UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 or
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 000-1021604
 
RETALIX LTD.
(Exact name of registrant as specified in its charter)
 
Israel
(Jurisdiction of incorporation or organization)
 
10 ZARHIN STREET, RA’ANANA 43000, ISRAEL
(Address of principal executive offices)
 
Hugo Goldman, CFO
Tel: + 972 -9-776-6631;  E-mail: hugo.goldman@retalix.com
10 Zarhin Street, Ra’anana 43000, Israel
(Name, telephone, email and/or facsimile number and address of company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Ordinary Shares, par value NIS 1.0 per share
Name of each exchange on which registered
 
NASDAQ Global Select Market
 
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:   None
 
_____________________
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 24,485,946 Ordinary Shares, nominal value NIS 1.00 per share.
 
 
 

 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
o  Yes     No x
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  
 
o  Yes     No x
 
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     o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
x  Yes     o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large Accelerated Filer o      Accelerated Filer x      Non-Accelerated Filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x      International Financial Reporting Standards   o      Other o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:  
 
Item 17 o     Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company:  
 
o  Yes     No x
 
 
 
2

 
 
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3

 
 

 
PART I
 
         Unless the context otherwise requires, all references in this annual report to “Retalix,” “us,” “we,” and “our” refer to Retalix Ltd. and its consolidated subsidiaries. The information contained in this annual report, including, without limitation, the description of our products is correct as of the date hereof; names and features relating to our products are subject to change from time to time.
 
         Our consolidated financial statements are prepared in United States dollars and in accordance with generally accepted accounting principles in the United States. All references to “dollars” or “$” in this annual report are to United States dollars, and all references to “Shekels” or “NIS” are to New Israeli Shekels. On March 20, 2012, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.749 to $1.00.
 
         Statements in this annual report concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and other U.S. Federal securities laws. We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” and similar expressions are intended to identify forward-looking-statements. Forward-looking statements address matters that are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those in these statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Item 3.D. – “Key Information – Risk Factors”, Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects”, as well as elsewhere in this annual report and in our other filings with the Securities and Exchange Commission, or SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.
 
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 selected consolidated statement of income (loss) data set forth below with respect to the years ended December 31, 2007, 2008, 2009, 2010 and 2011 and the selected consolidated balance sheet data set forth below as of December 31, 2007, 2008, 2009, 2010 and 2011 have been derived from our consolidated financial statements that were audited by Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited. The selected consolidated financial data set forth below should be read in conjunction with “Item 5 – Operating and Financial Review and Prospects” and our consolidated financial statements and notes to those statements for the years 2009, 2010 and 2011 included elsewhere in this annual report. Historical results are not necessarily indicative of the results to be expected in the future.
 
4

 
 
   
Year ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(in thousands, except share and per share data)
 
                               
Consolidated statement of income data
                             
Revenues:
 
   Product sales
 
$
80,511
   
$
72,907
   
$
58,145
   
$
     58,000
   
$
50,933
 
   Services
   
140,900
     
148,720
     
134,248
     
149,374
     
185,107
 
   Total revenues
   
221,411
     
221,627
     
192,393
     
207,374
     
236,040
 
Cost of revenues:
 
   Cost of product sales
   
39,132
     
45,201
     
39,560
     
34,974
     
31,997
 
   Cost of services
   
65,281
     
88,078
     
74,564
     
88,526
     
106,725
 
   Total cost of revenues
   
104,413
     
133,279
     
114,124
     
123,500
     
138,722
 
Gross profit
   
116,998
     
88,348
     
78,269
     
83,874
     
97,318
 
Operating expenses:
       
   Research and development expenses-net
   
58,653
     
38,357
     
28,991
     
29,657
     
32,026
 
   Selling and marketing expenses
   
31,617
     
23,623
     
18,776
     
17,338
     
26,221
 
   General and administrative expenses
   
27,539
     
26,677
     
21,007
     
24,635
     
26,639
 
   Other (income) expenses-net
   
643
     
(376
   
(154
)
   
(181)
     
(761)
 
Indirect private placement costs
   
-
     
-
     
1,823
     
-
     
-
 
   Impairment of goodwill
   
-
     
58,182
     
-
     
-
     
-
 
   Total operating expenses
   
118,452
     
146,463
     
70,443
     
71,449
     
84,125
 
Income (loss) from operations
   
(1,454
   
(58,115
)
   
7,826
     
12,425
     
13,193
 
Financial income (expenses)-net
   
1,032
     
(1,978
   
1,757
     
3,509
     
1,828
 
Income (loss) before taxes on income
   
(422
   
(60,093
)
   
9,583
     
15,934
     
15,021
 
Tax benefit (taxes on income)
   
435
     
8,960
     
(3,494
)
   
(4,667)
     
(495)
 
Share in income (losses) of an associated company
   
(3
)
   
54
     
17
     
25
     
38
 
Net income (loss)
   
(10
)
   
(51,079
)
   
6,106
     
11,292
     
14,564
 
Minority interests in losses (gains) of subsidiaries
   
(508
)
   
(537
)
   
(310
)
   
(505)
     
(874)
 
Net income (loss) attributed to Retalix Ltd.
 
$
(498
)
 
$
(51,616
)
 
$
5,796
   
$
10,787
   
$
13,690
 
   
Earnings (losses) per share:
       
                                         
Basic
 
$
(0.02
)
 
$
(2.55
)
 
$
0.28
   
$
0.45
   
$
0.56
 
   
   Diluted
 
$
(0.02
)
 
$
(2.55
)
 
$
0.28
   
$
0.44
   
$
0.55
 
   
Weighted average number of shares used in computation:
 
   Basic
   
19,851
     
20,265
     
20,824
     
24,102
     
24,230
 
   Diluted
   
19,851
     
20,265
     
21,020
     
24,515
     
24,717
 
 
 
5

 
 
 
Year ended December 31,
 
   
2007
 
2008
 
2009
 
2010
 
2011
 
 
(U.S. $ in thousands)
 
                     
Consolidated balance sheet data
                   
Cash, Cash equivalents, Deposits and Marketable Securities
  $ 27,596     $ 37,647     $ 104,583     $ 134,572     $ 135,682  
Working capital
    71,611       83,305       128,910       150,330       146,758  
Total assets
    288,590       240,792       285,009       304,692       332,080  
Total debt
    1,055       772       708       267       -  
Shareholders' equity
    218,518       175,722       215,944       231,076       249,304  
Capital stock
    172,025       180,815       214,927       218,804       224,179  
 
B. Capitalization and Indebtedness
 
Not applicable.
 
C. Reasons for Offer and Use of Proceeds
 
Not applicable.
 
D. Risk Factors
 
The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information. You should carefully consider the risks described below and elsewhere in this annual report before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
 
Risks Related To Our Business
 
The markets in which we sell our products and services are competitive, and increased competition and industry consolidation could cause us to lose market share, reduce our revenues, and adversely affect our operating results.
 
        The market for retail and distribution food and fuel information systems is highly competitive and is subject to continuous price pressure. A number of companies offer competitive products that address our target markets. In addition, we believe that new market entrants may attempt to develop and acquire retail and distribution food and fuel information systems, and we are likely to compete with new companies in the future. With respect to our Software-as-a-Service, or SaaS, initiatives, in particular, the barriers are relatively low and competition from other established and emerging companies may develop in the future. Some of our existing or potential competitors have greater financial, technical and marketing resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. We also expect to encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by these competitors. As a result, competitive pressures could cause us to lose market share and require us to reduce our prices and profit margins. This could cause a decline in our revenues and adversely affect our operating results.
 
 
6

 
 
Macroeconomic conditions and economic volatility could materially adversely affect the retail food industry, our primary target market.  If adverse macroeconomic conditions continue or worsen, our revenues and results of operations could be adversely affected.

Our future growth is critically dependent on increased sales to customers in the retail food industry. We derive the substantial majority of our revenues from the sale of software products and the provision of related services to the retail food industry worldwide, including retailers such as general merchants, supermarkets, convenience stores, fuel chains and restaurants as well as wholesalers and suppliers in this industry. The success of our customers is directly linked to economic conditions in the retail food industry, which in turn are subject to intense competitive pressures, are affected by overall macroeconomic conditions and face shoppers that are increasingly looking for value.  During previous economic downturns, the retail food industry experienced significant financial pressures that caused many in the industry to cut expenses and limit investment in projects.  This resulted in pricing pressures and more conservative purchasing decisions by customers, including a tendency toward lower-priced products and lower volume of purchases, and a curtailment of capital investment by many of our existing and potential customers, which continued to adversely affect to a certain extent our revenues and results of operations, mainly in the U.S. and Europe.

While we have experienced moderate growth in revenues and earnings and stronger demand in recent quarters, certain markets such as parts of Europe continue to experience weakened or uncertain economic conditions, including the more recent difficulties in the credit markets in the euro zone, and some of our customers, suppliers and partners may continue to be negatively impacted by the global credit markets slowdown. Market conditions may continue to be depressed or may be subject to further deterioration, which could lead to a further reduction in consumer and customer spending overall, and a reduction in our new customer engagements and the size of initial spending commitments under those engagements.  This could have an adverse impact on sales of our products and services, as well as increase the credit risk relating to our customers.  In addition, a slowdown in buying decisions may extend our sales cycle period and may limit our ability to forecast our flow of new contracts. If such adverse business conditions arise in the future, our business may be harmed.
 
        If we fail to manage changes in personnel effectively, our business could be disrupted, which could harm our operating results.
        
In the past, there were periods in which we experienced rapid growth in the number of our employees, the size and locations of our physical facilities and the scope of our operations. Any failure to manage growth effectively could disrupt our business and harm operating results. Although in 2008 and most of 2009 we reduced the size of our workforce in response to the prevailing adverse economic conditions, we resumed hiring in the fourth quarter of 2009 and continued to do so throughout 2010 and 2011, and may experience additional growth in the future. Reductions or increases in personnel also entail risks of business disruption and potential adverse effects on our sales and marketing efforts, customer service and research and development activities.  These adverse effects could harm our operating results.
 
If we fail to successfully introduce new or enhanced products to the market, our business and operating results may suffer.
 
