ and distributors’ organization
We believe that our integrated suite of software solutions is unique among retail and distribution food software solutions, in that it combines the essential elements of an enterprise-wide information system – stores, headquarters and warehouses. Such an integrated solution permits retailers and distributors to generate substantial operating efficiencies and cost savings through efficient management of sales, inventory, purchasing and merchandising.
Our solutions provide for both retail operations management and customer management
While retail enterprise solutions have traditionally focused exclusively on operations management – principally supply chain and merchandising processes – our enterprise solutions also include sophisticated customer management tools. Our customer management tool, Retalix Loyalty and Promotions, focuses 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 analysis capabilities enable retailers to explore and analyze customer transactions in detail, allowing them to closely monitor customer spending patterns and to target promotions to their loyalty program members.
Our demand science solutions provide consistent demand data throughout the enterprise and the supply chain
Providing consistent demand data for each item throughout the enterprise, from store replenishment to distribution center forecasting and purchasing, is a key requirement for supply chain efficiency, reduced goods shrinkage, reduced out-of-stock situations and increased sales. We believe that our high investment in demand science and the implementation of this science throughout the supply chain give us significant advantages compared to our competitors, and give our customers significant advantages compared to their competitors.
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 QSRs, and to support a variety of consumer service points, such as kiosk, self-scanning, self-weigh and self-checkout. This assists retailers in attracting new customers and in improving existing customer retention by 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 initiatives in the United States and Israel operate enterprise-level applications, such as pricebook, promotions, loyalty, reporting and analysis services, on a software-as-a-service 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. Our Connected Services (described below) allow independent retailers and small chains, in return for a 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 software solutions can support the multi-national operations of leading Tier 1 food and 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 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 that have stores near national borders, as well as multi-national retailers that prefer licensing software from a single vendor for all their locations.
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 retailer’s POS system for even a few minutes could result in substantial loss of sales, as well as significant customer dissatisfaction. Moreover, the data generated in these transactions are equally mission-critical, and the loss of such data could significantly impair a retailer’s 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 and the risk of data loss. We have developed a software architecture designed to support the high volume, multiple format environments of the largest food retailers and distributors 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 Carrefour, Tesco, Sainsbury’s and Woolworths is a strong testament to the robustness and resilience of our in-store solutions.
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 develop our next generation solutions based on a “thin client” architecture, using service oriented architecture and software technologies (J2EE and Microsoft .Net). 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 enterprise’s 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. This capability to provide for a “thin POS” and a “thin office” solution allows a choice of additional flexibility and cost savings, as part of our product suite.
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 and distributors 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 retailer’s existing systems to our enterprise and in-store solutions, thereby ensuring quicker time to market. This feature also allows the retailer and distributor 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 enterprise solutions can be easily customized, localized and personalized
Large and mid-size retailers and distributors require that software products be tailored to fit their operational needs. In many cases, such a requirement demands huge implementation efforts. Our products were designed and built to facilitate customer customization with reduced efforts. In addition, multinational retailers may operate in several locales or countries, and require specific customization per locale, and in some cases personalization capabilities. We offer to meet these needs as part of our customization capabilities.
Our Growth Strategy
The principal elements of our strategy to achieve our growth objectives are as follows:
Leverage our integrated suite of products to enhance our leadership position and become the leading provider of retail software solutions to the retail and distribution 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 checkout counter to the warehouse. We extended our product offering from in-store solutions to include integrated enterprise level and head office applications. We have added powerful pricing, inventory and DSD capabilities to our offering and have expanded our product offering to include distribution, supply chain execution and warehouse management systems. We believe that with our integrated solutions, we are well positioned to leverage our large customer base to become the leading provider of retail solutions to the retail and distribution food and fuel industries.
Continue to target Tier 1 and Tier 2 retail food chains, food distributors and major fuel chains operating legacy IT systems
The majority of Tier 1 and Tier 2 retail food chains, food distributors and major fuel chains continue to operate outdated legacy systems that do not provide the functionality required to implement and support the new applications and workflow processes that are necessary to compete effectively in today’s 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’ and distributors’ 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 food and fuel industries. In order to address a broader set of retailers’ and distributors’ 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. 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 introduced in 2003 a new “thin client” POS software application, and announced the first installation of this new solution built on the Microsoft .NET platform. In September 2005, we announced the introduction of Retalix InSync, our new J2EE-based platform and solution portfolio for retail, supply chain execution and warehouse management systems. In late 2006, we started implementing our beta versions of the Retalix loyalty system, which is comprised a central Microsoft .NET web-based application and a store promotion and loyalty engine. In 2006, we also introduced a self-checkout application based on our core application, StoreLine. In 2007, we announced the POS Presentation Layer, which includes a user interface editor to achieve, with no code changes, a customer tailor-made graphical user interface, or GUI, layer for all POS formats. In 2008, we announced the Dynamic Receipt Engine product, which provides innovative, flexible customer receipt editor and runtime executor to run next to the POS engine. The initial implementations of these new solutions are already taking place.
Enhance our global service offering
In 2010 we established a global service group, which will emphasize cross-departmental organization and concentration of effort, while ensuring high quality delivery of our product offering. The global service group intends to offer our customers lower total cost of ownership and an enhanced customer experience. We in turn would benefit from a stable and recurring stream of revenue. Over time, we will provide a broader range of services, which are tightly linked to our software, covering the full project lifecycle, and we are now in the process of expanding our offering. These product led services, coupled with our global deployment ability, will enable us to deepen our customer relationships and make them more strategic. They will further differentiate us due to the ability to provide a closed loop between development, deployment and support of our products and provide our customers with one point of accountability for the end result.
