-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LRSDmCFvZ9Kb7Gqnqpf5rSNFJf7MhrmBYMssNF3zIA6JrTkD0uFXvZXi9K15kcaP gD8o0d5rdMBWVsvi5yBBtQ== 0000950144-02-003611.txt : 20020415 0000950144-02-003611.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-003611 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACADA LTD CENTRAL INDEX KEY: 0001095747 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-30342 FILM NUMBER: 02604197 BUSINESS ADDRESS: STREET 1: 11 GALGALEI HAPLADA ST STREET 2: PO BOX 12175 CITY: HERZLIYA 46722 ISRAE STATE: L3 BUSINESS PHONE: 9729525900 MAIL ADDRESS: STREET 1: JACADA INC 400 PERIMETER CENTER TERRACE STREET 2: SUITE 195 CITY: ATLANTA STATE: GA ZIP: 30346 20-F 1 g75399e20-f.txt JACADA LTD UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 333-10882 JACADA LTD. (Exact name of Registrant as specified in its charter) ISRAEL (Jurisdiction of incorporation or organization) 11 GALGALEI HAPLADA ST. P.O. BOX 12175 HERZLIYA 46722, ISRAEL (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 5,175,000 ORDINARY SHARES (TITLE OF CLASS) - -------------------------------------------------------------------------------- Indicate the number of outstanding shares of each of the registrant's classes of capital or common stock as of the close of the period covered by the Annual Report: ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE 18,528,027SHARES - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO ------------- Indicate by check mark which financial statement item the registrant has elected to follow. [ ] Item 17 [X] Item 18 TABLE OF CONTENTS Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS........................................ 4 Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE....................................................... 4 Item 3. KEY INFORMATION............................................................................... 4 Item 4. INFORMATION ON THE COMPANY.................................................................... 13 Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................................................. 25 Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................................... 34 Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............................................. 40 Item 8. FINANCIAL INFORMATION ........................................................................ 42 Item 9. THE OFFER AND LISTING......................................................................... 43 Item 10. ADDITIONAL INFORMATION........................................................................ 45 Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................... 58 Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................................ 58 Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................... 58 Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.................. 59 Item 18. FINANCIAL STATEMENTS.......................................................................... F-1 Item 19. EXHIBITS
2 FORWARD LOOKING STATEMENTS This Annual Report contains forward-looking statements. These statements include all statements that are not statements of historical fact regarding the intent, belief, or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; and (iii) the Company's growth strategy and operating strategy (including the development of its products and services). The words "may," "could," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions or variations thereof are intended to identify forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained in this Annual Report identifies important factors that could cause such differences. We have prepared our consolidated financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles (GAAP). All references in this Annual Report to "dollars" or "$" are to U.S. dollars and all references to "NIS" are to New Israeli Shekels. Amounts and percentages appearing in this Annual Report may not total due to rounding. 3 ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS Not applicable. ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3: KEY INFORMATION A. SELECTED FINANCIAL DATA The following table sets forth our consolidated selected statements of operations, balance sheets and other data for the periods indicated. The selected consolidated statement of operations data for the years ended December 31, 2001, 2000 and 1999 and the selected consolidated balance sheet data as of December 31, 2001 and 2000 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report. These financial statements have been prepared in accordance with GAAP. The consolidated statements of operations data for the years ended December 31, 1998 and 1997, and the selected consolidated balance sheet data as of December 31, 1999, 1998 and 1997 are derived from audited consolidated financial statements that are not included herein. The following selected financial data are qualified by reference to and should be read in conjunction with the sections entitled "Item 5: Operating and Financial Review and Prospects" and "Item 11: Quantitative and Qualitative Disclosure about Market Risks" and our consolidated financial statements and the notes thereto included elsewhere in the Annual Report. 4
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (In thousands, except per share and share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software licenses ...................................... $ 10,930 $ 15,506 $ 8,831 $ 6,469 $ 3,432 Services ............................................... 8,986 6,070 3,362 1,874 1,455 Maintenance .......................................... 5,630 3,540 2406 1,145 714 ----------- ----------- ----------- ----------- ----------- Total revenues ....................................... 25,546 25,116 14,599 9,488 5,601 Cost of revenues: Software licenses ...................................... 520 725 639 342 276 Services ............................................... 4,859 3,636 1,619 1,735 1,148 Maintenance ............................................ 1,705 1,574 1,121 823 618 ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............................... 7,084 5,935 3,379 2,900 2,042 ----------- ----------- ----------- ----------- ----------- Gross profit ............................................. 18,462 19,181 11,220 6,588 3,559 Operating expenses: Research and development, net .......................... 6,446 4,979 3,267 2,440 1,515 Sales and marketing .................................... 14,619 12,873 6,529 5,411 4,464 General and administrative ............................. 5,679 3,624 1,960 1,637 1,033 Non-recurring charges .................................... 2,846 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total operating expenses ............................. 29,590 21,476 11,756 9,488 7,012 ----------- ----------- ----------- ----------- ----------- Operating loss ........................................... (11,128) (2,295) (536) (2,900) (3,453) Financial income (expense), net ......................... 2,330 3,082 530 (20) 24 Income (loss) before income taxes ........................ (8,798) 787 (6) (2,920) (3,429) Income taxes ............................................. 7 (10) -- -- (6) ----------- ----------- ----------- ----------- ----------- Net income (loss) ........................................ $ (8,791 $ 777 $ (6) $ (2,920) $ (3,423) =========== =========== =========== =========== =========== Basic and diluted net earnings (loss) per share: Basic net earnings (loss) per share ...................... $ (0.48) $ 0.04 $ (0.00) $ (0.81) $ (0.92) Weighted average number of shares used in computing basic net earnings (loss) per share ................... 18,465,127 18,141,223 6,572,476 3,615,143 3,704,298 Diluted net earnings (loss) per share .................... $ (0.48) $ 0.04 $ (00.0) $ (0.81) $ (0.92) Weighted average number of shares used in computing diluted net earnings (loss) per hare ................ 18,465,127 19,503,971 6,572,476 3,615,143 3,704,298
DECEMBER 31, ------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents ................................ $ 5,982 $ 9,360 $ 5,141 $ 5,613 $ 3,044 Working capital .......................................... 39,625 46,740 53,315 1,148 727 Total assets ............................................. 56,459 64,797 62,435 11,131 7,185 Long-term debt, net of current portion ................... -- -- 186 90 92 Shareholders' equity ..................................... 48,588 56,646 54,854 2,939 2,066
EXCHANGE RATES Not applicable. B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. 5 D. RISK FACTORS Readers are cautioned that an investment in Jacada is subject to a number of risks. Readers should consider carefully all information set forth herein and in particular the following risks in connection with an investment in Jacada: Fiscal year 2000 was our only profitable year, and we may not again achieve profitability. Prior to 2000, we incurred net losses in each fiscal year since our inception. We also incurred a net loss for 2001. To achieve and maintain profitability, we will need to increase revenues and contain expenses. We cannot assure you that our revenues will grow or that we will achieve or maintain profitability in the future. Our ability to increase revenues and maintain profitability will be affected by the other risks and uncertainties described in this section and in the sections entitled "Item 5: Operating and Financial Review and Prospects" and "Item 11: Quantitative and Qualitative Disclosure about Market Risks." Our eBusiness enabling products may not be widely adopted. If eBusiness enabling products such as ours are not widely adopted, our business could suffer. Our products are complex and generally involve significant capital expenditures by our customers. We do not have a long history of selling our products and we will have to devote substantial resources to educate prospective customers about the benefits of our products. Many prospective customers have made significant investments in internally-developed or customized systems and would incur significant costs in switching to third-party products such as ours. Even if our products are effective, our target customers may not choose them for technical, cost, support or other reasons. If the market for our products fails to grow or grows more slowly than we anticipate, our business could suffer. Competition in the market for eBusiness enabling software is intense. If we are unable to compete effectively, the demand for, or the prices of, our products may be reduced. The market for eBusiness enabling software is extremely competitive and subject to rapid change. We compete in that market with companies that utilize varying approaches to enable host-centric software applications to be utilized over the Internet. These companies include, Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO Software, Inc., Vitria Technology, Inc., WRQ, Inc. and webMethods, Inc. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. In addition, many companies choose to deploy their own information technology personnel or utilize system integrators to write new code or rewrite existing applications in an effort to develop their own eBusiness enabling solutions. As a result, prospective clients may decide against purchasing and implementing externally-developed and produced solutions such as ours. Many of our current and potential competitors have significantly greater financial, technical and marketing resources, greater name recognition and larger customer bases 6 than we do. Our present or future competitors may be able to develop products comparable or superior to ours; adapt more quickly than we do to new technologies, evolving industry trends or customer requirements; or devote greater resources than we do to the development, promotion and sale of products. Accordingly, we may not be able to compete effectively in our markets, competition may intensify and future competition may harm our business. Our software license revenues result from a relatively small number of sales. In addition, our sales cycle is lengthy. Sales of our products are also subject to seasonality. These factors may cause our revenues to fluctuate materially from period to period. If we fail to meet market expectations in any individual period, our stock price could decline significantly. Our sales typically involve significant capital investment decisions by prospective customers, as well as a significant amount of time to educate them as to the benefits of our products. As a result, before purchasing our products, companies spend a substantial amount of time performing internal reviews and obtaining capital expenditure approvals. It may take up to six months or more from the time we first contact a prospective customer before receiving an initial order. This cycle may lengthen in the future. Sales of our products and services tend to be lower in our first quarter, and higher in our fourth quarter, due to the capital budgeting and purchasing cycles of our current and prospective customers. It is difficult for us to evaluate the degree to which this seasonality may affect our business because our growth may have largely overshadowed this seasonality in recent periods. Because of these and other factors, our quarterly revenues may fluctuate materially and may not meet market expectations in any individual period. This would likely cause our stock price to decline. Further, period-to-period comparisons of our revenues will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance. We must expand our sales and marketing efforts in order to increase market awareness of our products and to generate increased revenues. Expansion of our sales and marketing efforts is essential to increase market awareness of our products and to generate increased revenue. In addition to increasing our direct sales and marketing efforts, we believe that our future success is dependent upon the expansion of our indirect distribution channels, consisting of our relationships with independent software vendors, software distributors and system integrators. We currently have relationships with only a limited number of these indirect distribution channels. Nevertheless, we have derived, and we anticipate that we will continue to derive, a significant portion of our revenues from these relationships. Our future growth will be limited if: - we fail to work effectively with our indirect distribution channels; 7 - we fail to increase the number of indirect distribution channels with which we have relationships; - the business of one or more of our indirect distribution channels fails; or - there is a decrease in the willingness and ability of our indirect distribution channels to devote sufficient resources and efforts to marketing and supporting our products. If any of these circumstances occurs, we will have to devote substantially more resources to the sales, marketing, distribution, implementation and support of our products than we otherwise would, and our own efforts may not be as effective as those of our indirect distribution channels. Our growth could be limited if we fail to retain consultants and sales implementation personnel. We rely on our staff of professional consultants and other technical service personnel to implement our solutions after purchases by our customers. Unless we are able to retain consultants and sales implementation personnel or hire and train qualified consultants and sales implementation personnel to replace anyone who leaves the Company, it will be difficult for us to increase or possibly maintain our present level of sales due to constraints on our capacity to implement additional sales. Rapid changes and developments in the eBusiness enabling software market could cause our products to become obsolete or require us to redesign our products. The eBusiness enabling software market is characterized by rapid technological change, frequent new product introductions and emerging industry standards. We also expect that the rapid evolution of Internet-based applications and standards, as well as general technology trends such as changes in or introductions of operating systems, will require us to adapt our products to remain competitive. Our products could become obsolete and unmarketable if we are unable to quickly adapt to new technologies or standards. To be successful, we will need to develop and introduce, in a timely manner and on a cost-effective basis, new products and product enhancements that respond to technological changes, evolving industry standards and other market changes and developments. Although we plan to continue to spend substantial amounts for research and development in the future, we cannot assure you that we will develop new products and product enhancements successfully or that our products will achieve broad market acceptance. Our failure to respond in a timely and cost-effective manner to new and evolving technologies and other market changes and developments could adversely impact our business. We rely on our key personnel, whose knowledge of our business and technical expertise would be extremely difficult to replace. Our future success depends, to a significant degree, on the continued services of our CEO, Gideon Hollander, as well as other key management, sales and technical personnel. The loss of services of any of our key management for any reason could have a material adverse effect on our business, financial condition and results of operations. We are also dependent on our ability to attract, retain and motivate highly skilled personnel. In the markets in which we recruit, 8 competition for qualified personnel is extremely intense. As a result, our ability to recruit and retain qualified candidates may be limited. We expect to be increasingly subject to risks of international operations. We currently market and sell our products and services primarily in North America, from which we received approximately 90% of our total revenues for the year ended December 31, 2001. However, we plan to increase our international operations, particularly in Europe. This expansion will require significant management attention and financial resources. Further, we currently have limited experience in marketing and distributing our products internationally. Our inability to successfully increase our international operations could adversely impact our business. In addition, exchange rate fluctuation between the dollar and European or other foreign currencies may adversely affect us. To date, we have not used risk management techniques or "hedged" the risks associated with fluctuations in foreign exchange rates. Our products may contain unknown defects that could harm our reputation, result in product liability or decrease market acceptance of our products. Our products may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Although we have not experienced any material software defects to date, defects could cause our customers to experience system failures. Our customers depend on our software for their critical systems and business functions. Any interruptions could: - damage our reputation; - increase our product development costs; - divert our product development resources; - cause us to lose future sales; or - delay or diminish market acceptance of our products. Although we conduct extensive testing, we may not discover software defects that affect our products or enhancements until after they are sold. Furthermore, we are unable to test our products in each of the applications in which they are designed to work. Our products are integrated with our customers' networks and software applications. The sale and support of our products may entail the risk of product liability or warranty claims based on damage to these networks or applications. In addition, the failure of our products to perform to customer expectations could give rise to warranty or other claims. Any of these claims, even if not meritorious, could result in costly litigation or divert management's attention and resources. We may not have sufficient funds or insurance coverage to satisfy any or all liability that may be imposed upon us with respect to these claims. 9 Our technology may be subject to infringement claims or may be infringed upon. Our success and ability to compete are substantially dependent upon our internally developed technology. Most of our intellectual property, other than our trademarks, consists of proprietary or confidential information that is not subject to patent or similar protection. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to copy or otherwise obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Furthermore, policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. Although we do not believe that we infringe upon any patent, trademark or other intellectual property rights of others, we cannot be certain that one or more persons will not make a claim of infringement against us. Any claims, with or without merit, could: - be expensive and time-consuming to defend; - cause product shipment and installation delays; - divert management's attention and resources; or - require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or may not be available at all. A successful claim of product infringement against us or our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations. RISKS RELATED TO OUR LOCATION IN ISRAEL Israeli courts might not enforce judgments rendered outside of Israel. We are incorporated under the laws of the State of Israel and we maintain significant operations in Israel. Certain of our officers and directors and our Israeli accountants and counsel reside outside of the United States. Therefore, you might not be able to enforce any judgment obtained in the United States against us or any of such persons. Additionally, you might not be able to bring civil actions under United States securities laws if you file a lawsuit in Israel. We have been advised by our Israeli counsel that, subject to certain limitations, Israeli courts may enforce a final executory judgment of a United States court for liquidated amounts in civil matters after a hearing in Israel, provided that certain conditions are met. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. Conditions in Israel could adversely affect our operations. . Because our principal research and development facilities are located in Israel. We are therefore directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any major hostilities involving Israel or the 10 interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect our operations. Despite the negotiations towards peace between Israel and certain of its Arab neighbors, the future of these peace efforts is uncertain. Since October 2000, there has been a significant increase in violence primarily in the West Bank and the Gaza Strip and negotiations between Israel and the Palestinian representatives have ceased for periods of time. . In addition, during 2002 both Israel and the Palestinians have intensified their military actions and Israel has undertaken certain military actions in the West Bank and the Gaza Strip. In connection with these actions the Israeli military has instituted a partial mobilization of its reserve forces. There can be no assurance that ongoing or revived hostilities or other factors related to Israel will not have a material adverse effect on us or on our business or adversely affect our share price. Some of our officers and employees in Israel are obligated to perform up to 39 days of military reserve duty annually and in some cases may be called upon to serve upon short notice. In addition, in some cases such reserve duty may exceed the above mentioned 39 days. The absence of these employees for significant periods during the work week may cause certain operating difficulties during these periods. Additionally, a number of countries continue to restrict or ban business with Israel or Israeli companies, which may limit our ability to make sales in those countries. Exchange rate fluctuations between the dollar and the NIS may negatively affect our earnings. A substantial majority of our revenues and a substantial portion of our expenses are denominated in dollars. However, a significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the dollar cost of our operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the dollar. We cannot predict any future trends in the rate of inflation in Israel or the rate of valuation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Any failure to obtain the tax benefits from the State of Israel that we anticipate receiving could adversely affect our plans and prospects. Pursuant to the Law for the Encouragement of Capital Investments, 1959, the Israeli government has granted "Approved Enterprise" status to our existing capital investment programs. Consequently, we are eligible for certain tax benefits for the first several years in which we generate taxable income. However, we have not yet begun to generate taxable income for purposes of this law. Once we begin to generate taxable income, our financial results could suffer if our tax benefits were significantly reduced. In order to receive tax benefits, we must comply with a number of conditions and criteria. If we fail to comply in whole or in part with these conditions and criteria, the tax benefits that we receive could be partially or fully canceled and we could be forced to refund the amount of the benefits we received, adjusted for inflation and interest. Although we believe that we have operated and will continue to operate in compliance with the required conditions, we cannot guarantee that this will continue. 11 In May 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued a report recommending a reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals, and would also affect corporate taxation. In particular, the proposed reform would reduce, but not eliminate, the tax benefits available to Approved Enterprises such as ours. The Israeli cabinet approved the recommendations in principle, but implementation of the reform requires legislation by Israel's Knesset (parliament). The Israeli government has set up a new committee to examine tax reform issues and the Israeli government has indicated that it may eliminate significant aspects of the proposed reform. We cannot be certain whether the proposed reform will be adopted, when it will be adopted or what form any reform will ultimately take. We cannot assure you that these tax benefits will be continued in the future at their current levels or at all. The termination or reduction of tax benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event that we increase our activities outside the State of Israel due to, for example, future acquisitions, these activities generally will not be eligible for inclusion in Israeli tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future. The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel. The terms of these grants prohibit us from manufacturing products or transferring technologies developed using these grants outside of Israel without special approvals. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. The technology developed with these grants may not be transferred to third parties without the prior approval of a governmental committee under the Research and Development Law, and may not be transferred to non-residents of Israel. These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the Office of the Chief Scientist, we may be required to refund any grants previously received, together with interest and penalties. Recently a committee for review of government support in research and development proposed certain amendments to the Research and Development Law, including amendments aimed to relax restrictions on transfer of technology or manufacturing abroad subject to making certain payments. A formal bill containing these amendments has been submitted to Israel's Knesset (Parliament). There is no assurance as to whether or when such proposals will be enacted and what effect they may have on us. Certain provisions of our articles of association and of Israeli law could delay, hinder or prevent a change in our control. Our articles of association contain provisions which could make it more difficult for a third party to acquire control of us, even if that 12 change would be beneficial to our shareholders.For example, our articles of association provide that our board of directors is divided into three classes, each serving three-year terms. In addition, certain provisions of the Israeli Companies Law, which came into effect in February 2000, could also delay or otherwise make more difficult a change in our control. The provision of the Israeli Companies Law relating to mergers and acquisitions are discussed in greater detail in "Item 10: Memorandum and Articles of Association." Our stock is traded on more than one stock exchange and this may result in price variations. Our stock is traded on the Nasdaq National Market and on the Tel Aviv Stock Exchange. Our stock is traded on these markets in different currencies (US dollars on the Nasdaq and New Israeli Shekels on the Tel Aviv Stock Exchange) and at different opening times (notably, different time zones and public holidays; in addition, the Tel Aviv Stock Exchange is closed on Friday and open on Sunday, while the Nasdaq is open on Fridays and closed on Sundays). This means that our stock is often traded at a price differential on these two markets resulting, among other factors, from the different trading times and the differences in exchange rates. In addition, we are subject to the regulatory rules of the Tel Aviv Stock Exchange. We have no control over these issues, but our shareholders may be affected by them. ITEM 4: INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY We were incorporated in Israel in December 1990 as a limited liability company. On August 9, 1999 we changed our name from Client/Server Technology Ltd. to Jacada Ltd. Our commercial name is Jacada. Our registered office in Israel is 11 Galgalei Haplada Street, Herzliya 46722 Israel and our telephone number is 972-9-952-5900. Our agent in the United States is Robert C. Aldworth, whose address is 400 Perimeter Center Terrace, Suite 195, Atlanta, Georgia 30346. Our address on the Internet is http://www.jacada.com. The information on our website is not incorporated into this Annual Report. Since October 1999, the Company's Ordinary Shares have been quoted on the NASDAQ National Market under the symbol "JCDA." In addition, the Company's Ordinary Shares have been quoted on the Tel Aviv Stock Exchange under the same symbol or its Hebrew equivalent since June 18, 2001. Jacada develops, markets and supports software that enables businesses to web-enable, modernize and integrate their existing host-centric software applications to better serve the needs of their users, customers, and partners. We also provide related professional services, including training, consulting, support and maintenance. Our products and services provide our end users with comprehensive eBusiness enabling solutions. Typical users of our products and services are medium to large businesses with sophisticated technology requirements. Some of the companies that have implemented or 13 are implementing our solutions include AIG, Bank of America, Caterpillar, Delta Air Lines, U.S. Department of Interior, The Federal Reserve Bank, Harrahs, Liberty Mutual, Her Majesty's Land Registry, Lockheed Martin, Manpower, Porsche Cars North America, Prudential Life Insurance Company and Saab Cars. See Items 5 and 18 for a description of capital expenditures by the Company for the past three fiscal years. The Company has made no divestitures during the same time period. We are not aware of any public takeover offers by third parties in respect of our shares, and we have made no public takeover offers in respect of other companies' shares during fiscal years 2000 and 2001. B. BUSINESS OVERVIEW INDUSTRY OVERVIEW The Internet has fundamentally changed the way companies think about their business strategies. It has created opportunities for companies to make their applications and data accessible to their employees, customers, suppliers and other third parties quickly and cost-effectively. The strategic importance of eBusiness is driving the demand for solutions that can provide the necessary infrastructure to extend existing applications and data to browser-enabled desktops and to the Internet. A significant number of the applications that are critical to companies in operating their businesses, such as customer account information applications, sales and inventory management applications, customer order information applications and manufacturing enterprise resource planning applications, are currently held in host-centric environments such as those based on mainframes and mini-computers. According to META Group, an independent research organization, more than 70% of corporate data still resides in the mainframe environment alone. Applications for host-centric systems are typically complex and proprietary and tailored to the needs of a specific company. These applications were originally designed to be accessible only by a fixed network of users, principally employees. Furthermore, these applications have complicated text-based user interfaces, which lack the flexibility and intuitiveness of today's graphical user interfaces. Companies continue to rely heavily on and invest a significant amount of resources in host-centric applications and data. Companies are increasingly seeking to circumvent the limitations of their existing host-centric systems by utilizing the broad distribution potential of browser-enabled desktops and the Internet to grant employees, customers, suppliers and corporate partners easy access to applications and data. Additionally, as newer applications are implemented, such as Customer Relationship Management software (CRM), there is an increasing need to easily integrate existing host-centric applications with these new systems. Web-enabling or integrating existing host-centric applications may be accomplished by either completely rewriting the existing applications or by using 14 technologies like ours to leverage those applications that exist today. Rewriting an application involves significant time and expense, as well as uncertain scheduling, budgeting and results. It may also render the skills and knowledge of a company's information technology staff obsolete. Companies' large investments in existing host-centric applications have created the need for a solution that enables application re-use without the costs, risks, and time required to rewrite the application. Gartner Group, an independent research organization, expects that, by the year 2003, 80% of application development organizations, which include internal application development departments and independent software vendors, will extend some or all of their applications to the Internet. Extending or integrating host-centric applications with products like ours allows companies to utilize their existing applications and data and can typically be accomplished more quickly than rewriting applications. An effective solution to extend and integrate existing applications should: - be able to be implemented rapidly; - enable the deployment of a comprehensive solution that does not require extensive custom programming; - provide a flexible architecture that allows for the efficient incorporation of evolving technologies; and - be able to operate on multiple platforms and support a variety of applications. OUR SOLUTIONS We develop, market and support software that enables businesses to web-enable, modernize, and integrate their existing host-centric applications to better serve the needs of their users, customers, and partners. Our solutions provide the following benefits: - Leverage Existing Information Technology Resources. Our solutions permit companies to access their existing host-centric applications through browser-enabled desktops or over the Internet, and can integrate these existing applications with newer software implementations such as CRM solutions from companies such as Siebel Systems, Inc. This eliminates the need to replace existing applications through time-consuming and expensive custom programming. Additionally, our solutions allow programmers trained in various languages to program in their native software languages and to deliver applications that are web-enabled. - Allow Rapid Implementation. We design our solutions to be implemented rapidly and to require minimal customization. Consequently, our solutions can typically be implemented more rapidly than internally-developed solutions. 15 - Provide a Complete eBusiness Enabling Solution. Our comprehensive solutions allow companies to conduct eBusiness to the same extent as available by direct connection with the host computer, without purchasing any other products. Our solutions have been or are being implemented by hundreds of companies worldwide. Our customers receive the following advantages: - Flexibility to Adapt to Evolving Business Needs. We design our solutions to work effectively even as companies modify existing and add new applications in response to their evolving business needs. As companies program changes into their applications, our solutions automate the changes in the graphical user interface. - Reliability and Scalability. Our solutions are designed to provide the reliability required for applications that are critical to the operation of businesses, and are easily scalable to accommodate additional users in response to the evolving business needs of our customers. - Programming Language Independence. Our solutions protect our customers from changes in interface development trends by generating multiple interface language standards from the same interface design. - Platform Independence. Our Java-based solution provides customers with the flexibility to run our products on any Java-enabled platform, including IBM S/390 (zSeries), AS/400 (iSeries), Sun Solaris, HP UX, IBM AIX, Microsoft Windows NT and Microsoft Windows 2000. PRODUCTS AND TECHNOLOGY Our products and services provide our customers with a comprehensive eBusiness enabling solution. Our products include: Jacada(R) Interface Server. Jacada Interface Server generates graphical user interfaces for mainframe and midrange software applications without requiring any change to the host applications. By generating Java or HTML graphical interfaces, Jacada Interface Server enables our customers to extend their host-centric applications and data to the Internet and their intranets without rewriting these applications. In addition, Jacada Interface Server provides the modern graphical features users expect from today's applications. Jacada Interface Server also allows customers to enhance their applications to add functionality, integrate with other data sources and link to other Internet applications. Jacada Interface Server also provides an ability to modernize the architecture of some host-centric applications. Developed in cooperation with IBM, the Jacada Interface Server's DDS Bridge and Jacada Interface Server for New Development contain innovative technology which enables new or existing applications written in COBOL or RPG to leverage the Jacada presentation technology to deliver graphical "thin 16 client" user screens, replacing the text-based," green screen" architecture found in legacy applications. Any software developer can utilize the Jacada Interface Server without any special knowledge of any other programming language. This allows organizations to leverage their existing software skills and resources to build modern applications. We have full ownership rights in these Jacada Interface Server products. Jacada(R) Integrator. Jacada Integrator is a software solution for integrating core host-centric business systems, including the data and processes in those systems, with multiple packaged applications, frameworks, and client environments. Jacada has established sales and marketing relationships with Siebel Systems and SeeBeyond, Inc. to utilize Jacada Integrator where a real-time, non-intrusive solution is required to integrate a host-centric application with its CRM or EAI solutions, respectively. Our customers get the benefits of on-line, real-time integration with back-office applications without rewriting any of their existing systems. Some of Jacada Integrator's key features include: - Automated tools for capturing screens and navigation, minimizing the amount of code to be written; - Support for a wide range of client front-ends, including Java, Windows APIs (such as ActiveX), and C-language libraries; - Special adapters and validation with Siebel eBusiness Solutions (CRM); - Special adapter and validation with SeeBeyond (EAI); - Special adapter for IBM MQSeries; - Support for XML; - Support for Application Servers, including WebSphere and WebLogic; and - Support for a wide range of back-end host-centric systems, including IBM mainframes (S/390 or zSeries) presenting 3270 screens, IBM AS/400s or iSeries presenting a 5250 interface, and a variety of UNIX, VMS, and other systems presenting a Telnet (VT100/220) interface. Jacada Interface Server and Jacada Integrator are based on our following core technology components: - - Jacada KnowledgeBase. The Jacada KnowledgeBase is a set of sophisticated algorithms for analyzing and interpreting host-centric applications and converting patterns on those text-based applications into graphical user interface components. During the conversion process, the Automated Conversion Environment automatically matches all the patterns identified on the screen with pattern definitions 17 in the KnowledgeBase. The KnowledgeBase then generates a new graphical user interface based on these pattern definitions. - - Jacada Automated Conversion Environment (ACE). In combination with the Jacada KnowledgeBase, ACE forms the powerful core of a solution that can quickly and easily generate graphical user interfaces for mainframe and midrange software applications. This allows companies to extend their host-centric applications to the Internet through user interfaces that are graphical in nature and intuitive, as opposed to user interfaces that are comprised solely of text. Graphical user interfaces may be created using Java, HTML or ActiveX/Visual Basic. ACE allows users to customize the graphical user interface by changing colors, fonts, sizes and layout, as well as by adding or deleting functions or graphics. - - MapMaker. Jacada Integrator includes our MapMaker graphical integration environment that enables the development of complex application integration solutions in an easy to use and understand modeling environment. It employs a rapid, component-based approach to legacy integration that requires no changes to the existing systems, saving time and eliminating complexity. MapMaker creates a map of the host application that consists of the application screens, the navigational information required to traverse through a sequence of screens, and the tags and fields included on each host application screen. This information is stored in Java class files produced within MapMaker that are implemented as Java services. Jacada Integrator also provides a means for packaging MapMaker services as Enterprise Java Beans. PROFESSIONAL SERVICES Our professional services include training, consulting, support and maintenance services. Support and maintenance services are provided to our customers through agreements under which we provide technical support by telephone, fax, email and the Internet and provide updates, upgrades and fixes to our software products. We require our customers to purchase support and maintenance services at a fixed annual fee for 12 months after the initial purchase of a software license, renewable annually thereafter. In addition, customers can elect optional services such as emergency coverage on a 24 hours per day, seven days per week basis and dedicated technical account managers. We also provide customer training at our Atlanta, Georgia facility and other locations, with coursework related to various aspects of our products. We provide our direct customers with training services to assist them in learning how to use our products. We also provide our direct customers with consulting services to assist them with installing our products and integrating our products into their systems, and to assist them with managing and enhancing their utilization of our products on an ongoing basis. We bill for consulting services by the hour plus out of pocket expenses and for training services by the day plus out of pocket expenses. We typically enter into commitments with customers to provide blocks of training and consulting services. 18 However, customers are not obligated to utilize the entire blocks of time and are permitted to pay only for the services that are actually rendered. The majority of our trainers and consultants are located in the United States. Our distributors and other resellers typically provide training and consulting services directly to their customers, assisted by us as necessary. PRINCIPAL MARKETS Our principal markets are North America and Europe. We generate revenues from licensing our software products to customers and providing customers with such services as training, consulting, support and maintenance. Software license revenues constituted approximately 42.8%, 61.7% and 60.5% of our total revenues for the years ended December 31, 2001, 2000 and 1999, respectively, while service and maintenance revenues constituted approximately 57.2%, 38.3% and 39.5% of our total revenues, respectively, for the same periods. Software license revenues generated from North American customers constituted approximately 37.3%, 55.6% and 46.2% of our total revenues for the years ended December 31, 2001, 2000 and 1999, respectively, while service and maintenance revenues generated from North American customers constituted approximately 54.5%, 36.9% and 35.2% of our total revenues, respectively, for the same periods. Software license revenues generated from European customers constituted approximately 5.5%, 6.1% and 14.2% of our total revenues for the years ended December 31, 2001, 2000 and 1999, respectively, while service and maintenance revenues generated from European customers constituted approximately 2.7%, 1.4% and 4.4% of our total revenues, respectively, for the same periods. The percentage of our revenues derived from the provision of services and maintenance increased during 2001 primarily because a growing base of customers utilized training and consulting services and support and from the effects of economic conditions which resulted in a decline in software license revenues. Our gross margins on software license revenues have historically been higher than our gross margins on service and maintenance revenues. Seasonality Sales of our products and services tend to be lower in our first quarter, and higher in our fourth quarter, due to the capital budgeting and purchasing cycles of our current and prospective customers. It is difficult for us to evaluate the degree to which this seasonality may affect our business in the future. RAW MATERIALS Not applicable. SALES AND MARKETING We sell our products through our direct sales force in North America and Europe, as well as through our indirect distribution channels, consisting of software distributors, independent software vendors and system integrators, in North America and Europe, as 19 well as in countries where we have no direct sales operations. As of December 31, 2001, we had 53 people in our sales and marketing organization. Our indirect distribution channels have capabilities that complement and augment our eBusiness solution and extend our market reach. In particular, independent software vendors often contribute industry-specific and application-specific expertise as well as large scale project management capabilities that enable us to address a broad range of vertical markets. Independent software vendors and system integrators often package or incorporate our products with their products or solutions. This enables us to create combined offerings that address specific needs, particularly for specific vertical markets, and provide more complete and tailored offerings. Our marketing efforts are focused on developing greater awareness among our target customers of our solution and the benefits it can provide. We market our products and services online and through tradeshows and public relations activities. We have developed a wide range of collateral materials and sales tools that are used by our direct sales force and our indirect distribution channels. These materials include brochures, white papers, case studies, press releases and our Web site. CUSTOMERS Our customers include both end users to whom we sell our products and services directly and distributors and other intermediaries who either resell our products to end users or incorporate our products into their own product offerings. Typical end users of our products and services are medium to large businesses with sophisticated technology requirements. These companies are using our solutions to rapidly deploy eBusiness applications. Some examples of our customers include: - - Insurance companies are using our solutions to modernize their call center applications, web-enable access to these applications for customers to update account information via the Internet, and integrate their customer information systems with customer relationship management applications. - - Financial institutions are using our solutions to provide real-time integration between Siebel eBusiness Solutions (CRM) and existing back-office systems, eliminating redundant data entry, providing real-time data access and processing, and enhancing customer service and service levels. - - Automotive companies are using our solutions to enhance the quality of their services by enabling dealers in their networks to utilize previously centralized sales and inventory management systems to locate and order cars and parts inventory. - - Retailers are using our solutions to enable existing back-office software applications to be used to receive and process orders from customers and to send orders to suppliers via the Internet. 