        If we are unable to successfully identify, develop or otherwise obtain new products, new features and new services to adequately meet the dynamic needs of our customers, our business and operating results will suffer. The application software market is characterized by:
 
 
·
technological advances in hardware and software development;
 
·
evolving standards in computer hardware, software technology and communications infrastructure;
 
·
dynamic customer needs; and
 
·
new product introductions and enhancements.

For example, in January 2011 we introduced the Retalix 10 Store Suite and since it is a new product, some of its future capabilities are in varying stages of development. While a few of our customers have chosen the current Retalix 10 Store Suite as the solution they  implement, there can be no assurance that the full future capabilities of the suite development will be completed successfully, or that many customers will purchase the new Retalix 10 Store Suite.  If the Retalix 10 Store Suite does not perform as expected for any reason, is not introduced in a timely manner, or otherwise does not adequately meet the needs of our customers, our revenues and business results may be adversely affected.
 
 
7

 
 
Insufficient or slower than anticipated demand for our SaaS and Cloud services could adversely affect our revenue growth.

We have incurred expenses in connection with the development of our SaaS initiatives, including the acquisition of MTXEPS, LLC, or MTXEPS. During January 2012 we further announced that our Retalix 10 suite is cloud ready. If significant demand fails to develop or develops more slowly than we anticipate, we may be unable to recover the expenses we have incurred in the development of these initiatives. Any delay in or failure of the development of significant demand for our SaaS and cloud services could cause our new business initiatives to fail. Even if significant demand does develop for our SaaS and cloud services, the growth of our SaaS and cloud services may erode parts of existing software sales revenue. Any of these factors could adversely affect our revenue growth.  

Security breaches and system failures could expose us to liability, harm our business and result in the loss of customers.
 
We retain sensitive data, including intellectual property, books of record and personally identifiable information, on our networks. It is critical to our business strategy that our infrastructure and other infrastructure we use to host our solutions remain secure, do not suffer system failures and are perceived by customers and partners to be secure and reliable. Despite our security measures, our infrastructure and third party infrastructure we use to host our solutions may be vulnerable to attacks by hackers or other disruptive problems.  In particular, our SaaS infrastructure could be vulnerable to security breaches, computer viruses or similar disruptive problems. Our SaaS data centers provide access to and distribution of some of our enterprise software solutions, including our hosted payments management solutions, to our customers. Providing unimpeded access to our SaaS servers is critical to servicing our SaaS customers and providing superior customer service to them. These systems are also subject to telecommunications failures, power loss and various other system failures. Any of these occurrences, whether intentional or accidental, could lead to interruptions, delays or cessation of operation of our SaaS data centers. Any such security breach or system failure may compromise information stored on our networks. Such an occurrence could negatively affect our reputation as a trusted provider of solutions and hosting such solutions by adversely affecting the market’s perception of the security or reliability of our products or services, and with respect to the SaaS application, could cause some of our customers to discontinue subscribing to our SaaS applications.
 
 
8

 
 
Sales to large customers represent a significant portion of our revenues, and a significant reduction in sales or services to these customers could significantly reduce our revenues.
 
Retalix is a leading global provider of innovative software and services to high volume, high complexity retailers, including general merchants, supermarkets, convenience stores, fuel stations, drugstores and department stores. Sales to such retailers and distributors are typically large in size and represent a significant portion of our revenues. A significant reduction in sales and services to any of our large customers could significantly reduce our revenues. This already occurred in the past and it could happen again in the future.  We anticipate that sales and services to large customers in any given reporting period will continue to contribute materially to our revenues in the foreseeable future.

The long sales cycle for certain of our products and services could cause revenues and operating results to vary from quarter to quarter, which could cause volatility in our stock price.
 
We could incur substantial sales and marketing and research and development expenses while customers are evaluating our products and before they place an order with us, if they ever make a purchase at all. Purchases of our solutions are often part of larger information technology infrastructure initiatives on the part of our customers. As a result, these customers typically expend significant effort in evaluating, testing and qualifying our software products. This evaluation process is frequently lengthy and can range from three months to one year or more. We have found that this process is even longer during periods of economic uncertainty, or when we introduce a new product or service, as in the case of the Retalix 10 Store Suite applications that we launched in January 2011.  Even after the evaluation process, a potential customer may not purchase our products. In addition, the time required to implement our products can vary significantly with the needs of our customers and generally lasts for several months or more. The implementation process is also subject to delay.  We cannot control these delays. As a result, we cannot predict the length of these sales cycles and we cannot control the timing of our sales revenue, and therefore our quarterly operating results have varied in the past and may vary in the future. Long sales cycles also subject us to risks not usually encountered by companies whose products have short sales cycles. These factors include:

 
·
the potential cancellation of orders based on customers’ changing budgetary constraints and changing economic conditions;
 
 
·
the shift in orders expected in one quarter to another quarter because of the timing of customers’ procurement decisions;
 
 
·
the unpredictability of internal acceptance reviews;
 
 
·
the size, timing, terms and fluctuations of customer orders and rollout schedules;
 
 
·
the long sales cycle associated with certain of our software products;
 
 
·
the deferral of customer orders in anticipation of new software products or services from us or our competitors;
 
 
·
general economic conditions;
 
 
·
changes in pricing by us or our competitors;
 
 
·
fluctuations in currency exchange rates, and especially the strengthening of the NIS and the Australian Dollar as well as the devaluation of the US Dollar, the Euro and the British Pound;
 
 
9

 
 
 
·
the uncertainty regarding the adoption of our current and future product and service offerings, including such products as our Retalix 10 Store Suite applications;
 
 
·
technical difficulties with respect to the use of software solutions and services developed by us;
 
 
·
seasonality in customer purchasing and deployment patterns; and
 
 
·
reduced service orders due to reduced product revenues.
 
These factors could cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could cause volatility in our stock price.
 
Our gross margins may vary significantly or decline, adversely affecting our operating results.

Because the gross margins on product revenues from license sales are significantly greater than the gross margins on product revenues from hardware sales and on services revenues, our combined gross margin has fluctuated from quarter to quarter, and it may continue to fluctuate significantly based on our revenue mix between product revenues and services revenues. In addition, since our product revenues are typically comprised of both software license and hardware elements and since the gross margins on license revenues are significantly higher than the gross margins on hardware revenues, our combined gross margin on products revenues in any particular quarter will also depend on our revenue mix between license and hardware revenues. Our operating results in any given quarter may be adversely affected to the extent our gross margins decline due to our generating in that quarter a greater percentage than average of services revenues or a greater percentage than average of hardware revenues. In addition, fixed price contracts for services we provide may expose us to additional risk if the actual costs in connection with such contracts are higher than expected, and therefore reduce our gross margins.

We recorded losses in 2008 and may not be able to sustain profitability.

For the year ended December 31, 2008, we recorded a net loss of $51.6 million. Our 2008 results were adversely impacted by an impairment of goodwill amounting to $58.2 million. Before this impairment charge, we still would have had a net loss in 2008, were it not for a tax benefit.  Though we recorded net income for the years ended December 31, 2009, 2010 and 2011, we cannot assure you that we will not report losses in future periods.
 
Our business will suffer to the extent that we develop new versions of our products based on new software platforms and are not successful in detecting and fixing problems with such software and products, which could harm their ability to achieve market acceptance.
 
We may develop new versions of our products based on new platforms, such as the product versions based on the Microsoft .NET platform and the J2EE platform, which we developed a number of years ago. The risks of our commitment to new platforms include the following:

 
·
the possibility that prospective customers will refrain from purchasing the current versions of our products because they are waiting for new versions;
 
 
·
the possibility that our beta customers with products based on new platforms will not become favorable reference sites;
 
 
·
the possibility that new platforms will not be able to support the multiple sites and heavy data traffic of our largest customers;
 
 
·
the possibility that our development staff will not be able to learn how to efficiently and effectively develop products using new platforms; and
 
 
·
the possibility that we will not be able to transition our customer base to products based on new platforms when these are available.
 
 
10

 
 
There can be no assurances that our efforts to develop new products using new platforms will be successful. If the products we develop for new platforms do not achieve market acceptance, it likely will have a material adverse effect on our business, operating results and financial condition.
 
Our software products might not be compatible with all major hardware and software platforms, which could inhibit sales and harm our business.
 
Any changes to third-party hardware and software platforms and applications that our products work with could require us to modify our products and could cause us to delay releasing a product until the updated version of that hardware and software platform or application has been released. As a result, customers could delay purchases until they determine how our products will operate with these updated platforms or applications, which could inhibit sales of our products and harm our business. In addition, developing and maintaining consistent software product performance across various technology platforms could place a significant strain on our resources and software product release schedules, which could adversely affect our results of operations. We must continually evaluate new technologies and implement into our products advanced technology. For example, in recent years we have been developing new versions of our products based on the Microsoft .NET platform and the J2EE platform. We cannot assure you that these new versions will be successful. Moreover, if we fail in our product development efforts to accurately address in a timely manner evolving industry standards, new technology advancements or important third-party interfaces or product architectures, sales of our products and services will suffer.
 
We may have difficulty implementing our products, which could damage our reputation and our ability to generate new business.

Implementation of our software products can be a lengthy process across many different functional and geographic areas of the enterprise, and commitment of resources by our clients is subject to a number of significant risks over which we have little or no control. In particular, this risk applies to: products which are implemented at larger retailers who have multiple divisions requiring multiple implementation projects; products that require the execution of implementation procedures in multiple layers of software, and/or products which offer retailers more deployment options and other configuration choices; and/or customer projects that may involve third party integrators to change business processes concurrent with the implementation of our software. Delays in the implementation of any of our software products, whether by our business partners or us, may result in client dissatisfaction, disputes with our customers, or damage to our reputation or result in cancellation of large projects. Significant problems implementing our software therefore can cause, in addition, delays or prevent us from collecting fees for our software and can damage our ability to generate new business.
  
Our acquisition of businesses and our failure to successfully integrate these businesses could disrupt our business, dilute your holdings in us and harm our financial condition and operating results.
 