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 our ability to support multiple enterprises from a single data center, we are now able to offer enterprise level applications, such as electronic payments, sales analysis, product and price management, promotions, loyalty, demand replenishment, loss prevention and information services, to Tier 3 and Tier 4 retailers on a SaaS basis. We provide these Connected Services through StoreNext in return for a 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. As of December 31, 2009, StoreNext USA has connected more than 2,500 stores and StoreNext Israel has connected over 1,500 stores and over 1,500 suppliers. 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 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, and to optimize their supply replenishment strategy. As we add more retailers to our Connected Services, we are able to offer suppliers an increasingly 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, timely and accurate view of the marketplace. We first established a community for suppliers in the retail food industry in Israel, where the number of retailer subscribers to our Connected Services through our StoreNext Israel initiative has reached a critical mass. We intend to provide similar collaboration services through our StoreNext USA initiative as the number of subscribers to our Connected Services in the United States grows. We 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 expand our product offerings and market position. We continue to evaluate opportunities to acquire complementary businesses and technologies in the retail and distribution information systems market in order to improve service to our customers, complement our product offerings, increase our market share, advance our technology, expand our distribution capabilities and penetrate new targeted markets.
Continue to expand into new geographic markets and additional retail and distribution market sectors
In the past our primary geographic markets were North America, Israel and Europe. In 2004, we announced significant sales in new markets, such as France and Italy in Europe, and China, Japan and India in Asia. In 2005, we announced significant new business in Australia, and in 2006 we strengthened our activities in Eastern Europe, focusing on Russia. In 2007, we continued to build a market presence in China, Japan and Russia. In 2008, we started to build a presence in the Spanish market. In addition, we may expand into other types of retail sectors, such as department stores and general merchandise, which have retail characteristics that are similar to the food and fuel retail and distribution 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, customer management needs and certain supply chain management and execution needs of the entire range of food and fuel retailers and distributors, from multi-national supermarket and major convenience store chains and major fuel retailers to local independent grocers. We offer our customers a suite of software products to address the principal elements of their retail operations:
In-Store Solutions: Suite of software solutions that provides supermarkets, convenience stores, fuel retailers and QSRs with applications supporting multiple types of customer service points, such as regular checkout, self-service kiosk, 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, StoreNet for the grocery and health and beauty market and StorePoint for the convenience store, fuel retail and QSR market – as well as additional back-office modules, Retalix Pocket Office and Retalix Store, and Retalix DemandAnalytX (DAX) for demand forecasting and order optimization. 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 Retalix StoreLine and Retalix StorePoint solutions.
Enterprise Headquarters Solutions: Suite of software tools that provides retailers and distributors with a comprehensive, modular solution which centralizes operation and management of their enterprise-wide and back-office activities such as product and price planning and management, promotions, merchandising, inventory management, direct store delivery management, receiving and ordering, and reporting and analysis. Our enterprise solutions also provide customer relationship management tools, enabling a wide variety of personalized and targeted promotions and loyalty card-based marketing techniques. For the grocery retail market our main offerings are the integrated in-store and headquarters software, now marketed as Retalix Store and Retalix HQ. For the fuel and convenience store markets our main product is our Microsoft .Net-based headquarters solution for convenience store, Retalix HQ-Convenience (HQC). For the food and convenience distributors, our main offering is Retalix Power Enterprise.
Supply Chain Management Solutions: Suite of supply chain management and warehouse management software solutions that provides retailers and distributors with a range of applications designed to help them optimize and manage the flow of goods through a complex supply chain network, which includes the suppliers, multi-facility warehouses and distribution centers and down to the stores. These applications include warehouse management, automated procurement for the stores and warehouses, merchandising, order management, order-optimization, invoice reconciliation, transportation management, yard management, and dock scheduling. Our supply chain execution and warehouse management systems consist of TRICEPS Warehouse Management (WMS), BICEPS Purchasing Management, PROMPT Invoice Matching, Retalix Yard Management (formerly marketed as MDS) and ABS Billing and Order Management. Our Retalix InSync solution portfolio will consolidate some of these offerings into a single product portfolio.
Food Distribution Enterprise Solutions: A suite of supply chain execution and warehouse management software solutions that provides food retail and food service distributors with a complete solution to run their business. This suite of products includes modules that provide purchasing, ordering, billing, rebates, accounting, electronic data interchange, or EDI, tradeshow management, and warehouse management (WMS) package for foodservice or grocery distribution; a web based ordering portal for retailers ordering from a foodservice, convenience store or grocery distributor; a web based supplier portal; a portable sales force automation solution for the food service industry; and a handheld solution for distributors. Our distribution solutions also include a suite of transportation management applications for food retail and food service distributors, including Retalix Dock Scheduling and Retalix Traffic Management.
SaaS and Supplier Solutions: Our StoreNext solutions, named ISS45 (which is StoreLine packaged version for Tier 3/Tier 4), tailored to smaller chains and independent grocers, enable smaller establishments with limited IT resources to enjoy the benefits of our headquarters and back office applications through an SaaS model, which we host and is 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 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. Although 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 retailer’s operations: the retail store, the headquarters or enterprise, and the warehouse and distribution center, as well as the distributors’ solutions. 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.