20 - - A car rental company is utilizing our solutions to permit employees of an insurance company to check availability and order cars for their insured customers via the Internet. - - Enterprise resource planning software vendors are utilizing our solutions in concert with their manufacturing applications software to enable their customers to manage the customers' manufacturing and inventory processes via the Internet. RESEARCH AND DEVELOPMENT We believe that strong product development capabilities are essential to our strategy of continuing to enhance and expand the capabilities of our products in order to continue to provide our customers with eBusiness enabling solutions. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within our organization and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, we have recruited key software engineers and developers with experience in Java, communications, expert systems and Internet technologies. Our research and development efforts have been primarily focused on enhancing and adding functionality to our existing products and adding new products based on our expectations of future technologies and industry trends. Our research and development expenses were $6.4 million for the year ended December 31, 2001, $5.0 million for the year ended December 31, 2000, and $3.3 million for the year ended December 31, 1999. As of December 31, 2001, 62 professionals were engaged in research and development activities. DEPENDENCE ON PATENTS AND LICENSES We are the owner of our core technology and the software products we license to customers. We are not dependent on any third party license or patent with respect to such technology or products. While we have two patents pending for our technology, we believe that the failure to obtain such patents would not diminish our ownership rights in our technology or our software products. COMPETITION The eBusiness enabling software market is extremely competitive and subject to rapid change. We believe that the competitive factors affecting the market for our products and services include: - product functionality and features; - availability of global support; - incumbency of vendors; 21 - ease of product implementation; - quality of customer support services; - product reputation; and - financial stability of vendors. The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to these factors, we may not be able to maintain our competitive position against current and potential competitors. In addition, many companies choose to deploy their own information technology personnel or utilize system integrators to write new code or rewrite existing applications in an effort to develop eBusiness solutions. As a result, prospective clients may decide against purchasing and implementing externally developed and produced solutions such as ours. We compete with companies that utilize varying approaches to enable host-centric software applications to be utilized over the Internet. These companies include Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO Software Inc., Vitria Technology, Inc., WRQ, Inc. and webMethods, Inc. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. MATERIAL EFFECTS OF GOVERNMENT REGULATION IN ISRAEL Our principal research and development facilities are located in Israel. We are therefore directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect our operations. Despite the negotiations towards peace between Israel and certain of its Arab neighbors, the future of these peace efforts is uncertain. Since October 2000, there has been a significant increase in violence primarily in the West Bank and in the Gaza Strip and negotiations between Israel and the Palestinian representatives have ceased for periods of time. There can be no assurance that ongoing or revived hostilities or other factors related to Israel will not have a material adverse effect on us or on our business or adversely affect our share price. Some of our officers and employees in Israel are obligated to perform up to 39 days of military reserve duty annually. The absence of these employees for significant periods during the work week may cause certain operating difficulties during these periods. Additionally, a number of countries continue to restrict or ban business with Israel or Israeli companies, which may limit our ability to make sales in those countries. 22 A substantial majority of our revenues and a substantial portion of our expenses are denominated in dollars. However, a significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, is incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the dollar cost of our operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the dollar. We cannot predict future trends in the rate of inflation in Israel or the rate of valuation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Pursuant to the Law for the Encouragement of Capital Investments, 1959, the Israeli government has granted "Approved Enterprise" status to our existing capital investment programs. Consequently, we are eligible for certain tax benefits for the first several years in which we generate taxable income. However, we have not yet begun to generate taxable income for purposes of this law. Once we begin to generate taxable income, our financial results could suffer if our tax benefits were significantly reduced. In order to receive tax benefits, we must comply with a number of conditions and criteria. If we fail to comply in whole or in part with these conditions and criteria, the tax benefits that we receive could be partially or fully canceled and we could be forced to refund the amount of the benefits we received, adjusted for inflation and interest. Although we believe that we have operated and will continue to operate in compliance with the required conditions, we cannot guarantee that this will continue. In May 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued a report recommending a reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals, and would also affect corporate taxation. In particular, the proposed reform would reduce, but not eliminate, the tax benefits available to Approved Enterprises such as ours. The Israeli cabinet approved the recommendations in principle, but implementation of the reform requires legislation by Israel's Knesset (parliament). The Israeli government has set up a new committee to examine tax reform issues and the Israeli government has indicated that it may eliminate significant aspects of the proposed reform. We cannot be certain whether the proposed reform will be adopted, when it will be adopted or what form any reform will ultimately take. We cannot assure you that these tax benefits will be continued in the future at their current levels or at all. The termination or reduction of tax benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event that we increase our activities outside the State of Israel due to, for example, future acquisitions, these activities generally will not be eligible for inclusion in Israeli tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future. From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel. The terms of these grants prohibit us from manufacturing products or transferring technologies developed using these grants outside of Israel without special approvals. 23 Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. The technology developed with these grants may not be transferred to third parties without the prior approval of a governmental committee under the Research and Development Law, and may not be transferred to non-residents of Israel. These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the Office of the Chief Scientist, we may be required to refund any grants previously received, together with interest and penalties. Recently a committee for review of government support in research and development proposed certain amendments to the Research and Development Law, including amendments aimed to relax restrictions on transfer of technology or manufacturing abroad subject to making certain payments. A formal bill containing these amendments has been submitted to Israel's Knesset (Parliament). There is no assurance as to whether or when such proposals will be enacted and what effect they may have on us. The Israeli Companies Law, which came into effect in February 2000, has brought about significant changes to Israel's corporate law. Under this new law, there may be uncertainties regarding corporate governance in some areas. These uncertainties will persist until this law has been adequately interpreted, and these uncertainties could inhibit takeover attempts or other transactions and inhibit other corporate decisions. C. ORGANIZATIONAL STRUCTURE Jacada holds 100% of the stock in Jacada, Inc., a corporation organized under the laws of the state of Delaware, and 100% of the stock in Jacada (Europe) Limited, a company organized under the laws of England. Jacada, Inc. holds 100% of the stock of Jacada Canada, Inc., a federal corporation incorporated under the laws of Canada. Jacada (Europe) Limited holds 100% of the stock of Jacada Deutschland GmbH, a limited liability company organized under the laws of Germany. D. PROPERTY AND EQUIPMENT As of December 31, 2001, our headquarters and principal administrative, research and development operations were located in approximately 18,000 square feet of leased office space in Herzliya, Israel. The lease expires in September 2002 with two renewal options each for two additional years. In the United States, we lease approximately 19,050 square feet in Atlanta, Georgia which we utilize for administration, marketing, sales, service and technical support. The lease expires in June 2002. In addition, we lease approximately 5,100 square feet in Brooklyn Park, Minnesota which we use for research and development, sales, and technical support. The lease expires in September 2007. We also lease office space in the Washington, D.C. area and Chicago, Illinois which we utilize for marketing and sales. 24 In addition, we currently lease approximately 1,900 square feet in London, England which we utilize for sales, marketing and services. The London lease expires in October 2002. We are currently exploring options of either extending our existing leases or leasing alternate office space in Herzliya, Israel, Atlanta, and London. ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. OPERATING RESULTS We develop, market and support software that enables businesses to utilize their existing host-centric software applications to conduct business over the Internet. We also provide related professional services, including training, consulting, support and maintenance. We were incorporated in December 1990. In March 1994, we shipped our first product, GUISys. Until that time, our operations consisted primarily of research and development, recruiting personnel and raising capital. Since that time, we have continued to focus on these activities, as well as on building our sales and marketing presence, expanding and enhancing our product offerings, building relationships with third parties, and supporting and maintaining our product deployments in an expanding customer base. We and our subsidiaries have adopted American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. We and our subsidiaries have also adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions," for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the "residual method" when Vendor Specific Objective Evidence (VSOE) of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. We derive our revenues from license fees for our products, fees from consulting and training and from maintenance and support. We sell licenses to our products primarily through our direct sales force and indirectly through resellers. Both our customers and our resellers are considered end users. We are also entitled to revenues from some distributors upon the sublicensing of the software to end users. Revenues from these sublicensing transactions are recognized when such revenues are reported to us upon the sublicensing of the software by the distributors. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectibility is probable. We do not grant a right of return to our customers. We consider all arrangements with payment terms extending beyond one year not to be fixed or 25 determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met. Maintenance and support revenue included in software licensing transactions is deferred and recognized on a straight-line basis over the term of the maintenance and support agreement. Transactions that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the transaction. When services are considered essential, revenue under the transaction is recognized using contract accounting. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. To date, we have determined that the consulting and training services are not considered essential to the functionality of other elements of the transaction. Where software arrangements involve multiple elements, revenue is allocated to each element based on VSOE of the relative fair values of each element in the arrangement, in accordance with the "residual method" prescribed by SOP 98-9. Our VSOE used to allocate the sales price to services, support and maintenance is based on the price charged when these elements are sold separately. License revenues are recorded based on the residual method. Under the residual method, revenue is recognized for the delivered elements when (1) there is VSOE of the fair values of all the undelivered elements, and (2) all revenue recognition criteria of SOP 97-2, as amended, are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Cost of software license revenues consists of royalties, including payments to the Office of the Chief Scientist of the State of Israel, amortization of acquired technology, commissions, and costs of duplicating media and documentation. Cost of service and maintenance revenues consists of compensation expense and related overhead costs for personnel engaged in training, consulting, support and maintenance services for our customers. We have incurred substantial research and development costs and have invested heavily in the expansion of our sales and marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. Our full-time employees increased from 21 as of January 1, 1995 to 199 as of December 31, 2001. At times, the number of full-time employees during 2001 exceeded 199 persons; however, we had two reductions in force, in July 2001 and in October 2001, in an effort to contain our costs during the economic downturn. Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional development costs are capitalized. Because we do not incur material costs between the time of completion of 26 development of a software product and the point at which the product is ready for general release, development costs are charged to the statement of operations as incurred. A majority of our revenues and that of our subsidiaries is generated in United States dollars. Our management believes that the dollar is the primary currency of the economic environment in which we and our subsidiaries operate. Thus, our functional and reporting currency and the functional and reporting currency of our subsidiaries is the dollar. The effects of foreign currency exchange rate for the years ended December 31, 2001, 2000, and 1999 were immaterial. RESULTS OF OPERATIONS Our historical operating results for the years ended December 31, 2001, 2000 and 1999 as a percentage of net revenues are as follows:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ------- ------- ------- Revenues: Software licenses ............................. 42.8% 61.7% 60.5% Services ...................................... 35.2 24.2 23.0 Maintenance .................................. 22.0 14.1 16.5 ----- ----- ----- Total revenues ............................. 100.0% 100.0% 100.0% Cost of revenues: Software licenses ............................. 2.0 2.9 4.4 Services ...................................... 19.0 14.4 11.1 Maintenance .................................. 6.7 6.3 7.7 ----- ----- ----- Total cost of revenues ..................... 27.7 23.6 23.2 ----- ----- ----- Gross profit ..................................... 72.3 76.4 76.8 Operating expenses: Research and development ...................... 25.2 19.8 22.4 Sales and marketing ........................... 57.2 51.2 44.7 General and administrative .................... 22.2 14.4 13.4 Non Recurring Charges.......................... 11.2 0.0 0.0 ----- ----- ----- Total operating expenses ................... 115.8 85.4 80.5 ----- ----- ----- Operating loss ................................... (43.5) (9.0) (3.7) Financial and other income (expense), net ........ 9.1 12.3 3.7 ----- ----- ----- Income (loss) before income taxes ................ (34.4) 3.1 (0.0) Income taxes ..................................... 0.0 (0.0) (0.0) ----- ----- ----- Net income (loss) ................................ (34.4)% 3.1% (0.0)% ===== ===== =====
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Revenues. Revenues were $25.5 million, $25.1 million and $14.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increases in revenues during these periods were attributable to an increase in the number of customers buying 27 our software products and using our services and maintenance. For the year ended December 31, 2001, one customer represented 10% of our revenues. For each of the years ended December 31, 2000 and 1999, revenues from two different customers represented 10% or more of our revenues. Software license revenues were $10.9 million, or 42.8% of revenues for the year ended December 31, 2001, compared to $15.5 million, or 61.7% of revenues, for the year ended December 31, 2000, and compared to $8.8 million, or 60.5% of revenues, for the year ended December 31, 1999. The reduction in software revenues during 2001 is directly related to global economic conditions, a period in which many customers delayed purchases and placed smaller initial orders for our software products. The increase in software license revenues during the 2000 and 1999 periods was primarily due to the growth of our customer base, recurring sales to our installed base and an increase in average transaction size. Service revenues were $9.0 million or 35.2% of revenues for the year ended December 31, 2001 compared to $6.1 million or 24.2% of revenues, for the year ended December 31, 2000 and compared to $3.4 million or 23.0% of revenues for the year ended December 31, 1999. Maintenance revenues were $5.6 million or 22.0% of revenues for the year ended December 31, 2001 compared to $3.5 million or 14.1% of revenues, for the year ended December 31, 2000 and compared to $2.4 million or 16.5% of revenues for the year ended December 31, 1999. The increases in service and maintenance revenues during these periods were primarily a result of new software license sales and our expanding customer base. Cost of Revenues. Cost of revenues was $7.1 million, or 27.7% of revenues for the year ended December 31, 2001 compared to $5.9 million, or 23.6% of revenues, for the year ended December 31, 2000 and compared to $3.4 million, or 23.2% of revenues, for the year ended December 31, 1999. The increase in cost of revenues during these periods was primarily due to the cost of providing increased service and maintenance and support. Cost of software license revenues was $0.5 million, or 2.0% of revenues, for the year ended December 31, 2001 compared to $0.7 million, or 2.9% of revenues, for the year ended December 31, 2000 and compared to $0.6 million, or 4.4% of revenues, for the year ended December 31, 1999. The decrease in cost of software license revenues as a percentage of revenues, in relation to the 2000 period, is due to a decrease in payment of royalties to the Office of the Chief Scientist with respect to certain products. Cost of service revenues was $4.9 million, or 19.0% of revenues, for the year ended December 31, 2001, compared to $3.6 million, or 14.4% of revenues, for the year ended December 31, 2000 and $1.6 million, or 11.1% of revenues, for the year ended December 31, 1999. Cost of maintenance revenues was $1.7 million, or 6.7% of revenues, for the year ended December 31, 2001, compared to $1.6 million, or 6.3% of revenues, for the year ended December 31, 2000 and $1.1 million, or 7.7% of revenues, for the year ended December 31, 1999. The increase in cost of service and maintenance in 2001 relative to 2000 and in 2000 relative to 1999 was a result of an increase in the 28 number of employees required to support increasing customer needs and changes in the utilization of employees. OPERATING EXPENSES The overall increase in total operating expenses from $21.5 million in 2000 to $26.7 million in 2001, exclusive of non-recurring expenses, was due to an increase in manpower costs to support actual and projected business levels. The Company experienced compounded annual growth rates in excess of 60% during the four years prior to 2001 and had similar growth expectations built into the 2001 business plan. The impact of global economic conditions did not affect Jacada until late in the second quarter of 2001. The early signs impacting Jacada forced us to temper our business plan objectives and resulted in a small staff reduction in July. We did not experience the full effect of global economic conditions until after the September 11th disaster. Once we gained an understanding of the impact these events would have on our business, we implemented the restructuring plan described in Restructuring below. Research and Development. Research and development expenses were $6.4 million, $5.0 million, and $3.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increases during these periods were attributable primarily to the addition of personnel in our research and development organization associated with increased development programs, quality assurance and documentation. As a percentage of total revenues, research and development expenses were 25.2%, 19.8%, and 22.4% for the years ended December 31, 2001, 2000 and 1999, respectively. Sales and Marketing. Sales and marketing expenses were $14.6 million, $12.9 million and $6.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increases during these periods were attributable to an increase in our sales and marketing personnel during the periods, which were a result of our efforts to expand our sales and marketing initiatives in Europe and to marketing programs aimed at increasing our brand awareness. As a percentage of total revenues, sales and marketing expenses were 57.2%, 51.2% and 44.7% for the years ended December 31, 2001, 2000 and 1999, respectively. General and Administrative. General and administrative expenses were $5.7 million, $3.6 million and $2.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increases in general and administrative expenses were in part due to increased personnel and related overhead to support our operations and from an increase in the reserve for potential non-collectable trade receivables associated with the changing global economy. As a percentage of total revenues, general and administrative expenses were 22.2%, 14.4% and 13.4% of total revenues for the years ended December 31, 2001, 2000 and 1999, respectively. Non-Recurring Charges. During 2001, we recorded charges associated with an arbitration award, the write-off of previously acquired technology and the cost of our restructuring plan. The total charge was $2.8 million, or 11.2% of revenues. 29 Arbitration Charge - In August 1999 a former distributor filed an arbitration complaint against one of our subsidiaries, alleging, among other things, that the subsidiary breached its agreement with such distributor by directly selling our products to a customer which the distributor claimed that it had the exclusive right to sell, entitling the distributor to damages. The arbitration was held in November 2000 and a decision by the arbitrators was entered on April 3, 2001. The arbitrators awarded the distributor a net amount of $392,000, including costs, to date and 50% of amounts billed and collected from the customer in the future. We had previously established a reserve for a potential settlement of $125,000, representing an amount equal to the limitation of liability clause in the agreement. As a result of the award, we recorded a charge in the first quarter of 2001 of $417,000, representing the award to date plus $150,000 for amounts billed to the customer, less the reserve previously recorded. During the fourth quarter of 2001, we reduced the reserve by $150,000 based on the customer's failure to pay the amounts billed during the first quarter of 2001. We have appealed the decision of the arbitrators on the grounds that the decision did not cap the subsidiary's exposure to the amount set forth in the limitation of liability provision of the agreement. In the interim, pursuant to the arbitrators' decision, we have provided and will provide on a prospective basis as a selling expense an amount equal to 50% of amounts billed and collected from the customer that relate to the agreement that was the subject of the arbitration proceeding. Technology Write Off - During the third quarter of 2001 and as part of our restructuring (see Restructuring below), we revised our product development plan and abandoned the use of technology previously acquired for use in the product development cycle. As a result, we wrote off the unamortized technology in the amount of $1.2 million. Restructuring - As a result of global economic conditions and the related impact on our operations, we implemented a worldwide restructuring plan during the fourth quarter of 2001. The plan included the elimination of approximately 25% of our workforce and a general reduction in all operating expenses. As a result of implementing the plan, by year-end, total employment was reduced to 199, and based on expense levels prior to the restructuring, we project a reduction in total expenses of approximately $10 million on an annualized basis. The cost of implementing the restructuring plan was $1.4 million and is included in the results for the fourth quarter of 2001. Financial Income (Expense), Net. Net financial income was $2.3 million for the year ended December 31, 2001, $3.1 million for the year ended December 31, 2000 and $0.6 million for the year ended December 31, 1999. In October 1999, we raised approximately $51 million, net of expenses, in an initial public offering. We maintained most of the funds raised in the public offering throughout the balance of 1999, 2000 and the first half of 2001. In August 2001 we used approximately $6.9 million for the acquisition of certain assets of Propelis Software, Inc., a business unit of Computer 30 Network Technology Corporation, and related expenses. Most of the financial income was generated from investments of our funds in certain financial instruments, which generate interest and investment income. Income Taxes. As of December 31, 2001, we had approximately $4.45 million of net operating loss carryforwards for Israeli tax purposes, approximately $0.52 million of net operating loss carryforwards for German tax purposes, approximately $5.8 million of net operating loss carryforwards for United States federal tax purposes and approximately $3.9 million of net operating loss carryforwards for United Kingdom tax purposes available to offset future taxable income. The United States net operating loss carryforwards expire in various amounts between the years 2010 and 2021. The Israeli and the United Kingdom net operating loss carryforwards have no expiration date. Net Income (Loss). We generated a net loss of $8.8 million in 2001, net income of $777,000 in 2000 and a net loss of $6,000 in 1999. B. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have funded operations primarily through the private placement and public offering of equity securities and, to a lesser extent, borrowings from financial institutions. As of December 31, 2001, we had $41.6 million in cash, cash equivalents and investments, all interest bearing. During 2001, operating activities used approximately $1.8 million in cash. The major components using cash during 2001 included the net loss of $8.8 million generated from operations and non-recurring charges and from a reduction in trade payables of $1.6 million. Partially offsetting the use of cash was a reduction in trade receivables of $4.4 million at the end of 2001, the non-cash write-off of acquired technology of $1.2 million and non-cash depreciation and amortization of $1.5 million. The reduction in trade receivables resulted from a decline in days sales outstanding from 74 in 2000 to 66 in 2001 and from a reduction in fourth quarter 2001 revenues in relation to fourth quarter 2000 as a result of global economic conditions. As of December 31, 2000, we had $52.5 million in cash, cash equivalents and investments, all interest bearing. During 2000, operating activities used $2.0 million in cash. The major components using cash included an increase in trade receivables of $2.6 million in support of increased revenues, and a decrease in deferred revenues of $2.0 million as we transitioned from selling products and receiving cash in advance of the period in which the revenue is earned as a means of financing operations. Partially offsetting the cash used in operating activities was net income from operations of $0.8 million, non-cash depreciation and amortization of $1.0 million, and increases in trade payables of $0.3 million and accrued expenses of $1.0 million associated with increased business levels relative to 1999. As of December 31, 1999, we had cash and cash equivalents of $5.1 million and $50.5 million in U.S. Government debentures. Cash used in operations includes expenditures associated with development activities and marketing efforts related to 31 promotion of our products. For the year ended December 31, 1999, cash provided by operations was $0.6 million, comprised of the net loss of $6,000, an increase in trade receivables of $0.8 million, partially offset by non-cash charges of $0.7 million, and an increase in accrued expenses of $0.9 million and a decrease in deferred revenues of $1.1 million. Expenditures on property and equipment were approximately $1.5 million, $1.7 million and $1.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. These expenditures include computer hardware and software used in product development and testing, leasehold improvements relating to new and existing facilities and office equipment in support of our operations. In addition, during 2001 we invested approximately $6.9 million in the acquisition of certain assets of Propelis Software, a business unit of Computer Network Technology Corporation, and $0.7 million to license technology for use in product development. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair value of such assets at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. Fair value of assets acquired and liabilities assumed approximates their book value. Fair value of technology rights was determined using the income approach, which reflects the present value of the projected earnings to be generated by the product which incorporates the technology. Based on the income approach, technology rights were valued at $1.3 million and determined to have a remaining life of five years, based on the product life cycle. We have raised approximately $53.3 million, net of issuance costs, from sales of equity securities and the exercise of stock options from 1999 through December 31, 2001 consisting of $0.2 million, $1.0 million, $52.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. We have financed our operations and capital requirements through the sale of equity securities (described above) and bank borrowings in past years. We have a $2.8 million credit facility with two banks, which is secured by substantially all of our assets in Israel. We have borrowed under the facility from time to time on terms that vary for each borrowing. There were no borrowings outstanding as of December 31, 2001 under the facility. Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and extent of establishing additional international operations and other factors. Over the next two years, we expect to devote substantial capital resources to expand our sales and marketing channels, invest in research and development activities, and increase our professional services activities. We believe our working capital is sufficient for our present requirements. 32 Please refer to Item 3.D and Item 10.E for certain information regarding the possible elimination of tax benefits in Israel. 33 C. RESEARCH AND DEVELOPMENT We believe that strong product development capabilities are essential to our strategy of continuing to enhance and expand the capabilities of our products in order to continue to provide our customers with enabling solutions. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within our organization and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, we have recruited key software engineers and developers with experience in Java, communications, expert systems and Internet technologies. Our research and development efforts have been primarily focused on enhancing and adding functionality to our existing products and adding new products based on our expectations of future technologies and industry trends. Our research and development expenses were $6.4 million for the year ended December 31, 2001, $5.0 million for the year ended December 31, 2000 and $3.3 million for the year ended December 31, 1999. As of December 31, 2001, 2000 and 1999, respectively, we had 62, 63 and 46 employees engaged in our product development activities. D. TREND INFORMATION We have been affected by global economic conditions in that existing and potential customers are closely monitoring their capital investments in products such as ours. The early effects of these conditions on Jacada forced us to temper our business plan objectives and resulted in a small staff reduction in July 2001. We did not experience the full effect of global economic conditions until after the September 11th disaster. Once we gained an understanding of the impact these events would have on our business, we implemented the restructuring plan described in Restructuring above. Our sales cycle generally continues to be at least six months from the date we qualify a prospective customer, but could be longer based on specific circumstances. We have no backlog of orders, as backlog is not a significant factor in our business. 34 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT The following table sets forth certain information regarding our executive officers and directors as of March 31, 2002:
Name Age Position - ------------------------ -------- -------------------------------------------------- Gideon Hollander(1)(2) 37 Chief Executive Officer and Director Michael J. Potts 39 President Robert C. Aldworth 48 Chief Financial Officer Peter M. Fausel 42 President, Jacada Inc. David Holmes 46 Senior Vice President, Marketing Nimrod Gil-Ad 36 Vice President, Research and Technology and Chief Technology Officer Tzvia Broida 32 Vice President, Finance Christian Singer 38 Managing Director, Jacada Deutschland GmbH Michael Warner 41 Managing Director, Jacada (Europe) Limited Yossie Hollander(1) 44 Chairman of the Board and Director Amnon Shoham(1)(2)(3) 44 Director Ohad Zuckerman(3) 36 Director Naomi Atsmon(3) 49 Director
- -------------- (1) Member of the Executive Committee (2) Member of the Compensation Committee (3) Member of the Audit Committee Gideon Hollander was a co-founder of Jacada in 1990 and has served as our Chief Executive Officer since1990. From 1988 to 1990, Mr. Hollander worked in the area of research and development at Comverse Technology. From 1982 to 1987, Mr. Hollander served in various technology and management positions in an elite unit of the Israeli Defense Forces, where he specialized in expert systems and user interface design. Two of the projects that Mr. Hollander managed won the most prominent Israeli award for technological innovations. Michael J. Potts has been President of Jacada Ltd. since January 2001. Prior to his appointment as President, Mr. Potts served as President of Jacada, Inc. and President of World Wide Distribution since 1998. From July 1995 to May 1998, Mr. Potts was a Senior Vice President of Jacada, Inc. From September 1987 to April 1995, Mr. Potts held various sales and sales management positions with Dun & Bradstreet Software, a financial application software company, later acquired by Geac Computer Corporation Limited, until his resignation as Eastern Regional Manager. Mr. Potts holds an undergraduate degree in Marketing from the University of Georgia. Robert C. Aldworth has been the Chief Financial Officer of Jacada Ltd. since January 2001. From August 1999 to July 2000, he was Chief Financial Officer and Director of Real Estate.com, Inc., an internet service provider to real estate professionals, and from June 1997 to March 1999 he was Chief Financial Officer at Homestead Village 35 Inc., a provider of extended stay lodging. From January 1996 to June 1997, he was Chief Operating Officer of LAT Sportswear Inc., a manufacturer and distributor of sporting apparel. Peter M. Fausel has been President of Jacada, Inc. since January 2001. During 2000, he was the senior vice president of sales and marketing at Ross Systems, Inc. From 1995 to 2000, Mr. Fausel held various positions at Invensys PLC, a software company, including managing director of a business segment. From 1983 until 1995, he worked for ABB Group, holding positions in sales and general management. David Holmes has been Senior Vice President, Marketing since June 1998 and Vice President of Marketing since October 1995. From June 1991 to October 1995, Mr. Holmes was Marketing Director for KnowledgeWare, Inc., later acquired by Sterling Software, Inc. From March 1984 to June 1991, Mr. Holmes was a consultant for Deloitte & Touche. Mr. Holmes holds a masters degree in Decision Sciences from Georgia State University and an undergraduate degree in Industrial Economics from Union College in Schenectady, New York. Nimrod Gil-Ad was a co-founder of Jacada in 1990 and currently serves as our Vice President, Research and Technology and Chief Technology Officer. From 1988 to 1990, Mr. Gil-Ad worked at Algorithmic Research Limited, later acquired by Cylink, a world leader in the fields of cryptography, access control and communications security. From 1983 to 1988, Mr. Gil-Ad was part of an elite unit in the Israel Defense Forces where he specialized in systems programming and design. Mr. Gil-Ad directed the development of new software concepts including one of the first full client/server systems in 1985. Mr. Gil-Ad holds an undergraduate degree in Mathematics and Computer Science from the Tel-Aviv University, Israel. Tzvia Broida is the Vice President, Finance of Jacada Ltd., having served in this capacity since March 2000. Mrs. Broida has held various positions at Jacada since August 1995. From 1994 to 1995, Mrs. Broida worked as an accountant at the accounting firm of Yehuda Ehrlich & Partners. From 1992 to 1994, Mrs. Broida worked as an accountant at the accounting firm of Vexler, Kodenzick & Partners. Mrs. Broida holds a BA degree in Accounting and Economics from the Jerusalem University. Christian Singer has been Managing Director of Jacada Deutschland GmbH since February 2001. From April 2000 until he joined Jacada, Mr. Singer worked as Business Unit Manager and Director Sales & Marketing for Geac Central Europe. From 1997 to 2000, he held various positions in Baan Company in Germany and the UK, where he successfully established the Baan Automotive Organisation. Between 1992 and 1997, Mr. Singer was employed at Zeuna Starker GmbH & Co KG, a German Tier 1 automotive supplier with operations on three continents. Mr. Singer holds a Business Degree from Augsburg University, Germany and an MBA from City University Business School in London, England. Michael Warner has been Managing Director, Jacada (Europe) Limited since August 2001. From May 2000 until July 2001, Mr. Warner was the Director, Worldwide 36 Channels, of Jacada Europe Limited. From 1995 to June 2000, he held various sales management positions with Sterling Software UK Limited, later acquired by Computer Associates Inc. until his resignation as Regional Manager, Eastern Europe. From 1990 to 1995 he held various sales positions at McDonnell Douglas Information Systems Ltd., an international software provider. Yossie Hollander has been chairman of the board of directors of Jacada since November 1995 and a director since 1990. Mr. Hollander was a founder of, and from 1983 to 1994 served as the Chief Executive Officer of New Dimension Software Ltd., an enterprise system and management software company that was acquired by BMC Software in April 1999. Yossie Hollander is Gideon Hollander's brother. Amnon Shoham has served as a director since January 1994. Mr. Shoham is the Managing Director of Cedar Advisors Ltd., a position he has held since 1997. Mr. Shoham is also a partner of Cedar Fund, a venture capital firm, investing in Israel-related, high technology companies, a position he has held since 2000. From 1993 to 1997, Mr. Shoham served as a Managing Partner of Star Ventures, a venture capital firm in Israel. Mr. Shoham serves on the board of directors of several private companies. Mr. Shoham holds a law degree from the Tel-Aviv University, Israel. Ohad Zuckerman has been a director of Jacada since December 2000. Mr. Zuckerman is the CEO and President of Zeraim Gedera Ltd., a position he has held since January 2000. From 1998 to January 2000, Mr. Zuckerman served as the Executive Vice-President of Zeraim Gedera and from 1990 to 1998 he served at the same company as the Marketing Manager. Mr. Zuckerman served as a member of the board of directors at Maximal Innovative Intelligence LTD. Mr. Zuckerman holds an Executive MBA, joint degree from J.L. Kellogg, Graduate School of Management, Northwestern University and Leon Recanati, Graduate School of Business Administration, of Tel Aviv University and a BSc. Agriculture of the Faculty of Agriculture, Hebrew University, Jerusalem. Naomi Atsmon has served as a director of Jacada since June 2001. Ms. Atsmon is a Division President of Amdocs Ltd., a position she has held since July 1997. From 1994 until 1997, Ms. Atsmon served as a vice president at Amdocs Ltd. Ms. Atsmon has held various positions at Amdocs since 1986. Prior to joining Amdocs, Ms. Atsmon was a project manager at Bank Hapoalim. Ms. Atsmon holds a degree in Management and Industrial Engineering from Haifa Technion. B. COMPENSATION The aggregate remuneration we paid for the year ended December 31, 2001 to all executive officers as a group (7 persons, including our former General Manager of Israeli Operations, who resigned effective February 17, 2002), was $1,552,729 in salaries, fees, commissions and bonuses. This amount includes $49,765 set aside or accrued to provide for pension, retirement or similar benefits provided to our executive officers. 37 Directors who are not executive officers do not receive compensation for their service on the board of directors or any board of directors committee. However, all non-management directors are entitled to be reimbursed for their expenses for each board of directors meeting attended. Directors also receive options to purchase our ordinary shares. As of December 31, 2001, options to purchase 2,129,778 ordinary shares granted to our directors and executive officers (11 persons, including our former General Manager of Israeli Operations, who resigned effective February 17, 2002) under our option plans were outstanding. The weighted average exercise price of these options was $3.58 per share. C. BOARD PRACTICE ELECTION AND TERM OF DIRECTORS Directors are elected by an ordinary resolution at the annual general meeting of shareholders, and by a vote of the holders of a majority of the voting power represented at the meeting. Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than 50% of the voting power have the power to elect all of our directors. As of the date of filing of this form, we have authorized five directors. In accordance with the terms of our articles of association, the board of directors is divided into three classes, with the following terms of office: - Class I directors, whose terms expire at the annual meeting of shareholders to be held in 2003; - Class II directors, whose terms expire at the annual meeting of shareholders to be held in 2004; and - Class III directors, whose terms expire at the annual meeting of shareholders to be held in 2002. Our Class I directors are Amnon Shoham and Ohad Zuckerman. Our Class II director is Naomi Atsmon. Our Class III directors are Gideon Hollander and Yossie Hollander. At each annual meeting of shareholders, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following the election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in control or management of our company. 38 Directors may be removed at any time by the holders of 75% of the voting power at a general meeting of shareholders. Shareholders may, by a majority vote (Ordinary Resolution), elect a director to fill the vacancy. If the shareholders do not elect a director to fill such vacancy within 30 days after the removal of the incumbent director, the board of directors may also elect a director to fill such vacancy. Any director elected to fill a vacancy will hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until such director's successor is elected and qualified. ALTERNATE DIRECTORS Our articles of association provide that a director may appoint, by written notice to us, any individual, whether or not the person is then a member of the board of directors, to serve as an alternate director. The appointment of an alternate director is subject to the consent of the board of directors if the appointee is not then a member of the board of directors. Any alternate director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint an alternate, unless otherwise specifically provided for in the appointment of such alternate. The alternate director may not act at any meeting at which the director appointing him or her is present. The alternate director may act as an alternate for several directors and have the corresponding number of votes. Unless the time period or scope of any appointment is limited by the appointing director, the appointment is effective for all purposes and for a period of time concurrent with the term of the appointing director. Currently, no alternate directors have been appointed. AUDIT COMMITTEE We are currently subject to the provisions of the new Israeli Companies Law which became effective on February 1, 2000 and which replaced the old Companies Ordinance. Under the Israeli Companies Law, an audit committee is required to be appointed by the board of directors. The audit committee must consist of at least three members, and include our external directors. Neither the Chairman of the board of directors, directors employed by us or granting services to us on a permanent basis, nor any controlling shareholder or any relative of a controlling shareholder may serve on the audit committee. The responsibilities of the audit committee include identifying irregularities in the management of our business and approving related-party transactions as required by law. Pursuant to the listing requirements of the Nasdaq National Market, we are required to have at least two independent directors on our board of directors and to establish an audit committee, at least a majority of whose members are independent of management. We have appointed such audit committee. The current members of the audit committee are: Amnon Shoham, Ohad Zuckerman and Naomi Atsmon. 39 In addition, the new Israeli Companies Law requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy certain independence requirements may not be appointed as an internal auditor. We have appointed Fahn Kanne Control Management Ltd. to serve as our internal auditor. EXTERNAL DIRECTORS Under the new Israeli Companies Law, Israeli companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange outside of Israel are treated as public companies. Under this law, a public company, like ours, is required to appoint two external directors. This law provides that a person may not be appointed as an external director if the person or the person's relative, partner, employer or any entity under the person's control, has, as of the date of the person's appointment to serve as external director, or had, during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or this controlling entity. The term "affiliation" includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder. External directors are elected at a shareholders meeting, provided that either the majority of shares voted at the meeting, including at least one third of the shares of non-controlling shareholders voted at the meeting, vote in favor of such election or the total number of shares voted against the election does not exceed one percent of the aggregate voting rights in the company. External directors do not have powers or authority that are different from those granted to all other directors. An external director is appointed for a term of three years. A person may not serve as an external director if the person's position or other business creates, or may create, conflict of interests with the person's responsibilities as an external director. Any committee of the board of directors must include at least one external director. An external director is only entitled to compensation as provided in regulations to be adopted under the new law. Amnon Shoham, Ohad Zuckerman, and Naomi Atsmon are currently serving as our external directors. D. EMPLOYEES As of December 31, 2001, we had 75 employees in Israel, 114 in the United States, and 10 in Europe. Of our 199 employees, 62 were engaged in research and development, 53 in sales, marketing and business development, 49 in professional services and technical support and 35 in finance, administration and operations. With respect to our Israeli employees, we are subject to Israeli labor laws and regulations. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. 40 Furthermore, with respect to our Israeli employees, we are subject to provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israeli) and the Coordination Bureau of Economic Organizations (including the Industrialists Association) by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living increases, recreation pay and other conditions of employment. To date, we have not experienced any work stoppages. E. SHARE OWNERSHIP 1. Not applicable. 2. Option Plans. We currently maintain three option plans, the 1994 Option Plan, the 1996 Option Plan and the 1999 Option Plan. The purpose of our option plans is to afford an incentive to officers, directors, employees and consultants of ours, or any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on behalf of us and to promote the success of our business. We have reserved 5,760,450 ordinary shares for issuance upon the exercise of options to be granted to officers, directors, employees and consultants of our subsidiaries. As of December 31, 2001, options to purchase 3,596,270 ordinary shares were outstanding under the option plans (this excludes 18,000 options to vendors). The weighted average exercise price of options outstanding under our option plans is $4.52 as of December 31, 2001. Our option plans are administered by our board of directors and the compensation committee of our board of directors. Under the option plans, options to purchase our ordinary shares may be granted to officers, directors, employees or consultants of ours or our subsidiaries. In addition, pursuant to the option plans, the exercise price of options shall be determined by our compensation committee but may not be less than the par value of the ordinary shares. The vesting schedule of the options is also determined by our compensation committee but generally the options vest over a three to four year period. Each option granted under the option plans is exercisable until the earlier of ten years from the date of the grant of the option or the expiration dates of the respective option plans. The 1994 Option Plan, the 1996 Option Plan and the 1999 Option Plan will expire on December 31, 2003, December 31, 2005 and December 31, 2009, respectively. ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS The following table sets forth, to the best of our knowledge, as of December 31, 2001, those shareholders that own 5% or more of our capital stock. 41