We have made, and intend to continue to make, strategic acquisitions of complementary companies, products or technologies.  For instance, in July 2011 we acquired MTXEPS, a provider of innovative, secure, end-to-end electronic payment software solutions for retailers, delivered via SaaS and in-store models. However, we cannot assure you that suitable acquisition candidates can be located, that acquisitions will be completed with favorable terms (including, for antitrust or other regulatory concerns), or that acquisitions we have made or will make in the future will indeed enhance our portfolio or strengthen our competitive position. Such acquisitions could disrupt our business. In addition, your holdings in our company would be diluted if we issue equity securities in connection with any acquisition, as we did in past acquisitions.  Acquisitions involve numerous risks, including:

 
·
problems in integration of acquired operations, technologies or products and personnel;
 
 
11

 
 
 
·
unanticipated or unidentified costs or liabilities, whether or not a proposed acquisition is consummated;
 
 
·
diversion of management's attention;
 
 
·
adverse effects on existing business relationships with suppliers and customers, which could lead to bad debts;
 
 
·
risks associated with entering markets in which we have no or limited prior experience;
 
 
·
potential loss of key employees, particularly those of the acquired organizations; and
 
 
·
potential future write-offs of goodwill recorded as a result of the acquisitions.
 
Further, products that we acquire from third parties often require significant expenditures of time and resources to upgrade and integrate with our existing product suite. We may not be able to successfully integrate any business, technologies or personnel that we have acquired or that we might acquire in the future, and this could harm our financial condition and operating results.
  
If we fail to adhere to regulations and security standards imposed by credit card networks, or if our products are not certified or otherwise fail to comply with such regulations and security standards applicable to software and service providers, who provide software and services to retailers (such as payment card industry standards, etc.), our results of operations could be adversely affected.

Our software products are designed to collect, store, and route certain personally identifiable information from the clients of our customers, as well as processing such clients’ payments using payment information.  In addition, we may store such information on our servers, in the case of our SaaS and cloud based products and services.

We are required by our customers to meet industry standards imposed by payment systems standards setting organizations such as EMVCo LLC, credit card associations such as Visa, MasterCard, and other credit card associations and standard setting organizations such as PCI SSC, Intermec and the U.K. Cards Association and other local organizations. Furthermore, many of our offerings are subject to the Payment Card Industry Data Security Standards (PCI DSS), which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card industry entities. Even though we attempt to protect our company through our contracts with our customers and other third-party service providers and in certain cases assess their security controls, we still have limited oversight or control over their actions and practice.

New standards are continually being adopted or proposed as a result of worldwide anti-fraud initiatives, encryption of cardholder data, the increasing need for system compatibility and technology developments such as wireless and wireline IP communication. We cannot be sure that we will be able to design our solutions to comply with future standards or regulations on a timely basis, if at all. Compliance with these standards could increase the cost of developing or producing our products, while non- compliance may harm our reputation or result in customer claims. New products designed to meet any new standards need to be introduced to the market and ordinarily need to be certified by the credit card associations and our customers before being purchased. The certification process is costly and time consuming and increases the amount of time it takes to sell our products.  Selling products that are non-compliant may result in fines against us or our customers, which we may be liable to pay.

In addition, even if our products are designed to be compliant, compliance with certain security standards is determined based on our customer’s or service provider's network environment in which our software is installed and, therefore, is dependent upon a number of additional factors such as proper installation of the components of the environment including our systems, compliance of software and system components provided by other vendors, implementation of compliant security processes and business practices and adherence to such processes and practices.
 
 
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Our business and financial condition could be adversely affected if we do not comply with new or existing industry standards and regulations, or obtain or retain necessary regulatory approval or certifications in a timely fashion, or if compliance results in increasing the cost of our products.

Some of our products contain “open source” software, and any failure to comply with the terms of one or more associated open source licenses could negatively affect our business.
 
Some of our products are distributed with software licensed by its authors or other third parties under so-called “open source” licenses, including, for example, the Mozilla Public License, the BSD License and the Apache License. Some of those licenses may require as a condition of the license that we make available source code for modifications or derivative works we create based upon, incorporating, or using such open source software, that we provide various notices with our products, and/or that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. The terms of some open source licenses have not been interpreted by any U.S. court or, to our knowledge, any other court, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to market our products. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of those open source licenses, we could be required to incur legal expenses in defending against such allegations, and if our defenses were not successful, we could be enjoined from distribution of the products that contained the open source software and/or required to either make the source code for the open source software available, to grant third parties certain rights of further use of our software, or to remove the open source software from our products, which could disrupt our distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software, which could limit or eliminate our ability to commercialize such software. If an author or other third party that distributes open source software were to obtain a judgment against us based on allegations that we had not complied with the terms of any such open source licenses, we could also be subject to liability for copyright infringement damages and breach of contract for our past distribution of such open source software. Although we take reasonable steps to ensure that our programmers do not include open source software in products and technologies we intend to keep proprietary, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into products and technologies we intend to keep proprietary.  
 
We could be exposed to possible liability for supplying inaccurate information to our B2B and SaaS customers, which could result in significant costs, damage our reputation and decreased demand for our products.
 
The information provided in our B2B and SaaS applications could contain inaccuracies. Dissatisfaction of the providers of this information or our customers with inaccuracies could materially adversely affect our ability to attract suppliers and new customers and retain existing customers. In addition, we may face potential liability for inaccurate information under a variety of legal theories, including defamation, negligence, copyright or trademark infringement and other legal theories based upon the nature, publication or distribution of this information. Claims of this kind could divert management time and attention and could result in significant cost to investigate and defend, regardless of the merits of any of these claims. The filing of any claims of this kind may also damage our reputation and decrease demand for our products.
 
Errors or defects in our software products could diminish demand for our products, harm our reputation and reduce our operating results.
 
Our software products are complex and may contain design defects, software errors, or security problems that could be detected at any point in the life of the product. We cannot assure you that software errors, design defects, or security problems will not be found in new products or releases after they have been implemented and used over time with different computer systems and in a variety of applications and environments. This could result in diminished demand for our products, delays in market acceptance and sales, diversion of development resources, harm to our reputation or increased service and warranty costs. In addition, if software errors or design defects in our products cause damage to our customers’ data, we could be subject to liability based on product liability claims. Our agreements with customers that attempt to limit our exposure to product liability claims may not be enforceable in jurisdictions where we operate. Our insurance policies may not provide sufficient protection should a claim be asserted against us. If any of these risks were to occur, our operating results could be adversely affected.
 
 
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Errors or defects in other vendors’ products with which our products are integrated could adversely affect the market acceptance of our products and expose us to product liability claims from our customers.
 
Because our products are generally used in systems with other vendors’ products, our products must integrate successfully with these existing systems. As a result, when problems occur in a system, it may be difficult to identify the product that caused the problem. System errors, whether caused by our products or those of another vendor, could adversely affect the market acceptance of our products, and any necessary revisions could cause us to incur significant expenses. Regardless of the source of these errors or defects, we will need to divert the attention of engineering personnel from our product development efforts to address errors or defects detected. These errors or defects could cause us to incur warranty or repair costs, liability claims or lags or delays. Moreover, the occurrence of errors or defects, whether caused by our products or the products of another vendor, may significantly harm our relations with customers, or result in the loss of customers, harm our reputation and impair market acceptance of our products.
 
We are dependent on key personnel to manage our business, the loss of whom could negatively affect our business.
 
Our future success depends upon the continued services of our executive officers, and other key sales, marketing, research and development and support personnel. We do not have “key person” life insurance policies covering any of our employees. Any loss of the services of our executive officers or other key personnel could adversely affect our business.

If we are unable to attract, assimilate or retain qualified personnel, our ability to develop, sell and market our products could be adversely impacted.
 
As our portfolio of products is comprised of complex software products designed to address our customers’ critical business functions, the success of our business and our business operations depends on our ability to attract, train, relocate, motivate and retain highly qualified engineers, software programmers and sales and marketing personnel, as well as other highly qualified personnel, on a global basis. Competition for highly-skilled engineers, IT professionals and sales and marketing personnel is intense in our industry, and we may not be successful in attracting, assimilating or retaining qualified engineers, IT professionals and sales and marketing personnel to fulfill our current or future needs. This could adversely impact our ability to develop, sell and market our products and services, and our ability to meet the needs of our customers. Moreover, if we are successful in winning several new customers or several new large-scale projects in a short period of time, we may be required to rapidly attract and retain additional highly qualified IT professionals. Failure to rapidly attract such appropriate personnel may result in increased retention costs and create difficulties in managing our operations and meeting our commitments to our customers and compete successfully on new business.
 
 
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Antitrust scrutiny of B2B initiatives may adversely affect our business.
 
The establishment and operation of B2B initiatives may raise issues under various countries’ antitrust laws. To the extent that antitrust regulators take adverse action with respect to business-to-business e-commerce exchanges or establish rules or regulations governing these exchanges, or that there is a perception that regulators may do any of the foregoing, the establishment and growth of our B2B initiatives may be delayed, which may adversely affect our business. 
 
Because we operate globally, we are subject to additional risks.
 
We currently offer our software products, professional services and SaaS services in a number of countries and we intend to enter additional geographic markets. Our business is subject to risks that often characterize international markets and may have a material adverse effect on our international operations, which could harm our results of operations and financial condition, including:

 
·
potentially weak protection of intellectual property rights;
 
 
·
economic and political instability;
 
 
·
import or export licensing requirements;
 
 
·
 partial or non-acceptance of non-localized products;
 
 
·
legal and cultural differences in conduct of business (including trade restrictions and labor and immigration regulations);
 
 
·
difficulties in collecting accounts receivable;
 
 
·
longer payment cycles;
 
 
·
unexpected changes in regulatory requirements and tariffs;
 
 
·
seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe;
 
 
·
fluctuations in exchange rates;
 
 
·
potentially adverse tax consequences; and
 
 
·
difficulties in complying with varied regulatory requirements across jurisdictions.
 
Our business and operating results could be harmed if we fail to protect and enforce our intellectual property rights.
 
Any misuse of our technology or the development of competing technology can considerably harm our business. Our portfolio is vastly comprised of software products we developed or acquired over the years, and that we regard as proprietary. While we rely upon a combination of trademarks, contractual rights, trade secret law, copyrights, non-disclosure agreements, licensing arrangements and other methods to protect our intellectual property rights, we currently have one patent application pending and no issued patents protecting our products. In addition, the laws of some countries in which our products are or may be developed, marketed or sold may not protect our products or intellectual property rights, increasing the possibility of piracy of our technology and products. Our competitors could also independently develop technologies that are substantially equivalent or superior to our technology.
 