The following is a summary of our products as of the date hereof; names and features are subject to change from time to time.
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 retail fuel market.
Retalix 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, Retalix StoreLine provides retailers with a comprehensive set of supermarket operational and management capabilities. Retalix StoreLine also offers interfaces to enterprise level systems and to third-party applications as well as to payment service providers. The Retalix 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, Retalix 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, Retalix StoreLine’s 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 Retalix StoreLine software suite supports additional integrated modules, such as:
Retalix StoreLine QSR – touch-screen based POS application for in-store quick service restaurants;
Retalix Fuel – system that supports a variety of fuel payment modes including pre-pay, pay-at-pump, pay-in-store and payment by automatic vehicle identification devices;
Retalix Self Checkout – customer self-scanning checkout that requires little or no staff assistance and, through integration with the back- office, ensures up-to-date pricing and promotions;
Retalix U-Weigh – easy to use, touch-screen customer-operated device for weighing fruit and vegetables that saves customers time at the checkout and allows retailers to make real-time price adjustments; and
Retalix Kiosk – multimedia information and sales kiosk that, through integration with our enterprise solution, provides real-time, in- store information on merchandise, pricing and promotions.
Customized versions of Retalix StoreLine software solutions include ISS45, which is distributed by StoreNext USA, Retalix Next, which is distributed by Retalix Israel to independent retailers in Israel, 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 Retalix 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.
Retalix StoreNet is a flexible deployment store solution (from thin client version of the POS to thick POS product) developed on the Microsoft .NET platform. Retalix StoreNet allows retailers to access POS applications 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. StoreNet was first deployed in 2003 at all Partner Communications stores in Israel (the Israeli franchisee of Orange plc, the international cellular communications operator). In 2007 Retalix StoreNet was deployed in supermarkets owned and operated by Supersol, Israel’s largest grocery retailer. The rollout to Supersol stores is complete.
Retalix 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 food service sales. In addition, StorePoint also provides extensive front office and back-office functionality, such as ordering and receiving, inventory management, petroleum inventory 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:
Retalix Fuel – system that supports a variety of fuel payment modes including pre-pay, pay-at-pump, pay-in-store and payment by audio-video-interleave devices;
Retalix Forecourt Server – software forecourt controller that can serve as a cheaper and a functionally richer option than the traditional hardware-based forecourt controllers, enabling control of fuel pumps, fuel tanks, price polls and other forecourt devices;
Retalix QSR – touch-screen based, easy-to-use application for selling quick-service food service to match any fast food, espresso bar, and food service type establishments. Includes the necessary inventory functions defining product tree, waste control, etc. as well as order preparation instructions and interactive kitchen order screens; and
Retalix Self-Serve – food service with self-order stations and drive-thru operations support.
In addition to StoreLine and StorePoint, we offer additional products for managing a retailer’s 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 HQ, StoreLine and StorePoint solutions and with our Power Enterprise solution. 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 initiative.
Retalix Store, a store back-office application, is used in North America by Tier 2 and Tier 3 retailers. It has powerful price generation and competitive pricing features, DSD management and reconciliation, inventory management and POS connectivity to most existing POS systems. Retalix Store is a Delphi based client-server solution, and is database independent.
Our DemandAnalytX software suite interprets store-level POS data, forecasts consumer demand and determines optimized replenishment orders, enabling retailers and distributors to improve 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 out-of-stock situations.
Retalix HQ, a headquarters application, is a retail headquarters system used in North America by Tier 1 through Tier 3 retailers. It has powerful price generation and competitive pricing features, DSD management and reconciliation and POS connectivity to most existing POS systems. Retalix HQ is a Delphi based client-server solution, and is database independent.
Retalix HQ for C-Stores (HQC) – HQ Solutions for Convenience Stores and Fuel Retailers (HQC)
HQC is a Microsoft .NET web-based application that provides large and mid-size convenience store chains with a comprehensive, modular solution addressing their retail headquarters needs, including product management, store sales audit and alert capabilities and reporting and analysis. Combining both head-office and back-office applications, HQC is integrated with our convenience store in-store solutions, allowing for synchronized information flow between the head-office and back-office.
HQC is an integrated set of modules addressing a convenience store retailer’s operations, including:
Retalix Loyalty and Central Promotions
Retalix Loyalty and Central Promotions is a set of consumer-oriented electronic marketing tools that enables retailers, at the enterprise level and the store level, to implement a wide variety of broad-based, promotions and loyalty card-based marketing programs. Retalix Loyalty allows retailers, through the use of targeted 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. The main advantages of Retalix Loyalty include providing retailers the ability to:
Supply Chain Management Solutions
Retalix TRICEPS Warehouse Management
Retalix 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.
Retalix BICEPS Purchasing Management
Retalix 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 transactions, costing, movement and forecasting data and to 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.
Retalix PROMPT Invoice Matching
Retalix PROMPT Invoice Matching is a fully automated invoice reconciliation system that integrates a retailer’s 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 vendor’s 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.
Retalix Yard Management (formerly MDS)
Through the use of RF identification tags, Retalix Yard 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.
Retalix ABS Billing and Order Management
Retalix 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.