NAME OF BENEFICIAL OWNER (1) NUMBER OF SHARES OWNED PERCENTAGE - ---------------------------- ---------------------- ---------- The Goldman Sachs Group, Inc.(1) 1,781,513 9.6% Meir Barel, M.D. (2) 1,712,814 9.2% Yossie Hollander (3) 1,311,280 7.1% Gideon Hollander (4) 1,189,988 6.4% Airbus Foundation (5) 1,146,300 6.2%
(1) Based on a Schedule 13G/A filed with the Commission on February 14, 2002, this amount represents 1,781,513 ordinary shares owned by certain investment partnerships, of which affiliates of The Goldman Sachs Group, Inc. ("GS Group") are the general partner, managing general partner or investment manager, including (a) 1,117,763 ordinary shares held by GS Capital Partners II, L.P.; (b) 444,368 ordinary shares held by GS Capital Partners II Offshore, L.P.; (c) 41,227 ordinary shares held by GS Capital Partners II (Germany) Civil Law Partnership; (d) 119,925 ordinary shares held by Stone Street Fund 1997, L.P.; and (e) 58,230 ordinary shares held by Bridge Street Fund 1997, L.P. GS Group disclaims beneficial ownership of the shares owned by such investment partnerships to the extent attributable to partnership interests therein held by persons other than GS Group and its affiliates. Each of such investment partnerships shares voting and investment power with certain of its respective affiliates. We make no representation as to the accuracy or completeness of the information reported. The address of GS Group is 85 Broad Street, New York, NY 10004. (2) Based on a Schedule 13G/A filed with the Commission on February 11, 2002, this amount represents ordinary shares held by the following entities of which Dr. Barel is the sole director and primary owner: (a) 1,038,278 ordinary shares held by SVM Star Venture Capital Management Ltd. (Star Israel) and (b) 647,242 ordinary shares held by Star Ventures Management GmbH no. 3 (Star Germany). We make no representation as to the accuracy or completeness of the information reported. The address of Dr. Barel is Possartstrasse 9, D-81679, Munich, Germany. (3) Based on a Schedule 13G filed with the Commission on November 15, 2001. Does not include 302,670 ordinary shares held by Dana Hollander (Yossie Hollander's wife). Mr. Hollander disclaims any beneficial ownership in these shares. We make no representation as to the accuracy or completeness of the information reported. The address of Mr. Hollander is 11 Galgalei Haplada Street, Herzliya, 46722, Israel. (4) Based on a Schedule 13G filed with Commission on February 13, 2001. We make no representation as to the accuracy or completeness of the information reported. The address of Mr. Hollander is 11 Galgalei Haplada Street, Herzliya, 46722, Israel. (5) Based on a Schedule 13G/A filed with the Commission on January 30, 2002, this amount represents 1,146,300 ordinary shares held by Airbus Foundation. We 42 make no representation as to the accuracy or completeness of the information reported. The address of Airbus Foundation is c/o Allegemeines, Treuunternehmen, P.O. Box 83, FL - 9490 Vaduz, Liechtenstein. As of March 11, 2002, there were 2,209 record holders of Jacada shares in the United States, which represented 39% of the outstanding shares as of such date. B. RELATED PARTY TRANSACTIONS A loan in the amount of $60,000 was made in November 2000 to Tzvia Broida, who is our Vice President of Finance. The loan, which bears interest in accordance with Israeli law at the rate of 4% per annum, is evidenced by a promissory note. The loan is repayable in monthly installments of 2,000 NIS (about $430) beginning in October 2001 (the monthly installments increased to 5,000 NIS (about $1,100) in February 2002). The amount outstanding on such loan on December 31, 2001 was 257,978 NIS (approximately $56,082). C. INTERESTS OF EXPERT AND COUNSEL Not applicable. ITEM 8: FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION SEE ITEM 18 FOR AUDITED CONSOLIDATED FINANCIAL STATEMENTS. EXPORT SALES The Company generated approximately 90% of its revenues in North America and approximately 10% in Europe during the period beginning January 1, 2001 and ending December 31, 2001. LEGAL PROCEEDINGS We are, from time to time, a party to legal proceedings which are incidental to our business. For example, on August 31, 1999, a former distributor filed a complaint with the American Arbitration Association against one of our subsidiaries. The arbitration complaint alleged, among other things, that our subsidiary breached its agreement with the former distributor by directly selling products to a customer which the distributor claimed was in violation of its exclusive right to sell to the customer, and that the distributor is entitled to damages of $3.5 million. The arbitration was held in November 2000 and a decision by the arbitrators was entered on April 3, 2001. The arbitrators awarded the distributor a net amount of $392,000 and 50% of the amounts of any revenue actually received from the customer in question in the future. Our management believes that our subsidiary did not breach its agreement with the distributor and that no damages were caused to the distributor. Moreover, the agreement with the distributor sets a limit 43 on the subsidiary's liability under the agreement, which the arbitrators disregarded. We have appealed the arbitrators' decision, and the matter is currently pending before the United States District Court in the Western District of Michigan. In November 2001, we received a letter from Inrange Corporation alleging that a software product we acquired from Computer Network Technology Corporation ("CNT") as part of the Propelis Software acquisition in August 2001 infringed a United States patent which was exclusively licensed to Inrange Corporation. Upon receipt of the letter, we made a claim for indemnification against CNT under the purchase agreement between CNT and the Company. CNT has denied that the software product infringes the Inrange patent in question and therefore has informed us that it has no obligation to indemnify the Company. At present, we have received no further communication from Inrange; however, we do not know whether Inrange will continue to pursue this matter or the amount of damages Inrange may claim. We do not believe that any other legal proceeding to which we have been or currently are a party has had, or is likely to have, a material impact upon us. DIVIDEND POLICY We have no current intention of paying dividends. B. SIGNIFICANT CHANGES There have been no significant changes since the date of our financial statements filed with Form 20-F/A for the year 2000. ITEM 9: THE OFFER AND LISTING A. OFFER AND LISTING DETAILS SHARE HISTORY Our ordinary shares are quoted on the NASDAQ National Market under the symbol "JCDA" and on the Tel Aviv Stock Exchange under the same symbol or its Hebrew equivalent. The following table shows the high and low market prices on the NASDAQ of our ordinary shares in the indicated years. Trading in our shares on the NASDAQ commenced on October 14, 1999.
Year Period High Low ---- ------ ------- ------ 1999 10/14/99 - 12/31/99 $37.375 $8.000 2000 01/01/00 - 12/31/00 33.375 4.375 2001 01/01/01 - 12/31/01 6.300 2.050
44 The following table shows the high and low market prices on the NASDAQ for our ordinary shares for each financial quarter since trading commenced.
Period High Low ------ ------- ------- 10/14/99 - 12/31/99 $37.375 $ 8.000 01/01/00 - 03/31/00 33.375 14.625 04/01/00 - 06/30/00 17.000 7.625 07/01/00 - 09/30/00 13.500 8.625 10/01/00 - 12/31/00 8.625 4.375 01/01/01 - 03/31/01 6.250 4.375 04/01/01 - 06/30/01 6.300 3.437 07/01/01 - 09/30/01 4.240 2.250 10/01/01 - 12/31/01 3.200 2.050 01/01/02 - 03/31/02 3.740 2.820
The following table shows the high and low market prices on the NASDAQ for our ordinary shares for the most recent six months.
Month High Low ----- ------ ----- March 2002 $3.74 $3.13 February 2002 3.25 3.01 January 2002 3.50 2.82 December 2001 3.18 2.62 November 2001 3.20 2.14 October 2001 2.40 2.05
The following table shows the high and low market prices on the Tel Aviv Stock Exchange ("TASE") of our ordinary shares in the indicated years. Trading in our shares on the TASE commenced on June 18, 2001. Share prices in the TASE are denominated in New Israeli Shekels. The following prices are denominated in U.S. Dollars in accordance with the applicable exchange rate between the U.S. Dollar and the NIS as of December 31, 2001.
Year Period High Low ---- ------ ------ ----- 2001 06/18/01 - 12/31/01 $4.16 $2.05
The following table shows the high and low market prices on the TASE for our ordinary shares for each financial quarter since trading commenced. 45
Period High Low ------ ------ ----- 06/18/01 - 06/30/01 $4.16 $3.84 07/01/01 - 09/30/01 4.07 2.50 10/01/01 - 12/31/01 3.12 2.05 01/31/02 - 03/31/02 -----
The following table shows the high and low market prices on the TASE for our ordinary shares for the most recent six months.
Month High Low ----- ------ ----- March 2002 $____ $____ February 2002 3.25 3.01 January 2002 3.50 2.82 December 2001 3.18 2.62 November 2001 3.20 2.14 October 2001 2.40 2.05
B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Our ordinary shares are quoted on the NASDAQ National Market under the symbol "JCDA" and on the Tel Aviv Stock Exchange under the same symbol or its Hebrew equivalent. D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. ITEM 10: ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION For a copy of our Memorandum of Association and our Articles of Association, see Item 19, Exhibits 1.1 and 1.2 which have been incorporated by reference as part of this Annual Report from our Registration Statement on Form F-1, File No. 333-10882. 46 In addition, because we are an Israeli company, we are governed by recently enacted provisions of the Israeli Companies Law which are described below along with certain provisions of our governing documents. APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS The Israeli Companies Law imposes a duty of care and a duty of loyalty on all of a company's office holders as defined below, including directors and executive officers. The duty of care requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty generally requires an office holder to act in good faith and for the good of the company. An "office holder" as defined in the Israeli Companies Law is a director, a general manager, a chief executive officer, a deputy chief executive officer, a vice chief executive officer, other managers directly subordinate to the chief executive officer and any person who fills one of the above positions without regard to title. The Israeli Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. Once an office holder complies with these disclosure requirements, the board of directors may approve a transaction between the company and the office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide otherwise. A transaction that is adverse to the company's interest cannot be approved. If the transaction is an extraordinary transaction under the Israeli Companies Law, then, in addition to any approval stipulated by the articles of association, it also requires audit committee approval before board approval and, in specified circumstances, subsequent shareholder approval. Any transaction between a company and one of its directors relating to the conditions of the director's service, including in relation to exculpation, insurance or indemnification, or in relation to the terms of the director's service in any other capacity requires audit committee approval before board approval and subsequent shareholder approval. The Israeli Companies Law also provides that a director with an interest in an extraordinary transaction brought before the board or the audit committee for its approval may not vote on the approval and may not be present for the discussion of the issue. However, this rule would not apply if a majority of the directors or a majority of the members of the audit committee also possessed an interest in the transaction. RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES Our Board of Directors may from time to time declare, and cause the Company to pay, an interim dividend and final dividend for any fiscal year only out of retained earnings, or earnings derived over the two most recent fiscal years, whichever is higher. Our articles provide that the final dividend in respect of any fiscal year shall be proposed by the Board of Directors and shall be payable only after the same has been approved by a resolution of the shareholders of the Company, approved by a simple majority. However, no such resolution shall provide for the payment of an amount exceeding the 47 amount proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall affect any interim dividend theretofore declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the shareholders entitled thereto. Subject to the provisions of our articles of association and subject to any rights or conditions attached at that time to any share in the capital of the Company granting preferential, special or deferred rights or not granting any rights with respect to dividends, the profits of the Company which shall be declared as dividends shall be distributed according to the proportion of the nominal value paid upon account of the shares held at the date so appointed by the Company, without regard to the premium paid in excess of the nominal value, if any. No amount paid or credited as paid on a share in advance of calls shall be treated as paid on a share. If the Company is wound up, after satisfying liabilities to creditors, then subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the shareholders shall be distributed to them in proportion to their respective holdings. Holders of ordinary shares have one vote for each fully-paid share held of record, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means. We may, subject to applicable law, issue redeemable shares and redeem the same. In addition, our Board of Directors may, from time to time, as it, in its discretion, deems fit, make calls for payment upon shareholders in respect of any sum which has not been paid up in respect of shares held by such shareholders. Under the Israeli Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder includes a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval requires that: (a) the majority of shares voted at the meeting, including at least one third of the shares of disinterested shareholders voted at the meeting, vote in favor of the transaction; or (b) the total number of shares of disinterested shareholders voted against the transaction does not exceed one percent of the aggregate voting rights in the company. The Israeli Companies Law also requires a shareholder to act in good faith towards a company in which he holds shares and towards other shareholders and to refrain from abusing his power in the company, including in connection with voting at a shareholders' meeting on: 48 - Any amendment to the articles of association; - An increase in the company's authorized capital; - A merger; or - Approval of some of the acts and transactions which require shareholder approval. A shareholder has the general duty to refrain from depriving other shareholders of their rights. Any controlling shareholder, any shareholder that knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of associations, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The Israeli Companies Law does not describe the substance of this duty. AMENDMENT OF ARTICLES Our articles require, in order to amend the articles, the approval of the holders of at least 75% of the shares represented at a meeting, in person or by proxy, with the right to vote on the issue ("Special Resolution"). However, the Israeli Companies Law requires only the consent of at least 50% of the voting power of the company represented at a meeting and voting on the change for amendment of articles of association ("Ordinary Resolution"). SHAREHOLDERS MEETINGS AND RESOLUTIONS We are required to hold an annual general meeting of our shareholders once every calendar year, but no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to as extraordinary general meetings. Extraordinary general meetings may be called by our board whenever it sees fit, at such time and place, within or without the State of Israel, as it may determine. In addition, the Israeli Companies Law provides that the board of a public company is required to convene an extraordinary meeting upon the request of (a) any two directors of the company or one quarter of the company's board of directors or (b) one or more shareholders holding, in the aggregate, (i) five percent of the outstanding shares of the company and one percent of the voting power in the company or (ii) five percent of the voting power in the company. The quorum required by our articles for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 33.3% of the voting power in our Company. Our articles differ from the Israeli Companies Law in this respect, as under the Israeli Companies Law only the presence of two shareholders holding at least 25% of the voting power in the Company is required for a quorum. A meeting adjourned for lack of quorum is adjourned to the same day in the following week at the same time and place or any time and place as the chairman of the meeting decides with the consent of the holders of a majority of the voting power 49 represented at such meeting. At such reconvened meeting, the required quorum consists of any two shareholders present in person or by proxy. Our articles enable our board to fix a record date to allow us to determine the shareholders entitled to notice of, or to vote at, any general meeting of our shareholders. The Israeli Companies Law provides that a record date may not be more than 40 nor less than four days before the date of the meeting. Each shareholder of record as of the record date determined by the board may vote the shares then held by that shareholder unless all calls and other sums then payable by the shareholder in respect of its shares have not been paid. LIMITATION ON OWNERSHIP OF SECURITIES The ownership and voting of our ordinary shares by non-residents of Israel are not restricted in any way by our articles or by the laws of the State of Israel, except for shareholders who are subjects of countries that are in a state of war with the State of Israel. MERGERS AND ACQUISITIONS; ANTI-TAKEOVER PROVISIONS The Israeli Companies Law includes provisions allowing corporate mergers. These provisions require that the board of directors of each company that is party to the merger approve the transaction. In addition, the shareholders of each company must approve the merger by a vote of the 75% of the company's shares, present and voting on the proposed merger at a shareholders' meeting, provided that the merger is not objected to by a majority of the shares represented at the meeting after excluding shares held by the other party to the merger or any person holding at least a 25% interest in such other party, including related parties or entities under the other party's control. The Israeli Companies Law does not require court approval of a merger other than in specified situations. However, upon the request of a creditor of either party to the proposed merger, a court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties of the merger to their creditors. A merger may not be completed unless at least 70 days have passed from the time that a request for the approval of the merger has been filed with the Israeli registrar of companies. This request may be filed once a shareholder meeting has been called to approve the merger. The Israeli Companies Law also provides that the acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the company. The rule does not apply if there already is another 25% shareholder of the company. Similarly, the law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would 50 become a 45% shareholder of the company, unless there already is a 50% shareholder of the company. If, following any acquisition of shares, the purchaser would hold 90% or more of the shares of the company, that acquisition must be made by means of a tender offer for all of the target company's shares. An acquirer who wishes to eliminate all minority shareholders must do so by means of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer prior to the acquisition. However, in the event that the tender offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares if by doing so the acquirer would own more than 90% of the shares of the target company. Our articles contain provisions which could delay, defer or prevent a change in our control. These provisions include the staggered board provisions of our articles described above under Item 6 C. CHANGES IN CAPITAL Our articles enable us to increase our share capital. Any such changes are subject to the provisions of the Israeli Companies Law and must be approved by a resolution passed by a majority of the holders of at least 75% of our shares represented, in person or by proxy, at a general meeting voting on such change in the capital. Our articles differ from the Israeli Companies Law in this respect, as under the law changes in capital require approval only of a majority of the voting power of a company represented at the relevant shareholders meeting and voting thereon. C. MATERIAL CONTRACTS In May 2000, we acquired an irrevocable, paid-up, perpetual, non-exclusive worldwide license to certain technology owned by Cortlandt Reade Technical Corporation ("CRTR"). In accordance with the terms and conditions of the license agreement, CRTR has provided and will continue to provide consulting and development services to integrate the technology into Jacada's software products. The purchase price for the license and for the consulting and development services was $1.5 million, $1.2 million of which has been paid. Jacada is obligated to pay CRTR the remaining balance of $300,000 three months after the date that the Jacada software product which incorporates the licensed technology is made generally available by Jacada. During the third quarter of 2001 and as part of our restructuring, we revised our product development plan and abandoned the use of technology acquired from CRTR. In August 2001, we acquired from Computer Network Technology Corporation certain assets and assumed certain liabilities related to its business unit known as Propelis Software pursuant to an Asset Purchase Agreement. The purchase price for Propelis Software was $7,463,000, which includes a warrant issued to Computer Network Technology Corporation to purchase 350,000 ordinary shares of Jacada, the fair value of which was $500,000. Among the assets we acquired from Computer Network Technology Corporation was the software product now known as Jacada Integrator, as 51 well as certain software license, maintenance and support, and consulting services agreements with customers. Other than the foregoing, we have entered into no material contracts outside of the ordinary course of business for the two year period ending December 31, 2001. D. EXCHANGE CONTROLS In 1998, the Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. Non-residents of Israel may freely hold and trade our securities. Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares. E. TAXATION INFORMATION REGARDING TAXES TO WHICH U.S HOLDERS MAY BE SUBJECT. The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us, and certain Israeli Government programs benefiting us. This section also contains a discussion of certain Israeli tax consequences to persons acquiring ordinary shares. This summary does not discuss all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to certain types of investors subject to special treatment under Israeli law, such as traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting share capital. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in this discussion will be accepted by the tax authorities. The discussion should not be construed as legal or professional tax advice and is not exhaustive of all possible tax considerations. POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES. 52 GENERAL CORPORATE TAX STRUCTURE The general corporate tax rate in Israel is currently 36%. However, the effective tax rate payable by a company which derives income from an "Approved Enterprise" may be considerably less. Under the Law for the Encouragement of Industry (Taxes), 1969, which is referred to below as the Industry Encouragement Law, a company qualifies as an "Industrial Company" if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from certain loans, marketable securities, capital gains, interest and dividends, is derived from Industrial Enterprises owned by it. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial manufacturing. We currently qualify as an Industrial Company. Pursuant to the Industry Encouragement Law, an Industrial Company is entitled to deduct the purchase price of know how, patents or rights over a period of eight years beginning with the year in which such rights were first used, and is also entitled to deduct 33.3% per annum of expenses incurred in connection with the issuance of publicly-traded shares over a period of three years from the time the expenses were incurred. Moreover, Industrial Enterprises which are Approved Enterprises can choose between the regular depreciation rates and accelerated rates of depreciation applied on a straight-line basis in respect of property and equipment, generally ranging from 200% in respect of equipment to 400% of the ordinary depreciation rates in respect of buildings during the first five years of service of the assets, subject to a ceiling of 20% per year with respect to depreciation of buildings. Qualification as an Industrial Company under the Industrial Encouragement Law is not conditioned upon the receipt of prior approval from any Israeli Government authority. No assurance can be given that we will continue to qualify as an Industrial Company or will in the future be able to avail ourselves of any benefits available to companies so qualifying. LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959 The Law for Encouragement of Capital Investments, 1959, which is referred to below as the Capital Investments Law, provides that capital investments in a production facility or other eligible assets may, upon application to the Israeli Investment Center of the Ministry of Industry and Commerce, be designated as an "Approved Enterprise." Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. An Approved Enterprise is entitled to certain benefits, including Israeli Government cash grants, state-guaranteed loans and tax benefits. 53 TAX BENEFITS Taxable income derived from an Approved Enterprise is subject to a reduced corporate tax rate of 25%. That income is eligible for further reductions in tax rates depending on the percentage of the foreign investment in our share capital conferring rights to profits, voting and appointment of directors and the percentage of its combined share and loan capital owned by non-Israeli residents. The tax rate is 20% if the foreign investment is 49% or more but less than 74%, 15% if the foreign investment is 74% or more but less than 90% and 10% if the foreign investment is 90% or more. The lowest level of foreign investment during the year will be used to determine the relevant tax rate for that year. These tax benefits are granted for a limited period not exceeding seven years or 10 years for a company whose foreign investment level exceeds 25% from the first year in which the Approved Enterprise has taxable income. The period of benefits may in no event, however, exceed the lesser of 12 years from the year in which the production commenced or 14 years from the year of receipt of Approved Enterprise status. An Approved Enterprise approved after April 1, 1986 may elect to forego any entitlement to the grants otherwise available under the Capital Investments Law and, in lieu of the foregoing, may participate in an Alternative Benefits Program, under which the undistributed income from the Approved Enterprise is fully exempt from corporate tax for a defined period of time. The period of tax exemption ranges between two and ten years commencing in the first year in which the company generates taxable income, depending upon the location within Israel of the Approved Enterprise and the type of the Approved Enterprise. On expiration of the exemption period, the Approved Enterprise would be eligible for the otherwise applicable beneficial tax rates under the Capital Investments Law, ranging from 10% to 25%, for the remainder, if any, of the otherwise applicable benefits period. There can be no assurance that the current benefit programs will continue to be available or that we will continue to qualify for benefits under the current programs. We currently have Approved Enterprise programs under the Capital Investments Law, which entitle us to certain tax benefits. The tax benefit period for these programs has not yet commenced. We have elected to participate in three Alternative Benefit Programs. Income derived from our Alternative Benefit Programs is exempt from tax for a period of two years, commencing in the first year in which we generate taxable income from the Approved Enterprise. For the five years following this two year period of exemption, we are subject to a reduced tax rate of up to 25% as mentioned above. See note 10 to our consolidated financial statements. A company that has elected to participate in the Alternative Benefits Program and that subsequently pays a dividend out of the income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed, including withholding tax thereon, at the rate that would have been applicable had the company not elected the Alternative Benefits Program, ranging from 10% to 25%. The dividend recipient is taxed at the reduced rate of 15%, applicable to dividends from Approved Enterprises if the dividend is distributed within 12 years 54 after the benefits period. The withholding tax rate will be 25% after such period. In the case of a company with over 25% foreign investment level, as defined by law, the 12-year limitation on reduced withholding tax on dividends does not apply. This tax should be withheld by the company at source, regardless of whether the dividend is converted into foreign currency. See "Withholdings and Capital Gains Taxes Applicable to Non-Israeli Shareholders." From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Capital Investments Law. The termination or substantial reduction of any of the benefits available under the Capital Investments Law could materially impact the cost of our future investments. Each application to the Investment Center is reviewed separately, and a decision as to whether or not to approve such application is based, among other things, on the then prevailing criteria set forth in the Capital Investments Law, on the specific objectives of the applicant company set forth in such application and on certain financial criteria of the applicant company. Accordingly, there can be no assurance that any such application will be approved. In addition, the benefits available to an Approved Enterprise are conditional upon the fulfillment of certain conditions stipulated in the Capital Investments Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that these conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits, together with linkage differences to the Israeli CPI and interest. We believe that our Approved Enterprise programs operate in compliance with all such conditions and criteria. OTHER BENEFITS An Approved Enterprise is also entitled to the following two other incentives from the Israeli Government regardless of whether the Alternative Benefits Program is elected: - - loans to Approved Enterprises, approved prior to January 1, 1997, which also qualify as Industrial Companies, from banks and other financial institutions, of up to 70% of approved project expenditures, of which 75% or in certain cases 85%, are State-guaranteed; and - - accelerated depreciation on property and equipment, generally ranging from 200% with respect to equipment to 400% with respect to buildings of the ordinary depreciation rates during the first five tax years of the operation of these assets, subject to a ceiling of 20% per year with respect to depreciation on buildings. TAXATION UNDER INFLATIONARY CONDITIONS The Income Tax (Inflationary Adjustment) Law, 1985, which is referred to below as the Inflationary Adjustment Law, attempts to overcome some of the problems presented to a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the law was enacted. Generally, the Inflationary 55 Adjustments Law provides significant tax deductions and adjustments to depreciation methods and tax loss carry forwards to compensate for loss of value resulting from an inflationary economy. Our taxable income is subject to the provisions of this law. The Israeli Income Tax Ordinance and the Inflationary Adjustments Law allow "Foreign-Invested Companies," which maintain their accounts in dollars in compliance with regulations published by the Israeli Minister of Finance, to base their tax returns on their operating results as reflected in the dollar financials statements or to adjust their tax returns based on exchange rate changes rather than changes in the Israeli CPI, in lieu of the principles set forth by the Inflationary Adjustments Law. For these purposes, a "Foreign-Invested Company" is a company, more than 25% of whose share capital, in terms of rights to profits, voting and appointment of directors, and of whose combined share and loan capital is held by persons who are not residents of Israel. A company that elects to measure its results for tax purposes based on the dollar exchange rate cannot change that election for a period of three years following the election. We believe that we qualify as a Foreign Investment Company within the meaning of the Inflationary Adjustment Law. We have not yet elected to measure our results for tax purposes based on the dollar exchange rate, but may do so in the future. TAX BENEFITS OF RESEARCH AND DEVELOPMENT Israeli tax law permits, under certain conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, in scientific research and development projects, if the expenditures are approved by the relevant government ministry, determined by the field of research, and if the research and development is for the promotion of the enterprise and is carried out by, or on behalf of, a company seeking such deduction. Expenditures not so approved are deductible over a three year period; however, expenditures made out of proceeds made available to us through government grants are not deductible. WITHHOLDING AND CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. We are generally required to withhold income tax at the rate of 25%, or 15% for dividends generated by an Approved Enterprise, on all distributions of dividends. Israeli law imposes a capital gains tax on the sale of securities and other capital assets. Under current law, however, sales of our ordinary shares covered by this Annual Report are exempt from Israeli capital gains tax for so long as: - - the shares are quoted on Nasdaq or listed on a stock exchange recognized by the Israeli Ministry of Finance, 56 - - we continue to qualify as an Industrial Company or Industrial Holding Company, and - - the shares are not held for business purposes. Furthermore, under the income tax treaty between the United States and Israel, a holder of ordinary shares who is a United States resident will be exempt from Israeli capital gains tax on the sale, exchange or other disposition of such ordinary shares unless the holder owns, directly or indirectly, 10% or more of our voting power. A nonresident of Israel who receives interest, dividend or royalty income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer. Israel presently has no estate or gift tax. TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY. We will be deemed to be a passive foreign investment company or PFIC if 75% or more of our gross income in a taxable year, including the pro rata share of the gross income of any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value, is passive income. Alternatively, we will be considered to be a PFIC if 50% or more of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including the pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income. Passive income includes amounts derived by reason of the temporary investment of funds. We do not expect to be treated as a PFIC for 2001. The tests for determining PFIC status, however, are applied annually based on facts and circumstances, and it is difficult to make accurate predictions of future income, assets and activities which are relevant to this determination and that to some extent, may be beyond our control. Accordingly, there can be no assurance that we will never be deemed to be a PFIC. If we were deemed to be a PFIC, and a U.S. Holder did not make an election to treat us as a "qualified electing fund" (as described below), U.S. Holders could be subject to adverse tax consequences upon receipt of certain distributions from us or upon disposition of our ordinary shares, including denial of capital gains rates and interest charges. The adverse tax consequences referred to above would not apply to a U.S. Holder that makes an election to treat us as a "qualified electing fund," or a QEF election, in the first taxable year in which the U.S. Holder owns ordinary shares if we comply with certain reporting requirements, which we intend to do. A shareholder of a qualified electing fund would, however, be required to include in income a pro rata share of the earnings of the qualified electing fund whether or not the earnings are distributed. As an alternative to a QEF election, you may elect to mark-to-market your ordinary shares, recognizing as ordinary income or loss each year an amount equal to the 57 difference as of the close of the taxable year between the fair market value of the ordinary shares and your adjusted tax basis in such ordinary shares. Losses would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. You are urged to consult your own tax advisors regarding the advisability of making a QEF election or a mark-to-market election in the event we are classified as a PFIC. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY We are currently subject to the information and periodic reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, and file periodic reports and other information with the Securities and Exchange Commission through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this Annual Report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the Securities and Exchange Commission located at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and the Commission's regional offices located in New York, New York and Chicago, Illinois. Copies of all or any part of the registration statement or other filings may be obtained from these offices after payment of fees required by the Commission. Please call the Commission at 1-800-SEC-0330 for further information. The Commission also maintains a website at http://www.sec.gov from which certain filings may be accessed. As a foreign private issuer, we are exempt from certain rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements to our shareholders. In addition, we, our directors, and our officers are also exempt from the shortswing profit recovery and disclosure regime of Section 16 of the Exchange Act. 58 I. SUBSIDIARY INFORMATION Not applicable. ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We do not use derivative financial instruments for trading purposes and, as of year end, we had no derivative financial instruments of any kind outstanding. Accordingly, we have concluded that there is no material market risk exposure of the type contemplated by Item 11, and that no quantitative tabular disclosures are required. We are exposed to certain other types of market risks, as further described below. We develop products in Israel and sell them in North America and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most of our sales are currently made in dollars, an increase in the value of the dollar could make our products less competitive in foreign markets. The foreign currency exchange rate effects for the year ended December 31, 2001, 2000, and 1999 were immaterial. Our interest expense is sensitive to changes in LIBOR. Due to the nature and levels of our borrowings, we have concluded that there is no material market risk exposure. We invest in U.S. Treasury notes, investment grade U.S. corporate securities and dollar deposits with banks. These investments typically carry fixed interest rates. Until September 2001 our marketable securities were designated under FAS 115 as held-to-maturity marketable securities. As a result of unexpected events, we sold our held-to-maturity marketable securities. As of December 31, 2001, our marketable securities were designated as available for sale. If we hold these securities to the maturity date, financial income over the holding period is not sensitive to changes in interest rates. As of December 31, 2001, we had no other exposure to changes in interest rates and had no interest rate derivative financial instruments outstanding. ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 59 ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS There have been no changes in the rights of holders of any of our registered securities. The effective date of the registration statement (No. 333-10882) for our initial public offering of our ordinary shares, NIS 0.01 par value, was October 14, 1999. The offering commenced on October 20, 1999, and terminated after the sale of all the securities registered. The managing underwriter of the offering was Lehman Brothers. We registered 5,175,000 ordinary shares in the offering, including shares issued pursuant to the exercise of the underwriters' over-allotment option. We sold 5,175,000 ordinary shares at an aggregate offering price of $56,925,000 ($11.00 per share). Under the terms of the offering, we incurred underwriting discounts of $3,984,750. We also incurred expenses of $2,769,250 million in connection with the offering. None of the amounts was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owing ten percent or more of any class of our equity securities, or to any of our affiliates. The net proceeds that we received as a result of the offering were $50,568,390. As of December 31, 2001, the net proceeds have been used to invest in a variety of financial instruments and for general corporate purposes. More specifically, a portion of the proceeds, $6.9 million, was used to purchase certain assets of Propelis Software, Inc., a business unit of Computer Network Technology Corporation. None of the net proceeds of the offering was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates. ITEM 17: FINANCIAL STATEMENTS See Item 18. ITEM 18: FINANCIAL STATEMENTS ITEM 19: EXHIBITS
Exhibit Description of Document Number ----------------------- - ------- 1.1 Memorandum of Association of the Company (incorporated by reference to Exhibit 3.1 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 1.2 Articles of Association of the Company (incorporated by reference to Exhibit 3.2 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.2 1994 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)).