 
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Our intellectual property rights protection measures may not be adequate and therefore we may not be able to prevent unauthorized use of our products. It may also be necessary to litigate to enforce our copyrights and other intellectual property rights, to protect our trade secrets or to determine the validity of and scope of the proprietary rights of others. Such litigation can be time consuming, distracting to management, expensive and difficult to predict. Our failure to protect or enforce our intellectual property could have an adverse effect on our business and results of operation.
 
Our technology may infringe on the intellectual property rights of third parties and we may lose our rights to it, which would harm our business.
 
We may be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlap. It is possible that we will inadvertently violate the intellectual property rights of other parties and that other parties will assert infringement claims against us. If we violate the intellectual property rights of other parties, we may be required to modify our products or intellectual property or obtain a license to permit their continued use. Any future litigation to defend ourselves against allegations that we have infringed the rights of others could result in substantial cost to us, even if we ultimately prevail, and a determination against us in any such litigation could subject us to significant liabilities to other parties and could prevent us from developing, selling or using our products. If we lose any of our rights to our proprietary technology, we may not be able to continue our business.

Our results of operations could be harmed as a result of a strengthening or weakening of the dollar compared to other currencies.
 
We generate a majority of our revenues in dollars or in dollar-linked currencies, but some of our revenues are generated in other currencies such as the NIS, the Australian Dollar, the British Pound and the Euro. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses  are generated in dollars or in dollar-linked currencies, but a significant portion of our expenses such as salaries or hardware costs are generated in other currencies such as the NIS, the Australian Dollar, the British Pound or the Euro. In addition to our operations in Israel, we are expanding our international operations. Accordingly, we incur and expect to continue to incur additional expenses in non-dollar currencies. As a result, some of our financial liabilities are denominated in these non-dollar currencies. Most of the time, our non-dollar assets are not totally offset by non-dollar liabilities. Due to the foregoing and to the fact that our financial results are measured in dollars, our results could be adversely affected as a result of a strengthening or weakening of the dollar compared to these other currencies. During 2009 and 2010 the dollar depreciated in relation to the NIS, which raised the dollar cost of our Israeli based operations and adversely affected our financial results, while during 2011 the dollar increased in relation to the NIS, which reduced the dollar cost of our Israeli based operations costs.   In addition, our results could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we have entered and may continue to enter into currency contracts that are either designated for hedging or not purposed to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS or other currencies. These measures, however, may not adequately protect us from future currency fluctuations and, even if they do protect us, involve operational or financing costs we would not otherwise incur.
 
We may fail to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 .
 
The Sarbanes-Oxley Act of 2002 imposed certain duties on us and our executive officers and directors. Our efforts to comply with the requirements of the Sarbanes-Oxley Act of 2002, and in particular with Section 404 under it, resulted in increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. We cannot assure you that we will able to conclude in future years that we have effective internal control over financial reporting.  In particular, we are still in the process of implementing an enterprise resource planning, or ERP, system to improve our internal management of our financial operations.  This could yet create problems with our planning, integration of data or compatibility with other internal systems.  Controls that are considered adequate at one time may become inadequate in the future because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
 
 
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If we encounter problems with our ERP system, this could disrupt our internal operations, increase our costs and adversely affect our financial results or our ability to report our financial results. 
 
Since 2008, we have been implementing an ERP system to improve our internal management of our financial operations. This is intended to result in a more centralized, streamlined planning system featuring more transparent and efficient use of real-time data.  We have incurred significant expenses in implementing such system and are in the final stages of such implementation. Investments in new technology are complex and time consuming, may cause unexpected delays due to errors until their correction, may require us to continue incurring expenses and making investments in the system in order to make it more efficient and could create problems with our planning, integration of data or compatibility with other internal systems.  This may result in increasing our costs and adversely affecting our financial results or our ability to report our financial results in a timely and accurate manner.
 
Under ASC 718 “ Compensation – Stock Compensation ”, we are required to record a compensation expense in connection with share-based compensation which significantly reduces our profitability.
 
Accounting Standard Codification No. 718 requires all share-based payments to employees to be recognized as a compensation expense based on their fair values. During 2009, 2010 and 2011, this accounting standard had a material impact on our results by increasing our expenses, which lowered our reported net income by approximately $2.6 million, $3.9 million and $2.3 million, respectively. Should economic events or our business or operational characteristics change, or should there be a change in the habits of our employees with respect to stock option exercises and forfeitures, future determinations as to fair value may significantly change the value attributed to stock-based compensation and significantly impact our results of operations.
 
Risks Related To Our Location in Israel
 
Potential political, economic and military instability in the Middle East may adversely affect our results of operations.
 
Our principal offices and headquarters are located in Israel. Accordingly, political, economic and military conditions in the Middle East may affect our operations.   Ongoing violence between Israel and the neighboring countries, as well as recent instability due to political changes in these countries (such as Egypt and Syria) and the threat to Israel caused by Iran stepping up its efforts to achieve nuclear capability may effect our business, financial conditions and results of operations. Recent political events in Egypt and other countries in the Middle East have shaken the stability of those countries. These circumstances may escalate in the future to violent events which may affect Israel and us, which would likely negatively affect business conditions and adversely affect our results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to make sales in those countries.
 
 
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Our results of operations could be negatively affected by the obligations of our personnel to perform military service.
 
Our operations could be disrupted by the absence for significant periods of one or more of our executive officers, key employees or a significant number of other employees because of military service. Some of our executive officers and the majority of our male employees in Israel are obligated to perform military reserve duty, which could accumulate annually from several days to up to two months in special cases and circumstances. The length of such reserve duty depends, among other factors, on an individual’s age and prior position in the army. In addition, if a military conflict or war occurs, these persons could be required to serve in the military for extended periods of time. Any disruption in our operations as the result of military service by key personnel could harm our business.
 
The dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the dollar, which would harm our results of operations.
 
Since a considerable portion of our expenses, such as employees’ salaries, are linked to an extent to the rate of inflation in Israel, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. During 2011, the value of the dollar increased in relation to the NIS by 7.7%, and inflation increased by 2.2%. We cannot predict whether in the future the NIS will appreciate against the dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and harm our results of operations.
 
We currently participate in or receive tax benefits from government programs. These programs require us to meet certain conditions and these programs and benefits could be terminated or reduced in the future, which could harm our results of operations.
 
We receive tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959, or the Investments Law and its amendments, with respect to our production facilities that are designated as “Approved Enterprises” or “Benefited Enterprises”. See “Operating Results— Corporate Tax Rate” under Item 5.A of this annual report for additional information concerning our effective corporate tax rate. In order to receive these tax benefits, we are required to comply with certain requirements as described in “Taxation” under Item 10.E below. We believe that we are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund historical tax benefits of up to approximately $11.1 million, not including interest and adjustments for inflation based on the Israeli consumer price index. In addition, an increase in our development activities outside of Israel may be construed as a failure to comply with the Investments Law conditions. There can be no assurance that new benefits will be available, or that existing benefits will be available in the future, at their current level or at any level.

On December 27, 2010, the Israeli parliament approved an amendment to the law dealing with Approved and Benefited Enterprise programs effective as of January 1, 2011.  This amendment generally abolishes the previous tax benefit routes that were afforded under the law, specifically the tax-exemption periods previously allowed, and introduces certain new tax benefits for industrial enterprises meeting the criteria of the law.  See “Israel Taxation—Law for the Encouragement of Capital Investments, 1959” under Item 10.E of this annual report for additional information.  
 
 
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Although this recent amendment took effect on January 1, 2011, the transitional provisions of its adoption allow the company to defer its adoption to future years.  While we do not believe that this amendment will have a material effect on our provision for taxes, it is too early to predict how the new law is to be implemented since tax authority guidance has yet to be released and accepted practice has yet to be established.
 
Because we received grants from the Office of the Chief Scientist in previous years, we are subject to ongoing restrictions that limit the transferability of our technology and of our right to manufacture outside of Israel, and certain of our large shareholders are required to undertake to observe such restrictions.
 
We received in previous years royalty-bearing grants from the Office of the Chief Scientist, or OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel. We must pay royalties to the OCS on the revenue derived from the sale of products and technologies, and related services, which incorporate or are based on know-how developed with the grants from the OCS. As of December 31, 2011, our total contingent liability to the OCS in this respect amounted to $4.4 million. According to Israeli law, any products which incorporate or are based on know-how developed with grants from the OCS are usually required to be manufactured in Israel, unless we obtain prior approval of a governmental committee. As a condition to obtaining this approval, we may be required to pay the OCS up to 300% of the grants we received and to repay such grants at a quicker rate. In addition, we are prohibited from transferring to third parties the technology developed with these grants without the prior approval of a governmental committee. Any non-Israeli who becomes a direct holder of 5% or more of our outstanding ordinary shares will be required to notify the OCS and to undertake to observe the law governing the grant programs of the OCS, the principal restrictions of which are the transferability limits described above in this paragraph.
 
In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of Israel about our Israeli operations. If we fail to meet the conditions related to the grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the Israeli government, we might be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future. The inability to receive these grants would result in an increase in our research and development expenses.
 
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees and officers.
 
Israeli courts have required employers seeking to enforce non-compete undertakings against former employees to demonstrate that the former employee breached an obligation to the employer and thereby caused harm to one of a limited number of legitimate interests of the employer recognized by the courts, such as the confidentiality of certain commercial information or a company’s intellectual property. We currently have non-competition clauses in the employment agreements of most of our employees. The provisions of such clauses prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. In the event that any of our employees chooses to work for one of our competitors, we may be unable to prevent that competitor from benefiting from the expertise such former employee obtained from us, if we cannot demonstrate to the court that such former employee breached a legitimate interest of ours recognized by a court and that we suffered damage thereby.
 
 
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It could be difficult to enforce a U.S. judgment against our officers, our directors and us.
 
Service of process upon us, upon our directors and officers, a substantial number of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because our principal assets and a substantial number of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
 
Additionally, it may be difficult for you to enforce civil liabilities under the Securities Act of 1933 and the Securities Exchange Act of 1934, or the Exchange Act, in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
 
However, subject to specified time limitations and other conditions, Israeli courts may enforce a U.S. final executory judgment in a civil matter, including a monetary or compensatory judgment in a non-civil matter, obtained after due process before a court of competent jurisdiction according to the laws of the state in which the judgment is given and the rules of private international law currently prevailing in Israel.
 
Provisions of Israeli law could delay, prevent or make difficult a change of control, and therefore depress the price of our shares.
 