Retalix Power Enterprise
Retalix Power Enterprise provides a complete solution for foodservice, convenience store or grocery distributors. Includes enterprise master data management, purchasing, ordering, billing, light warehouse management, rebates, accounting, EDI, tradeshow management, and other features; based on the IBM iSeries technology and the DB400 database; has a Java based GUI;
Retalix Power Warehouse
Retalix Power Warehouse is a full featured WMS application for foodservice, convenience store and grocery distribution. Main modules include: receiving, inventory management, shipping, labor management, voice and RF directed movements and others; based on the IBM iSeries technology and the DB400 database; has Java based GUI;
Retalix Power Buy
Retalix Power Buy is an advanced buying application for foodservice, convenience store and grocery distribution that supports seasonality trends, buyers workflow, and other areas; based on the IBM iSeries technology and the DB400 database; has Java based GUI;
Retalix Power Sell
Retalix Power Sell is a PC based sales-force automation software tool to assist sales agents of foodservice, convenience store and grocery distributors in their work while visiting customers (retail chains, food service locations, etc.);
Retalix Power Net
Retalix Power Net is a web based Portal that includes 2 main modules: Customer Portal for retailers ordering from a foodservice, convenience store or grocery distributor; and Supplier Portal for suppliers’ relation management and collaboration with a foodservice, convenience store or grocery distributor.
Retalix Dock Scheduling
Retalix Dock Scheduling is used by operators of distribution centers to manage all planned shipments, allowing for quick carrier assignment and scheduling. Loading/unloading duration calculations are done by the planning module or defined by the scheduler. Retalix Dock Scheduling automatically displays available appointments by load due date and recommends the appropriate dock and door group. Retalix Dock Scheduling’s Carrier Web-Scheduling module allows user approved carriers to schedule their own appointments via the internet. The system’s drop yard module provides visibility and detailed tracking of drop trailers and containers throughout the shipping and receiving process and enables products to be easily located at the facility by trailer and location. This helps to eliminate expensive detention and demurrage charges by identifying and prioritizing trailer and container loading and unloading.
Retalix Traffic Management
Retalix Traffic Management is a complete traffic management system for food and consumer goods distributors. Designed to seamlessly interface with existing procurement and warehouse management applications, the system eliminates manual activities including fleet costing, carrier rate selection, vendor allowance calculations, pallet control, performance monitoring and reporting and management income reports. Retalix Traffic Management supports fleet costing by calculating mileage charges, driver labor costs, straight and overtime, unloading costs and miscellaneous costs such as layover charges. It also calculates cost based on the incremental mileage incurred in making a backhaul pickup. A variety of customizable reports enables users to track new revenue generating opportunities and provide real-time measurement and control.
In September 2005, we announced our new next-generation portfolio of synchronized applications – the only complete suite designed and developed specifically to meet the requirements of retailers, distributors and operators in the grocery and foodservice industries. Retalix InSync brings together more than 20 years of accumulated industry and software development expertise and experience from us, OMI International, IDS and TCI Solutions.
Retalix InSync is based on state-of-the-art technology and architecture, including such technical features as:
The Retalix InSync solution portfolio currently includes the following:
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 initiatives, we have leveraged our ability to support multiple enterprises from a single platform to offer our applications to these independent and small chain food retailers on a Software-as-a-Service (SaaS) basis. These SaaS solutions, or Connected Services, allow independent retailers and small chains, in return for a 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 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, as well as aggregated market share information. We first established a community for suppliers in the retail food industry in Israel, where the number of retailer subscribers to our Connected Services through our StoreNext Israel initiative has reached a critical mass. We intend to provide similar services through our StoreNext USA initiative 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.
Our professional services personnel provide customers with expertise and assistance in planning, designing and implementing our 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.
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 POS product offerings.
We believe that our professional services personnel facilitate a retailer’s 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.
Principal Markets and Customers
Our software has been deployed worldwide in supermarket and grocery stores, convenience stores, fuel retailers and quick service restaurants. Our software is also used in North America and Australia by foodservice, convenience and grocery distributors.
The following table provides a breakdown by geographical area of our revenues and relative percentages during the last three fiscal years (dollars in thousands):
See "Operating Results—Comparison of 2007, 2008 and 2009" under Item 5.A of this annual report for a breakdown of our revenues by category of activity.
The following list is a representative sample of companies that purchased an aggregate of at least $200,000 of our products and services in 2008 and 2009 combined.
The StoreNext Initiatives
StoreNext Retail Technology LLC, which we refer to as StoreNext USA, is a wholly owned subsidiary which provides POS hardware and software and Connected Services to the independent and small chain grocery market sectors (Tier 3 and Tier 4 retailers). This initiative manages the regional dealer channels for the Tier 3 and Tier 4 grocery market sectors. Retalix receives revenues from the sale of its software solutions to StoreNext USA. StoreNext USA has recently begun to offer Connected Services to these Tier 3 and Tier 4 food retailers. As of December 31, 2009, we estimate that StoreNext USA has more than 2,500 stores that have signed up to Connected Services.
StoreAlliance.com Ltd., which we refer to as StoreNext Israel, provides Connected Services to food retailers and suppliers in Israel. 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 over 1,500 stores and over 1,500 suppliers.