60 4.3 1996 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.4 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.3 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.5 Employment Agreement of Gideon Hollander with Jacada Inc. dated March 3, 1999 (incorporated by reference to Exhibit 10.4 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.6 Employment Agreement of Michael J. Potts dated June 10, 1995 (incorporated by reference to Exhibit 10.6 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.7 Employment Agreement of Nimrod Gil-Ad dated August 21, 1996 (incorporated by reference to Exhibit 10.10 from the Company's Registration Statement filed on Form F-1 (file no. 333-10882)). 4.8 Technology and Product License Agreement between the Company and Cortlandt Reade Technical Corporation dated May 25, 2000 (incorporated by reference to the Company's Annual Report on Form 20-F for the year end December 31, 2000). 4.9 Amendment to 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company's Registration Statement on Form S-8 (file no. 333-73650) 4.10 Asset Purchase Agreement dated as of August 19, 2001 among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries 4.11 First Amendment to Asset Purchase Agreement among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries dated August 23, 2001 8 List of Jacada's Subsidiaries (incorporated by reference to the Company's Annual Report on Form 20-F for the year end December 31, 2000). 10 Consent of Kost, Forer and Gabbay, a member of Ernst & Young International.
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and it has duly caused and authorized the undersigned to sign this Annual Report on its behalf on April 9, 2002. JACADA LTD. /s/ Robert C. Aldworth ------------------------------------------ By: Robert C. Aldworth Chief Financial Officer 61 JACADA LTD. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 IN U.S. DOLLARS INDEX
PAGE ---------- REPORT OF INDEPENDENT AUDITORS F-2 CONSOLIDATED BALANCE SHEETS F-3 - F4 CONSOLIDATED STATEMENTS OF OPERATIONS F-5 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-31
F-1 (ERNST & YOUNG LOGO) - KOST FORER & GABBAY Phone: 972-3-6232525 3 Aminadav St. Fax: 972-3-5622555 Tel-Aviv 67067, Israel REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF JACADA LTD. We have audited the accompanying consolidated balance sheets of Jacada Ltd. ("the Company") and its subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2001 and 2000 and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel KOST FORER & GABBAY January 29, 2002 A Member of Ernst and Young International F-2 JACADA LTD. CONSOLIDATED BALANCE SHEETS U.S. DOLLARS IN THOUSANDS
DECEMBER 31, ------------------------ 2001 2000 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,982 $ 9,360 Short-term bank deposits -- 5,309 Marketable securities 35,660 32,154 Trade receivables (net of allowance for doubtful accounts of $1,022 and $ 204 at December 31, 2001 and 2000, respectively) 4,261 6,403 Other current assets 626 485 -------- -------- Total current assets 46,529 53,711 -------- -------- LONG-TERM INVESTMENTS: Marketable securities -- 5,644 Severance pay fund 567 548 Long-term other assets 203 369 -------- -------- Total long-term investments 770 6,561 -------- -------- PROPERTY AND EQUIPMENT, NET 3,632 3,151 -------- -------- OTHER ASSETS, NET: Technology (net of accumulated amortization of $ 95 and $ 126 at December 31, 2001 and 2000, respectively) 1,245 1,374 Goodwill 4,283 -- -------- -------- Total other assets 5,528 1,374 -------- -------- $ 56,459 $ 64,797 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 JACADA LTD. CONSOLIDATED BALANCE SHEETS U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31, ------------------------ 2001 2000 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ -- $ 12 Trade payables 750 2,105 Deferred revenues 2,065 1,046 Accrued expenses and other liabilities 4,089 3,808 -------- -------- Total current liabilities 6,904 6,971 -------- -------- LONG-TERM LIABILITIES: Accrued severance pay 967 1,036 Other long-term payable -- 144 -------- -------- Total long-term liabilities 967 1,180 -------- -------- SHAREHOLDERS' EQUITY: Share capital: Ordinary shares of NIS 0.01 par value: Authorized: 30,000,000 shares as of December 31, 2001 and 2000; Issued and outstanding: 18,537,704 and 18,428,531 shares as of December 31, 2001 and 2000, respectively 54 54 Additional paid-in capital 68,486 67,843 Deferred stock compensation (71) (161) Accumulated deficit (19,881) (11,090) -------- -------- Total shareholders' equity 48,588 56,646 -------- -------- $ 56,459 $ 64,797 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 JACADA LTD. CONSOLIDATED STATEMENTS OF OPERATIONS U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 --------- --------- --------- Revenues: Software licenses $ 10,930 $ 15,506 $ 8,831 Services 8,986 6,070 3,362 Maintenance 5,630 3,540 2,406 --------- --------- --------- Total revenues 25,546 25,116 14,599 --------- --------- --------- Cost of revenues: Software licenses 520 725 639 Services 4,859 3,636 1,619 Maintenance 1,705 1,574 1,121 --------- --------- --------- Total cost of revenues 7,084 5,935 3,379 --------- --------- --------- Gross profit 18,462 19,181 11,220 --------- --------- --------- Operating expenses: Research and development 6,446 4,979 3,267 Sales and marketing 14,619 12,873 6,529 General and administrative 5,679 3,624 1,960 Non-recurring charges 2,846 -- -- --------- --------- --------- Total operating expenses 29,590 21,476 11,756 --------- --------- --------- Operating loss (11,128) (2,295) (536) Financial expenses (209) (131) (240) Financial income 2,539 3,213 770 --------- --------- --------- Income (loss) before taxes on income (8,798) 787 (6) Taxes on income (benefit) (7) 10 -- --------- --------- --------- Net income (loss) $ (8,791) $ 777 $ (6) ========= ========= ========= Basic net earnings (loss) per share $ (0.48) $ 0.04 $ *) -- ========= ========= ========= Diluted net earnings (loss) per share $ (0.48) $ 0.04 $ *) -- ========= ========= =========
*) Represents an amount lower than $ 0.01 The accompanying notes are an integral part of the consolidated financial statements. F-5 JACADA LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
CONVERTIBLE PREFERRED SHARES ORDINARY SHARES ADDITIONAL ------------------------- ------------------------ PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- ------ ----------- ------ ----------- Balance as of January 1, 1999 8,407,635 $ 26 3,621,893 $ 12 $ 14,887 Issuance of Preferred "C" shares, net 389,490 2 -- -- 1,237 Conversion of Ordinary shares into Preferred shares 31,155 *) -- (31,155) *) -- -- Conversion of Preferred shares into Ordinary shares (8,828,280) (28) 8,828,280 28 -- Issuance of Ordinary shares, net -- -- 5,175,000 12 50,556 Exercise of stock options, net -- -- 16,875 *) -- 19 Deferred stock compensation -- -- -- -- 242 Amortization of deferred stock compensation -- -- -- -- -- Net loss -- -- -- -- -- ---------- ----- ----------- ----- -------- Balance as of December 31, 1999 -- -- 17,610,893 52 66,941 Exercise of stock options, net -- -- 817,638 2 958 Cancellation of deferred stock compensation -- -- -- -- (56) Amortization of deferred stock compensation -- -- -- -- -- Net income -- -- -- -- -- ---------- ----- ----------- ----- -------- Balance as of December 31, 2000 -- -- 18,428,531 54 67,843 Exercise of stock options, net -- -- 109,173 *) -- 158 Cancellation of deferred stock compensation -- -- -- -- (15) Amortization of deferred stock compensation -- -- -- -- -- Issuance of warrant in respect of the acquisition of Propelis -- -- -- -- 500 Net loss -- -- -- -- -- ---------- ----- ----------- ----- -------- Balance as of December 31, 2001 -- $ -- 18,537,704 $ 54 $ 68,486 ========== ===== =========== ===== ======== DEFERRED TOTAL STOCK ACCUMULATED SHAREHOLDERS' COMPENSATION DEFICIT EQUITY ------------- ----------- ------------ Balance as of January 1, 1999 $(125) $(11,861) $ 2,939 Issuance of Preferred "C" shares, net -- -- 1,239 Conversion of Ordinary shares into Preferred shares -- -- *) -- Conversion of Preferred shares into Ordinary shares -- -- -- Issuance of Ordinary shares, net -- -- 50,568 Exercise of stock options, net -- -- 19 Deferred stock compensation (242) -- -- Amortization of deferred stock compensation 95 -- 95 Net loss -- (6) (6) ----- -------- -------- Balance as of December 31, 1999 (272) (11,867) 54,854 Exercise of stock options, net -- -- 960 Cancellation of deferred stock compensation 56 -- -- Amortization of deferred stock compensation 55 -- 55 Net income -- 777 777 ----- -------- -------- Balance as of December 31, 2000 (161) (11,090) 56,646 Exercise of stock options, net -- -- 158 Cancellation of deferred stock compensation 15 -- -- Amortization of deferred stock compensation 75 -- 75 Issuance of warrant in respect of the acquisition of Propelis -- -- 500 Net loss -- (8,791) (8,791) ----- -------- -------- Balance as of December 31, 2001 $ (71) $(19,881) $ 48,588 ===== ======== ========
*) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. F-6 JACADA LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (8,791) $ 777 $ (6) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,474 987 724 Write-off of Old Technology 1,188 -- -- Amortization of deferred stock compensation 75 55 95 Accrued interest on short-term bank deposits 49 (92) -- Accrued interest and amortization of premium on marketable securities 329 (490) (222) Gain on sales of held-to-maturity marketable securities (192) -- -- Decrease (increase) in accrued interest on long-term other assets 27 (20) -- Increase (decrease) in accrued severance pay, net (88) 241 85 Decrease (increase) in trade receivables 4,439 (2,643) (794) Decrease (increase) in other current assets 188 (296) (90) Increase (decrease) in trade payables (1,596) 340 1,006 Increase (decrease) in deferred revenues 246 (1,978) (1,128) Increase in accrued expenses and other liabilities 877 1,047 899 Other 1 1 34 --------- --------- --------- Net cash provided by (used in) operating activities (1,774) (2,071) 603 --------- --------- --------- Cash flows from investing activities: Investment in short-term bank deposits -- (5,161) (56) Proceeds from sale of short-term bank deposits 5,260 -- -- Investment in marketable securities (58,485) (89,301) (50,297) Redemption of held to maturity marketable securities 37,847 102,512 -- Proceeds from sale of held to maturity marketable securities 22,639 -- -- Purchase of property and equipment (b) (1,475) (1,717) (1,048) Payment in respect of other assets (700) (500) -- Proceeds from sale of property and equipment 32 14 41 Investment in long-term other assets (91) (175) -- Payment for the acquisition of Propelis (c) (6,863) -- -- Other 86 26 19 --------- --------- --------- Net cash provided by (used in) investing activities (1,750) 5,698 (51,341) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of shares, net 158 960 52,122 Payment of principal of long-term debt (12) (368) (202) Proceeds from long-term debt -- -- 368 Short-term bank debt, net -- -- (2,022) --------- --------- --------- Net cash provided by financing activities 146 592 50,266 --------- --------- --------- Increase (decrease) in cash and cash equivalents (3,378) 4,219 (472) Cash and cash equivalents at the beginning of the year 9,360 5,141 5,613 --------- --------- --------- Cash and cash equivalents at the end of the year $ 5,982 $ 9,360 $ 5,141 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-7 JACADA LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31, ----------------------------------- 2001 2000 1999 ------ ------ ------ Supplemental disclosure of cash flows activities: a. Cash paid during the year for: Interest and charges $ 60 $ 20 $ 118 ===== ====== ===== b. Non-cash activities: Other long-term payable $ -- $ -- $ 296 ===== ====== ===== Purchase of property and equipment $ 17 $ 170 $ -- ===== ====== ===== Purchase of technology $ -- $1,000 $ -- ===== ====== ===== c. In August 2001, the Company and its subsidiaries acquired certain assets and assumed certain liabilities of Propelis Software, Inc., a business unit of Computer Network Technology Corporation. The estimated net fair value of the assets acquired and liabilities assumed as of the date of acquisition was as follows: Working capital, net $1,355 Property and equipment 385 Goodwill 4,283 New technology 1,340 ------ 7,363 Issuance of warrant (500) ------ $6,863 ======
The accompanying notes are an integral part of the consolidated financial statements. F-8 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 1:- GENERAL a. Jacada Ltd. (the "Company") was incorporated, under the laws of Israel, in December 1990. b. Jacada Ltd. and its wholly-owned subsidiaries - Jacada (Europe) Limited. (the U.K. subsidiary) and its wholly-owned subsidiary Jacada Deutschland GmbH, Jacada, Inc. (the U.S. subsidiary) and its wholly-owned subsidiary Jacada Canada, Inc. - develop and market web application hosting and business-to-business infrastructure software. The Company and its subsidiaries generate revenues from licensing their software products and from services such as maintenance, support, consulting and training. The majority of the Company and its subsidiaries sales are made in North America and Europe. As for major customers, see also Note 13. c. Jacada (Europe) Limited. established a wholly-owned subsidiary in Germany during 2001. d. Acquisition of Propelis Software Inc. ("Propelis"): On August 23, 2001, the Company and its U.K. and U.S. subsidiaries acquired certain assets and assumed certain liabilities related to Propelis Software Inc., a business unit of Computer Network Technology Corporation, for an aggregate purchase price of approximately $ 7,463 of which $ 6,963 in cash, and a warrant to purchase 350,000 Ordinary shares of the Company at a fair value of $ 500. As of December 31, 2001, $100 relating to transaction expenses remain outstanding (see also Note 9e). Products acquired as part of the Propelis acquisition enable world-class organizations to leverage their existing information assets and infrastructure in highly collaborative e-business solutions that integrate critical business processes, information and people. The operations of Propelis are included in the consolidated statements from the date of acquisition. The acquisition was accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. According to Statement of Financial Accounting Standard Board No. 142, "Goodwill and Other Intangible Assets ("SFAS No. 142"), this goodwill will not be amortized but will be subject to annual impairment tests in accordance with the statement. The allocation of the purchase price of the Propelis acquisition is based on the estimated fair value of assets acquired. F-9 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 1:- GENERAL (CONT.) The following is a summary of the net assets acquired: Working capital, net $ 1,455 Property and equipment 385 Goodwill 4,283 New Technology (1) 1,340 ----- $ 7,463 =======
(1) See also Note 5. The following represents the unaudited pro-forma results of operations for the years ended December 31, 2001 and 2000, assuming that the Propelis acquisition had been consummated as of January 1, 2001 and 2000, respectively:
YEAR ENDED DECEMBER 31, ---------------------------- 2001 2000 ---------- ---------- Revenues $ 32,507 $ 33,451 ========== ========== Net loss $ (16,686) $ (12,743) ========== ========== Basic and diluted net loss per share $ (0.9) $ (0.7) ========== ==========
The pro-forma financial information is not necessarily indicative of the consolidated results that would have been attained had the acquisition taken place at the beginning of 2000 or 2001, nor is it necessarily indicative of future results. e. Restructuring charges: In October 2001, due to recent events and a slowdown in the software industry, the Company and its subsidiaries made changes in their business strategies, operations and structure in an attempt to improve future operating results, by adopting a restructuring plan. The plan consisted of the involuntary termination of 56 employees (14 research and development employees, 16 professional services and support employees, 22 sales and marketing employees and 4 administrative employees), the subletting of a portion of the existing office space of the Company and its subsidiaries and decreasing compensation and benefits to the Company's employees. In connection with the restructuring plan, EIFT 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Cost to Exit an Activity (including certain cost in restructuring)" and SAB 100 "Restructuring and Impairment Charges" were applied and accordingly, the Company and its subsidiaries incurred expenses of $1,391, of which $518 remain accrued, and $173 of which are for employees termination benefits. F-10 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 1:- GENERAL (CONT.) The major components of restructuring charges are as follows:
YEAR ENDED DECEMBER 31, 2001 ------------ Employee termination benefits $ 916 Facilities closures 411 Other 64 ------- $ 1,391 =======
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"). a. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b. Financial statements in U.S. Dollars: A majority of the revenues of the Company and its subsidiaries is generated in United States dollars ("dollars"). The Company and its subsidiaries' management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. Foreign currency translation differences expenses amounted to approximately $124, $73 and $94 for the years ended December 31, 2001, 2000 and 1999, respectively. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation. F-11 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES d. Cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less. e. Short-term bank deposits: Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. The short-term bank deposits are presented at cost, including accrued interest. The balance of short-term bank deposits bore interest at an annual rate of 6.5 % to 7.9 %. A part of the balance was denominated in NIS. f. Marketable securities: The Company and its subsidiaries account for their investments in marketable securities using Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company and its subsidiaries have the positive intent and ability to hold the securities to maturity and are stated at amortized cost. At December 31, 2000 all marketable securities covered by SFAS No. 115 were designated as held-to-maturity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in financial expense (income). The cost of securities sold is based on the specific identification method. Debt securities for which the Company and its subsidiaries do not have the intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities that have not been classified as "trading securities". At December 31, 2001 all marketable securities covered by SFAS No. 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with the unrealized gains and losses, reported as a separate component of shareholders' equity, accumulated other comprehensive income (loss). Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations. The Company and its subsidiaries investments in debt securities are diversified among high-credit quality securities in accordance with the Company and its subsidiaries' investment policy. (See also Note 3). F-12 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) g. Property and equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:
% -------------------------- Computers and peripheral equipment 20 - 33 Office furniture and equipment 6 - 12.5 Motor vehicles 15 Leasehold improvements Over the term of the lease
The Company and its subsidiaries periodically assess the recoverability of the carrying amount of property and equipment and provide for any possible impairment loss based upon the difference between the carrying amount and fair value of such assets, in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). As of December 31, 2001, no impairment losses have been identified. h. Other assets: 1. During 2000, the Company purchased and capitalized technology in the amount of $ 1,500 ("Old Technology"). The Old Technology was amortized using the straight line method over the estimated economic life of the technology, which was four years. In August 2001, as a result of the Propelis acquisition, the Company's U.S. subsidiary acquired new technology ("New Technology") in the amount of $ 1,340. The New Technology is being amortized using the straight-line method over the estimated economic life of the technology rights, which is five years. The net realizable value of the Old Technology and New Technology is periodically reviewed by management, based on the estimated future gross revenues from the Old Technology and New Technology reduced by the estimated future costs for disposing of each of them. If this review indicates that the unamortized capitalized costs exceed the net realizable value of the Old Technology or the New Technology, then that amount should be reduced. Due to the slowdown in the software industry and to the purchase of New Technology, the Company and its subsidiaries decided to stop its selling and marketing efforts of the Old Technology's Product. Therefore, the unamortized capitalized cost of the Old Technology exceeded the net realizable value and the balance was written off. F-13 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) As of December 31, 2001, the Old Technology's unamortized balance of approximately $ 1,188 was charged as expenses to the statement of operations. (see also Note 12). 2. In August 2001, as a result of the Propelis acquisition, the Company and its subsidiaries recorded goodwill in the amount of approximately $ 4,283 (see also Note 1d). Under Statement of Financial Accounting Statement SFAS No. 142, "Goodwill and other Intangible Assets" ("SFAS No. 142"), goodwill and intangible assets acquired subsequent to June 30, 2001, are deemed to have indefinite lives, will not be amortized, and will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company and its subsidiaries will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets during 2002. i. Research and development costs: Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for general release. Therefore, research and development costs are charged to the statement of operations as incurred. j. Income taxes: The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. F-14 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) k. Revenue recognition: To date, the Company and its subsidiaries have derived their revenues from license fees for their products, maintenance and support and rendering of services including consulting and training. The Company and its subsidiaries sell their products primarily through their direct sales force to customers and indirectly through resellers, both the customers and the resellers are considered end users. The Company and its subsidiaries are also entitled to royalties from some distributors upon the sublicensing of the software to end users. The Company and its subsidiaries have adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended. SOP 97-2, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company and its subsidiaries have also adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions", for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements and all other criteria of Sop 97-2 have been met. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. The Company and its subsidiaries do not grant a right of return to their customers. The Company and its subsidiaries consider all arrangements with payment terms extending beyond one year not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met. When software arrangements involve multiple elements, revenue is allocated to each element based on VSOE of the relative fair values of each element in the arrangement, in accordance with the "residual method" prescribed by SOP 98-9. The VSOE of fair value of all undelivered elements is determined based on the price charged for the undelivered element when sold separately. Revenues from royalties are recognized when such royalties are reported to the Company and its subsidiaries upon the sublicensing of the software by the distributors. Maintenance and support revenue included in software arrangements is deferred and recognized on a straight-line basis over the term of the maintenance and support agreement. F-15 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS Arrangements that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. To date, the Company and its subsidiaries had determined that the consulting and training services are not considered essential to the functionality of other elements of the arrangement. F-16 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) Deferred revenue includes amounts received from customers for which revenue has not yet been recognized. l. Accounting for stock-based compensation: The Company and its subsidiaries have elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44") in accounting for its employee stock option plans. Under APB 25, when the exercise price of the Company's stock options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. The pro forma disclosures required by Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), are provided in Note 9. The Company and its subsidiaries apply SFAS No. 123, EITF 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and its amendments with respect to options issued to non-employees. SFAS No. 123 requires use of an option valuation model to measure the fair value of the options at the date of grant. m. Advertising expenses: Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31, 2001, 2000 and 1999 were $ 633, $ 329 and $ 159, respectively. n. Severance pay: The Company's liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Israeli employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its Israeli employees, is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. Severance pay expenses for the years ended December 31, 2001, 2000 and 1999, were $ 566, $ 502 and $ 332, respectively. F-17 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) o. Fair value of financial instruments: The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments: The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables and trade payables approximate their fair value due to the short-term maturity of such instruments. The fair value for marketable securities is based on the quoted market prices (See Note 3). The carrying amounts of the Company and its subsidiaries' long-term other assets approximate their fair values. The fair values were estimated using discounted cash flow analyses, based on the Company and its subsidiaries incremental borrowing rates for similar types of borrowing arrangements. p. Basic and diluted net earnings (loss) per share: Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with FASB Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"). All convertible Preferred shares and outstanding stock options and warrants have been excluded from the calculation of the diluted net earnings (loss) per Ordinary share because all of these securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the outstanding convertible Preferred shares, options and warrants excluded from the calculations of diluted net loss per share were 69,978, 0 and 2,604,384 for the year ended December 31, 2001, 2000 and 1999, respectively. q. Concentrations of credit risk: Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, short-term bank deposits and trade receivables. Cash and cash equivalents and short-term bank deposits are deposited in U.S. dollars, Canadian dollars, European currencies and New Israeli Shekels with major banks in the United States, Canada, England, Germany and Israel. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's and its subsidiaries investments are financially sound, and accordingly, minimal credit risk exists. F-18 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) The Company and its subsidiaries' marketable securities include investments in debentures of the U.S government, preferred securities and U.S. corporations. Management believes that those corporations are financially sound, the portfolio is well diversified, and accordingly, minimal credit risk exists with respect to these marketable securities. The Company and its subsidiaries' trade receivables are mainly derived from sales to customers in North America and Europe. The Company and its subsidiaries perform ongoing credit evaluations of their customers and provide an allowance for doubtful accounts with respect to those amounts that the Company and its subsidiaries have determined to be doubtful of collection. Write-offs of uncollectible accounts for the years ended December 31, 2001, 2000 and 1999 were $ 120, $ 0 and $ 9, respectively. The Company and its subsidiaries have no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. r. Impact of recently issued accounting standards: In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a business". FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company and its subsidiaries expect to adopt FAS 144 as of January 1, 2002 and have not determined the effect, if any, the adoption of FAS 144 will have on the Company and its subsidiaries' financial position and results of operations. F-19 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 3:- MARKETABLE SECURITIES The following is a summary of available-for-sale securities and held-to-maturity securities:
DECEMBER 31, ------------------------------------------------------------------------------ 2001 2000 ------------------------------------ ------------------------------------ GROSS ESTIMATED GROSS ESTIMATED AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR COST LOSSES VALUE COST LOSSES VALUE --------- ---------- --------- --------- ---------- --------- Available-for-sale: Preferred Securities $35,660 $ -- $35,660 $ -- $ -- $ -- ======= ==== ======= ======= ==== ======= Held-to-maturity: U.S. Government Securities $ -- $ -- $ -- $32,280 $431 $31,849 U.S. corporate debts -- -- -- 5,518 200 5,318 ------- ---- ------- ------- ---- ------- $ -- $ -- $ -- $37,798 $631 $37,167 ======= ==== ======= ======= ==== =======
The amortized cost and estimated fair value of marketable securities as of December 31, 2001 and 2000, by contractual maturity, are shown below. The Company did not realize any gains or losses on redemption of held-to-maturity securities in 2000. During 2001, the Company sold held-to-maturity securities at an amortized cost of $22,447, and recorded realized gain in the amount of $ 192. There are no realized gains or losses on sales of available-for-sale securities, as of December 31, 2001.