Provisions of Israeli corporate law may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, us. The Israeli Companies Law – 1999, or the Companies Law, generally provides that, other than in specified exceptions, a merger be approved by the board of directors and a majority of the shares present and voting on the proposed merger at a meeting of shareholders. Upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of the surviving company. Furthermore, a merger may generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each of the parties.

The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company, unless there is already another 25% or greater shareholder of the company. Similarly, an acquisition of shares must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, unless there is already a 45% or greater shareholder of the company. In any event, if as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s shares, the acquisition must be made by means of a tender offer for all of the shares. Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap. These laws may have the effect of delaying or deterring a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our securities.
 
 
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The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
 
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. See “Duties of Shareholders” under Item 10.B of this annual report for additional information concerning this duty.
 
Risks Related To Our Ordinary Shares
 
Our stock price has fluctuated and could continue to fluctuate significantly.
 
The market price for our ordinary shares, as well as the price of shares of other technology companies, has been volatile. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as:

 
·
fluctuations in our quarterly revenues and earnings and those of our publicly held competitors;
 
 
·
shortfalls in our operating results from levels forecast by securities analysts;
 
 
·
announcements concerning us or our competitors;
 
 
·
changes in pricing policies by us or our competitors;
 
 
·
general market conditions, and changes in market conditions in our industry; and
 
 
·
trading volumes and the general state of the securities markets.
 
In addition, trading in shares of companies listed on the Nasdaq Stock Market (including the Nasdaq Global Select Market), or Nasdaq, in general and trading in shares of technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market and industry factors may depress our share price, regardless of our actual operating results. In addition, if we issue additional shares in financings or acquisitions, our shareholders will experience additional dilution and the existence of more shares could decrease the amount that purchasers are willing to pay for our ordinary shares.
 
Two shareholders may be able to control us.
 
As of March 20, 2012, the Alpha Group holds an aggregate of 4,803,900 ordinary shares and warrants to purchase an additional 1,250,000 ordinary shares, representing in the aggregate beneficial ownership of 23.5%  of our ordinary shares (after giving effect to the exercise of such warrants).  The Alpha Group is comprised of the following individuals: Boaz Dotan, Eli Gelman, Nehemia Lemelbaum, Avinoam Naor and Mario Segal.  In addition, as of March 20, 2012, Ronex Holdings, Limited Partnership, or Ronex, an affiliate of the FIMI Opportunity Funds, holds 4,471,591 ordinary shares, representing beneficial ownership of 17.4% of our ordinary shares (after giving effect to the exercise of Alpha Group warrants).  Furthermore, the Alpha Group and Ronex are parties to a shareholders agreement pursuant to which they have undertaken to elect a board of directors comprised of 11 members, of which six nominees will be designated by the Alpha Group and five nominees will be designated by Ronex.  They also have agreed to meet with one another before any shareholder meeting and try to reach a unified position with respect to the principal proposals on the agenda of such meeting. As a result of the shareholders agreement, the Alpha Group and Ronex may be deemed to share beneficial ownership of 10,525,491, or 40.9%, of our outstanding shares (after giving effect to the exercise of Alpha Group warrants).  See Item7A below for more information about these shareholders.
 
 
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If the Alpha Group and Ronex act together, they may likely have the power to control the outcome of matters submitted for the vote of shareholders, including the approval of change in control transactions, as well as other strategic matters and the composition of our management. This may make certain transactions more difficult and result in delaying or preventing a change in control of us unless approved by one or both of them.
 
Substantial future sales of our ordinary shares may depress our share price.
 
The Alpha Group is entitled to demand that we register with the SEC resales of 4,803,900 ordinary shares and 1,250,000 ordinary shares underlying warrants, subject to certain conditions and limitations on its registration rights and resale rights.  If the Alpha Group or other shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding warrants or employee options, or if the perception exists that we or our shareholders may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall. If we issue additional shares in financings or acquisitions, our shareholders will experience additional dilution and the existence of more outstanding shares could reduce the amount purchasers are willing to pay for our ordinary shares. Any substantial sales of our ordinary shares in the public market also might make it more difficult for us to sell equity securities.
 
Our ordinary shares are traded on more than one market and this may result in price variations.
 
Our ordinary shares are traded on the Nasdaq  and on the Tel Aviv Stock Exchange, or the TASE. Trading in our ordinary shares on these markets is effected in different currencies (dollars on Nasdaq and NIS on the TASE) and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ, resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States and Israel. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
 
ITEM 4 – INFORMATION ON THE COMPANY
 
A. History and Development of the Company
 
We were incorporated on March 5, 1982, under the laws of the State of Israel. Both our legal and commercial name is Retalix Ltd. Our principal offices are located at 10 Zarhin Street, Ra’anana 43000, Israel, and our telephone number is (011) 972-9-776-6600. Our U.S. agent is our subsidiary, Retalix USA Inc., located at 6100 Tennyson Parkway, Suite 150, Plano, Texas 75024, and its telephone number is (469) 241-8400. Our website address is www.retalix.com. The information contained on, or linked from, our website is not a part of this annual report.
 
Our ordinary shares began trading on the TASE in October 1994 and on the Nasdaq National Market (now the Nasdaq Global Select Market) in July 1998.
 
 
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During our initial years of operation in the 1980s and the early 1990s we focused on the development and sales of store level software solutions to food retailers. During the second half of the 1990s we expanded our offerings to cover, in addition to solutions designed for the grocery retail industry, also solutions for the fuel and convenience retail industries as well as solutions covering the management of sales operations at the chain level. During this period we also significantly increased our sales internationally and in particular in the United States. During the period from 1999 through 2003, we strengthened our presence internationally, formed our StoreNext initiatives in Israel and the United States, which are designed to create collaborative communities of small retailers, suppliers and manufacturers, and we enriched our offerings with the introduction of web based and mobile solutions. During 2004 and 2005, we widened our offerings to include certain merchandizing and supply-chain management solutions for retailers as well as for suppliers and manufacturers. In 2005, we introduced new sophisticated solutions complementing industry focuses and needs, such as customer loyalty and optimization of ordering. Over the last few years we have developed a number of merchandising applications, most particularly our buying suite (formerly known as Insync). In January 2011, we continued to enhance our store-based offerings with the introduction of our Retalix 10 Store Suite as well as an expanded set of Services offerings to better serve our customers.
 
Principal Capital Expenditures
 
We had capital expenditures of $3.0 million in 2009, $2.6 million in 2010 and $5.3 million in 2011.  Our capital expenditures in 2009 consisted primarily of the purchase of software and related professional services, computers and peripheral equipment related to the ERP system, amounting to approximately $1.8 million, and our capital expenditures related to building refurbishment, levies, improvements and furniture amounting to approximately $1.2 million. During 2010, we purchased software, computers and peripheral equipment in the amount of $2.1 million that are mostly related to the increased development activity and partly related to our ERP system ongoing implementation. During 2011 we purchased software, computers and peripheral equipment in the amount of $4.1 million that are mostly related to the increased development activity and our headcount growth including also our recent acquisition, and additional capital expenditures of $0.8 million related to leasehold improvements and furniture. In 2012, we expect the purchase of software and related professional services, computers and peripheral equipment, office refurbishment and other expenditures of approximately $4.6 million, of which $3.0 million will be in Israel and $1.6 million will be in the United States. We have financed, and expect to continue to finance, these capital expenditures with cash generated from operations.

B. Business Overview

Overview

We are a leading global provider of innovative software and services for high volume, high complexity retailers, including general merchants, supermarkets, convenience stores, fuel stations, drugstores and department stores. We also may serve other large high volume, high complexity retailers who would benefit from our offerings, retail focus and domain expertise. We design, develop and deliver mission critical software and services solutions to our customers. Spanning the retail and distribution supply chain from the point of sale to the warehouse, our suite of software solutions integrates the information flow across a retailer’s or distributor’s operations, encompassing stores, headquarters and in some cases distribution centers. Our Retalix 10 Store Suite announced in January 2011 enables retailers to manage their businesses, and to interact with their consumers across a multitude of touch-points/channels.  Our comprehensive solution suite enables retailers and distributors to better understand their customers, anticipate demand, differentiate their offerings and thus elevate the customer experience. At the same time, we believe we enable our customers to manage their operations more profitably by assisting them to operate more efficiently, flexibly and with an emphasis on quick time to market. Our software solutions also enable retailers to capture and analyze consumer behavior data that can be used to devise and implement more effective targeted promotions and loyalty programs in order to stimulate demand and increase sales. At the same time, our software solutions enable retailers and distributors to reduce shrinkage, inventory and cost of sale. We believe that our deep domain expertise, accumulated experience and focus on developing software and services for our customers only in and focused on the above mentioned retail sector provide us with a competitive advantage in the market. 
 
 
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We sell our solutions through a worldwide direct sales force. Our direct selling efforts are augmented by a combination of channel partners and resellers who enable us to expand our geographical scope and address smaller retailers to whom we do not sell through our direct sales force. Sales to Tier 1 and Tier 2 food retailers, large convenience store chains, major fuel retailers and large and mid-size foodservice, convenience store and grocery distributors have historically represented a substantial majority of our revenues.

We also provide our customers with delivery services to implement and customize our applications to meet specific requirements of our customers and ongoing support and product maintenance services. In addition, we provide system integration services, or SI services, tightly coupled to our product offerings, such as training, project management and testing.

We believe that we are differentiated within the segments within which we operate. This stems from a number of factors including: deep domain expertise based on almost 30 years of activity focused only in the retail segments in which we operate while our main competitors are focused on numerous industry verticals, hardware and more; we have a strong customer base including some of the world’s leading and household name retailers; we have a leading portfolio of products and we have a business model in which we provide a multitude of services that are tightly related to our software solutions.

We are able to serve a large and diverse customer base because we have designed our applications to include multiple levels of functionality that can be adapted to the various sizes and forms of retail operations of our customers.