StoreNext Israel is a business initiative controlled by us. In addition there are three other Israeli shareholders in this initiative: Discount Investment Corporation Ltd.; Isracard, a subsidiary of Bank Hapoalim, one of Israel’s largest banks; and the Central Bottling Company Ltd. (Coca Cola Israel). In addition, approximately 270,000 ordinary shares of StoreNext Israel, or approximately 7.7% of StoreNext Israel’s issued and outstanding share capital, were reserved for issuance upon the exercise of options granted to our StoreNext Israel’s employees. In November 2008, 65,000 options were exercised and as of December 31, 2009, all the unexercised options are forfeited. An additional 90,000 ordinary shares of StoreNext Israel, or approximately 2.3% of StoreNext Israel’s issued and outstanding share capital, are reserved for issuance upon the exercise of options granted to employees of Coca Cola Israel. An additional 305,973 ordinary shares of StoreNext Israel, or approximately 7.9% of StoreNext Israel’s issued and outstanding share capital, were reserved for issuance upon the exercise of an option granted to Isracard, which was forfeited in October 2009. As of December 31, 2009, we owned directly and through one of our wholly owned subsidiaries, approximately 51.5% of the issued share capital of StoreNext Israel.
Certain distributions by StoreNext Israel to its shareholders require the consent of certain shareholders. Our shares in StoreNext Israel are subject to certain put and call options held by other shareholders of StoreNext 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, Asia, Australia, South Africa and Israel, augmented by a combination of channel partners and integrators. Sales to Tier 1 and Tier 2 supermarket and convenience store 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, subsidiaries and through our StoreNext initiatives in the United States and Israel. For larger supermarket and convenience store chains, fuel retailers and distributors, 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, from time to time, in marketing programs with several companies, including IBM and Microsoft. 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, Italy, France, Australia, Japan, China and Israel. Our sales force sells our products directly to supermarkets, convenience stores and fuel retailers and distributors within these countries and also relies on trade shows, promotions and referrals to obtain new customers.
In 2001, we joined IBM Corporation’s 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 convenience store market. We are included on IBM’s ISV partner list.
We also work closely and have a partner relationship with Microsoft. We may also explore additional such relationships with other major players in the future.
We have direct distribution agreements for the sale of some of our products with partners in Australia, Bermuda, Canada, Chile, China, Finland, Greece, Japan, Mexico, New Zealand, Norway, the Philippines, South Africa, Switzerland, Russia, the United Kingdom, the United States and Venezuela. 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 principal competition in the supermarket and grocery market for in-store solutions has traditionally come from integrated IT vendors such as IBM, NCR and Wincor-Nixdorf (which usually provide their software integrated with their hardware), as well as local or regional software providers such as PCMS and Torex. On the enterprise level, our principal competitors in the supermarket and grocery market are SoftTechniques and BRData, as well as in-house developed solutions. We also experience competition from both independent retail industry focused software vendors such as JDA and Aldata, and from larger ERP software companies such as Oracle (which acquired Retek and Profitlogic) and SAP (which acquired Triversity and Khimetrics). 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, Pinnacle Systems, Gilbarco, VeriFone and Wincor-Nixdorf. In the supply chain management markets, our competition includes Manhattan Associates, Oracle, Red Prairie and SAP on the high end and companies such as AFS Technologies Inc., Vermont Information Processors and Vormittag Associates Inc. on the low end. Some competitors, such as Wincor-Nixdorf and IBM, are also our marketing partners in several market sectors or locations.
The market for retail software systems is highly competitive and subject to rapidly changing technology. We believe that the primary competitive factors impacting our business are as follows:
We sell hardware manufactured by third parties to some of our customers, such as point of sale and other store-level computer hardware, mobile computer terminals, scanning equipment, printers, equipment used in warehouses, etc. We buy these hardware components from various suppliers including DataLogic, Fujitsu, IBM, LXE, Motorola and Vocollect.
C. Organizational Structure
We have the following subsidiaries and related companies:
Our Israeli corporate headquarters are located in Ra’anana, Israel, where we occupy approximately 10,400 square meters of office space, of which approximately 8,000 square meters represent ownership rights under a long-term lease from the Israel Lands Administration and approximately 2,400 square meters are leased from other third parties for shorter terms. In 2007, we purchased the 3rd floor (in unfinished condition) of the building in which our corporate headquarters are located in Ra’anana, Israel.
In addition to our corporate headquarters in Ra’anana, Israel, we currently lease approximately 50,400 square feet of office space in Plano, Texas that serves as our U.S. headquarters. We also lease offices in Arizona, Kansas, Michigan, Nebraska, Ohio, Oklahoma, Pennsylvania and Texas, as well as in Gatwick, England, Bolengo, Italy, Paris, France, Sydney, Australia, Tokyo, Japan, and Petah-Tikva, Israel. We believe our facilities are adequate for our current and planned operations.
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 a leading provider of integrated software solutions to food and fuel retailers and to grocery, convenience store and foodservice distributors. Spanning the retail and distribution supply chain from the point of sale to the warehouse, our suite of software solutions integrates the retail information flow across a retailer’s or distributor’s entire operations, encompassing stores, headquarters and warehouses. Our comprehensive integrated solution suite enables retailers and distributors to manage their operations more efficiently, reduce costs and collaborate more closely with suppliers. Our software solutions also enable retailers to capture and analyze consumer behavior data that can be used to devise and implement more effective targeted promotions and loyalty programs in order to stimulate demand and increase sales. At the same time our software solutions enable retailers and distributors to reduce shrinkage, inventory and cost of sale.
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 certain intellectual property assets from BGI International in 2007, and Base Products in February 2006, TCI Solutions and IDS in April 2005.