DECEMBER 31, ------------------------------------------------------ 2001 2000 --------------------- ------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- ------ --------- ------- Available-for-sale: Matures in one year $35,660 $35,660 $ -- $ -- ======= ======= ======= ======= Held-to-maturity: Matures in one year $ -- $ -- $32,154 $31,457 Matures after one year through three years -- -- 5,644 5,710 ------- ------- ------- ------- Total $ -- $ -- $37,798 $37,167 ======= ======= ======= =======
F-20 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 4:- PROPERTY AND EQUIPMENT, NET Composition of property and equipment is as follows:
DECEMBER 31, -------------------------- 2001 2000 -------- -------- Cost: Computers and peripheral equipment $ 4,263 $ 3,188 Office furniture and equipment 1,056 824 Motor vehicles 1,445 1,230 Leasehold improvements 561 459 -------- -------- 7,325 5,701 Accumulated depreciation 3,693 2,550 -------- -------- Depreciated cost $ 3,632 $ 3,151 ======== ========
Depreciation expenses for the years ended December 31, 2001, 2000 and 1999 were $ 1,193, $ 861 and $ 724, respectively. As for charges, see Note 8. NOTE 5:- OTHER ASSETS, NET
DECEMBER 31, -------------------------- 2001 2000 -------- -------- Original amounts: Old Technology (see also Note 2h) $ -- $ 1,500 New Technology 1,340 -- Goodwill 4,283 -- -------- -------- 5,623 1,500 -------- -------- Accumulated amortization: Old Technology and New Technology 95 126 -------- -------- Amortized cost $ 5,528 $ 1,374 ======== ========
Amortization expense for the years ended December 31, 2001, 2000 and 1999 amounted to $ 281, $ 126 and $ 0, respectively. F-21 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31, -------------------------- 2001 2000 -------- -------- Employee and payroll accruals $ 1,928 $ 2,228 Accrued expenses 951 455 Restructuring accruals (1) 518 -- Old Technology 300 1,000 Accrued arbitration charges (2) 392 125 -------- -------- $ 4,089 $ 3,808 ======== ========
(1) See also Note 1e. (2) See also Note 12. NOTE 7:- CURRENT MATURITIES OF LONG-TERM DEBT
DECEMBER 31, LINKED INTEREST ------------------- TO RATE 2001 2000 ------- -------- ----- ----- Long-term debt to financial U.S. institutions and others Dollars 7.125% $ -- $ 12 ===== ===== Aggregate maturities of long-term debt: First year (current portion) $ -- $ 12 ===== =====
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES a. Royalties: The Company participates in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2001, the Company had obtained grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade ("the OCS") in the aggregate amount of $ 1,976 for certain of the Company's research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 3%-4% of the sales of the products and other related revenues generated from such projects, up to 100%-150% of the grants received, linked to the U.S. dollar. Through December 31, 2001, the Company has paid or accrued royalties to the OCS in the amount of $ 1,684. As of December 31, 2001, the aggregate contingent liability to the OCS amounted to $314. F-22 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.) b. Lease commitments: The Company and its subsidiaries facilities are leased under various operating lease agreements, which expire on various dates, the latest of which is in 2007. Future minimum lease payments under non-cancelable operating leases are as follows:
YEAR ENDED DECEMBER 31 ----------- 2002 $ 599 2003 95 2004 96 2005 86 2006 52 2007 39 ------ $ 967 ======
Total rent expenses for the years ended December 31, 2001, 2000 and 1999 were approximately $ 1,164, $ 902 and $ 513, respectively. c. Guarantees: The Company has provided guarantees, in connection with bank credit and in favor of a lessor, totaling $ 200. The Company had an unused credit facility in the amount of approximately $ 2,800 as of December 31, 2001, with a renewal option at the beginning of every year and bearing interest at the rate of Libor+1.75%. d. Charges: As collateral for the Company's unused credit facilities (see also Note 8c), charges have been placed on all of the Company's assets in Israel, including insurance rights. e. Litigation: 1. In August 1999, a former distributor filed an arbitration demand against a subsidiary of the Company. This demand alleged that the subsidiary breached its agreement with the distributor by directly selling products to a customer, which the distributor had an exclusive right to sell to said customer, and that the distributor was entitled to damages of $ 3,500. A decision by the arbitration was entered during 2001. The arbitrators awarded the distributor a net amount of $ 392 and 50% of amounts collected from this customer in the future. F-23 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.) The Company had previously made a provision for a potential liability of $ 125. As a result, the Company has recorded an additional charge in 2001 of $ 267, increasing the provision to the full amount of the award to date. On April 24, 2001, the subsidiary of the Company filed an action to vacate the arbitration charge. Subsequently, the distributor filed an application for enforcement of the arbitration award. As of December 31, 2001, no court has addressed any of the substantive issues in the case (see also Note 12). 2. In November 2001, the Company received a claim by a third party ("the claimant"), which has arisen out of the Propelis acquisition, regarding an alleged infringement of a patent. The claimant purported to be the exclusive licensee of the patent which is used by the Company since the Propelis acquisition. To date, the Company has not responded to the claimant, nor received any subsequent correspondence from claimant. The Company's management believes that under the acquisition agreement CNT should indemnify the Company for any such patent infringement. Since the claim is in its preliminary stages, the Company's management and its legal advisors is unable to estimate the outcome of the claim. NOTE 9:- SHAREHOLDERS' EQUITY a. General: Since October 1999, the Company's shares have been traded on the NASDAQ, National Market. Since June 2001, the Company's shares have been traded on the Tel-Aviv Stock Exchange. All share and per share data included in these financial statements have been retroactively adjusted to reflect the stock split effected as stock dividend of one Ordinary share for every two shares outstanding effected in September 1999. In July 1999, 31,155 Ordinary shares and 85,688 Preferred "A" shares were converted into Preferred "C" shares on a one-for-one basis. As part of the issuance of shares in July 1997, the investors received warrants to purchase 389,490 additional Preferred "C" shares at a price of $ 3.21 per share. On July 24, 1999, these warrants were exercised. b. Composition of share capital: In October 1999, 4,500,000 Ordinary shares were issued in consideration of $ 49,500 (not including issuance expenses) in an Initial Public Offering ("IPO"). F-24 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 9:- SHAREHOLDERS' EQUITY (CONT.) The Company granted an option to the underwriters of the IPO to purchase up to 675,000 additional Ordinary shares on the same terms and conditions as set forth in the IPO solely to cover over allotments, if any. On November 4, 1999, the underwriters exercised their option to purchase 675,000 Ordinary shares in the amount of $ 7,425 (not including issuance expenses). All of the Company's Preferred shares were automatically converted into Ordinary shares on a one-for-one basis upon completion of the IPO. c. Stock Option Plans: As of December 31, 2001, the Company has authorized by several Incentive Share Option Plans (the 1994, 1996 and 1999 plans), the grant of options to officers, management, other key employees and others of up to 5,760,450 of the Company's Ordinary shares (including an addition of 1,800,000 Ordinary shares to the 1999 plan in January 2001). The options granted generally become fully exercisable after three to four years and expire ten years from the approval date of the option plan under the terms of grant. Any options which are forfeited or canceled before expiration, become available for future grants. As of December 31, 2001, an aggregate of 1,211,495 Ordinary shares of the Company are still available for future grant. A summary of the Company's employees share option activity, and related information is as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Outstanding - at the beginning of the year 2,957,787 $5.02 2,594,634 $3.28 1,902,444 $1.32 Granted 1,320,750 $4.32 1,379,133 $6.53 747,840 $8.20 Exercised 109,173 $1.45 817,638 $1.18 16,875 $1.13 Forfeited and cancelled 573,094 $7.23 198,342 $6.12 38,775 $3.05 --------- ----- --------- ----- --------- ----- Outstanding - at the end of the year 3,596,270 $4.52 2,957,787 $5.02 2,594,634 $3.28 ========= ===== ========= ===== ========= ===== Exercisable options as of December 31, 1,832,792 $3.86 1,169,478 $2.51 1,618,308 $1.22 ========= ===== ========= ===== ========= =====
F-25 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 9:- SHAREHOLDERS' EQUITY (CONT.) The options outstanding as of December 31, 2001 have been classified by exercise price, as follows:
WEIGHTED OPTIONS WEIGHTED OPTIONS AVERAGE OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE AS OF REMAINING AVERAGE AS OF PRICE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, OPTIONS PRICE 2001 LIFE (YEARS) PRICE 2001 EXERCISABLE --------------- ------------ ------------ -------- ----------- ----------- $ 0.99 - $ 1.13 569,818 3.32 $ 1.01 569,818 $ 1.01 $ 1.60 - $ 2.22 422,283 6.83 $ 2.1 316,547 $ 2.06 $ 2.23 - $ 2.89 209,250 9.53 $ 2.89 19,125 $ 2.89 $ 4.04 - $ 5.06 1,734,444 8.25 $ 4.56 609,021 $ 4.5 $ 9 - $ 11 660,475 8.15 $ 9.52 318,281 $ 9.56 --------------- --------- ---- ------ --------- ------- $ 0.99 - $ 11 3,596,270 7.36 $ 4.52 1,832,792 $ 3.86 =============== ========= ==== ====== ========= =======
Deferred compensation expenses which represent the excess of the market value over the exercise price totaled $ 296 and are amortized to the statements of operations over the vesting period which usually is four years. Options granted to the Chief Executive Officer in 1998 vest over an eight to ten year period, with possible acceleration of vesting if certain criteria are met. Deferred compensation expenses of approximately $ 75, $ 55 and $ 95 were recognized during the years ended December 31, 2001, 2000 and 1999, respectively.
FOR EXERCISE PRICES ON THE DATE OF GRANT THAT ---------------------------------------------------------------------- EQUAL MARKET PRICE ARE LESS THAN MARKET PRICE --------------------------------- ------------------------------ DECEMBER 31, DECEMBER 31, --------------------------------- ------------------------------ 2001 2000 1999 2001 2000 1999 ------ ------ ------- ----- ----- ------ Weighted average exercise prices $ 4.32 $ 6.53 $ 10.22 $ -- $ -- $ 2.22 ====== ====== ======= ===== ===== ====== Weighted average fair values on date of grant $ 2.81 $ 4.58 $ 3.67 $ -- $ -- $ 1.59 ====== ====== ======= ===== ===== ======
Under SFAS 123, pro forma information regarding net earnings (loss) and net earnings per share is required and has been determined as if the Company had accounted for its employee stock option under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Minimum Value Option Pricing Model for options granted at the period commencing January 1, 1999 through the date of the IPO: risk-free interest rates of approximately 6%, dividend yields of 0% and an expected life of the option of approximately 4 years. As of the date of the IPO, the fair value for options granted was estimated using the Black-Scholes option pricing model, with the following weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rate of 4% for the year 2001 and 6% for the years 2000 and 1999; dividend yields of 0% for each year, volatility factor of the expected market price of the Company's Ordinary shares of 1.14, 1.253 and 0.5, respectively; and a weighted-average expected life of the option of 2.5 years for each year. F-26 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 9:- SHAREHOLDERS' EQUITY (CONT.) Pro forma information under SFAS 123:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2001 2000 1999 ---------- --------- -------- Net income (loss) as reported $ (8,791) $ 777 $ (6) ========== ========= ======== Pro forma net loss $ (11,329) $ (322) $ (140) ========== ========= ======== Pro forma basic and diluted net loss per share $ (0.61) $ (0.03) $ (0.02) ========== ========= ========
d. Options issued to consultants: 1. The Company's outstanding options to consultants as of December 31, 2001, are as follows:
OPTIONS FOR EXERCISE ORDINARY PRICE OPTIONS EXERCISABLE ISSUANCE DATE SHARES PER SHARE EXERCISABLE THROUGH ------------- ----------- --------- ----------- ----------- 1996 7,500 $ 1.13 7,500 *) 1999 1,500 $ 11.00 938 *) 2000 4,000 $ 4.375 4,000 *) 2001 5,000 $ 2.89 5,000 *) ------ ------ Total 18,000 17,438 ====== ======
*) 10 years from the date of grant. 2. The Company had accounted for its options to consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these options was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rates of 4% for 2001 and 6% for the years 2000 and 1999, dividend yields of 0% for each year, volatility factors of the expected market price of the Company's Ordinary shares of 1.14, 1.253 and 0.5 respectively and a weighted-average expected life of the options of approximately 2.5 years for each year. 3. Due to immateriality, no compensation expenses have been recorded in the financial statements. F-27 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 9:- SHAREHOLDERS' EQUITY (CONT.) e. Warrant: During 2001, in connection with the acquisition of Propelis, the Company issued CNT a warrant to purchase 350,000 Ordinary shares of the Company at an exercise price of $ 3.26. This warrant is exercisable until August 2004. The fair value of the warrant was included in the purchase price determination. The fair value of the warrant was estimated using a Black-Scholes Option-Pricing Model with the following weighted-average assumptions for 2001: risk-free interest rate of 4%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 0.808 and a weighted-average expected life of the warrant of approximately 2 years. f. Dividends: In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash dividends in the foreseeable future. NOTE 10:- TAXES ON INCOME a. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the "law"): The production facilities of Jacada Ltd. have been granted the status of "Approved Enterprise" under the law, for three separate investment programs, which were approved in July 1994, July 1995 and December 1996. According to the provisions of the law, the Company has elected the "alternative benefits" - waiver of grants in return for tax exemption and, accordingly, the Company's income is tax-exempt for a period of two years commencing with the year it first earns taxable income relating to each expansion program, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional period of five years, (based on the percentage of foreign ownership in each taxable year). The period of tax benefits, detailed above, is limited to the earlier of 12 years from the commencement of production, or 14 years from the approval date. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "approved enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As the Company currently has no taxable income, these benefits have not yet commenced. F-28 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 10:- TAXES ON INCOME (CONT.) The tax-exempt income attributable to the "Approved Enterprises" can be distributed to shareholders, without subjecting the Company to taxes, only upon the complete liquidation of the Company. If these retained tax-exempt income is distributed in a manner other than in the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative tax benefits (currently between 10% to 25% for an "Approved Enterprise"). The Company's board of directors has determined that such tax exempt income will not be distributed as dividends. The Company expects that during the period in which these tax losses are utilized, its income would be substantially tax exempt. Accordingly, there will be no tax benefit available from such losses and no deferred income taxes have been provided in these financial statements. Income not eligible for the "Approved Enterprise" benefits mentioned above, is taxed at the regular corporate rate of 36%. b. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: Results for tax purposes of the Company are measured and reflected in real terms in accordance with the changes in the Israeli Customer Price Index. As explained in Note 2b, the financial statements are presented in U.S. dollars. The difference between the change in the Israeli Customer Price Index and in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. c. Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969: The Company is an "industrial company", as defined by this law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes. d. Net operating losses carryforward: As of December 31, 2001, Jacada Ltd. had approximately $ 4,451 of Israeli net operating loss carryforwards. The Israeli loss carryforwards have no expiration date. F-29 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 10:- TAXES ON INCOME (CONT.) As of December 31, 2001, the UK subsidiary had accumulated losses for income tax purposes in the amount of approximately $ 3,895. These net operating losses may be carried forward and offset against taxable income in the future for an indefinite period. During 2000, the U.K. subsidiary had interest income that cannot be offset against operating loss; therefore, the U.K. subsidiary had provided for taxes on income the amount of $ 10 which was offset during 2001. F-30 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 10:- TAXES ON INCOME (CONT.) As of December 31, 2001, the U.S. subsidiary had U.S. federal net operating loss carryforwards for income tax purposes in the amount of approximately $5.8 million. Net operating loss carryforwards arising in taxable years beginning before August 6, 1997 can be carried forward and offset against taxable income for 15 years and expire from 2010 to 2012. Net operating loss carryforwards arising in taxable years beginning after August 5, 1997 can be carried forward and offset against taxable income for 20 years and expire from 2017 to 2021. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. As of December 31, 2001, the German subsidiary had accumulated losses for income tax purposes in the amount of approximately $515. e. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, ----------------------------- 2001 2000 -------- -------- Deferred tax assets: U.S. operating loss carryforward $ 2,197 $ 1,470 U.K. operating loss carryforward 784 610 Germany operating loss carryforward 129 -- -------- -------- Total deferred tax asset before valuation allowance 3,110 2,080 Valuation allowance (3,110) (2,080) -------- -------- Net deferred tax asset $ -- $ -- ======== ========
The U.S., U.K. and German subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforward. Management currently believes that since the Company and its subsidiaries have a history of losses it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future. F-31 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA f. Pre-tax income (loss):
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ---------- ------ ------- Domestic (Israel) $ 4,086 $ 76 $ 154 Foreign (12,884) 711 (160) ---------- ------ ------- $ (8,798) $ 787 $ (6) ========== ====== ========
NOTE 11:- EARNING PER SHARE The following table sets forth the computation of basic and diluted net earnings (loss) per share. Numerator:
YEAR ENDED DECEMBER 31, ------------------------------------------- 2001 2000 1999 --------- ------ ----- Net income (loss) $ (8,791) $ 777 $ (6) ========= ====== ===== Numerator for basic and diluted net earnings (loss) per share - income available to shareholders of Ordinary shares $ (8,791) $ 777 $ (6) ========= ====== =====
Denominator:
YEAR ENDED DECEMBER 31, ------------------------------------------- 2001 2000 1999 ---------- ---------- --------- Denominator for basic net earnings (loss) per share - weighted average shares 18,465,127 18,141,223 6,572,476 ---------- ---------- --------- Effect of dilutive securities: Employee stock options and options to consultants *) -- 1,362,748 *) -- ---------- ---------- --------- Dilutive potential Ordinary shares *) -- 1,362,748 *) -- ---------- ---------- --------- Denominator for diluted net earnings (loss) per share 18,465,127 19,503,971 6,572,476 ========== ========== =========
*) Antidilutive. F-32 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA NOTE 12:- NON-RECURRING CHARGES Arbitration charge (1) $ 267 Restructuring charges (2) 1,391 Write-off of Old Technology (3) 1,188 -------- $ 2,846 ========
(1) See also Note 8e. (2) See also Note 1e. (3) See also Note 2h. NOTE 13:- GEOGRAPHIC AND OTHER OPERATING INFORMATION Summary information about geographical areas: The Company and its subsidiaries manage their business on a basis of one reportable segment (see Note 1 for a brief description of the Company's business) and follows the requirements of SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". The following is a summary of operations within geographic areas based on customer's location.
DECEMBER 31, ----------------------------------------------- 2001 2000 1999 --------- --------- --------- Revenues from sales to unaffiliated customers: United States $ 22,619 $ 23,030 $ 11,894 United Kingdom 1,050 1,582 2,193 Canada 445 195 -- Israel and others 1,432 309 512 --------- --------- --------- $ 25,546 $ 25,116 $ 14,599 ========= ========= =========
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 --------- -------- -------- Long-lived assets: Israel $ 1,980 $ 3,403 $ 1,516 United States 7,016 1,021 617 United Kingdom 136 101 7 Germany 28 -- -- --------- -------- -------- $ 9,160 $ 4,525 $ 2,140 ========= ======== ========
F-33 JACADA LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA Major customer data as a percentage of total revenues:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 ---- ---- ---- Customer A 10% 12% *) -- Customer B *) -- *) -- 13% Customer C *) -- *) -- 10% Customer D *) -- 14% --
*) Less than 10% of total revenues. F-34 EX-4.10 3 g75399ex4-10.txt ASSET PURCHASE AGMT DATED 8/19/01 EXHIBIT 4.10 ASSET PURCHASE AGREEMENT dated as of August 19, 2001 by and among JACADA LTD., JACADA, INC., JACADA (EUROPE), LIMITED, PROPELIS SOFTWARE, INC., COMPUTER NETWORK TECHNOLOGY CORPORATION AND CNT INTERNATIONAL LTD. 1 This ASSET PURCHASE AGREEMENT dated as of August 19, 2001 is made and entered into by and among (i) JACADA LTD., an Israeli corporation ("Parent"), (ii) the following direct wholly-owned subsidiaries of Parent: JACADA, INC., a Delaware corporation ("Jacada-US") and JACADA (EUROPE), LIMITED, a company organized under the laws of England ("Jacada-UK") (Jacada-US and Jacada-UK are collectively referred to herein as the "Purchasers"), (iii) Computer Network Technology Corporation, a Minnesota corporation ("CNT"), and (iv) the following direct wholly-owned subsidiaries of CNT: Propelis Software, Inc., a Minnesota corporation (f/k/a RealLegacy.com, Inc. and CNT Acquisition I Corporation) ("Propelis") and CNT International Ltd., a company organized under the laws of England and Wales ("CNTUK"), (CNT, Propelis, and CNTUK are collectively referred to herein as the "Sellers"). RECITALS: WHEREAS, Sellers, through their Enterprise Integration Solutions Division ("EISD Division"), are engaged in the business of developing, marketing, licensing and selling Products and related services for the business process management and enterprise application integration marketplace (the "Business"; for the avoidance of doubt, the term "Business" shall not include the networking, managed services or SNA businesses or any other businesses of Sellers); and WHEREAS, Sellers desire to sell, transfer and assign to Parent and Purchasers, and Parent and Purchasers desires to purchase and acquire from Sellers, substantially all of the assets of Sellers relating to the operation of the Business, and in connection therewith, Parent and Purchasers have agreed to assume certain of the liabilities of Sellers relating to the Business, all on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE OF ASSETS AND CLOSING 1.01 Assets. (a) Assets Transferred. On the terms and subject to the conditions set forth in this Agreement, Sellers will sell, transfer, convey, assign and deliver to Parent and Purchasers, and Parent and Purchasers will purchase and pay for, at the Closing, free and clear of all Liens other than Permitted Liens, all of Sellers' right, title and interest in, to and under the assets and properties of Sellers used in connection with the Business, as the same shall exist on the Closing Date (the "Assets") including, without limitation, the following assets used in connection with the Business, but specifically excluding the Excluded Assets (as such term is defined in Section 1.01(b)): (i) Inventory. All inventories of Products contained on compact disks and related documentation (the "Inventory"); 2 (ii) Tangible Personal Property. All equipment, machinery, furniture, fixtures and other tangible personal property used in connection with the Business (including without limitation the items listed in Section 1.01(a)(ii) of the Disclosure Schedule) ("Tangible Personal Property"); (iii) Accounts Receivable. All trade and other accounts receivable and all notes, bonds and other evidences of Indebtedness of and rights to receive payments arising out of Products sold or licensed or services rendered (including without limitation deferred maintenance billings) occurring in the conduct of the Business (other than amounts due from Gelco, which shall be excluded from the Closing Date Statement), including any rights of Sellers with respect to any third party collection procedures or any other Actions or Proceedings which have been commenced in connection therewith (the "Accounts Receivable"); (iv) Personal Property Leases. The leases of tangible personal property described in Section 1.01(a)(iv) of the Disclosure Schedule as to which a Seller is the lessee or sublessee, together with any options to purchase the underlying property (the leases and subleases described above, the "Personal Property Leases"); (v) Contracts. All Contracts (other than the Real Property Leases and the Personal Property Leases) to which a Seller is a party and which are utilized in the conduct of the Business including without limitation those described in Section 1.01(a)(v) of the Disclosure Schedule (the "Assumed Agreements"); (vi) Prepaid Expenses; Employee Stock Option Receivables. All prepaid payroll related to UK Employees through August 31, 2001; all other prepaid expenses relating to the Business; and all employee stock option receivables; including but not limited to the items listed in Section 1.01(a)(vi) of the Disclosure Schedule (the "Prepaid Expenses"); (vii) Intellectual Property. All Intellectual Property used in the conduct of the Business (including Sellers' goodwill therein), including without limitation all rights in the name "Propelis Software," "Enterprise/Access," Propelis EAI, Propelis BPm, and Enterprise/Access 2000 (the "Intellectual Property Assets"); (viii) Licenses. All Licenses (including applications therefor) utilized in the conduct of the Business; (ix) Books and Records. All Books and Records used or held for use in the conduct of the Business or otherwise relating to the Assets, other than the minute books, stock transfer books and corporate seal of Sellers (the "Business Books and Records"); (x) Claims. All rights of any Seller under any claims, warranties, guaranties, refunds, causes of action, rights of recovery, rights of set-off and rights of recoupment of 3 every kind and nature relating to the Business, other than those relating to the Excluded Assets or the Retained Liabilities; and (xi) Other Assets and Properties. All other assets and properties of Sellers used or held for use in connection with the Business, excluding the Excluded Assets. (b) Excluded Assets. Notwithstanding anything in this Agreement to the contrary, the following assets and properties of Sellers (the "Excluded Assets") shall be excluded from and shall not constitute Assets: (i) Cash. All operating cash, commercial paper, certificates of deposit and other bank deposits, treasury bills and other cash equivalents; (ii) Real Property Leases. The leases of real property described in Section 1.01(b)(ii) of the Disclosure Schedule as to which a Seller is the lessee or sublessee, together with any options to purchase the underlying property and leasehold improvements thereon (the "Real Property Leases"); (iii) Personal Property Leases. The leases of tangible personal property described in Section 1.01(b)(iii) of the Disclosure Schedule as to which a Seller is the lessee or sublessee, together with any options to purchase the underlying property; (iv) Contracts. All Contracts described in Section 1.01(b)(iv) of the Disclosure Schedule; (v) Corporate Records. The minute books, stock transfer books and corporate seal of Sellers; (vi) Benefit Plans. All Benefit Plans of Sellers including all assets thereof; (vii) Insurance Policies. All casualty, liability or other policies of insurance maintained by or on behalf of the Sellers and the rights thereunder and all rights under self insurance programs; (viii) This Agreement. Sellers' rights under this Agreement; (ix) Personal Property. All equipment, machinery, furniture, fixtures and other tangible personal property of any Seller (a) not used in connection with the Business or (b) described in Section 1.01(b)(ix) of the Disclosure Schedule; and (x) Shared Facilities and Assets. The Shared Facilities and Assets. (xi) Other. As set forth in Section 1.01(b)(xi) of the Disclosure Schedule (c) Allocation of Assets. The Assets shall be allocated among Parent and the Purchasers in accordance with the terms of this Section 1.01(c). Parent shall acquire the Intellectual Property Assets. Jacada-UK shall acquire all Assets that are located in the 4 United Kingdom or that have a legal situs or presence in the United Kingdom (other than Intellectual Property Assets) (the "UK Assets"). Jacada-US shall acquire all remaining Assets (other than Intellectual Property Assets), including without limitation all Assets that are located in the United States or that have a legal situs or presence in the United States (the "US Assets"). Each of Parent and the Purchasers agree that it shall bear a portion of the Purchase Price proportionate to the value of the Assets acquired by it. 1.02 Liabilities. (a) Assumed Liabilities. In connection with the sale, transfer, conveyance, assignment and delivery of the Assets pursuant to this Agreement, on the terms and subject to the conditions set forth in this Agreement, at the Closing, Parent and Purchasers will assume and agree to pay, perform and discharge when due the following obligations of Sellers arising in connection with the operation of the Business, as the same shall exist on the Closing Date (the "Assumed Liabilities"), and no others: (i) Personal Property Lease Obligations. All obligations of Sellers under the Personal Property Leases, so long as such obligations have been incurred in the ordinary course of business consistent with past practices (but specifically excluding liabilities for breaches thereof occurring on or prior to the Closing Date, whether occurring as a result of the transactions contemplated by this Agreement or otherwise); and (ii) Obligations under Assumed Agreements. All obligations of Sellers under the Assumed Agreements, so long as such obligations have been incurred in the ordinary course of business consistent with past practices (but specifically excluding liabilities for breaches thereof occurring on or prior to the Closing Date, whether occurring as a result of the transactions contemplated by this Agreement or otherwise). (iii) Accounts Payable. All trade and other accounts payable of Sellers related only to the Business incurred in the ordinary course of business consistent with past practices on or prior to the Closing Date ("Accounts Payable"). (iv) Other. As set forth in Section 1.02(a)(iv) of the Disclosure Schedule. (b) Retained Liabilities. Except for the Assumed Liabilities, Parent and Purchasers shall not assume by virtue of this Agreement or the transactions contemplated hereby, and shall have no liability for, any Liabilities of Sellers (including, without limitation, those related to the Business or any Benefit Plans) of any kind, character or description whatsoever, whether accrued, absolute or contingent, whether known or unknown, whether disclosed or undisclosed and regardless of when asserted (the "Retained Liabilities"). Sellers shall discharge in a timely manner or shall make adequate provision for all of the Retained Liabilities. (c) Allocation of Liabilities. The Assumed Liabilities shall be allocated among Parent and Purchasers in a manner consistent with the allocation of the Assets pursuant to Section 1.01(c). 1.03 Purchase Price; Allocation of Purchase Price. 5 (a) Purchase Price. The Purchase Price, as adjusted pursuant to Section 1.06, for the Assets (the "Purchase Price") will consist of (i) SIX MILLION DOLLARS ($6,000,000) in cash; and (ii) a warrant (the "Warrant") to purchase THREE HUNDRED FIFTY THOUSAND (350,000) unregistered ordinary shares, NIS $0.01 par value (the "Underlying Shares"), of Parent, which Warrant shall be substantially in the form of the warrant attached hereto as Exhibit 1.03(a). Parent and Purchasers shall be jointly and severally liable for payment of the Purchase Price. (b) Escrowed Amount. As security for the indemnification obligations of the Sellers pursuant to Article IX, the "Escrowed Amount" (as defined below) will be delivered by Parent and Purchasers to the Escrow Agent at Closing, to be held, administered and disbursed by the Escrow Agent pursuant to the terms of an Escrow Agreement substantially in the form of Exhibit 1.03(b) attached hereto (the "Escrow Agreement"). As used herein, the term "Escrowed Amount" means $600,000.00, subject to increase or decrease post-Closing by deposit or withdrawal, as applicable, to reflect ten percent (10%) of the cash portion of the Purchase Price, as adjusted pursuant to Section 1.06. (c) Allocation of Purchase Price. Upon completion of the Purchase Price adjustment pursuant to Section 1.06, Parent and Purchasers and Sellers shall negotiate in good faith and determine the allocation of the consideration paid by Parent and Purchasers for the Assets. Each party hereto agrees (i) that any such allocation shall be consistent with the requirements of Section 1060 of the Code and the regulations thereunder, (ii) to complete jointly and to file separately Form 8594 with its Federal income Tax Return consistent with such allocation for the tax year in which the Closing Date occurs and (iii) that no party will take a position on any income, transfer or gains Tax Return, before any Governmental or Regulatory Authority charged with the collection of any such Tax or in any judicial proceeding, that is in any manner inconsistent with the terms of any such allocation without the consent of the other party. 1.04 Closing. The Closing will take place at the offices of Smith, Gambrell & Russell, LLP in Atlanta, Georgia, at 10:00 a.m. EST, on August 23, 2001 or on such other date and time as Parent and Purchasers and Sellers shall mutually agree (the "Closing Date"). At the Closing, Parent and Purchasers will (a) pay Sellers the cash portion of the Purchase Price (less the Escrowed Amount) by wire transfer of immediately available funds to such account as Sellers may reasonably direct by written notice delivered to Parent and Purchasers by Sellers at least two (2) Business Days before the Closing Date and (b) deliver the Warrant to CNT. Simultaneously, Sellers will assign and transfer to Parent and Purchasers good and valid title in and to the Assets (free and clear of all Liens, other than Permitted Liens) by delivery of (i) one or more Bills of Sale in form and substance reasonably acceptable to Sellers and Parent and Purchasers (the "Bills of Sale"), duly executed by Sellers, (ii) an assignment of the Intellectual Property Assets and other intangible Assets in form and substance reasonably acceptable to Sellers and Parent and Purchasers, duly executed by Sellers (the "General Assignment"), and (iii) such other good and sufficient instruments of conveyance, assignment and transfer, in form and substance reasonably acceptable to Sellers and Parent and Purchasers, as shall be effective to vest in Parent and Purchasers good title to the Assets (free and clear of all Liens, other than Permitted Liens) (the Bill of Sale and the other instruments referred to in clauses (ii) and (iii) being collectively referred to herein as the "Assignment Instruments"), and (d) Parent and 6 Purchasers will assume from Sellers the due and punctual payment, performance and discharge of the Assumed Liabilities by delivery of one or more Assumption Agreements in form and substance reasonably acceptable to Sellers (the "Assumption Agreements"), duly executed by Parent and Purchasers, and such other good and sufficient instruments of assumption, in form and substance reasonably acceptable to Sellers, as shall be effective to cause Parent and Purchasers to assume the Assumed Liabilities as and to the extent provided in Section 1.02(a) (the Assumption Agreements and such other instruments being collectively referred to herein as the "Assumption Instruments"). At the Closing, there shall also be delivered to Sellers and Parent and Purchasers the opinions, certificates and other contracts, documents and instruments required to be delivered under Articles V and VI. 1.05 Prorations. Prorations relating to the Assets and the ownership and operation of the Business will be made by the parties as of the Closing Date, with the Sellers liable to the extent such items relate to any time period prior to the Closing Date and Parent and Purchasers liable to the extent such items relate to the periods beginning with and subsequent to the Closing Date. Except as otherwise agreed by the parties, the net amount of all such prorations will be settled and paid on the Closing Date. No prorations will be made for accruals reflected on the Closing Date Statement. 1.06 Closing Date Balance Sheet. (a) Within thirty (30) days following the Closing Date, Sellers shall prepare a statement of Assets and Assumed Liabilities based on the Closing Date balance sheet of the Sellers (the "Closing Date Statement"). Except as provided in the following sentence, the Closing Date Statement will include only the Assets and the Assumed Liabilities, and shall be prepared in accordance with generally accepted accounting principles consistently applied and the accounting practices used to prepare the Carve-Out Financial Statements consistent with the Business Books and Records. The Closing Date Statement will (i) also include as an Asset all outstanding obligations of customers of Sellers to make payments to Sellers for Products delivered or services rendered relating to the Business but with respect to which the customers have not yet been invoiced or billed and (ii) will not include any reference to severance payments or obligations. Parent and Purchasers acknowledge that Sellers have not historically included a separate reserve for receivables related to the EISD Division, and the Closing Date Statement will include a reasonable reserve for accounts receivable, calculated in accordance with GAAP. (b) In the event that the amount calculated by subtracting the Assumed Liabilities from the Assets as set forth on the Closing Date Statement (the "Adjusted Net Worth") is greater than $2,175,000.00, Parent and Purchasers shall pay Sellers in cash the difference between the Adjusted Net Worth and $2,175,000.00. If the Adjusted Net Worth is less than $2,175,000.00, Sellers shall pay Parent and Purchasers in cash the difference between $2,175,000.00 and the Adjusted Net Worth. Payment shall be made by wire transfer within three (3) business days after the parties either agree upon the difference or the difference is determined as set forth in Section 1.06(c). (c) Parent and Purchasers shall have the right to review fully all work papers relating to the Closing Date Statement in order to confirm that such Closing Date Statement has 7 been determined as provided herein. Parent and Purchasers shall complete their review of such Closing Date Statement within thirty (30) days after such determination and related documentation have been made available for its review. If Parent and Purchasers believe that any adjustment should be made to such Closing Date Statement in order for said amount to be determined in accordance with the requirements of this Section, Parent and Purchasers shall give the Sellers written notice of such adjustments. If the Sellers agree with the adjustments proposed by Parent and Purchasers, the adjustments shall be made to such Closing Date Statement. If there are proposed adjustments which are disputed by the Sellers, then the Sellers and Parent and Purchasers shall negotiate in good faith to resolve all disputed adjustments. If, after a period of thirty (30) days following the date on which Parent and Purchasers gives the Sellers written notice of any proposed adjustments, any such adjustments still remain disputed, Parent and Purchasers and the Sellers will jointly engage Deloitte & Touche LLP (the "Independent Accountant") to resolve any remaining disputed adjustments in accordance with this Agreement, and the decision of such firm shall be final, binding and nonappealable on the parties hereto and shall be deemed a final arbitration award that is enforceable pursuant to the terms of the Federal Arbitration Act. Payment required under Section 1.06(b) and (c) shall be tendered within three (3) business days after the earlier of the agreement of the parties on the amount thereof or a written notice of any resolution of such amount has been given by the Independent Accountant to the parties hereunder. All fees and expenses of the Independent Accountant incurred in connection with such resolution shall be split equally between the parties. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS Sellers hereby jointly and severally represent and warrant to Parent and Purchasers as follows as of the date hereof and as of the Closing Date, subject to the exceptions specifically disclosed in writing in the Disclosure Schedule, the sections of which correspond to the Sections of this Agreement: 2.01 Organization of Sellers. Each Seller is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization, and has full corporate power and authority to conduct the Business as and to the extent now conducted and to own, use and lease its assets and properties used in the Business. Each Seller is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions specified in Section 2.01 of the Disclosure Schedule, which are the only jurisdictions in which the ownership, use or leasing of its assets and properties, or the conduct or nature of the Business, makes such qualification, licensing or admission necessary, except for such failures to be so qualified or licensed and in good standing as could not reasonably be expected to have a materially adverse effect (a "Material Adverse Effect") on the Condition of the Business. 2.02 Authority; Execution. Each Seller has full corporate power and authority to execute and deliver this Agreement and the Operative Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by each Seller of this Agreement and the Operative Agreements to which it is a party, and the performance by each Seller of its 8 obligations hereunder and thereunder, have been duly and validly authorized by its board of directors and its shareholders, no other corporate action on the part of such Seller or its shareholders being necessary. This Agreement has been duly and validly executed and delivered by each Seller and constitutes, and upon the execution and delivery by each Seller of the Operative Agreements to which such Seller is a party, such Operative Agreements, assuming the due authorization, execution and delivery of this Agreement and the Operative Agreements by Parent and Purchasers, will constitute legal, valid and binding obligations of each Seller enforceable against such Seller in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to creditors rights and to general principles of equity. 2.03 Capitalization; Ownership of Subsidiaries. CNT owns all of the issued and outstanding shares of Propelis and CNTUK. The Assets do not include any shares of capital stock or any other ownership interest in, or securities of, any corporation, partnership, joint venture or other legal entity. 2.04 No Conflicts. The execution and delivery by each Seller of this Agreement do not, and the execution and delivery by each Seller of the Operative Agreements to which it or he is a party, the performance by each Seller of their respective obligations under this Agreement and such Operative Agreements and the consummation of the transactions contemplated hereby and thereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles or certificate of incorporation or bylaws of any Seller; (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Section 2.04 of the Disclosure Schedule, conflict with or result in a material violation or breach of any term or provision of any Law or Order applicable to any Seller or any of the Assets; or (c) except as disclosed in Section 2.04 of the Disclosure Schedule, (i) conflict with or result in a material violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require any Seller to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (iv) result in the creation or imposition of any Lien upon any Seller or any of the Assets under, any material Contract or License to which any Seller is a party or by which any of the Assets is bound. 2.05 Governmental Approvals and Filings. Except as disclosed in Section 2.05 of the Disclosure Schedule, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of any Seller is required in connection with the execution, delivery and performance of this Agreement or any of the Operative Agreements to which it or he is a party or the consummation of the transactions contemplated hereby or thereby. 9 2.06 Pro Forma Financial Information. Section 2.06 of the Disclosure Schedule sets forth true and complete copies of the pro forma unaudited balance sheet of the Business as of April 30, 2001, and the pro forma unaudited profit and loss statement for the Business for the fiscal year ended January 31, 2001 and the three-month period ended April 30, 2001. Except as disclosed in Section 2.06 of the Disclosure Schedule, all such financial statements (a) have been prepared by Sellers on a pro forma basis to reflect the operation of the Business as a separate operating unit, (b) fairly present in all material respects the financial condition and results of operations of the Business as of the respective dates thereof and for the respective periods covered thereby, and (c) were compiled from Business Books and Records regularly maintained by management and used to prepare the financial statements of Sellers. The Business Books and Records fairly reflect, in all material respects, the income, expenses, assets and liabilities of the Business and the Business Books and Records provided a fair and accurate basis for the preparation of the Financial Statements delivered to Parent and Purchasers in accordance with this Section. 2.07 Absence of Changes. Except for the execution and delivery of this Agreement and the transactions to take place pursuant hereto on or prior to the Closing Date, since April 30, 2001 there has not been any material adverse change, or any event or development which, individually or together with other such events, could reasonably be expected to result in a material adverse change, in the Condition of the Business. Without limiting the foregoing, except as disclosed in Section 2.07 of the Disclosure Schedule, there has not occurred, between April 30, 2001 and the date hereof, any of the following: (a) (i) any increase in the salary, wages or other compensation of any Employee whose annual salary is, or after giving effect to such change would be, $100,000 or more; (ii) any establishment or modification of (A) targets, goals, pools or similar provisions in respect of any fiscal year under any employment-related Contract or other compensation arrangement with or for Employees or (B) salary ranges, increase guidelines or similar provisions in respect of any employment-related Contract or other compensation arrangement with or for Employees; or (iii) any adoption, entering into or becoming bound by any Benefit Plan, employment-related Contract or collective bargaining agreement, or amendment, modification or termination (partial or complete) of any Benefit Plan, employment-related Contract or collective bargaining agreement, except to the extent required by applicable Law and, in the event compliance with legal requirements presented alternatives, only to the extent the alternative which Sellers reasonably believed to be the least costly was chosen; (b) (i) incurrences by Seller of Indebtedness with respect to the conduct of the Business in an aggregate principal amount exceeding $25,000, or (ii) any voluntary purchase, cancellation, prepayment or complete or partial discharge in advance of a scheduled payment date with respect to, or waiver of any right of Seller under, any Indebtedness of or owing to Seller with respect to the conduct of the Business; (c) any physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of the plant, real or personal property or equipment of any Seller used or held for use in the conduct of the Business in an aggregate amount exceeding $25,000; 10 (d) any material change in (i) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or Tax practice or policy of the Business or (ii) any method of calculating any bad debt, contingency or other reserve of the Business for accounting, financial reporting or Tax purposes; (e) any write-off or write-down of or any determination to write-off or write-down any of the Assets; (f) (i) any acquisition or disposition of any material amount of Assets, other than Inventory in the ordinary course of business consistent with past practice; or (ii) any creation or incurrence of a Lien, other than a Permitted Lien, on any Assets; (g) any entering into, amendment, modification, termination (partial or complete) or granting of a waiver under or giving any consent with respect to (i) any Contract which is required (or had it been in effect on the date hereof would have been required) to be disclosed in the Disclosure Schedule pursuant to Section 2.18 or (ii) any License; (h) capital expenditures or commitments for additions to property, plant or equipment used or held for use in the conduct of the Business constituting capital assets in an aggregate amount exceeding $25,000; (i) any transaction with any officer, director, Affiliate or Associate of any Seller or any Associate of any such officer, director or Affiliate (i) outside the ordinary course of business consistent with past practice or (ii) other than on an arm's-length basis; (j) any disposal of or lapse of any rights to the use of any Intellectual Property, or disclosure to any Person of any trade secret, formula, process or know-how not theretofore a matter of public knowledge without obtaining an appropriate confidentiality agreement from such person; (k) any sale, assignment, transfer or license of any Intellectual Property, except for nonexclusive licenses granted to customers in the ordinary course of business; (l) any entering into of a Contract to do or engage in any of the foregoing after the date hereof; or (m) any other transaction involving or development affecting the Business or the Assets outside the ordinary course of business consistent with past practice. 2.08 No Undisclosed Liabilities. Except as reflected or reserved against in the April 30, 2001 balance sheet of the Business or as disclosed in Section 2.08 of the Disclosure Schedule, there are no Liabilities against, relating to or affecting the Business or any of the Assets, other than Liabilities incurred in the ordinary course of business consistent with past practice which in the aggregate are not material to the Condition of the Business. 11 2.09 Taxes. (a) Each Seller has timely paid all Taxes, and all interest and penalties due thereon and payable by it for the Pre-Closing Tax Period which will have been required to be paid on or prior to the Closing Date, the non-payment of which would result in a Lien on any Asset, would otherwise adversely affect the Business or would result in Parent or Purchasers becoming liable or responsible therefor. (b) Each Seller has established, in accordance with generally accepted accounting principles applied on a basis consistent with that of preceding periods, adequate reserves for the payment of, and will timely pay all Tax liabilities, assessments, interest and penalties which arise from or with respect to the Assets or the operation of the Business and are incurred in or attributable to the Pre-Closing Tax Period, the non-payment of which would result in a Lien on any Asset, would otherwise adversely affect the Business or would result in Parent or Purchasers becoming liable therefor. (c) Section 2.09(c) of the Disclosure Schedule contains an entity-by-entity complete and accurate list of (i) all jurisdictions to which any material amount of Tax has been paid or is properly payable by or with respect to any Seller or its Affiliates with respect to the Business or the Assets during the preceding three years, and (ii) all Tax Returns that have been filed or are properly required to be filed in any such jurisdiction and on which material amounts of Taxes are required to be shown by or with respect to any Seller or its Affiliates with respect to the Business or the Assets during the preceding three years (or with respect to which the failure to file could have a Material Adverse Effect on the Condition of the Business). (d) Except as set forth in Section 2.09(d) of the Disclosure Schedule: (i) each Seller and its Affiliates has filed on a timely basis (or has received a valid extension to file) with the appropriate Tax Authorities all Tax Returns (applicable to the Business or the Assets) on which material amounts of Taxes are required to be shown by the applicable laws of any jurisdiction (or the failure of which to file could have a Material Adverse Effect on the Condition of the Business); and (ii) all such returns are true, correct, and complete in all material respects. 2.10 Legal Proceedings. Except as disclosed in Section 2.10 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) there are no Actions or Proceedings pending or, to the Knowledge of Sellers, threatened against, relating to or affecting any Seller with respect to the Business or any of the Assets which (i) could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements or otherwise result in a material diminution of the benefits contemplated by this Agreement or any of the Operative Agreements to Parent or Purchasers, or (ii) if determined adversely to such Seller, could reasonably be expected to result in (A) any injunction or other equitable relief that would interfere in any material respect with the Business or (B) Losses by Sellers, individually or in the aggregate with Losses in respect of other such Actions or Proceedings, exceeding $25,000; and 12 (b) there are no Orders outstanding against any Seller with respect to the Business or the Assets. 2.11 Compliance With Laws and Orders. Except as disclosed in Section 2.11 of the Disclosure Schedule, Sellers are not, nor have they at any time within the last three (3) years been, nor have they received any notice that they are or have at any time within the last three (3) years been, in violation of or in default under any Law or Order applicable to the Business or the Assets in a manner that could reasonably be expected to have a Material Adverse Effect on the Condition of the Business. 2.12 Employee Benefits; ERISA. Sellers do not have any liability under, nor are they subject to any Lien, restriction or other adverse right relating to, any "employee benefit plan" (as defined in Section 3(3) of ERISA), including any multiemployer plans (as defined in Section 4001(a)(3) of ERISA) or any other bonus, deferred compensation, severance pay, pension, profit-sharing, retirement, insurance stock purchase, stock option or other fringe benefit plan, arrangement or practice maintained, or contributed to, by any Seller for the benefit of any current or former employees, officers or directors (collectively, the "Benefit Plans") (i) that would affect in any manner whatsoever Parent or either Purchaser's right, title and interest in, or right to use or enjoy (free and clear of any Lien, other than Permitted Liens, or restriction), the Assets or (ii) that would result in the assumption by or imposition on Parent or either Purchaser of any liability other than liabilities expressly included as Assumed Liabilities or as contemplated by Section 9.06(e). 2.13 Property. (a) Sellers do not own any real property which is used in connection with the Business. Section 2.13(a) of the Disclosure Schedule lists all leases of real property used in connection with the Business to which any Seller is a party. (b) Seller is in possession of and has good title to, or has valid leasehold interests in or valid rights under Contract to use, all the Tangible Personal Property, which includes all tangible personal property reflected on the balance sheet included in the Annual Financial Statements and tangible personal property acquired since the Annual Financial Statement Date other than tangible personal property disposed of since such date in the ordinary course of business consistent with past practice. All the Tangible Personal Property is free and clear of all Liens, other than Permitted Liens and Liens disclosed in Section 2.13(b) of the Disclosure Schedule, and is in good working order and condition, ordinary wear and tear excepted, and its use complies with all applicable Laws in all material respects. 2.14 Orders; Commitments; Warranties and Returns. Section 2.14 of the Disclosure Schedule sets forth Sellers' warranties currently made with respect to the Business, and current policies with respect to returns of products. Except as set forth in Section 2.14 of the Disclosure Schedule, Sellers have experienced no actual or, to their Knowledge, threatened claims against them for warranty costs exceeding $25,000 in the aggregate. As used above, the term "warranty cost" shall mean customer refund and other costs and expenses associated with 13 correcting, returning or replacing defective or allegedly defective products or services, whether such costs and expenses arise out of claims sounding in warranty, contract, tort or otherwise. 2.15 Intellectual Property (a) Section 2.15(a) of the Disclosure Schedule sets forth a list of all patents, patent applications, copyright registrations (and applications therefor), and trademark and trade name registrations (and applications therefor) and trade names owned by any Seller and used in the Business. Each of the federal and state registrations relating to the foregoing Assets is valid and in full force and effect. Section 2.15(a) of the Disclosure Schedule also sets forth a list of any unregistered trademarks, trade names, service marks, brand names, logos or other identifiers for the Products or otherwise used in the Business. (b) Section 2.15(b) of the Disclosure Schedule sets forth a list of all patents, software and other technology used in the Business and for which the Sellers do not own all right, title and interest (collectively, the "Third Party Technology"), and all license agreements or other contracts pursuant to which the Sellers have the right to use the Third Party Technology (the "Third Party Licenses"). Sellers have the lawful right to use (free of any material restriction not expressly set forth in the Third Party Licenses) all Third Party Technology that is incorporated or used in the Business, and no royalties or other compensation is payable for the right to use such Third Party Technology other than as expressly set forth in the Third Party Licenses. Sellers have not received notice that any party to any such license intends to cancel, terminate or refuse to renew (if renewable) such license or to exercise or decline to exercise any option or right thereunder, and Sellers have used the Third Party Technology in accordance with all of the terms of the Third Party Licenses. Sellers are not in breach of any Third Party Licenses. (c) Section 2.15(c) of the Disclosure Schedule sets forth a list of all software products and tools developed, produced, marketed or sold by Sellers in the operation of the Business as of the Closing, or since January 1, 1998 (the "Products"). (d) All the Intellectual Property Assets are owned by Sellers free and clear of all Liens, other than Permitted Liens. Except as set forth on Section 2.15(d) of the Disclosure Schedule and other than nonexclusive licenses granted in the ordinary course of business, Sellers have not granted to any third party any rights or permissions to use any of the Intellectual Property Assets. Sellers have not received any notice or claim (whether written, oral or otherwise) challenging Sellers' ownership or rights in the Intellectual Property Assets or claiming that any other person or entity has any legal or beneficial ownership with respect thereto or challenging the validity or enforceability of the Intellectual Property Assets. (e) Except as set forth in Section 2.15(e) of the Disclosure Schedule, Sellers have obtained an enforceable written assignment of all right, title and interest in and to each item of the Intellectual Property Assets owned by Sellers from each person or entity participating in the discovery, development or creation of such item and, except with respect to employees, have provided to Parent and Purchasers true and correct copies of each such assignment. Except as otherwise provided in Section 2.15(e) of the Disclosure Schedule, Sellers have no obligation to compensate, or to obtain the consent of, any third party for the use of any item of the Intellectual Property Assets. Since January 1, 1998, all employees, independent contractors, or other persons 14 who have had access to or participated in the development in any of the Intellectual Property Assets owned by Sellers have signed appropriate confidentiality and non-disclosure agreements and, in the case of independent contractors, appropriate work for hire agreements and assignments, sufficient to protect Sellers' ownership rights in the Intellectual Property Assets and the unauthorized use or disclosure of same. All registrations and applications to register the Intellectual Property Assets in each of the countries in which any of the same is registered are valid and subsisting in all respects and have been properly maintained in all material respects. No party has asserted any claim to any moral rights with respect to the Intellectual Property Assets owned by Sellers. (f) Section 2.15(f) of the Disclosure Schedule sets forth a complete list (but, in the case of nonexclusive licenses granted by Sellers in the ordinary course of Business, only since January 1, 1998) of all software licenses (other than evaluation licenses) for the Products, which list identifies for each such software license (i) the end user, (ii) the Products licensed, (iii) any license fees payable after the date of this Agreement, (iv) any continuing obligations of Sellers under such software license, and (v) the term of the software license. Except for software licenses and as otherwise provided on Section 2.15(f) of the Disclosure Schedule, Sellers have not granted any license or other right to use, in any manner, any item of Intellectual Property Assets, whether or not requiring the payment of royalties, and no third party has any right to use any of the Intellectual Property Assets owned by Sellers. Except as set forth on Section 2.15(f) of the Disclosure Schedule, Sellers have not licensed, leased, sold or otherwise transferred or disclosed the source code for any of the Products to any person or entity other than to Sellers' employees and independent contractors pursuant to an agreement with such employees and independent contractors protecting the intellectual property rights therein and the nondisclosure thereof. (g) Neither Sellers' operation of the Business prior to Closing nor the Intellectual Property Assets infringe, violate or interfere with or constitute a misappropriation of any right, title or interest (including, without limitation, any patent, copyright, trademark or trade secret right) held by any other person or entity. Sellers have not received any notice or claim (whether written, oral or otherwise) regarding any infringement, misappropriation, misuse, abuse or other interference with any third party intellectual property or proprietary rights (including, without limitation, infringement of any patent, copyright, trademark or trade secret right of any third party) by either Sellers' operation of the Business or the Intellectual Property Assets. (h) There is neither pending nor to the Knowledge of Sellers threatened any suit, action, claim, arbitration, grievance, litigation, administrative or legal or other proceeding, or investigation, against Sellers or its licensors contesting the validity of, or Sellers' right to use, any of the Intellectual Property Assets. (i) To the Sellers' Knowledge, no other person or entity is infringing or misappropriating the Intellectual Property Assets. (j) Except as disclosed on Section 2.15(j) to the Disclosure Schedule, (i) Sellers have not disclosed any source code to any person or entity (excluding employees, independent contractors and former employees and independent contractors); (ii) Sellers have at all times maintained and diligently enforced commercially reasonable procedures to protect all 15 confidential information of the Business; and (iii) Sellers have not deposited any source code into any source code escrows or similar arrangements. If, as disclosed in Section 2.15(j) of the Disclosure Schedule, Sellers have deposited any source code into source code escrows or similar arrangements, to Sellers' Knowledge, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. (k) Except as set forth on Section 2.15(k) of the Disclosure Schedule, each Product functions substantially in accordance with the published documentation and specifications therefor. All of the Products are available in "general release form" (as opposed to only "alpha," "beta" or "early release" forms) and there exists user and technical documentation that describes the functionality provided by such Products, which user and technical documentation is substantially complete and accurate. (l) Section 2.15(l) of the Disclosure Schedule sets forth a complete and accurate list of all agreements pursuant to which Sellers are obligated to provide support or maintenance for the Products, as well as all other agreements related to or concerning the Products not otherwise listed on a Schedule which contain any obligations of Sellers which have not yet been performed or fulfilled. (m) To Sellers' Knowledge, the cost of Sellers' outstanding obligations (i) to perform or reperform for its customers or end users any installation, implementation, warranty, maintenance, modification, upgrade, enhancement, consulting, or other services in connection with any Products, and (ii) to deliver, license, or develop Products to or for its customers, does not exceed the aggregate payments expected to be received from those customers or end users attributable to each such obligation. (n) Section 2.15(n) of the Disclosure Schedule sets forth a list of all Internet domain names used by Sellers in the Business (collectively, the "Domain Names"). Sellers have, and upon the Closing Parent will have, a valid registration and all material rights (free of any material restriction) in and to the Domain Names, including, without limitation, all rights necessary to continue to conduct the Business as it is currently conducted. (o) The Intellectual Property Assets contain all of the Intellectual Property used or held for use in, and necessary for the conduct of, the Business as conducted by Sellers as of the Closing Date. (p) Web Integrator is a predecessor Product to Propelis EAI that was discontinued on December 31, 2000. Sellers have no remaining obligations under any Contract relating to Web Integrator. 2.16 Accounts Receivable. All Accounts Receivable represent amounts due for services performed or sales or licenses actually made in the ordinary course of business and properly reflect the amounts due. The bad debt reserves and allowances reflected in the Closing Date Statement have been calculated in accordance with GAAP. To Seller's Knowledge, all Accounts Receivable are expected to be collectible by the Purchasers in the ordinary course of business consistent with past practice in 90 days or less. 16 2.17 [Intentionally Omitted.] 2.18 Contracts. (a) Section 2.18(a) of the Disclosure Schedule (with paragraph references corresponding to those set forth below) contains a true and complete list of each of the following Contracts or other arrangements related to the Business (true and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto and all waivers of any terms thereof, have been delivered to Parent and Purchasers prior to the execution of this Agreement) to which any Seller is a party and by which any of the Assets is bound: (i) (A) all Contracts (excluding Benefit Plans) providing for a commitment of employment or consultation services for a specified or unspecified term to, or otherwise relating to employment or the termination of employment of, any Employee, the name, position and rate of compensation of each Employee party to such a Contract and the expiration date of each such Contract; and (B) any written or unwritten representations, commitments, promises, communications or courses of conduct (excluding Benefit Plans and any such Contracts referred to in clause (A)) involving an obligation of any Seller to make payments in any year, other than with respect to salary or incentive compensation payments in the ordinary course of business, to any Employee; (ii) all Contracts with any Person containing any provision or covenant prohibiting or limiting the ability of any Seller to engage in any business activity or compete with any Person in connection with the Business or prohibiting or limiting the ability of any Person to compete with Sellers in connection with the Business; (iii) all partnership, joint venture, shareholders' or other similar Contracts with any Person in connection with the Business; (iv) all Contracts with licensors, licensees, distributors, dealers, manufacturer's representatives, sales agencies or franchises with whom any Seller deals in connection with the Business; (v) all Contracts to which any Seller is a party or by which any Seller is bound that relate to the Intellectual Property Assets; (vi) all Contracts between or among a Seller, on the one hand, and any officer, director, Affiliate of Associate of any Seller or any Associate of any such officer, director or Affiliate, on the other hand; (vii) all collective bargaining or similar labor Contracts; (viii) all Contracts relating to Indebtedness of any Seller; (ix) all Contracts relating to (A) the future disposition or acquisition of any Assets, other than dispositions or acquisitions of Inventory in the ordinary course of 17 business consistent with past practice, and (B) any merger or other business combination relating to the Business; (x) all Contracts containing development obligations of any Seller that have not been completed; and (xi) all other Contracts with respect to the Business that (A) involve the payment or potential payment, pursuant to the terms of any such Contract, by or to any Seller of more than $25,000 annually and (B) cannot be terminated within thirty (30) days after giving notice of termination without resulting in any material cost or penalty to such Seller. (b) Each Contract required to be disclosed in Section 2.18(a) of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of each party thereto; and except as disclosed in Section 2.18(b) of the Disclosure Schedule, neither Sellers nor, to the Knowledge of Sellers, any other party to such Contract is, or has received notice that it is, in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Contract) in any respect. 2.19 Licenses. Section 2.19 of the Disclosure Schedule contains a true and complete list of all material Licenses used or held for use in the Business (and all pending applications for any such Licenses), setting forth the grantor, the grantee, the function and the expiration and renewal date of each. Prior to the execution of this Agreement, Sellers have delivered or made available to Parent and Purchasers true and complete copies of all such Licenses. Except as disclosed in Section 2.19 of the Disclosure Schedule: (a) Sellers own or validly hold all Licenses that are material, individually or in the aggregate, to the Business; (b) each License is valid, binding and in full force and effect; (c) Sellers are not, nor has they received any notice that they are, in default (or with the giving of notice or lapse of time or both, would be in default) under any License; and (d) As of the Closing, all such Licenses will be validly assigned to Purchasers. 2.20 Affiliate Transactions. Except as disclosed in Section 2.20 of the Disclosure Schedule, (a) no officer, director, Affiliate or Associate of any Seller or any Associate of any such officer, director or Affiliate provides or causes to be provided any assets, services or facilities used or held for use in connection with the Business, and (b) the Business does not provide or cause to be provided any assets, services or facilities to any such officer, director, Affiliate or Associate that, in either such case, would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act. Each of the transactions listed in Section 2.20 of the Disclosure Schedule is on terms that are on an arm's-length basis. 2.21 Employees; Labor Relations. 18 (a) Section 2.21(a) of the Disclosure Schedule contains a list of the name of each Employee at the date hereof, together with such Employee's position or function, annual base salary or wages and any incentive or bonus arrangement with respect to such Employee in effect on such date. Each Employee has executed a nondisclosure agreement in the form provided to Parent and Purchasers. To Sellers' Knowledge, no Employee is in violation of any agreement relating to the relationship of such Employee with Sellers. (b) Except as disclosed in Section 2.21(b) of the Disclosure Schedule, (i) no Employee is presently a member of a collective bargaining unit and, to the Knowledge of Sellers, there are no threatened or contemplated attempts to organize for collective bargaining purposes any of the Employees, and (ii) no unfair labor practice complaint or sex, age, race or other discrimination claim has been brought since October 31, 1997 against Sellers with respect to the conduct of the Business before the National Labor Relations Board, the Equal Employment Opportunity Commission or any other Governmental or Regulatory Authority. Sellers are in compliance with all applicable Laws relating to the employment of labor, including, without limitation those relating to wages, hours and collective bargaining with respect to the Employees. 2.22 Substantial Customers and Suppliers. Section 2.22 of the Disclosure Schedule lists the twenty (20) largest customers of the Business, on the basis of revenues for the most recently-completed fiscal year. Section 2.22 of the Disclosure Schedule lists the ten (10) largest suppliers of the Business, on the basis of cost of goods or services purchased for the most recently-completed fiscal year. Except as disclosed in Section 2.22 of the Disclosure Schedule, no such customer or supplier has ceased or materially reduced its purchases from, use of the services of, sales to or provision of services to the Business since April 30, 2001, or to the Knowledge of Sellers, has threatened to cease or materially reduce such purchases, use, sales or provision of services after the date hereof. Except as disclosed in Section 2.22 of the Disclosure Schedule, to the Knowledge of Sellers, no such customer or supplier is threatened with bankruptcy or insolvency. 2.23 [Intentionally Omitted.] 2.24 Entire Business. The sale of the Assets by Seller to Parent and Purchasers pursuant to this Agreement will effectively convey to Parent and Purchasers the entire Business and all of the tangible and intangible assets and property used by Sellers (whether owned, leased or held under license by Seller, by any of Seller's Affiliates or Associates or by others) in connection with the conduct of the Business as heretofore conducted by Sellers (except for the Excluded Assets). Except for the Shared Facilities and Assets, there are no shared facilities or services which are used in connection with the Business and any other business or other operations of Sellers or any of Sellers' Affiliates or Associates. 2.25 Disclosure. No representation or warranty contained in this Agreement, and no statement contained in the Disclosure Schedule (including without limitation the Financial Statements) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein, in the light of the circumstances under which they were made, not misleading. 19 2.26 Accredited Investor; Acquisition for Investment. CNT is an "accredited investor" as defined in Rule 501 of Regulation D under the Securities Act. CNT will acquire the Warrant (and, upon exercise thereof, the Underlying Shares) for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, and CNT has no present intention or plan to effect any distribution of the Warrant (or, upon exercise thereof, the Underlying Shares). 2.27 Brokers. Except as disclosed in Section 2.27 of the Disclosure Schedule, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Sellers directly with Parent and Purchasers without the intervention of any Person on behalf of Sellers in a manner as to give rise to any valid claim by any Person against Parent or either Purchaser for a finder's fee, brokerage commission or similar payment. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASERS Parent and Purchasers, jointly and severally, hereby represent and warrant to Sellers as follows: 3.01 Organization, Standing and Power. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Israel. Each Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization. Parent and Purchasers have the full corporate power and authority to conduct their respective businesses as and to the extent now conducted and to own, use and lease their respective assets and properties. Parent and Purchaser are duly qualified, licensed or admitted to do business and are in good standing in each jurisdiction where the ownership, use or leasing of their respective assets and properties, or the conduct or the nature of their business makes such qualification, licensing or admission necessary, except for such failures to be so duly qualified or licensed and in good standing that could not reasonably be expected to have a materially adverse effect on the financial condition of Parent and Purchasers taken as a whole (a "Parent Material Adverse Effect"). 3.02 Authority. The execution and delivery by Parent and Purchasers of this Agreement and the Operative Agreements to which they are a party, and the performance by Parent and Purchasers of their obligations hereunder and thereunder, have been duly and validly authorized by the Board of Directors of Parent and Purchasers, respectively, no other corporate action on the part of Parent or Purchasers being necessary. This Agreement has been duly and validly executed and delivered by Parent and Purchasers and, assuming the due authorization, execution and delivery of this Agreement and the Operative Agreements by Sellers, constitutes, and upon the execution and delivery by Parent and Purchasers of the Operative Agreements to which they are a party, such Operative Agreements will constitute, legal, valid and binding obligations of Parent and Purchasers enforceable against Parent and Purchasers in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to creditors rights and to general principles of equity. 20 3.03 No Conflicts. The execution and delivery by Parent and Purchasers of this Agreement do not, and the execution and delivery by Parent and Purchasers of the Operative Agreements to which they are a party, the performance by Parent and Purchaser of their obligations under this Agreement and such Operative Agreements and the consummation of the transactions contemplated hereby and thereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles or certificate of incorporation or by-laws of Parent or Purchasers, respectively; (b) conflict with or result in a material violation or breach of any term or provision of any Law or Order applicable to Parent, Purchasers or any of their assets and properties; or (c) (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, or (iii) require Parent or Purchasers to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of any Contract or License to which Parent or Purchasers are a party or by which any of their assets and properties is bound. 3.04 Governmental Approvals and Filings. Except as required under federal and state securities laws and except for the Israeli Approvals, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Parent or Purchasers is required in connection with the execution, delivery and performance of this Agreement or the Operative Agreements to which they are a party or the consummation of the transactions contemplated hereby or thereby. 3.05 Legal Proceedings. There are no Actions or Proceedings pending or, to the Knowledge of Parent or Purchasers, threatened against, relating to or affecting Parent or Purchasers or any of their respective assets and properties which could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. Except as set forth in the SEC Documents (as defined below), there are no suits, actions or legal, administrative, arbitration or other proceedings or governmental investigations against Parent or Purchasers pending or, to Parent's Knowledge, threatened, which if determined adversely to Parent or Purchasers, could be expected to result in a Parent Material Adverse Effect. 3.06 Capitalization. As of December 31, 2000, the authorized capital stock of Parent consisted of 30,000,000 Ordinary Shares of which 18,428,531 shares were issued and outstanding, all of which are validly issued, fully paid and non-assessable. 