To date, our software solutions have been installed at approximately 70,000 sites in 51 countries. Our customers include leading supermarket chains, diversified retailers, mass merchants and food service distributors such as Publix, Food Lion, Hannaford Bros., Hy-Vee, K-VA-T, Big Y, Food Services of America, Odom Beverage, Save-A-Lot and Save Mart in the United States; Target Canada Corporation; Tesco, Carrefour, Delhaize, Intermarche, Morrisons, Sainsbury’s, Jumbo and Argos in Europe; Metcash and Woolworths in Australia; large convenience store and fuel retailers, such as the Reitan group in Scandinavia, BP and Coles in Australia, the UK and North America; PetroChina and Reliance in Asia; Casey’s, Husky, Irving Oil, Love’s, Pilot Travel Centers and The Pantry in North America; and large health and beauty retailers such as Walgreens in the United States, and A.S. Watsons in Europe and Asia.

Our Market Opportunity

Background
 
The retail segments in which we operate today are markets in transformation. There are several trends ongoing in the market which we believe continue to play to our strengths.

The trends include a major shift towards consumers: today’s consumers are better informed, more empowered and as such the shopper dynamics are changing. Retailers need to understand what their consumers expect. The interaction with their consumers happens across many more touchpoints, channels and media (importantly mobile and social networks), at all times of the day, before and after the shopping event and not just in the store as was once the case. Interaction and communication with the consumers need to be highly relevant and timely, and in the channel that best suits their individual preferences.

The competition among high volume, high complexity fast moving consumer goods retailers is as fierce as ever, putting pressure on pricing and operating margins. This is compounded by the fact that most economies in which we operate are emerging from, or in some cases still in the midst of, a major financial crisis. Regulation is becoming more stringent and consumers are changing behavioral patterns – for example an increased focus on “shopping for value”. While a few large retailers have been able to address these changes through economies of scale “everyday low price” strategies, the need for differentiation, innovation, very quick response times and time to market, and reasonable total cost of ownership, or TCO, across all retailers – including the “everyday low price” players – has never been higher.
 
 
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Competition is causing retailers to seek growth for their business both through continued internationalization and entrance into new retail segments.  As such the traditional retail segments are blurring. For example, large food retailers and distributors have expanded their operations beyond their traditional focus on food supermarkets to encompass additional retail formats, such as convenience stores, food service, fuel stations and quick service restaurants, or QSRs (which in turn increased the competition and the needs in the convenience store market which was historically serviced by smaller chains and independent retailers). Further, food retailers have been introducing a significantly wider assortment of non-food goods into their offering. Conversely, large non-food retailers have been ramping up their food offerings, mainly to increase the frequency of consumer visits to their stores.

Retailers and distributors need to be able to convert their customer / market data into actionable knowledge, providing their consumers and suppliers with relevant, in context, optimized offerings and promotions. Pricing and assortment need to be adapted and optimized regularly to respond to competition and to drive sales and margins. To do this retailers require sophisticated retail information systems, ideally being fed by real time transaction and customer data, efficiently executing and tracking their operational tasks, such as order optimization, inventory management, merchandising and pricebook management while at the same time providing visibility into the supply chain processes.

All of the above factors create a multitude of challenges for our customers. Retalix is well positioned to address these challenges.

The software and services needs of our customers and prospects
 
In order to deal with the changing customer dynamics and fierce competition, our customers need, and Retalix provides, robust, modular, architecturally advanced, information systems.

Currently, there are still numerous retailers, convenience stores, or C-Stores, and fuel players and distributors who are running a complex set of fragmented and poorly integrated legacy information systems, many over a decade old. Such systems are the byproduct of years of delaying implementation of a coherent enterprise-wide information technology, or IT, strategy, favoring patchwork upgrades over comprehensive system revitalization. As a result, many food and fuel retailers and distributors operate information systems that are difficult to adapt to today’s intensely competitive retail and distribution industries. In many cases, these retailers’ and distributors’ existing information systems consist of stand-alone point-of-sale, or POS, systems with little integration to other customer touch-points and/or with their back-office and with no enterprise-wide information system. These systems generally cannot be easily modified to provide cross-enterprise visibility, collaboration and integration, nor can they support the information capture and analysis necessary for reliable forecasting and coordinated purchasing decisions. In addition, in continuing to rely on these legacy systems, retailers and distributors face an increasing frequency of breakdowns and system failures, exposing them to the ongoing cost of expensive maintenance.
 
Accordingly, many retailers and distributors are seeking to replace their legacy IT systems with modern, integrated retail information that addresses the challenges of today’s market, allow enterprise-wide information flow and enable implementation of sophisticated customer loyalty and promotion strategies. We believe that these replacement systems typically will be based upon a modular, open-systems architecture, or non-proprietary software that can be easily integrated into a retailer’s existing IT infrastructure. Systems meeting such criteria provide retailers and distributors with the flexibility to modify their systems and processes to respond to and manage their changing business environment.

We operate in a large market, wherein we believe, based on our experience and independent industry analyst research, our total addressable market for software and services is between $7 to $8 billion annually and thus, over time, and while the market continues to transform and the competitive pressures are expected to increase, we have ample room for growth.
 
 
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Our Solutions

We provide software and services to high volume, high complexity retailers and distributors, addressing the following main areas of activity: retail stores and sales channels (including mobile and e-commerce), customer management and marketing, merchandising and logistics and enhancing collaboration between retailers and distributors. Our solutions are designed to deliver a superior shopper experience across the various shopping channels and touch points, while at the same time enabling our customer to achieve brand differentiation, cost efficiencies, fast time to market, and operational flexibility and scalability to support ongoing business transformation and growth, based, to a large extent, on interpretation and insight of the shopper demand. We believe that our solutions differentiate us from other providers of software solutions to retailers and distributors because they combine the following attributes:

Our store and sales channels solutions drive unified and seamless usage and support across multiple retail formats and customer touch points

Our store and sales channels solutions offer retailers the ability to unify the management and deployment of multiple retail formats and customer touch points and channels around a single software engine, or at a single retail site. Retailers can use software solutions to operate different retailing formats such as general merchandize, grocery, health and beauty, fuel, sales, convenience, and QSRs; and to support a variety of consumer service points, such as, but not limited to, customer self-checkout, customer service kiosk, self-scanning, customer scale and pump terminal, as well as additional shopping channels such as e-commerce and mobile (both for the consumer and for the store associates). This assists retailers in attracting new customers and in improving retention of existing customers by providing a superior, unified consumer experience, and enabling quick and consistent delivery of new capabilities to the business.  Reduced TCO is another significant benefit, enabled by avoiding costly and lengthy integrations between different in-store solutions, or across multiple sales channels operated with different solutions.

Our innovative next generation solution architecture enables multiple deployment options, driving high level of flexibility and reduced TCO
 
In response to retailers’ increasing demand for easier deployment, more flexibility in system solution, and reduced TCO, we developed our next generation solutions based on a “thin client” architecture. The concept of “thin client” enables installing software on in-store computers, or remote central servers, with the users running the applications through a standard browser and/or with lighter client applications. Our innovative product architecture enables using a choice between multiple deployment options – “Thick Store” (where each application is installed fully on each applicable computer), “Thin Store” (where applications reside on a central server (or in the “cloud”) and the entire store has “thin” clients accessing the central server), or “Thin” POS (where the POS machines run only a very thin client, and they run off the application server, which resides on the local in-store server, with an option to reside centrally)resides on the store server. This architecture reduces the need for expensive, large footprint hardware and software installations at each store location and/or relevant computer, reduces infrastructure costs and simplifies IT management; it is easier and more cost-effective to upgrade software, hence enabling quicker time to market of new business capabilities and reduced maintenance costs. Additionally, there is significantly greater flexibility and choice for the retailer IT teams, in deploying new systems and combining forms of thin/thick and hybrid within the same store, or same chain according to their infrastructure and business requirements.

Our robust store solutions provide system resiliency and data redundancy
 
The retail segments that we are targeting are characterized by a highly complex operations and high volume of customer transactions that retailers are required to process quickly and efficiently. We believe that retailers view their POS systems as mission-critical to their operations, as these systems must be continuously functioning to process customer transactions. The malfunction or failure of a retailer’s POS system for even a few minutes could result in substantial loss of sales, as well as significant customer dissatisfaction. Moreover, the data generated in these transactions are equally mission-critical, and the loss of such data could impair a retailer’s internal reporting and accounting systems. As a result, retailers require highly robust and resilient POS solutions that will allow them to continue to operate despite system failures, as well as to avoid the risk of being unable to process customer transactions and the risk of data loss. We have developed a software architecture designed to support the high volume, multiple format environments of the largest Fast Moving Consumer Goods, or FMCG, retailers and distributors, capable of supporting very high volumes of stores and checkout lanes at a high speed, without risk of significant malfunction or failure. Equally important, our software architecture deploys advanced data protection mechanisms for critical data, through numerous mechanisms, including duplication at the store or enterprise levels. For example, in case of system failures, each POS terminal can continue to operate in stand-alone mode, despite the interruption of communications with the store office application, storing all transactions locally, to be transferred to the server level when communications are restored. We believe the adoption of our in-store solutions in leading global large supermarket chains such as Tesco, Sainsbury’s, Delhaize, Morrisons, Publix and Woolworths is a strong testament to the reliability, robustness and resilience of our store solutions.
 
 
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Our modular solutions can be easily integrated with existing IT infrastructures

The modular nature of our products’ architecture and our tools for building open interfaces to external systems, including software protocol standards such as web services, XML, ARTS, PCI, etc., streamlines the introduction of our solutions into existing IT environments, reducing overall integration costs and enabling easy extensibility. Our customers can purchase systems that fit their current needs and budgets, and then gradually replace legacy products, or add additional modules as their business needs evolve over time. Additionally, our solutions are hardware neutral, capable of working with retail platforms from most major hardware vendors, including IBM, NCR, HP, Fujitsu, Epson, Dell and Wincor-Nixdorf. We are innovative, for example, in providing self-checkout and self-scan software that can be de-coupled from the hardware but that is compatible with the standard hardware, and pre-integrated with our POS and store management store solutions. This modular and open architecture decreases the software integration risks associated with migrating from a retailer’s existing systems to our enterprise and in-store solutions, thereby ensuring quicker time to market and protecting previous IT investments. This also allows the retailers to make separate purchasing decisions for the hardware and the software, thus realizing great savings in hardware costs by being able to bid for the hardware as a standard market commodity.
 
Our enterprise solutions can be easily customized and localized

Most retailers and distributors require that software products be tailored to fit their specific operational needs. In addition, multi-national retailers which operate in several regions or countries, typically require specific customization per region. Typically, such a requirement demands significant implementation efforts. Our products were designed and built to facilitate customer customization and enhancements with reduced efforts. We offer to meet these needs through a combination of our open and easily extensible solution architecture and throughout our expert customization and delivery services.