We generate revenues from the sale of licenses for our software solutions, complementary computer and other hardware equipment, 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 supermarkets and convenience store chains and major fuel retailers, 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.
We also generate revenues from sales of licenses for our software solutions, maintenance and related services to smaller grocers in the United States and to a lesser extent in Israel. To some extent, we also sell hardware manufactured by third parties to such customers, such as point of sale and other store-level computer hardware, mobile computer terminals, scanning equipment, printers, equipment used in warehouses, etc. In addition, leveraging on our ability to support multiple enterprises from a single data center, we offer smaller grocers in the United States and Israel a variety of hosted applications, such as pricebook, promotions, loyalty and information services, which we refer to as Connected Services (recently also referred as SaaS), as well as Connected Payments programs, which are payment processing services through a joint venture with our payment processing software partner, MTXEPS Inc. We receive subscription fees for these Connected Services and Connected Payments programs. We anticipate that revenues relating to these Connected Services will account for a growing portion of our overall revenues in future periods.
During 2009, we continued our strategy of focusing on large and mid-size supermarkets, large convenience store chains and major fuel retailers. In addition, we continued to derive benefits from the companies and businesses we acquired in recent years and in particular the IDS acquisition which strengthened and widened our offering in the supply chain and warehouse management areas.
Recent turmoil in global financial and credit markets has caused liquidity problems for many financial institutions and adversely affected investor and consumer confidence generally. This has resulted in a curtailment of capital investment by many of our existing and potential customers, which has adversely affected our revenues and results of operations. Conditions may continue to be depressed or may be subject to further deterioration, which could lead to a further reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their orders of our products and the inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity. Although we did not experience any significant customer default and customer payment was strong in 2009, we cannot assure that we will not experience difficulty in collection in the future. A significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to previous purchases by that customer. As a result, our reserves for doubtful accounts and write-offs of accounts receivable may increase.
As a result of the uncertain economic climate around the world, in 2009 we continued to implement additional cost-cutting measures. These measures included a decrease in our workforce by 129 employees, primarily in the areas of research and development and marketing.
Highlights of the past three years include:
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include our accounts and the accounts of our subsidiaries.
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 management’s judgment in its application, while in other cases, management’s 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 management’s judgments and estimates.
Allocation of expenses>
We make estimates and judgments to classify certain expenses to various expense line items in our statement of income. Whether we classify a particular expense as a cost of revenues or as an operating expense affects the amount of our gross profit but does not affect our operating income. Using our time reporting data, which reflects the type and quantity of work performed by our employees in our various business activities, we classify our expenses applying certain guidelines and principles as follows: First, we classify all billable customer work as cost of revenues. Second, we classify all research and development work related to our product enhancement activities as research and development expenses. Finally, we classify expenses as sales and marketing or as general and administrative specifically based on their nature. Certain overhead costs are attributed to the various expense line items based on the portion of each cost group's employees in the time reporting data.
Our revenue recognition policy is critical because our revenue is a key component of our results of operations. We derive our revenues from the licensing of integrated software products. To some extent we also derive revenues from the sale of complementary computer and other hardware equipment. We also derive revenues from maintenance and other professional services which are principally software changes and enhancements requested by customers, as well as on-line application, information and messaging services, mostly associated with products sold by us and which we classify as revenues from services.
Determining whether and when some of the criteria required to recognize revenue have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific objective evidence of fair value exists for each undelivered element and to determine whether and when each element has been delivered. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Revenues from sales of product and software license agreements are recognized when all of the criteria in ASC 985-605, “Software Revenue Recognition” (formerly Statement of position (“SOP”) 97-2), are met. Revenues from products and license fees are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, no further obligations exist and collectability is probable.
Revenues from software licenses and/or sale of products that require significant customization, integration and installation are recognized based on ASC 605-35, “Construction-type and production-type contracts” (formerly SOP 81-1), according to which revenues are recognized on a percentage of completion basis. Percentage of completion is determined based on the “Input Method” and when collectability is probable. After delivery of milestones, if uncertainty exists about customer acceptance, revenue is not recognized until acceptance. Provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of the losses is identified. As of December 31, 2009, no such estimated losses were identified.
Where software license arrangements involve multiple elements, the arrangement consideration is allocated using the residual method. Under the residual method, revenue is recognized for the delivered elements when (1) Vendor Specific Objective Evidence, or VSOE of the fair values of all the undelivered elements exists, and (2) all revenue recognition criteria of ASC 985-605, as amended, are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Our VSOE of fair value for maintenance is based on a consistent statistical renewal percentage derived from the majority of maintenance renewals. Revenues from maintenance services are recognized ratably over the contractual period or as services are performed.
Revenues from professional services that are not bundled or linked to a software sale are recognized as services are performed in accordance with the provisions of ASC 605-20 “Services” (formerly Staff Accounting Bulletin (“SAB”) 101 and SAB 104).
Hardware sales are recognized on a gross price basis, in accordance with ASC 605-45, 605-45 “Principal Agent Considerations” (formerly EITF 99-19, “Reporting Gross Revenue as a Principal versus Net as an Agent”).
In cases where the products are sold to smaller retailers, through resellers, revenues are recognized as the products are supplied to the resellers in accordance with the provisions of ASC 605-15, “Products” (formerly SFAS No. 48, “Revenue Recognition When Right of Return Exists”). In specific cases where resellers have the right of return or we are required to repurchase the products or in cases when we guarantee the resale value of the products, revenues are recognized as the products are delivered by the resellers.