3.07 SEC Documents. Parent has furnished or made available to Sellers a true and complete copy of (a) its Annual Reports on Form 20-F for the fiscal years ended December 31, 2000 and 1999, and (b) all other filings (other than preliminary registration and proxy statements) between December 31, 1999 and the date hereof (collectively, the "SEC Documents"), which Parent filed under the federal securities laws with the Securities and Exchange Commission ("SEC"). As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the 21 circumstances under which they were made, not misleading, except to the extent corrected by a subsequently filed document with the SEC. 3.08 Brokers. All negotiations relative to this Agreement and the transaction contemplated hereby have been carried out by Parent and Purchasers directly with Sellers without the intervention of any Person on behalf of Parent and Purchasers in a manner as to give rise to any valid claim by any Person against Sellers for a finder's fee, brokerage commission or similar payment. ARTICLE IV COVENANTS BETWEEN SIGNING AND CLOSING 4.01 Access. During the period commencing on the date of this Agreement and continuing through the Closing Date, Sellers, upon reasonable prior notice from Parent and Purchasers to Sellers, will (a) afford to Parent and Purchasers and their Representatives, at all reasonable times during normal business hours, full and complete access to Sellers' personnel, professional advisors, properties, contracts, books and records, and other documents and data and (b) furnish Parent and Purchasers and their Representatives with copies of all such contracts, books and records, and other existing documents and data as Parent and Purchasers may reasonably request, all of which shall be done under the supervision of such Representatives of Sellers as may be designated by Sellers from time to time. 4.02 Operation of the Business of Sellers. Between the date of this Agreement and the Closing Date, unless otherwise consented to in writing by Parent and Purchasers, which consent shall not be unreasonably withheld, delayed or conditioned, Sellers will: (a) except as otherwise allowed or required pursuant to the terms of this Agreement, conduct the Business in the ordinary course in a manner consistent with past practice; (b) use commercially reasonable, good faith efforts to (i) preserve intact the current business organization of Sellers relating to the Business, (ii) keep available the services of the current officers, employees and agents of Sellers related to the Business, and (iii) maintain the relations and goodwill with their suppliers, customers, landlords, trade creditors, employees, agents, and others having business relationships with Sellers relating to the Business; (c) confer with Parent and Purchasers concerning business or operational matters relating to the Business of a significant nature; (d) use commercially reasonable, good faith efforts to maintain all of the Assets in their current condition, ordinary wear and tear excepted; and (e) maintain the Business Books and Records in the usual, regular and ordinary manner, on a basis consistent with prior years. 22 4.03 Negative Covenants. Except as otherwise expressly permitted by this Agreement, between the date of this Agreement and the Closing Date, Sellers will not, without the prior written consent of Parent and Purchasers which consent shall not be unreasonably withheld, delayed or conditioned, take any action, or fail to take any action within their reasonable control, as a result of which any of the changes or events listed in Section 2.07 would occur. In addition, without the prior written consent of Parent and Purchasers (which consent shall not be unreasonably withheld, delayed or conditioned), Sellers will not: (a) settle any pending Actions or Proceedings or obtain any releases of threatened Actions or Proceedings if (i) such settlement or release would impose restrictions on Sellers' ability to conduct the Business or may adversely affect Sellers other than by reason of Sellers' payment of monies thereunder or (ii) the amounts payable by Sellers pursuant to such settlement or release would exceed Twenty Five Thousand Dollars ($25,000.00) and such settlement liability is to be assumed by Parent and Purchasers hereunder; (b) invoice or bill any customer for licensee fees, support or maintenance fees or any other fees owed by the customer to the Sellers; (c) materially accelerate or delay collection of any notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of business consistent with past practice; (d) materially accelerate or delay payment of any trade or other accounts payable in advance of or beyond their regular payment dates or the dates when the same would have been paid in the ordinary course of business consistent with past practice; or (e) take any action, or fail to take any action within any Seller's reasonable control, which would result in any of the representations and warranties set forth in Article II not being true and correct on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. 4.04 No Negotiation. Until such time, if any, as this Agreement is terminated pursuant to Article XI, Sellers will not, nor will any Seller cause or permit any of their respective Representatives to, directly or indirectly, solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, or provide any nonpublic information to, any Person (other than Parent and Purchasers and their Representatives) relating to any transaction involving the sale of the Business or any material portion of the Assets (an "Acquisition Transaction"). Sellers covenant that from the date hereof through the Closing Date (or the termination of this Agreement), Sellers will not, directly or indirectly, enter into or authorize, or permit any Representative to enter into, any negotiation, letter of intent, commitment, agreement, understanding, or agreement in principle with any third Person for an Acquisition Transaction. Sellers covenant and agree to inform Parent and Purchasers in writing by facsimile within twenty-four (24) hours following the receipt (from the date hereof through the Closing Date or the termination of this Agreement) by any of them or their Representatives of any inquiry, proposal, offer or bid (including the terms thereof and the identity of the Person making such inquiry, proposal, offer or bid) in respect of any Acquisition Transaction. 23 4.05 Shareholder Approval. CNT will cause the transactions hereunder to be approved by Propelis and CNTUK. 4.06 Supplementation and Correction of Information. Between the date of this Agreement and the Closing Date, Sellers will use reasonable best efforts to promptly correct and supplement the information set forth on the Disclosure Schedule delivered by Sellers pursuant to this Agreement in order to cause such Disclosure Schedule to remain correct and complete in all respects. Sellers' delivery to Parent and Purchasers of any corrections or supplements will, without further notice or action on the part of Sellers or Parent and Purchasers, immediately and automatically constitute an amendment to the Disclosure Schedule to which such corrections and supplements relate; provided, however, that solely for purposes of determining whether the condition precedent pursuant to Section 5.01 has been satisfied, or whether Parent and Purchasers have the right to terminate this Agreement pursuant to Sections 11.01(b) or (d), any such amendment to the Disclosure Schedule will be disregarded. 4.07 Reasonable Efforts; Further Assurances; Cooperation. Subject to the other provisions of this Agreement, the parties hereto shall each use their reasonable, good faith efforts to perform their obligations herein and to take, or cause to be taken or do, or cause to be done, all things necessary, proper or advisable under applicable law to satisfy all conditions to the obligations of the parties under this Agreement and to cause the transactions contemplated herein to be effected in accordance with the terms hereof and shall cooperate fully with each other and their respective Representatives in connection with any steps required to be taken as a part of their respective obligations under this Agreement. 4.08 Public Announcements. Neither party hereto will issue any press release or make any other public announcement relating to the transactions contemplated by this Agreement without the prior consent of the other party hereto, except that a party may make any disclosure required to be made under applicable law or stock exchange rule if such party determines in good faith that it is necessary to do so and, if practicable, gives prior notice to the other party. 4.09 No Discussions with Employees. Each Seller covenants and agrees that, during the period commencing on the date hereof and continuing through the Closing Date, it will not offer post-Closing employment on any terms (whether part-time or full-time, as an employee, independent contractor or otherwise) to, or enter into any discussions concerning the same with, any Person who is an Employee as of the date hereof, other than Employees with respect to whom Parent and Purchasers have indicated to Seller in writing that they do not intend to offer employment. 4.10 CNT Undertaking. CNT agrees to execute and deliver to Parent an undertaking, in form and substance reasonably acceptable to CNT, as required by the provisions of the Israeli Research and Development Law in connection with the issuance of the Warrant by Parent. 24 ARTICLE V CONDITIONS TO OBLIGATIONS OF PURCHASER AND PARENT The obligations of Parent and Purchasers hereunder to purchase the Assets and to assume and to pay, perform and discharge the Assumed Liabilities and for Parent to issue the Warrant are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Parent and Purchasers in their sole discretion): 5.01 Representations and Warranties. Each of the representations and warranties made by Sellers in this Agreement shall be true and correct when made and, except to the extent such representations and warranties speak as of an earlier date, shall be true and correct in all material respects on and as of the Closing Date, as though made on that date (except that any representations and warranties qualified as to materiality shall be true and correct in all respects). 5.02 Performance. Sellers shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Sellers at or before the Closing. 5.03 Closing Certificates. CNT shall have delivered to Parent and Purchasers: (a) a certificate, dated the Closing Date and executed by an authorized officer of CNT, in form and substance reasonably satisfactory to Parent and Purchasers, certifying that the conditions in Sections 5.01, 5.02 and 5.04 have been fulfilled; and (b) a certificate, dated the Closing Date and executed by the Secretary of Propelis and CNTUK, in form and substance reasonably satisfactory to Parent and Purchasers, as to the authenticity of the actions of the Board of Directors and shareholders authorizing the transactions contemplated herein and in the Operative Agreements. Certified copies of each of Propelis and CNTUK's certificate or articles of incorporation and bylaws (or other organizational documents) shall be attached to the secretary's certificate. 5.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. 5.05 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Parent and Purchasers and Sellers to perform their obligations under this Agreement and the Operative Agreements and to consummate the transactions contemplated hereby and thereby shall have been duly obtained, made or given, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement and the Operative Agreements, shall have occurred. Such consents shall include, without limitation, the consents of the Israeli Office of the Chief Scientist, the Israeli Investment Center of the Ministry of Industry and Trade and the Tel Aviv Stock Exchange relating to the issuance of the Warrant (the "Israeli Approvals"). 25 5.06 Third Party Consents; Estoppel Certificates. All consents (or in lieu thereof waivers) set forth on Section 5.06 of the Disclosure Schedule shall have been obtained; and Parent and Purchasers shall have received an estoppel certificate executed by IntelliFrame Corporation, substantially in the form of the certificate attached hereto as Exhibit 5.06. 5.07 Shareholder Approval. The shareholders of Propelis and CNTUK shall have approved the Acquisition by written consent in accordance with applicable Laws and their respective Articles of Incorporation and Bylaws. 5.08 Opinion of Counsel. Parent and Purchasers shall have received the opinion of Leonard, Street and Deinard, Professional Association, counsel to Sellers, dated the Closing Date, substantially in the form and to the effect of Exhibit 5.08 hereto. 5.09 Deliveries. Sellers shall have delivered to Parent and Purchasers the General Assignment and the other Assignment Instruments. 5.10 Employees. The Key Employees and at least 90% of all other Employees that are offered employment with Purchasers shall have accepted such offer of employment, and shall have executed and delivered to Purchasers their standard form of confidentiality agreement. 5.11 Escrow Agreement. Sellers and Escrow Agent shall have executed and delivered to Parent and Purchasers the Escrow Agreement. 5.12 Due Diligence. Parent and Purchasers shall be satisfied in all respects with the results of their due diligence investigation of the Assets and the Condition of the Business. 5.13 Proceedings. All proceedings to be taken on the part of Sellers in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Parent and Purchasers, and Parent and Purchasers shall have received copies of all such documents and other evidences as Parent and Purchasers may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 5.14 No Material Adverse Change. Since the date of this Agreement through the Closing Date, no event shall have occurred that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Condition of the Business. 5.15 Transition Services. CNT shall have executed and delivered to Parent and Purchasers the Transition Services Agreement attached hereto as Exhibit 5.15. 5.16 Value Added Tax. The parties shall have mutually agreed upon their respective rights and obligations relating to any value added tax payable in connection with the transfer of the Assets pursuant to the Laws of the United Kingdom. 26 ARTICLE VI CONDITIONS TO OBLIGATIONS OF SELLERS The obligations of Sellers hereunder to sell the Assets are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Sellers in their sole discretion): 6.01 Representations and Warranties. Each of the representations and warranties made by Parent and Purchasers in this Agreement shall be true and correct when made and, except to the extent such representations and warranties speak as of an earlier date, shall be true and correct in all material respects on and as of the Closing Date, as though made on that date (except that any representations and warranties qualified as to materiality shall be true and correct in all respects). 6.02 Performance. Purchasers and Parent shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Purchasers and Parent at or before the Closing, including without limitation the payment of the cash portion of the Purchase Price (less the Escrowed Amount) and the delivery of the Warrant to the Sellers. 6.03 Officers' Certificate; Secretary's Certificate. Parent and Purchasers shall have delivered to Sellers: (a) a certificate, dated the Closing Date and executed by an authorized officer of Parent and Purchasers, in form and substance reasonably satisfactory to Sellers, certifying that the conditions in Sections 6.01 and 6.02 have been fulfilled; and (b) a certificate, dated the Closing Date and executed by the Secretary of Parent and Purchasers, in form and substance reasonably satisfactory to Sellers, as to the authenticity of the actions of the Board of Directors authorizing the transactions contemplated herein and in the Operative Agreements. Certified copies of Parent and Purchasers' certificate or articles of incorporation and bylaws (or other organizational documents) shall be attached to such secretary's certificate. 6.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law that became effective after the date of this Agreement restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. 6.05 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Sellers and Parent and Purchasers to perform their obligations under this Agreement and the Operative Agreements and to consummate the transactions contemplated hereby and thereby shall have been duly obtained, made or given, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement and the Operative Agreements shall have occurred. Such consents shall include, without limitation, the Israeli Approvals. 6.06 Opinions of Counsel. Sellers shall have received the opinions of (i) Smith, Gambrell & Russell, LLP, dated the Closing Date, substantially in the form and to the effect of 27 Exhibit 6.06 hereto, and (ii) Meitar, Liquornik, Geva & Co., dated the Closing Date, in form and substance reasonably acceptable to Sellers. 6.07 Deliveries. Parent and Purchasers shall have delivered to Sellers the Assumption Agreement and the other Assumption Instruments. 6.08 Proceedings. All proceedings to be taken on the part of Parent and Purchasers in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Sellers, and Sellers shall have received copies of all such documents and other evidences as Sellers may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 6.09 No Material Adverse Change. Since the date of this Agreement through the Closing Date, no event shall have occurred that has had or could reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect. Changes in the trading prices of Parent ordinary shares shall not constitute a Parent Material Adverse Effect. 6.10 Value Added Tax. The parties shall have mutually agreed upon their respective rights and obligations relating to any value added tax payable in connection with the transfer of the Assets pursuant to the Laws of the United Kingdom. ARTICLE VII TRANSFER OF WARRANT 7.01 Restrictions on Transfer. CNT agrees and acknowledges that it will not, directly or indirectly, offer, sell, assign, pledge, encumber or otherwise transfer the Warrant or solicit any offers to purchase or otherwise acquire or make a pledge of the Warrant, except to a wholly-owned subsidiary or in connection with a sale of substantially all of CNT's assets, whether by transfer, consolidation, merger or otherwise. ARTICLE VIII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS 8.01 Survival of Representations, Warranties, Covenants and Agreements. Notwithstanding any right of Parent and Purchasers (whether or not exercised) to investigate the Business or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other party contained in this Agreement, Purchasers and Parent have the right to rely fully upon the representations and warranties of Sellers contained in this Agreement. The representations and warranties of the parties contained in this Agreement will survive the Closing (a) for the applicable statute of limitations, with respect to the representations and warranties contained in Sections 2.01, 2.02, 2.03, 2.04(a) and (b), 2.05, 2.09, 3.01, 3.02, 3.03(a) and (b) and 3.04 and (b) until the date which is twelve (12) months following the Closing Date in the case of all other representations and warranties, except that any representation or warranty that would otherwise terminate will continue to survive if a Claim Notice or Indemnity Notice (as applicable) shall have been timely given under Article IX on or 28 prior to such termination date, until the related claim for indemnification has been satisfied or otherwise resolved as provided in Article IX and in the Escrow Agreement. The covenants and agreements of Sellers and the other parties contained in this Agreement will survive the Closing until all obligations with respect thereto have been performed or shall have been terminated in accordance with their terms. ARTICLE IX INDEMNIFICATION; POST-CLOSING OBLIGATIONS 9.01 Indemnification. (a) Subject to the other Sections of this Article IX, Sellers shall jointly and severally indemnify the Purchaser Indemnified Parties in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to (i) any misrepresentation or breach of warranty on the part of any Seller contained in this Agreement (determined in all cases as if the terms "material" or "materially" were not included therein); (ii) any nonfulfillment of or failure to perform any covenant or agreement on the part of any Seller contained in this Agreement or (iii) any failure to timely pay, perform and discharge the Retained Liabilities or any Loss suffered by Parent or Purchasers from the operation of the business prior to the Closing Date (other than Losses relating to Assumed Liabilities). For the avoidance of doubt, any indemnification claims related to misrepresentation or breach of warranty shall be made pursuant to subsection (i) above. (b) Subject to the other Sections of this Article IX, Parent and Purchasers shall jointly and severally indemnify the Seller Indemnified Parties in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to (i) any misrepresentation or breach of warranty on the part of Parent or Purchasers contained in this Agreement (determined in all cases as if the terms "material" or "materially" were not included therein); (ii) any nonfulfillment of or failure to perform any covenant or agreement on the part of Parent or Purchasers contained in this Agreement; (iii) any failure by Parent or Purchasers (as applicable) to comply with the terms and conditions of the webMethods License or the webMethods Option; (iv) any failure to timely pay, perform and discharge the Assumed Liabilities or any Loss suffered by Sellers from the operation of the Business after the Closing Date or (v) any allegation of discriminatory hiring practices of Employees by Purchasers, made by any Employee that does not receive an offer of employment from Purchasers or any Seller. For the avoidance of doubt, any indemnification claims related to misrepresentation or breach of warranty shall be made pursuant to subsection (i) above. 9.02 Method of Asserting Claims. All claims for indemnification by any Indemnified Party under Section 9.01 will be asserted and resolved as follows: (a) In the event any claim or demand in respect of which an Indemnified Party might seek indemnity under Section 9.01 is asserted against or sought to be collected from such Indemnified Party by a Person other than a Purchaser Indemnified Party or Seller Indemnified 29 Party (a "Third Party Claim"), the Indemnified Party shall deliver a Claim Notice with reasonable promptness to the Escrow Agent and the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim, but only to the extent that the Indemnifying Party's ability to defend has been irreparably prejudiced by such failure of the Indemnified Party. The Indemnifying Party will notify the Escrow Agent and the Indemnified Party as soon as practicable within the Dispute Period whether the Indemnifying Party disputes its liability to the Indemnified Party under Section 9.02 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Escrow Agent and the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 9.02(a), then the Indemnifying Party will have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings will be reasonably, vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party will not be indemnified in full by reason of Section 9.03). The Indemnifying Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time subsequent to the delivery of a Claim Notice to the Indemnified Party and prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this Section 9.02(a)(i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest; and provided, further, that the Indemnified Party may choose separate counsel at the sole cost and expense of the Indemnified Party in the event that a conflict of interest arises between the Indemnified Party and the Indemnifying Party. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this Section 9.02(a)(i), and except as provided in the preceding sentence, the Indemnified Party will bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 9.02 with respect to such Third Party Claim. (ii) If the Indemnifying Party fails to assume the defense of the Third Party Claim within the Dispute Period or fails to prosecute reasonably, vigorously and diligently or settle the Third Party Claim, then the Indemnified Party will have the right 30 to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this Section 9.02(a)(ii), if the Indemnifying Party has notified the Escrow Agent and the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 9.02(a)(ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 9.02(a)(ii), and the Indemnifying Party will bear its own costs and expenses with respect to such participation. (iii) If the Indemnifying Party notifies the Escrow Agent and the Indemnified Party that it does not dispute its liability to the Indemnified Party with respect to the Third Party Claim under Section 9.02, or if the Indemnifying Party fails to deliver a notice to the Escrow Agent and the Indemnified Party within the Dispute Period, then the Loss in the amount specified in the Claim Notice will be conclusively deemed a liability of the Indemnifying Party under Section 9.02 and the Escrow Agent or the Indemnifying Party (as applicable) shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has disputed its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by litigation in a court of competent jurisdiction in accordance with Section 9.10. (b) In the event any Indemnified Party has a claim under Section 9.02 against any Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice with reasonable promptness to the Escrow Agent and the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Escrow Agent and the Indemnified Party that it does not dispute the claim described in such Indemnity Notice, or if the Indemnifying Party fails to deliver a notice to the Escrow Agent and the Indemnified Party within the Dispute Period, then the Loss in the amount specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under 31 Section 9.02 and the Escrow Agent or the Indemnifying Party (as applicable) shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by litigation in a court of competent jurisdiction in accordance with Section 9.10. 9.03 Liability Limits. Notwithstanding anything to the contrary set forth herein: (a) Except for Losses based on fraud or Losses arising under Sections 9.01(a)(ii) or 9.01(a)(iii) or any breach of the representations and warranties in the Transition Services Agreement or failure to perform under the terms of the Transition Services Agreement (with respect to which there will be no limitation), Sellers' indemnification obligations hereunder shall be limited, in the aggregate, to the Escrowed Amount. (b) Except for Losses based on fraud or Losses arising under Sections 9.01(b)(ii), 9.01(b)(iii), 9.01(b)(iv) or 9.01(b)(v) or any breach of the representations and warranties in the Warrant or failure to perform under the terms of the Warrant (with respect to which there will be no limitation), Purchasers' and Parent's indemnification obligations hereunder shall be limited, in the aggregate, to $600,000.00. (c) Except for Losses based on fraud, the indemnification provisions of this Article IX are the sole and exclusive remedy of any Purchaser Indemnified Party for breach of any of Sellers' representations or warranties contained herein. (d) Except for Losses based on fraud, the indemnification provisions of this Article IX are the sole and exclusive remedy of any Seller Indemnified Party for breach of any of Parent or Purchasers' representations or warranties contained herein. (e) Sellers shall not be liable to Purchaser Indemnified Parties for Losses arising under Section 9.01(a)(i), unless and until the aggregate of such Losses exceed $60,000, and then Sellers shall be liable for all such Losses, not just the amount in excess of $60,000. (f) Purchasers and Parent shall not be liable to Seller Indemnified Parties for Losses arising under Section 9.01(b)(i), unless and until the aggregate of such Losses exceed $60,000, and then Purchasers and Parent shall be liable for all such Losses, not just the amount in excess of $60,000. (g) All claims for Losses hereunder shall be made net of any insurance proceeds actually recovered by the party claiming such indemnification; provided, that, such party shall only be obligated to use commercially reasonable efforts to pursue any such insurance proceeds. (h) In no event shall any party be liable under this Article IX for special, indirect, consequential (including lost profits) or punitive damages. 32 9.04 Forfeiture of Escrowed Amount. Except for Losses based on fraud or Losses arising under Sections 9.01(a)(ii) or 9.01(a)(iii), the indemnification obligations of Sellers hereunder shall be satisfied by claims against the Escrowed Amount. 9.05 Use of Name. Within ten (10) days after Closing, Propelis Software, Inc. shall file an amendment with the Minnesota Secretary of State to its Articles of Incorporation to change its name to CNT Acquisition I Corporation. From and after the Closing, Sellers shall not use, directly or indirectly, the name "Propelis Software," "Enterprise/Access," or "BPm," or any similar name, except in connection with customary activities related to the winding-down of the Business. 9.06 US Employee Matters. (a) Except as specifically set forth in Section 9.06(e), Jacada-US shall have no obligation to offer employment to, or employ, any Employees in the United States ("US Employees") and Jacada-US shall have no liability in respect of any such US Employees for salary, compensation, severance, stock options or stock option plans, health, welfare, retirement or other benefits arising out of employment with Sellers. Jacada-US shall have the right, in its sole discretion, to offer employment to any US Employee, and Sellers shall have no influence or control over the selection process. Prior to Closing, Sellers shall advise all US Employees that: (i) their employment with Sellers shall terminate immediately prior to the Closing Date; (ii) Sellers shall offer its severance practice as provided in subsection (iii) below; and (iii) upon termination of employment, they will be entitled to severance pay from Sellers in an amount to be calculated in accordance with Sellers' Standard Severance Practice (or in a greater amount, in the case of US Employees with agreements providing for same), but only in the event that they do not receive an offer of employment from Jacada-US or any Seller on or prior to the sixty-day anniversary of the Closing Date (regardless of whether they accept any such offer of employment). Sellers shall indemnify and hold Parent and Purchasers harmless against any and all damages, losses and liabilities associated with or related to the failure of Sellers to pay severance amounts to US Employees in accordance with Sellers' Standard Severance Practice. (b) To the extent permitted by applicable law and the terms of the applicable Benefit Plans, US Employees of Sellers that are hired by Jacada-US shall receive credit for eligibility to participate and vesting under Jacada-US's Benefit Plans for years of service with Sellers (and their respective subsidiaries and predecessors). (c) Notwithstanding any other provision of this Agreement, Sellers shall provide "continuation coverage" to all "M&A qualified beneficiaries" in connection with the transactions contemplated herein, all as determined pursuant to Section 4980B of the Internal Revenue Code and the regulations thereunder and Section 601 of ERISA et seq. Sellers shall indemnify and hold Parent and Purchasers harmless against any and all damages, losses and liabilities associated with or related to the Sellers' failure to comply with COBRA. (d) Sellers shall be responsible for providing any notice of layoff or plant closings required, and any severance pay or other liabilities or obligations to US Employees under the Worker Adjustment and Retraining Notification Act of 1988 ("WARN"), any successor federal law, and any applicable foreign, state or local plant closing notification statute. Sellers shall 33 indemnify and hold Parent and Purchasers harmless against any and all damages, losses and liabilities associated with or related to Sellers' failure to comply with WARN and such other laws. (e) Promptly after Closing, Parent or Purchasers shall reimburse Sellers for severance obligations actually paid by Sellers to US Employees that do not receive an offer of employment from Jacada-US or any Seller (regardless of whether they accept any such offer of employment), but only in an amount not to exceed, in the aggregate, 100% of the amount reflected in the column entitled "Base Severance" and 50% of the amount reflected in the column entitled "Additional Severance" on Exhibit 9.06(e) for each applicable US Employee, subject to Sellers providing reasonable documentation of such expenses. In the event that one or more US Employees thereafter receives an offer of employment from any Seller on or prior to the sixty-day anniversary of the Closing Date (regardless of whether they accept any such offer of employment), Sellers shall refund to Parent or Purchasers (as applicable) the associated severance costs previously paid to Sellers by Parent or Purchasers (as applicable). The foregoing reimbursement obligation shall be referred to herein as the "Severance Reimbursement Obligation". 9.07 UK Employee Matters. (a) The parties acknowledge and agree that the sale and purchase pursuant to this Agreement will constitute a relevant transfer for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations (the "Transfer Regulations") and that it will not operate so as to terminate any of the contracts of employment of the Employees employed in the Business in the United Kingdom (the "UK Employees") and such contracts shall be transferred to Jacada-UK pursuant to the Transfer Regulations with effect from the Closing Date. (b) Jacada-UK hereby undertakes to CNTUK: (i) to perform and observe, on and from the Closing Date, all employer obligations (whether arising under common law, statute, equity or otherwise) under or in connection with the contracts of employment of the UK Employees (or any of the said obligations CNTUK would have had under or in connection with the said contracts but for the Transfer Regulations); and (ii) fully to indemnify and keep indemnified the Sellers against all losses, damages, costs, actions, awards, penalties, fines, proceedings, claims, demands, liabilities (including without limitation any liability to Taxes), and expenses (including, without limitation, legal and other professional fees and expenses) which the Sellers may suffer, sustain, incur, pay or be put to by reason or on account of or arising from: (A) any failure by Jacada-UK to comply with its obligations under subsection (b)(i); (B) any claim or other legal recourse by all or any of the UK Employees in respect of any fact or matter concerning or arising from employment with Jacada-UK on and from the Closing Date; (C) any claim or other legal recourse by any trade union or staff association or employee representatives in respect of all or any of the UK Employees arising from or connected with the failure by Jacada-UK to comply with its legal obligations to such trade union or staff association or employee representatives; (D) any act or omission done or omitted to be done by Jacada-UK in relation to the UK Employees on and from the Closing Date; 34 (E) without prejudice to subsection (ii)(d) above, any claim or demand or other legal recourse against the Sellers by any UK Employee or other person or agent or employee or contractor who claims (whether correctly or not) that there has been a breach by Jacada-UK of Regulation 10 of the Transfer Regulations; and (F) any termination or dismissal (constructive, unfair or otherwise) or any steps taken to terminate the contract of employment, of any of the UK Employees on and from the Closing Date. (c) CNTUK hereby undertakes to Jacada-UK that: (i) they have performed and observed, at all times prior to the Closing Date, all employer obligations (whether arising under common law, statute, equity or otherwise) under or in connection with the contracts of employment of the UK Employees; and (ii) fully to indemnify and keep indemnified Parent and Purchasers against all losses, damages, costs, actions, awards, penalties, fines, proceedings, claims, demands, liabilities (including without limitation any liability to Taxes), and expenses (including, without limitation, legal and other professional fees and expenses) which Parent and Purchasers may suffer, sustain, incur, pay or be put to by reason or on account of or arising from: (A) any failure by CNTUK to comply with its obligations mentioned in subsection (c)(i); (B) any claim or other legal recourse by all or any of the UK Employees in respect of any fact or matter concerning or arising from employment with CNTUK prior to the Closing Date; (C) any claim or other legal recourse by any trade union or staff association or employee representatives in respect of all or any of the UK Employees arising from or connected with the failure by CNTUK to comply with its legal obligations to such trade union or staff association or employee representatives; (D) any act or omission done or omitted to be done by CNTUK in relation to the UK Employees prior to the Closing Date; (E) without prejudice to subsection (ii)(D) above, any claim or demand or other legal recourse against Parent or Purchasers by any UK Employee or other person or agent or employee or contractor who claims (whether correctly or not) that there has been a breach by CNTUK of Regulation 10 of the Transfer Regulations provided that the indemnity shall not apply where such breach results, directly or indirectly, from a breach by Parent or Purchasers of such Regulation; and (F) any termination or dismissal (constructive, unfair or otherwise) or any steps taken to terminate the contract of employment, of any of the UK Employees prior to the Closing Date. (d) Without prejudice to the other provisions of this clause, the Sellers shall, at the expense of Parent and Purchasers, give Parent and Purchasers such assistance as they may reasonably require to contest any claim by any UK Employee employed in the Business at or prior to Closing resulting from or in connection with this Agreement if such claim is one for which this Agreement makes Parent and Purchasers responsible; and Parent and Purchasers shall, at the expense of Sellers, give Sellers such assistance as they may reasonably require to contest any claim by any such employee if such claim is one for which this Agreement makes the Sellers responsible. 9.08 Covenants Against Competition. 35 (a) In order to induce Purchasers and Parent to enter into this Agreement and consummate the transactions contemplated hereby, each Seller agrees that neither it nor any of its respective Affiliates (but specifically excluding outside members of their respective Boards of Directors) shall, without the prior written consent of Parent and Purchasers, for its own account or jointly with another, directly or indirectly, for or on behalf of any Person, as principal, agent, shareholder, participant, partner, promoter, director, officer, manager, employee, consultant, sales representative or otherwise, except for the benefit of the Parent and Purchasers or their Affiliates: (i) for a period of three (3) years from the date of the Closing, engage or invest in, or own, control, manage or participate in the ownership, control or management of, or render services or advice to, any business engaged, or which it reasonably knows is undertaking to become engaged, in a Competing Business in the Restricted Territory. (ii) for a period of three (3) years from the date of the Closing solicit, or assist in the solicitation of, any Person having an office or place of business within the Restricted Territory and to whom Sellers sold or provided any products or services related to the Business on, or during the two (2) year period prior to, the date of the Closing, for the purpose of obtaining the patronage of such Person for the purchase of any competitive products or services; (iii) for a period of three (3) years from the date of the Closing, (A) solicit, or assist in the solicitation of, for the purpose of offering employment to or hiring, or (B) actually hire, any Person employed by Parent or either Purchaser (as an employee, independent contractor or otherwise) that was formerly an Employee of the Business; or (iv) use, disclose or reveal to any Person, any Confidential Information (as defined below) of the Parent and Purchasers; provided, however, that the obligations of this clause (iv) shall terminate with respect to any business information that does not constitute a trade secret under applicable Law upon the expiration of three (3) years after the date of the Closing. "Confidential Information" means all information of the Parent and Purchasers which derives value, economic or otherwise, from not being generally known to the public, but excluding any information that comes into the public domain through no fault of Sellers or any information that is required to be disclosed by an Order or by any Law. (b) Notwithstanding anything herein to the contrary, (i) it shall not be a breach of the covenant contained in subsection (a)(i) above for a Seller or any of its Affiliates to own not more than five percent (5%) of the equity interests of any Person whose equity interests are publicly traded; (ii) it shall not be a breach of the covenant contained in subsection (a)(iii) above for Sellers to run general advertisements for employment opportunities in newspaper publications or otherwise; and (iii) the covenants described in this Section 9.08 shall apply only if the transactions contemplated hereby are consummated at the Closing. If the transactions contemplated herein are consummated, "Confidential Information" of Parent and Purchasers shall be deemed to include all Confidential Information of Sellers related to the Business, and Sellers shall be subject to the obligations of non-use and non-disclosure contained in this Section 9.08 with respect to all of such information. 