Our Product Led Services ensure successful implementations with our expert teams

We provide an extensive offering of strategic, value-added services, ensuring high-quality implementation of our solutions, which include program management, business consulting, testing, automated testing, training, documentation, support, deployment and more. Our product-led services are tightly linked to our software, enable one point of accountability for our customers, and significantly enhance our value proposition as a leading retail solution and service provider (see more detail below in the sections entitled “Our Product Led Services” and “Our Growth Strategy”).
 
 
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Our solutions provide for both retail operations management and customer marketing and management

While retail enterprise solutions have traditionally focused on sales operations management, our solutions offering also includes sophisticated customer-centric solutions that address the retailer’s marketing needs. Our Customer Management and Marketing Suite (previously known as Retalix Loyalty and Promotions) is a comprehensive set of marketing tools for management of customers, loyalty campaigns, promotions and coupons, as well as advanced analytics. The Customer Management and Marketing tools focus on enhancing consumer retention and influencing consumer spending habits through the use of analysis of rich shopper data, which enable segmentation, and use of personalized and targeted promotional campaigns and sophisticated loyalty programs. Our store and sales channels systems are integrated with Retalix Customer Management and Marketing Suite, enabling fast and simple execution of promotions and loyalty programs at any other consumer touch point (such as self-checkout, self-scanning, mobile devices, customer kiosk, customer portal and so on). This holistic approach of connecting the Customer Management and Marketing Suite with the store and sales channels as well as with the merchandising suite, enables retailers’ marketing departments to devise and execute rich and flexible marketing programs and campaigns, including diverse mass promotions, targeted campaigns and loyalty programs on an enterprise level, that can be easily implemented at the store level and every customer touch point. Moreover, our integrated data analytics capabilities enable retailers to enhance customer experience and increase customer retention and spend, by analyzing customer transactions, gaining valuable customer insight and personalizing promotions for their loyalty program members.

Our demand-driven forecasting and replenishment solutions provide consistent demand data throughout the enterprise and the supply chain

Providing consistent demand data for each item throughout the enterprise, from store replenishment to distribution center forecasting and purchasing, is a key requirement driving reduced shrinkage and spoilage, reduced out-of-stock levels, and increased sales and supply chain efficiency. We believe that our investment in demand “science” (including our Multi-Echelon Demand Driven Replenishment application, based on advanced algorithms that interpret demand and optimize replenishment orders) and the integration of this science throughout our solutions, provide our customers and us with a competitive advantage.
 
We provide independent and small chain food retailers with access to sophisticated software solutions at an affordable price

Independent and small chain food retailers have many of the same needs and face many of the same challenges as do larger retailers, but lack the managerial, financial and technological capacity to implement the necessary systems to meet them. Our StoreNext business unit in the United States operates enterprise-level applications, such as electronic payments, sales analysis, product and price management,  and reporting, on a SaaS basis, meaning that the application is remotely hosted on our centralized servers or “cloud” technology, and are accessed by the retailers over the web or private data lines. Our Connected Services (described below) allow independent retailers and small chains, based on a subscription fee, to use applications that would otherwise be too expensive for them to procure and manage in-house. With access to these applications, smaller retailers can derive operating efficiencies that are similar to those enjoyed by their larger competitors and thus compete with them more effectively. In this regard, in January 2012 we also announced the availability of the Retalix 10 Store Suite on the cloud.

Our software solutions provide proven extensive and expert support for global multi-national operations of leading Tier 1 high volume, high complexity retailers
 
Our software solutions provide retailers with extensive support, world-class technology and proven expert multi-national software solutions, that enable support of multiple retail environments and formats, languages, currencies, fiscal and legal regulations across multiple countries. We enable global, multi-national retailers to consolidate and standardize IT solutions across multiple retail concepts, brands, and geographic regions, while enjoying the flexibility to use different hardware configurations and deployment options, and comply with local requirements and regulations. We believe that these capabilities provide us with a competitive advantage with leading global, multi-national retailers or with international retailers that are located in multi-lingual countries or that have stores near national borders. They prefer licensing one software solution from a single vendor for all their global estate, which, in addition to standardization, drives quicker time to market of business capabilities and lower overall maintenance costs.
 
 
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Our Growth Strategy

We operate in a large market, and thus, over time, and while the market continues to transform and the competitive pressures are expected to increase, we believe we have ample room for growth. We strive to provide best in class software products and services targeted at high volume, high complexity, fast moving consumer goods retailers and distributors.

The principal elements of our strategy to achieve our growth objectives are as follows:

We continuously aim to enhance our position as a leading software provider in our space.

We have a track record of innovation in this industry.  For example, we believe we were the first company to decouple retail software from its associated hardware.  In addition, over the last five years we have introduced, among other products, loyalty, dynamic receipts, “native” self-checkout (again, we believe, being the first in the industry to decouple this software from hardware) and Retalix Purchasing (formerly known as Insync Purchasing).  In January 2011 at the National Retailers Federation annual conference, we introduced, our innovative Retalix 10 Store Suite. In January 2012, at the same show, we introduced a range of mobility offerings and announced the availability of the Retalix 10 Store Suite on the cloud.  We continue to invest in and drive our existing integrated suite of products.  A detailed explanation of our product suite can be found below under “Our Products”.
 
Enhance our global product led services offering

In 2010, we established the Retalix Global Delivery Group, and the Global SI Services group. The former provides implementation, customization and ongoing support of our products for our customers while the latter introduces a range of services such as automated testing, training, project management, business consulting, deployment and various types of customer support.

Our services (as opposed to those provided by general SIs) are and will be tightly linked to our own software products, leveraging our focused deep domain retail expertise, the fact the we know our products best, can provide a closed loop with our development teams and as such provide advantages in terms of time to market, cost of ownership, quality and service level agreements to our customers.

These product led services, coupled with our global deployment ability, will enable us to further enhance our customer relationships and provide our customers with one point of accountability for the end result.
 
Continue to target high volume, high complexity FMCG retailers, C-Stores and Fuel and distributors and continue to expand our customer base across geographies 

Many FMCG retailers, distributors and major fuel chains continue to operate legacy systems that do not provide all the functionality required to implement and support the new applications and workflow processes that are necessary to compete effectively in today’s markets. We believe that our software and services solutions are well positioned to capitalize on this market opportunity.

Today we are active in North America, Israel, Western Europe (Belgium, France, Italy, UK, Spain), Russia, Scandinavia, APAC (China, Japan, New Zealand, Australia) as well as numerous other countries we entered via the expansions of business with our global customers. We endeavor to penetrate or deepen our presence in additional geographies in both developed and selected, emerging economies around the world.  
 
 
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Continue to penetrate our target markets through the provision of SaaS
 
Leveraging our ability to support multiple enterprises from a single data center, we offer enterprise level applications on a SaaS basis including, for example, electronic payments, sales analysis, reporting and others. We expect this offering to expand over time to cover additional applications. We provide SaaS in return for a subscription fee. In the case of smaller retailers, SaaS enables these retailers to enjoy many of the benefits of enterprise and back-office applications that were originally designed for larger retailers, without the need to make a significant upfront investment in the systems and personnel required to run these applications in-house. In line with our strategy, we acquired MTXEPS in July 2011.

Continue broadening market penetration through strategic acquisitions
 
In July 2011, we acquired MTXEPS, a leading provider of innovative, secure, end-to-end electronic payment software solutions for retailers, delivered via SaaS and in-store models. MTXEPS was, prior to its acquisition by us, a privately held, US-based, growing and profitable company with solutions deployed directly, or through partner channels (including us), in over 20,000 stores in North America. This acquisition is aimed at enhancing our market leadership in offering retailers comprehensive, advanced payments solutions across all customer touch points and sales channels, and enhancing our SaaS offering (which is one of our growth engines).

We continue to evaluate opportunities to acquire complementary businesses and technologies in order to improve service to our customers, complement our product offerings, increase our market share, advance our technology, expand our distribution capabilities and penetrate new targeted markets.

Our Products

We offer a broad portfolio of comprehensive, proven software solutions in the areas of Store & Sales Channels, Customer Management and Marketing, Merchandising and Enterprise–level Chain Management, and Supply Chain Execution/Logistics. Our solutions are addressing a spectrum of high volume, high complexity, and leading FMCG retailers worldwide –ranging from large multi-national supermarkets and major convenience store chains, to major fuel retailers, through regional grocers and convenience operators, to local independent grocers, general merchandise/mass merchandise retailers, health and beauty and drugstore retailers and department store retailers as well as wholesalers and distributors. Our products help our customers manage and optimize their operations, differentiate their brand and build their customer loyalty, while providing them with the flexibility and scalability to support ongoing business transformation and growth. Our comprehensive product portfolio is composed of several suites of software products:

The Store and Sales Channels Suite
 
A suite of extensive, robust, and innovative software solutions that provide retailers with the capability to seamlessly operate and support a wide array of sales channels and customer touch-points.  Many of these touch points are in-store but also span sales channels, such as mobile commerce and e-commerce, and include applications such as: retail Point of Sale (POS)/checkout, self-checkout, self-scanning, customer kiosk, customer scale, mobile POS, consumer-operated mobile apps, e-commerce services and more.  This suite also includes applications for store operations management, cash and employee management, as well as store level inventory management and replenishment (including dry stock and wet stock).
 
Our Store and Sales Channels Suite consists of our well known and widely installed “classic” in-store products, such as StoreLine, for the grocery, general merchandise and health & beauty retail segments; and StorePoint for the convenience, fuel retail and Quick Service Restaurant (QSR) market segments, both supporting a wide range of store applications.  Our next generation store and sales channels solution and platform - the Retalix 10 Store Suite - was launched publicly in January 2011, and is designed for grocery, convenience, fuel, general merchandise, health and beauty and department store retailers.  The Retalix 10 Store Suite, whose earlier versions are already working with leading retailers and in process of deployment with other leading global retailers, such as Tesco, is innovative in its architecture and functionality, and drives a superior and unified shopping experience and increased customer retention and spend, while enabling reduced TCO, and quick time to market of new business capabilities (as provided in more detail below).
 
 
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In terms of contribution of our various software solutions to our historical revenues, we have derived the substantial majority of our product sales from the sale of our Store and Sales Channels solutions.