Revenues from on-line application, information and messaging services, are recognized as rendered in accordance with the provisions of ASC 605-20.
Deferred revenues include advances and payments received from customers, for which revenue has not yet been recognized.
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.
Goodwill and Intangible Assets
ASC 350, “Intangibles - Goodwill and Other” (formerly SFAS No. 142 “Goodwill and Other Intangible Assets”), requires that goodwill and intangible assets with an indefinite life be tested for impairment on adoption and at least annually thereafter. Goodwill and intangible assets with an indefinite life are required to be written down when impaired, rather than amortized as previous accounting standards required. Goodwill and intangible assets with an indefinite life are tested for impairment. Goodwill impairment testing is a two-step process. The first step involves comparing the fair value of a company’s reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit.
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relations, acquired developed technologies and trade names, and values of open contracts. In addition, other factors considered are the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
If we do not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of depreciation and amortization expense may not appropriately reflect the actual impact of these costs over future periods, which will affect our net income.
Fair values are determined by using a discounted cash flow methodology for each business unit. The discounted cash flow methodology is based on projections of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit. We also consider factors such as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements. Additionally, the discounted cash flow analysis takes into consideration cash expenditures for further product development. We perform our annual impairment tests in the fourth quarter. In the fourth quarter of 2009, as a result of our analysis, we determined that the fair value of each unit supported its carrying amount. We also conduct a sensitivity analysis to assess whether an impairment would occur if certain parameters, such as the unit’s projected growth rate and its weighted average cost of capital, were adversely changed to a reasonable degree. In the fourth quarter of 2009, we determined that the fair value of each unit supported its carrying amount even under such revised assumptions.
In December 2008, we conducted a goodwill impairment test on the goodwill acquired in our various reporting units, taking into account the decrease in our market capitalization in the latter part of 2008 and the global economic downturn that negatively affected the computer software market. Following a determination that the carrying value of the goodwill exceeded its fair value, we concluded in our goodwill impairment test that the goodwill acquired in the US reporting unit had been impaired and therefore, in the fourth quarter of 2008, we recorded an impairment charge of $58.2 million. As a result of the goodwill impairment, a temporary difference was created for the goodwill portion on which tax amortization is applied, resulting in an approximately $4 million increase in deferred tax assets.
Should future results or economic events cause additional changes in projected cash flows, share price decline or changes to other assumptions, or should our business or operational strategies change, future determinations of fair value may not support the current carrying amount of a reporting unit, and the related goodwill would need to be written down further to an amount considered recoverable.
Stock based compensation
ASC 718 “Compensation – Stock Compensation” (formerly SFAS No. 123 (Revised 2004), “Share-Based Payment”), requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We selected the Black-Scholes option pricing model as the appropriate fair value method for our stock-options awards based on the market value of the underlying shares at the date of grant. We recognize compensation costs using the accelerated vesting attribution method that results in an accelerated recognition of compensation costs in comparison to the straight line method.
In addition, we use historical stock price volatility as the expected volatility assumption required in the Black-Scholes option valuation model. As equity-based compensation expense recognized in our consolidated statement of income for fiscal 2007, 2008 and 2009 is based on awards ultimately expected to vest, such expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Accounting for stock based compensation requires significant subjective judgment. Such judgment is implemented in this context in choosing the appropriate pricing model upon which the fair value of stock based compensation is measured as well as a variety of factors involved in the fair value computation, such as volatility, rate of forfeiture, etc.
Should economic events or our business or operational characteristics change, or should there be a change in the habits of our employees with respect to stock option exercises and forfeitures, future determinations as to fair value may significantly change the value attributed to stock based compensation and significantly impact our results of operations.
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.
Additional discussion of accounting characteristics
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 mainly generate revenues in dollars or in NIS linked to the dollar. 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 Retalix Italia, StoreAlliance.com Ltd., StoreNext Ltd., TradaNet Electronic Commerce Services Ltd., DemandX Ltd., Retail College StoreNext Ltd., or, collectively, the StoreAlliance group, and Cell-Time Ltd., or Cell-Time, is their local currency (Euro and New Israeli Shekel, respectively). The financial statements of Retalix Italia are included in our consolidated financial statements translated into dollars in accordance with ASC 830 “Foreign Currency Translation” or ASC 830. 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 the StoreAlliance group are included in our consolidated financial statements translated into dollars in accordance with ASC 830. Accordingly, assets and liabilities are translated at year end exchange rates, while income statement 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 ASC 830; the resulting translation adjustments are presented under shareholders’ equity, in the line item “Accumulated other comprehensive income.”
Sources of Revenue
We derive our revenues from the licensing of integrated software products, and to some extent also from the sale of complementary computer and other hardware equipment, all of which we classify as revenues from product sales. We also derive revenues from maintenance and other services which are principally software changes and enhancements requested by customers, all associated with our software products, which we classify as revenues from services. In addition, we provide business flow communication services between retailers and suppliers, data analysis and supply chain information services to suppliers as well as manufacturers and on-line application services primarily to small independent retailers. We do business through subsidiaries in the United States, Israel, the United Kingdom, Italy, France, Japan and Australia.
Our relationships primarily with our large customers, 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.
During 2008 and 2009, none of our customers accounted for 5% or more of our revenues. During 2007, one customer accounted for 5% or more of our revenues.