36 (c) Notwithstanding anything contained in this Agreement to the contrary, Sellers acknowledge and agree that Parent and Purchasers' remedy at law for a breach or threatened breach of any of the provisions of Sections 9.08(a) would be inadequate and, in recognition of that fact, in the event of a breach or threatened breach by Sellers of the provisions of Sections 9.08(a), it is agreed that, in addition to its remedies at law, Parent and Purchasers shall be entitled to equitable relief in the form of specific performance, temporary restraining order, temporary, preliminary, or permanent injunction, or any other equitable remedy which may then be available, including but not limited to an equitable accounting of all earnings, profits and other benefits arising from or in connection with such violation. Sellers agree not to oppose Parent and Purchasers' request for any of the above relief on the grounds that Parent and Purchasers have not been irreparably injured or that Parent and Purchasers have an adequate remedy at law or that such equitable relief is inappropriate. Nothing set forth in this Section 9.08(c) shall be construed as prohibiting Parent and Purchasers from pursuing any other rights and remedies available to them for such breach or threatened breach. (d) Notwithstanding anything herein to the contrary, the covenants described in Section 9.08(a)(i), (ii) and (iii) shall terminate in the event of the acquisition of the remaining business of the Sellers by an unrelated third party in an arms' length transaction (whether pursuant to the acquisition of all or substantially all of the assets of the Sellers or the capital stock of CNT, or a merger, exchange or consolidation to which CNT is a party as a result of which the shareholders of CNT immediately prior to such transaction will own less than 51% of the outstanding equity interests of the surviving entity), but only in the event that both of the following conditions are satisfied: (i) the acquisition cannot be consummated prior to the first anniversary of the date of Closing if the acquiring entity is listed on Schedule 9.08(d) attached hereto (unless such entity is primarily engaged in the storage networking business on the date of such acquisition); and (ii) if the acquiring entity is engaged in a Competing Business, any Employees of the Business that are re-hired by Sellers may not work in or with the subsidiary, division or other business unit of the acquiring entity that is engaged in the Competing Business. 9.09 Further Assurances; Post-Closing Cooperation. At any time or from time to time after the Closing, at Parent and Purchasers' request and expense, but without further consideration, Sellers shall execute and deliver to Parent and Purchasers such other instruments of sale, transfer, conveyance, assignment and confirmation, provide such materials and information and take such other actions as Parent and Purchasers may reasonably deem necessary or desirable in order more effectively to transfer, convey and assign to Parent and Purchasers, and to confirm Parent and Purchasers' title to, all of the Business and the Assets, and, to the full extent permitted by Law, to put Parent and Purchasers in actual possession and operating control of the Assets and to assist Parent and Purchasers in exercising all rights with respect thereto, and otherwise to cause Sellers to fulfill their obligations under this Agreement and the Operative Agreements. 37 9.10 Third-Party Consents. To the extent that any contract, lease, license or other agreement included in the Assets is not assignable or transferable without the consent of another party, this Agreement shall not constitute an assignment or an attempted assignment thereof if such assignment or attempted assignment would constitute a breach thereof (an "Unassigned Item"). Sellers shall use their reasonable best efforts (but without any requirement to pay money) to obtain the necessary consent to the assignment or transfer of all Unassigned Items, and Parent and Purchasers shall cooperate in those efforts. The beneficial interest in and to each Unassigned Item shall in any event pass to Parent and Purchasers at Closing, and Sellers covenant and agree to cooperate with Parent and Purchasers in any reasonable arrangement to provide Parent and Purchasers with Sellers' entire interest in the benefits under each Unassigned Item. If and only if such reasonable arrangement can be made, Parent and Purchasers agrees to accept the burdens and perform the obligations under such Unassigned Item. Furthermore, if the other party's consent is subsequently obtained (without any modification thereto which is adverse to Parent and Purchasers), Parent and Purchasers shall at such time agree to assume all liabilities and obligations thereunder at which time such Unassigned Item shall become an Asset. If and to the extent that such arrangement cannot be made, Parent and Purchasers shall have no obligation pursuant to Section 1.02(a) or otherwise with respect to any such Contract. The provisions of this Section 9.10 shall not affect the right of Parent and Purchasers not to consummate the transactions contemplated by this Agreement if the condition to its obligations hereunder contained in Section 5.06 has not been fulfilled. 9.11 Submission to Jurisdiction. (a) Parent and each Purchaser agree that any legal suit, action or proceeding instituted by any of them, arising out of or based upon this Agreement or the Operative Agreements shall be instituted in any Federal court in Hennepin County, State of Minnesota (or, if such courts do not have jurisdiction, as determined by the plaintiff, in any state court in Hennepin County, State of Minnesota), and irrevocably submits to and accepts the exclusive jurisdiction of such courts in any such proceeding. To the extent that CNTUK, any of its respective revenues, assets or properties has or hereafter may acquire any immunity from jurisdiction of any court in Hennepin County, State of Minnesota, CNTUK hereby irrevocably agrees not to claim, and irrevocably waives (to the extent it lawfully may do so), any such immunity, and any defense based on such immunity, in respect of its obligations arising out of this Agreement, the Operative Agreements or the transactions contemplated hereby or thereby. (b) Each Seller agree that any legal suit, action or proceeding instituted by any of them, arising out of or based upon this Agreement or the Operative Agreements shall be instituted in any Federal court in Fulton County, State of Georgia (or, if such courts do not have jurisdiction, as determined by the plaintiff, in any state court in Fulton County, State of Georgia), and irrevocably submits to and accepts the exclusive jurisdiction of such courts in any such proceeding. To the extent that Parent, Jacada-UK, any of their respective revenues, assets or properties has or hereafter may acquire any immunity from jurisdiction of any court in Fulton County, State of Georgia, Parent and Jacada-UK hereby irrevocably agree not to claim, and irrevocably waives (to the extent it lawfully may do so), any such immunity, and any defense based on such immunity, in respect of its obligations arising out of this Agreement, the Operative Agreements or the transactions contemplated hereby or thereby. 38 9.12 Carve-Out Financial Statements. CNT will use reasonable best efforts to deliver to Parent and Purchasers true and complete copies of the following financial statements within thirty (30) after Closing: (a) the audited consolidated balance sheet of the Business as of December 31, 2000 and 1999; and (b) the related audited statement of operations and cash flows for the fiscal years ended December 31, 2000, 1999 and 1998, together with a true and correct copy of the report on such audited information by CNT's auditors. The foregoing financial statements shall be referred to as the "Carve-Out Financial Statements". The Carve-Out Financial Statements (i) will be prepared from the Business Books and Records in accordance with GAAP, (ii) will fairly present the financial condition and results of operations of the Business as of the respective dates thereof and for the respective periods covered thereby, and (iii) will be compiled from the Business Books and Records regularly maintained by management and used to prepare the financial statements of Sellers in accordance with the principles stated therein. CNT's auditors will be engaged and paid by Parent and Purchasers, and Parent and Purchasers will reimburse CNT for any reasonable out-of-pocket expenses incurred by Sellers in connection therewith. Notwithstanding the foregoing, in the event that Parent is unable to engage CNT's independent auditors, CNT shall engage such auditors to audit the Carve-Out Financial Statements, and Parent and Purchasers shall reimburse CNT for same. 9.13 Accounts Receivable. The parties will make reasonable efforts to collect all Accounts Receivable after the Closing, but neither party shall be obligated to institute any legal proceeding or hire any collection agent for the purpose of collecting such accounts receivable. Sellers shall repurchase from Purchasers on the date which is ninety (90) days following the Closing Date (or on such other date as Sellers and Purchasers mutually agree), all such Accounts Receivable, to the extent not collected on or before such date, for a purchase price equal to 100% of their outstanding balance. The amount repurchased shall be net of any bad debt reserves, and with respect to maintenance receivables, net of any remaining deferral of accrued revenue related to the uncollectible receivable so repurchased. In determining whether an account has been collected, payments by an account debtor shall be applied to the oldest accounts outstanding, unless otherwise reasonably indicated by remittance advice or similar documentation that such payment should not be applied to the oldest accounts because of a dispute with respect to such accounts. 9.14 Access to Records. Following the Closing, each party will afford the other party, its counsel and its accountants, during normal business hours, reasonable access to the books, records and other data relating to the Business in its possession with respect to periods prior to the Closing and the right to make copies and extracts therefrom, to the extent that such access may be reasonably required by the requesting party in connection with (i) the preparation of Tax Returns, (ii) the determination or enforcement of rights and obligations under this Agreement, (iii) compliance with the requirements of any Governmental or Regulatory Authority, (iv) the determination or enforcement of the rights and obligations of any Indemnified Party or (v) in connection with any actual or threatened Action or Proceeding. Further each party agrees for a period extending five (5) years after the Closing Date not to destroy or otherwise dispose of any such books, records and other data unless such party shall first offer in writing to surrender such books, records and other data to the other party and such other party shall not agree in writing to take possession thereof during the ten (10) day period after such 39 offer is made. Notwithstanding anything to the contrary contained in this Section 9.14, if the parties are in an adversarial relationship in litigation or arbitration, the furnishing of information, documents or records relating to the matter in dispute shall be subject to applicable rules relating to discovery. ARTICLE X DEFINITIONS 10.01 Definitions. (a) Defined Terms. As used in this Agreement, the following defined terms have the meanings indicated below: "Accounts Payable" has the meaning ascribed to it in Section 1.02(a)(iii). "Accounts Receivable" has the meaning ascribed to it in Section 1.01(a)(iii). "Acquisition" means the purchase and sale of the Assets pursuant to this Agreement. "Acquisition Transaction" has the meaning ascribed to it in Section 4.04). "Actions or Proceedings" means any action, suit, proceeding, arbitration or Governmental or Regulatory Authority investigation or audit. "Adjusted Net Worth" has the meaning ascribed to it in Section 1.06(b). "Affiliate" means any Person that directly, or indirectly through one of more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by Contract or otherwise and, in any event and without limitation of the previous sentence, any Person having record ownership of ten percent (10%) or more of the voting securities of another Person (other than CEDE & Co.) shall be deemed to control that Person. "Agreement" means this Asset Purchase Agreement and the Exhibits, the Disclosure Schedule and the Schedules hereto and the certificates delivered in accordance with Sections 5.03 and 6.03, as the same shall be amended from time to time. "Annual Financial Statement Date" means the last day of the most recent fiscal year of the Business for which Financial Statements are delivered to Parent and Purchasers pursuant to Section 2.06. "Annual Financial Statements" means the Financial Statements for the most recent fiscal year of the Business delivered to Parent and Purchasers pursuant to Section 2.06. 40 "Assets" has the meaning ascribed to it in Section 1.01(a). "Assignment Instruments" has the meaning ascribed to it in Section 1.04. "Associate" means, with respect to any Person, any corporation or other business organization of which such Person is an officer or partner or is the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of equity securities, any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as a trustee or in a similar capacity and any relative or spouse of such Person, who has the same home as such Person. "Assumed Agreements" has the meaning ascribed to it in Section 1.01(a)(v). "Assumed Liabilities" has the meaning ascribed to it in Section 1.02(a). "Assumption Agreement" has the meaning ascribed to it in Section 1.04. "Assumption Instruments" has the meaning ascribed to it in Section 1.04. "Benefit Plan" has the meaning ascribed to it in Section 2.12. "Bill of Sale" has the meaning ascribed to it in Section 1.04. "Books and Records" of any Person means all files, documents, instruments, papers, books and records relating to the business, operations, condition of (financial or other), results of operations and assets and properties of such Person, including without limitation, budgets, pricing guidelines, ledgers, journals, Contracts, Licenses, customer lists, computer files and programs, retrieval programs and operating data. "Business" has the meaning ascribed to it in the forepart of this Agreement. "Business Books and Records" has the meaning ascribed to it in Section 1.01(a)(ix). "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of Georgia are authorized or obligated to close. "Carve-Out Financial Statements" has the meaning ascribed to it in Section 9.11. "Claim Notice" means written notification pursuant to Section 9.02(a) of a Third Party Claim as to which indemnity under Section 9.01 is sought by an Indemnified Party, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim against the Indemnifying Party under Section 9.01, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim. 41 "Closing" means the closing of the transactions contemplated by Section 1.04. "Closing Date" has the meaning ascribed to it in Section 1.04. "Closing Date Statement" has the meaning ascribed to it in Section 1.06. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Competing Business" means a business competitive with the Business, as the Business exists as of the date hereof. "Condition of the Business" means the business, condition (financial or otherwise), results of operations, assets, properties of the Business. "Contract" means any agreement, lease, license, evidence of Indebtedness, mortgage, indenture, security agreement or other contract (whether written or oral). "Disclosure Schedule" means the record delivered to Parent and Purchasers by Sellers herewith and dated as of the date hereof, as modified pursuant to Section 4.06 hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein by Sellers pursuant to this Agreement. "Dispute Period" means the period ending thirty (30) days following receipt by an Indemnifying Party of either a Claim Notice or an Indemnity Notice. "Domain Name" has the meaning ascribed to it in Section 2.15(n). "Employee" means each current employee, officer or consultant of any Seller engaged in the conduct of the Business (excluding administrative personnel that have job functions in whole or in part supporting other business units of Sellers). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Escrow Agent" means the Person selected by Parent and Purchasers who shall serve as Escrow Agent pursuant to the Escrow Agreement. "Escrow Agreement" means the Escrow Agreement to be executed at Closing among Parent, Seller and the Escrow Agent. "Escrowed Amount" has the meaning ascribed to it in Section 1.03(b). "Exchange Act" means the Securities Exchange Act of 1934, as amended. 42 "Excluded Assets" has the meaning ascribed to it in Section 1.01(b). "Financial Statements" means the pro forma financial statements delivered to Parent and Purchasers pursuant to Section 2.06. "GAAP" means generally accepted accounting principles in the United States. "General Assignment" has the meaning ascribed to it in Section 1.04. "Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision. "Indebtedness" of any Person means all obligations of such Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases and (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) above of any other Person. "Indemnified Party" means any Person claiming indemnification under any provision of Article IX, including without limitation a Person asserting a claim pursuant to Section 9.02. "Indemnifying Party" means any Person against whom a claim for indemnification is being asserted under any provision of Article IX, including without limitation a Person against whom a claim is asserted pursuant to Section 9.02. "Indemnity Notice" means written notification pursuant to Section 9.02(b) of a claim for indemnity under Article IX by an Indemnified Party, specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim. "Independent Accountant" has the meaning ascribed to it in Section 1.06(c). "Intellectual Property" means all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, domain names, service marks and service mark rights, service names and service name rights, brand names, inventions, processes, methods, designs, devices, tools, specifications, techniques, algorithms, formulae, improvements, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, industrial models, computer programs, software (whether in source or object code) and related documentation, technical information, manufacturing, engineering and technical drawings, know-how and all pending applications for and registrations of patents, trademarks, service marks and copyrights. 43 "Intellectual Property Assets" has the meaning ascribed to it in Section 1.01(a)(vii). "Inventory" has the meaning ascribed to it in Section 1.01(a)(i). "Israeli Approvals" has the meaning ascribed to it in Section 3.04. "Key Employees" means the Employees identified by Parent and Purchasers to Sellers in writing as soon as reasonably practicable after the date of this Agreement. "Knowledge" means in the case of an individual that he will be deemed to have Knowledge of a particular fact or other matter if such individual is actually aware of such fact or other matter or would be expected to be aware of such fact or matter after due inquiry. When used with respect to any or all of the Sellers, Knowledge means the Knowledge of Thomas Hudson, Gregory Barnum, Jeffery Bertelsen, Gail Greener, Michael Ducatelli, William Fell and Mark Kazimer, and when used with respect to Parent or Purchasers, means the Knowledge of Gideon Hollander, Michael Potts, Robert Aldworth and Lisa Wannamaker. "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Liabilities" means all Indebtedness, obligations and other liabilities of a Person (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due). "Licenses" means all licenses, permits, certificates of authority, authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental or Regulatory Authority. "Liens" means any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sales Contract, title retention Contract or other Contract to give any of the foregoing. "Loss" means any and all damages, fines, fees, penalties, deficiencies, losses and expenses (including without limitation interest, court costs, reasonable fees of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment). "Material Adverse Effect" has the meaning ascribed to it in Section 2.01. "Operative Agreements" means, collectively, the Escrow Agreement, the Transition Services Agreement, the Warrant, the General Assignment and the other Assignment Instruments, the Assumption Agreement and the other Assumption Instruments and any other agreements to be entered into in connection with the Acquisition. 44 "Order" means any writ, judgment, decree, injunction or similar order of any Governmental or Regulatory Authority (in each such case whether preliminary or final). "Parent Material Adverse Effect" has the meaning ascribed to it in Section 2.01. "Permitted Lien" means (i) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a Liability that is not yet due or delinquent, (iii) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not materially impair the value of the property subject to such Lien or the use of such property in the conduct of the Business and (iv) any lien set forth on Section 2.13(b) of the Disclosure Schedules. "Person" means any natural person, corporation, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Personal Property Leases" has the meaning ascribed to it in Section 1.01(a)(iv). "Pre-Closing Tax Period" means any Tax period (or portion thereof) ending on or before the close of business on the Closing Date. "Prepaid Expenses" has the meaning ascribed to it in Section 1.01(a)(vi). "Products" has the meaning ascribed to it in Section 2.15(c). "Purchase Price" has the meaning ascribed to it in Section 1.03(a). "Purchasers" has the meaning ascribed to it in the forepart of this Agreement. "Purchaser Indemnified Parties" means Purchasers, Parent and their respective officers, directors, employees, agents and Affiliates. "Real Property Leases" has the meaning ascribed to it in Section 1.01(b)(i). "Representative" means a Person's directors, officers, employees, agents, consultants, advisors or other representatives, including legal counsel and accountants. "Resolution Period" means the period ending thirty (30) days following receipt by an Indemnified Party of a written notice from an Indemnifying Party stating that it disputes all or any portion of a claim set forth in a Claim Notice or an Indemnity Notice. "Restricted Territory" means the United States of America and the United Kingdom. 45 "Retained Liabilities" has the meaning ascribed to it in Section 1.02(b). "SEC" has the meaning ascribed to it in Section 3.07. "SEC Documents" has the meaning ascribed to it in Section 3.07. "Securities Act" means the Securities Act of 1933, as amended. "Sellers" has the meaning ascribed to it in the forepart of this Agreement. "Sellers' Standard Severance Practice" means one week of severance pay for each year of service with Sellers (subject to a two-week minimum) and, in the event that the applicable Employee executes a release in favor of Sellers, an additional two to six weeks of severance pay (depending on the applicable Employee's position) and payment of two months of COBRA costs. "Severance Reimbursement Obligation" has the meaning ascribed to it in Section 9.06(e). "Shared Facilities and Assets" means the following items to the extent not related exclusively to the Business: (i) the accounting records of CNT and its subsidiaries, (ii) assets, property, contracts, trusts or rights related to Benefit Plans, (iii) insurance polices and rights thereto, (iv) inventory (other than Inventory), (v) assets, tangible or intangible, related to general and administrative services of CNT and its subsidiaries generally, including finance, information technology, accounting systems, human resources, heating, ventilation and air conditioning systems, real estate and vehicles, and (vi) domain names (other than www.propelis.com and www.legacyEAI.com), phone numbers, phone systems, shared networks and computer systems, (viii) the name Computer Network Technology Corporation, CNT and related trademarks, service marks, trade dress, logos and corporate names. "Tangible Personal Property" has the meaning ascribed to it in Section 1.01(a)(ii). "Tax Returns" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Taxes" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Third Party Claim" has the meaning ascribed to it in Section 9.02(a). 46 "Third Party Licenses" has the meaning ascribed to it in Section 2.15(b). "Third Party Technology" has the meaning ascribed to it in Section 2.15(b). "Warrant" has the meaning ascribed to it in Section 1.03(a). "webMethods License" means that certain Technology License Agreement by and between IntelliFrame Corporation and RealLegacy.com, Inc. dated February 2, 2001. "webMethods Option" means the patent license option existing in favor of webMethods, Inc. ("webMethods") pursuant to Section 5.15 of that certain Agreement and Plan of Merger by and among webMethods, CNT and certain other parties dated January 26, 2001. "Unassigned Item" has the meaning ascribed to it in Section 9.09. "Underlying Shares" has the meaning ascribed to it in Section 1.03(a). (b) Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; and (v) the phrases "ordinary course of business" and "ordinary course of business consistent with past practice" refer to the business and practice of Sellers in connection with the Business. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP. ARTICLE XI TERMINATION 11.01 Termination. This Agreement may be terminated: (a) by mutual written consent of Parent and Purchasers and Seller; (b) by Parent and Purchasers, if the conditions set forth in Article V shall not have been complied with or performed and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by Sellers on or before August 31, 2001, provided that Parent and Purchasers are not in material default under this Agreement; or (c) by Sellers, if the conditions set forth in Article VI shall not have been complied with or performed and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by Parent and Purchasers on or before August 31, 2001, provided that Seller is not in material default under this Agreement; or 47 (d) by either Parent and Purchasers or Sellers in the event that Closing has not occurred on or before August 31, 2001. 11.02 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 11.01, this Agreement shall forthwith become void and there shall be no continuing obligation on the part of any party hereto or any of its affiliates, directors, officers or shareholders except the provisions of Sections 9.10, 12.04 and 12.05 shall survive. Notwithstanding the foregoing, nothing contained herein shall relieve any party from liability for any breach hereof. ARTICLE XII MISCELLANEOUS 12.01 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Parent or Purchasers, to: Jacada Ltd. 400 Perimeter Center Terrace Suite 195 Atlanta, Georgia 30346 Facsimile No.: (770) 352-1313 Attn: Chief Financial Officer with copies to: Jacada Ltd. 400 Perimeter Center Terrace Suite 195 Atlanta, Georgia 30346 Facsimile No.: (770) 352-1313 Attn: General Counsel Smith, Gambrell & Russell 1230 Peachtree Street, N.E. Suite 3100 Atlanta, Georgia 30309-3592 Facsimile No.: (404) 685-6932 Attn: Arthur Jay Schwartz, Esq. If to Sellers, to: 48 Computer Network Technology Corporation 6000 Nathan Lane North Plymouth, Minnesota 55442 Facsimile No.: (763) 268-6810 Attn: Chief Financial Officer with a copy to: Leonard, Street and Deinard, P.A. Suite 2300 1500 South Fifth Street Minneapolis, Minnesota 55402 Facsimile No.: (612) 335-7076 Attn: Morris M. Sherman All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (b) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (c) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. 12.02 Bulk Sales Act. The parties hereby waive compliance with the bulk sales act or comparable statutory provisions of each applicable jurisdiction. 12.03 Entire Agreement. This Agreement and the Operative Agreements supersede all prior discussions and agreements between the parties with respect to the subject matter hereof and thereof between the parties, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof and thereof. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT OR THE OPERATIVE AGREEMENTS, NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE OPERATIVE AGREEMENTS. 12.04 Expenses. Except as provided in the following sentence and except as otherwise expressly provided in this Agreement, whether or not the transactions contemplated hereby are consummated, each party (Sellers collectively, and Purchasers and Parent collectively, each being one party for purposes of this Section 12.04) will pay its own costs and expenses (including without limitation all broker's or finder's fees) incurred in connection with the negotiation, execution and closing of this Agreement and the Operative Agreements and the transactions contemplated hereby and thereby. Notwithstanding the foregoing, in the event that Closing occurs, Jacada-US will reimburse Sellers for the Severance Reimbursement Obligation in accordance with Section 9.06(e) and will pay CNT's auditors for the Carve-Out Financial 49 Statements in accordance with Section 9.13. Parent and Purchasers shall reimburse Employees and CNT (without duplication) for all out-of-pocket travel and lodging expenses incurred in accordance with CNT's travel policies which are associated with job interviews by Employees with Parent and Purchasers. The foregoing sentence shall survive termination of this Agreement. 12.05 Confidentiality. In connection with the negotiation of this Agreement, a party (Sellers collectively, and Purchasers and Parent collectively, each being one party for purposes of this Section 12.05) hereto (the "Disclosing Party") may disclose Confidential Information to one of the other parties hereto (the "Disclosee"). Each party agrees that if the transactions contemplated herein are not consummated, it will return to the Disclosing Party all documents and other written information furnished to it. Each party further agrees not to use, except for purposes of accomplishing the transactions contemplated herein, and not to disclose or reveal to any other Person (except in connection with financing transactions or mergers and acquisitions where the recipient has executed a confidentiality agreement) any of the Disclosing Party's Confidential Information (other than to such party's Affiliates and Representatives who have a need to know such information in connection with the transactions contemplated herein and who have been instructed to treat such as confidential); provided, however, that the foregoing obligations shall not apply to (a) any information which was known by the Disclosee prior to its disclosure by or on behalf of the Disclosing Party; (b) any information which was in the public domain prior to the disclosure thereof; (c) any information which comes into the public domain through no fault of the Disclosee; or (d) any information which is required to be disclosed by an Order or by any Law. The Disclosee shall bear the burden of demonstrating the applicability of one or more of the foregoing exceptions. For purposes of this Agreement, "Confidential Information" shall mean, with respect to any Person, any and all technical, business, and other information of such Person which derives value, actual or potential, economic or otherwise, from not being generally known to the public or to other Persons, including, without limitation, technical or nontechnical data, compositions, devices, methods, techniques, drawings, inventions, processes, financial data, financial plans, product plans, lists of actual or potential customers or suppliers, information regarding the acquisition and investment plans and strategies, business plans or operations of the Person or its Affiliates. Confidential Information of a Person includes information of third parties that such Person is obligated to keep or treat as confidential. The provisions of this Section 12.05 shall survive any termination of this Agreement for any reason and shall continue indefinitely; provided, however, that the restrictions contained in this Section 12.05 shall terminate with respect to any Confidential Information that does not constitute a trade secret under applicable Law after the third anniversary of the date hereof. 12.06 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 12.07 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. 50 12.08 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person under United States or English law (including the Contracts (Rights of Third parties) Act) other than any Person entitled to indemnity under Article IX. 12.09 No Assignment; Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, except (a) for assignments and transfers by operation of Law and (b) that either Purchaser may assign any or all of its rights, interests and obligations hereunder (including without limitation its rights under Article XI) to (i) a wholly-owned subsidiary, provided that any such subsidiary agrees in writing to be bound by all of the terms, conditions and provisions contained herein or (ii) any post-Closing purchaser of the Business or a substantial part of the Assets but no such assignment shall relieve Purchasers of their obligations hereunder. Sellers may assign their rights hereunder to any Affiliate or to any Person that acquires all or substantially all of the remaining business of Sellers. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 12.10 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 12.11 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 12.12 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Georgia applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 12.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Signatures delivered as facsimiles shall be binding to the same extent as original signatures. 51 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party as of the date first above written. JACADA LTD. By: /s/ Robert C. Aldworth --------------------------------------------- Name: Robert C. Aldworth -------------------------------------- Title: CFO -------------------------------------- JACADA, INC. By: /s/ Robert C. Aldworth --------------------------------------------- Name: Robert C. Aldworth -------------------------------------- Title: CFO -------------------------------------- JACADA (EUROPE), LIMITED By: /s/ Robert C. Aldworth --------------------------------------------- Name: Robert C. Aldworth -------------------------------------- Title: Director -------------------------------------- COMPUTER NETWORK TECHNOLOGY CORPORATION By: /s/ Greg Barnum --------------------------------------------- Name: Greg Barnum -------------------------------------- Title: Chief Financial Officer -------------------------------------- PROPELIS SOFTWARE, INC., f/k/a/ REALLEGACY.COM. INC. AND CNT ACQUISITION I CORPORATION By: /s/ Greg Barnum ---------------------------------------------- Name: Greg Barnum -------------------------------------- Title: Chief Financial Officer -------------------------------------- 52 CNT INTERNATIONAL LTD. By: /s/ Greg Barnum ---------------------------------------------- Name: Greg Barnum --------------------------------------- Title: Director --------------------------------------- 53 EX-4.11 4 g75399ex4-11.txt FIRST AMENDMENT TO ASSET PURCHASE AGMT EXHIBIT 4.11 FIRST AMENDMENT to ASSET PURCHASE AGREEMENT dated as of August 19, 2001 by and among JACADA LTD., JACADA, INC., JACADA (EUROPE), LIMITED, PROPELIS SOFTWARE, INC., COMPUTER NETWORK TECHNOLOGY CORPORATION AND CNT INTERNATIONAL LTD. FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT is entered into as of this 23rd day of August, 2001, by and among (i) JACADA LTD., an Israeli corporation ("Parent"), (ii) the following direct wholly-owned subsidiaries of Parent: JACADA, INC., a Delaware corporation ("Jacada-US"), and JACADA (EUROPE), LIMITED, a company organized under the laws of England ("Jacada-UK") (Jacada-US and Jacada-UK are collectively referred to herein as the "Purchasers"), (iii) Computer Network Technology Corporation, a Minnesota corporation ("CNT"), and (iv) the following direct wholly-owned subsidiaries of CNT: Propelis Software, Inc., a Minnesota corporation (f/k/a RealLegacy.com, Inc. and CNT Acquisition I Corporation) ("Propelis"), and CNT International Ltd., a company organized under the laws of England and Wales ("CNTUK"), (CNT, Propelis, and CNTUK are collectively referred to herein as the "Sellers"). RECITALS: WHEREAS, Parent, Purchasers and Sellers (collectively the "Parties") entered into an Asset Purchase Agreement dated as of August 19, 2001 (the "Asset Purchase Agreement"); and WHEREAS, the Parties desire to amend the Asset Purchase Agreement as set forth in this First Amendment to Asset Purchase Agreement ("First Amendment"). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in the Asset Purchase Agreement and this First Amendment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. A new Section 9.15 shall be added to the Asset Purchase Agreement as follows: 9.15 Value Added Tax. The Parties intend that the Business in the United Kingdom shall be transferred to Jacada-UK as a going concern with effect from Closing and that the provisions of Article 5 of the Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268) shall apply to such transfer and the sale and purchase of the Assets in the United Kingdom and each party shall use its reasonable efforts to procure that the sale of the Business in the United Kingdom is treated as neither a supply of goods nor a supply of services under such Article 5 of the Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268). (a) CNTUK and Jacada-UK shall within 30 days of Closing give notice of such transfer to the appropriate office of H.M. Commissioners of Customs and Excise in accordance with such regulations and requirements as may be applicable. (b) Jacada-UK undertakes to Sellers that: (i) after Closing, the Business in the United Kingdom will be carried on by it as a going concern and the Assets will be used by it in carrying on the Business or a business of the same kind; and (ii) Jacada-UK is already or will as a result of such transfer of the Business immediately on Closing become a taxable person (as defined in Section 3 of the Value Added Tax Act 1994). (c) The Parties acknowledge that the Purchase Price is exclusive of value added tax ("VAT") and in the event that H.M. Commissioners of Customs and Excise determine that any VAT is payable on the sale of the Business or the Assets, following receipt of a valid VAT invoice, Jacada-UK shall pay to the Sellers an amount equal to the VAT payable either five Business Days prior to the date on which the Sellers are due to account for the same to H.M. Commissioners of Customs and Excise or, if later, five calendar days following the receipt of the tax invoice. (d) Within a reasonable amount of time after Closing, CNTUK shall make an application to H.M. Commissioners of Customs and Excise requesting that any VAT records relating to the Business and Assets in the United Kingdom be retained by CNTUK and requesting that section 49 (1)(b) VATA 1994 not apply. In the event that CNTUK's application is accepted by H.M. Commissioners of Customs and Excise, CNTUK shall allow Jacada-UK or its appointed agents to have reasonable access to such records and CNTUK shall retain such records for 6 years following the Closing Date. In the event that CNTUK application is not accepted by H.M. Commissioners of Customs and Excise, CNTUK shall transfer all VAT records relating to the Business and Assets of the United Kingdom to Jacada-UK and Jacada-UK shall retain such records for 6 years from the date of transfer and shall allow CNTUK or its appointed agents reasonable access to such records. 2. The definition of Taxes pursuant to Section 10.01(a) of the Asset Purchase Agreement shall be replaced in its entirety with the following: "Taxes" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp (except for stamp duty payable on this Agreement or the transfer of the Business and/or Assets of the United Kingdom pursuant to this Agreement), occupation, premium, windfall profits, environmental (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. 3. All other provisions of the Asset Purchase Agreement shall remain unchanged and in effect. [SIGNATURES APPEAR ON FOLLOWING PAGE] IN WITNESS WHEREOF, this First Amendment has been duly executed and delivered by the duly authorized officer of each party as of the date first above written. JACADA LTD. By: /s/ Robert C. Aldworth ------------------------------------- Name: Robert C. Aldworth ----------------------------------- Title: CFO ---------------------------------- JACADA, INC. By: /s/ Robert C. Aldworth ------------------------------------- Name: Robert C. Aldworth ----------------------------------- Title: CFO ---------------------------------- JACADA (EUROPE), LIMITED By: /s/ Robert C. Aldworth ------------------------------------- Name: Robert C. Aldworth ----------------------------------- Title: Director ---------------------------------- COMPUTER NETWORK TECHNOLOGY CORPORATION By: /s/ Gregory T. Barnum ------------------------------------- Name: Gregory T. Barnum ----------------------------------- Title: Chief Financial Officer ---------------------------------- PROPELIS SOFTWARE, INC., f/k/a/ REALLEGACY.COM. INC. AND CNT ACQUISITION I CORPORATION By: /s/ Gregory T. Barnum ------------------------------------- Name: Gregory T. Barnum ----------------------------------- Title: Chief Financial Officer ---------------------------------- CNT INTERNATIONAL LTD. By: /s/ Gregory T. Barnum ------------------------------------- Name: Gregory T. Barnum ----------------------------------- Title: Director ---------------------------------- EX-10.1 5 g75399ex10-1.txt CONSENT OF KOST, FORER & GABBAY EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Registration Statement on Form S-8 (Registration No. 333-34420 and 333-73650), pertaining to the Jacada Ltd. 1999 Share Option and Incentive Plan, the Jacada Ltd. 1996 Share Option Plan and to the Jacada Ltd. 1994 Stock Option Plan, of our report, dated January 29, 2002 with respect to the consolidated financial statements of Jacada Ltd. included in its Annual Report (Form 20-F) for the year ended December 31,2001. Tel Aviv ,Israel April 8, 2002 /s/ KOST, FORER AND GABBAY A MEMBER OF ERNST & YOUNG INTERNATIONAL -----END PRIVACY-ENHANCED MESSAGE-----