Product sales consist of the sale of software through perpetual license agreements with direct customers, integrators, distributors and dealers. In addition, sales to Tier 3 and Tier 4 retailers and to distributors also include hardware manufactured by third parties. Such hardware could typically be point of sale and other store level computer hardware, mobile computer terminals, scanning equipment, printers, optical equipment used in warehouses, etc.
Revenues from services consist of:
Multiple element agreements
Our sales also consist of multiple element arrangements that in most cases involve the sale of licenses as well as maintenance services in regard to the products sold.
Sales to integrators
In some cases, we sell our products and provide our services to integrators to which typical customers outsource their IT activities. In these cases, the integrators are the actual customers in all material respects.
Sales through resellers
We also sell our products, primarily to smaller retailers, through resellers.
Cost of Revenues
Cost of revenues is comprised of the cost of product sales and the cost of services. Furthermore, intangible assets created through purchase price allocations such as customer base and technology are amortized to cost of revenues over their expected periods of life. In addition, generally we are obligated to pay the Israeli government royalties at a rate of 3% to 5% on revenues from specific products resulting from grants, up to a total of 150% of the grants received. These royalties are presented as part of our cost of revenues.
Operating expenses consist of research and development expenses, net, selling and marketing expenses, and general and administrative expenses. In 2007, 2008 and 2009, expenses under ASC 718 resulted in annual compensation expenses of $3.9 million, $4.8 million and $2.2 million, respectively, before taxes.
Share in Income (Losses) of an Associated Company
Share in income (losses) of an associated company represents our share in the losses of Cell-Time. Store Next Israel, our subsidiary, holds 33.3% of Cell-Time’s shares.
Minority Interests in Losses (Gains) of Subsidiary
Minority interests in losses (gains) of subsidiaries reflect the pro rata minority share attributable to the minority shareholders in losses or gains of our subsidiary, StoreNext Israel.
The following table sets forth the percentage relationship of certain statement of operations items to total revenues for the periods indicated:
During 2009, our revenue level was lower than 2008 and reflected significant decreases in both services and product sales, primarily due to adverse economic conditions throughout the year. Our services business is usually less affected by such conditions because it stems from the on-going needs of existing customers, while product sales are usually affected more because of a tendency of customers to postpone the purchase of new products during such periods. If the economic crisis continues, our service revenues could further decline, as well. The product revenues in 2009 consisted of 42% license sales and 58% hardware sales, compared to 37% and 63%, respectively, in 2008. During 2009, our revenues from license sales declined 9% to $24.5 million, compared to $26.9 million in 2008. In 2009, hardware sales declined 26% to $34.0 million, compared to $46.0 million in 2008.
The decrease in services in 2009 was mainly due to fewer contracts with new customers and fewer services to existing customers. We have several large customers, with which we have relatively significant dedicated team arrangements, which are based on professional personnel exclusively dedicated to and controlled by these customers and which provide maintenance as well as project-oriented services. As a result, service revenues from these large customers cover both maintenance and project-oriented services, and we do not differentiate between the two. Our total revenues from services in 2009 consisted of 42% from maintenance and 58% from professional services, including all services provided through customer-dedicated personnel arrangements.
We conduct business globally and generate revenues from customers located in three geographical areas: the U.S. region (which includes the United States, Canada and Latin America), International (which includes Europe, Africa, Asia and the Pacific) and Israel. During 2009, our U.S. revenues constituted 59% of total revenues, our international revenues constituted 30% of total revenues, and our Israeli revenues constituted 11% of total revenues, compared to 57%, 33% and 10% in 2008, respectively.
During 2009, our U.S. region revenues decreased by 10% to $113 million, as compared to $126 million in 2008. The decrease is mainly due to a reduction in service revenues, including maintenance, as a result of the market turmoil as well as a decrease in hardware revenues, offset in part by an increase in license revenues.
During 2009, our international revenues decreased by 21% to $58 million, as compared to $73 million in 2008, primarily due to lower license revenues in that region. 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, as well as a result of currency fluctuations.
During 2009, our Israeli revenues decreased by 5% to $21 million, as compared to $22.2 million in 2008. The decrease was primarily due to reduction in service revenues.
During 2008, our revenue level was similar to that of 2007 but reflected an increase in services and a reduction in product sales, particularly in the second half of the year due to adverse economic conditions. Our services business was less affected by such conditions because they stem from long-term relationships with existing customers. If the economic crisis continues, our service revenues could decline, as well. The product revenues in 2008 consisted of 37% license sales and 63% hardware sales, compared to 54% and 46%, respectively, in 2007. During 2008, our revenues from license sales declined 38% to $26.9 million, compared to $43.3 million in 2007. In 2008, hardware sales grew 24% to $46.0 million, compared to $37.2 million in 2007.
The increase in services in 2008 was mainly due to contracts with new customers. Our total revenues from services in 2008 consisted of 38% from maintenance and 62% from professional services, including all services provided through customer-dedicated personnel arrangements.
During 2008, our U.S. revenues constituted 57% of total revenues, our international revenues constituted 33% of total revenues, and our Israeli revenues constituted 10% of total revenues, compared to 56%, 36% and 8% in 2007, respectively.
During 2008, our U.S. region revenues increased by 2% to $126 million, as compared to $123 million in 2007. The increase is mainly due to an increase in service revenues, includ