Retalix 10 Store Suite
 
The Retalix 10 Store Suite offers advanced software applications and a unique architecture that seamlessly combines major customer-centric retail functions – customer touch points, store management, targeted promotions and loyalty – into a unified solution, while enabling quicker delivery of new business capabilities, time to market, or TTM, and reducing TCO.  The Retalix 10 applications provide extensive retail functionality leveraging Retalix’s 30 years of retail know-how and expertise ranging from easy to use, sophisticated sales customer touch points, stationary or mobile, through extensive store and cash management and inventory management applications. It enables personalization and targeted promotions to be delivered through seamless integration with the Retalix Customer Marketing and Management Suite.
 
The Retalix 10 Store Suite unifies the management and deployment of in-store system, online storefronts and mobile commerce opportunities, and provides a seamless customer experience across multiple touch points and channels, including POS, self-checkout, self-scanning, customer kiosks, customer scales, fuel, online storefronts and a variety of mobile applications for staff in-store operations or consumer-operated shopping, using devices such as smart phones and tablet computers.
 
Retalix 10’s unique architecture enables high volume, high complexity retailers to break away from systems requiring integration of disparate ‘silos’ into a unified  platform for upmost flexibility, accelerated time-to-market, reduced TCO and enhanced central management capabilities. Retalix 10 features agile development methodologies and easy extensibility, as well as advanced capabilities of flexible deployment alternatives—thin, thick and hybrid - either in the same store or between stores, with servers in the store or at the center. Starting January 2012, Retalix 10 Store Suite is offered as a service from the cloud. With this new service, Retalix continues to be at the forefront of retail trends, providing retailers with innovative solutions combining outstanding retail expertise with cutting-edge technology. Retalix thus provides retailers with the flexibility to deploy the Retalix 10 Store Suite, as a service-on-demand from the cloud, with an option for a subscription payment model. This enables retailers to vary deployment strategies across their brands, formats and geographies with benefits such as simplified management of operations and IT infrastructure, reduced capital expenditures and accelerated time-to-market. Additionally, Retalix 10 is compatible with all retail hardware platforms and a variety of legacy and third-party systems, and provides retailers with the flexibility needed to protect previous IT investments while minimizing the cost of future changes and add-ons.

Retalix 10 Store Suite also enables innovation through seamless integration between the in-store channel and the e-commerce and mobile commerce channels, running with the same core business processes and unified data and enabling enhanced customer retention and spending through the unification of the data, processes and shopper loyalty handling across channels and touch points.

Several leading international retailers have already selected Retalix 10 Store Suite, or are already in process of working with Retalix 10 Store Suite, including  Tesco Plc. (operates globally, headquartered in the UK),  Shufersal supermarkets (Israel), Printemps department store (France), Target Canada Corporation and an additional leading Tier 0 retailer.
 
 
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Retalix Mobile Solutions

Retalix offers a comprehensive, innovative set of mobile solutions for retailers that focus on enhancing the shopper engagement and spending, increasing staff effectiveness and productivity, improving customer service and providing a superior overall shopping experience. Our Mobile offering spans applications of mobile marketing, mobile commerce and mobile operations, which are integrated with the Store & Sales channels, Customer Management & Marketing and Merchandising suites, providing a unified user experience across all touch points and channels, with unified data, prices, promotions and business processes.

Mobile Shopper is a set of retailer-branded, smartphone-based applications that retailers can offer to their shoppers to enhance the shopping experience and increase their engagement with their brand. The shoppers can use their personal smartphone to manage their shopping inside and outside the store at any time, to find store locations, manage shopping lists, access product information and pricing, view special offers, access their loyalty status online, scan items, perform payments and more . A unique benefit of the Mobile Shopper is its ability to serve as a store touch-point, completely integrated with the specific store platform and database.

Mobile Operations applications refer to the retailer staff associates at the stores, for whom we offer applications such as Mobile Store Manager and Mobile Inventory Manager (previously known as RPO – Retalix Pocket Office). This includes applications such as price check, remote manager approval,  ordering, receiving and stock counting, cashier management and various dashboards/reports that can be operated on smart phones or ruggedized retail handheld devices.  Another new staff application is Mobile POS – which gives store staff access to comprehensive POS functionality on the go (including receiving payments), allowing them to serve customers from anywhere in the store to help shorten queues, support sidewalk sales and answer in-aisle queries.

We view mobile solutions as one of the most significant trends in retail technology at this time, an important offering for retailers.

Retalix StoreLine

Retalix StoreLine is a fully integrated, modular, open architecture POS solution for multiple format supermarket and grocery chains, as well as other high-volume, high-complexity fast moving consumer goods retailers. Specifically designed to cater to the high-tier chains that frequently add new formats and additional related services, Retalix StoreLine provides retailers with a comprehensive set of retail operational and management capabilities. StoreLine also offers interfaces to enterprise level systems and to third-party applications as well as to payment service providers. Retalix StoreLine supports additional integrated modules for multiple in-store retail formats, such as: Retalix StoreLine QSR –for in-store quick service restaurants; Retalix Fuel - for supermarkets with adjacent fuel forecourt and RFS (described below);   and additional customer touch points such as self checkout; customer scale; customer-service kiosk, and self scanning.  In addition, Retalix StoreLine also provides the option of front-office functionality, such as cash and supplier and employee management. Running on the Microsoft Windows operating system, Retalix StoreLine’s client server architecture is hardware neutral, supporting a variety of open and proprietary hardware devices, such as full-screen customer displays, color touch screens, scanners and checkout and scales, as well as standard retail hardware supplied by leading vendors. StoreLine is multi-lingual and supports multi-currency/tax for global deployments. It is well known for its resilience and robustness.

We also provide “lighter” (smaller, prepackaged) versions of Retalix StoreLine software solutions which include ISS45 , which is sold and supported by StoreNext USA and Retalix Next , which is distributed by Retalix Israel to independent grocery retailers in Israel.

Retalix Storeline also tightly integrates with our Customer Management and Marketing suite (see below) and select merchandising solutions such as Retalix HQ and Demand-Driven Replenishment (see below).
 
 
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Retalix provides a well-defined set of migration strategies for retailers who wish to migrate from Storeline (or any other third party POS solution in place) to Retalix 10, which offer retailers significant flexibility and quick time to value: Retailers can deploy any single or several Retalix 10 touch points without having to replace their incumbent POS system – and run the combined integrated side-by-side solution. This enables the retailers to protect their existing IT investments, while being able to introduce significant modernization to their business very early on. Retailers can thus limit risks and costs involved in system evolution with this step-by-step approach.

Retalix StorePoint

Retalix StorePoint is a fully integrated, modular open architecture solution set for the multi-format convenience store and fuel retail segments. By using StorePoint, convenience stores and fuel retailers can use one integrated solution for retail sales (convenience store), fuel sales and food service (QSR) sales. In addition, StorePoint also provides extensive front office and back-office functionality, such as ordering and receiving, inventory management, petroleum inventory (“wet-stock”) management, cash and employee management, as well as specialized functionality for the food service environment, such as menu, recipe and waste management. StorePoint interfaces with various head office systems, allowing central management and decision control for the entire enterprise, and is tightly integrated with Retalix HQC for item/price/assortment/store management and sales reporting. It is also tightly integrated with our Customer Marketing and Management suite and merchandising solutions such as Demand-Driven Replenishment for optimized inventory management and reduced out-of-stocks. Operating on a Windows platform, StorePoint is a pre-integrated, modular solution that allows for easy and cost-effective on-site installation. StorePoint is hardware neutral, supporting a variety of open and proprietary hardware devices, as well as industry-standard forecourt servers. StorePoint is multi-lingual and supports multi-currency/tax for global deployments. It is known for its resilience and robustness and its ability to provide comprehensive functionality for its target sector.
 
The StorePoint software family supports additional integrated modules such as:

 
·
Retalix Fuel – system that supports a variety of fuel payment modes including pre-pay, pay-at-pump, pay-in-store and payment by audio-video-interleave devices, as well as site management configuration and management of sales and wetstock;
 
 
·
Retalix Forecourt Server (RFS)– an innovative software forecourt controller that can serve as a cheaper and a functionally richer option than the traditional hardware-based forecourt controllers, enabling control of fuel pumps, fuel tanks, price polls and other forecourt devices; and
 
 
·
Retalix QSR – touch-screen based, easy-to-use application for selling quick-service food service to match any food service type establishments. Includes the necessary inventory functions defining product tree, waste control, etc. as well as order preparation instructions and interactive kitchen order screens.
 
The Customer Management and Marketing Suite

This is a customer-centric suite of applications (previously known as Retalix Loyalty and promotions) that focuses on increasing consumer retention and influencing consumer shopping patterns, through the use of segmentation-based promotions and other loyalty marketing programs across the retail enterprise, and across multiple shopping channels and touch-points.

Our extensive Customer Management and Marketing suite includes enterprise level applications for management of customer data, loyalty programs, promotion and coupons management, as well as campaign management. In addition, the Customer Management and Marketing suite offers in-store systems that provide functionality for executing promotional and loyalty programs either at the checkout lane or at other touch points (such as at the self-checkout and self-scanning).
 
 
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These applications enable retail marketers to devise a rich variety of chain-wide level marketing campaigns, loyalty and promotional programs that can easily be implemented at any channel such as store, e-commerce, mobile, as well as at any relevant customer touch point.

Seamless integration with our Store & Sales Channels and Merchandising suites provides valuable access to customer, transaction, and item data.  The aggregated data is analyzed by the Customer Management and Marketing analytics module, shopping patterns and preferences are defined and fine-granulated customer insights are generated – all to be “fed” into the Customer Management and Marketing applications. Extensive applications such as Loyalty Management, Campaign Management, Promotions Management, Coupon Manager, Customer Management and Targeted Marketing enable retail marketers to devise a rich variety of chain-wide level marketing campaigns, loyalty and promotional programs that can be easily implemented at any channel level, such as the store, e-commerce, mobile, as well as at every relevant customer touch point.

The Customer Management and Marketing suite drives the benefits of enhanced customer experience, increased customer engagement, retention spending– all leading to increased sales and a stronger retailer brand loyalty.
 
It includes several principal modules, as follows:

Customer Management – A powerful foundation enabling acquisition and aggregation of customer data from multiple online and offline sources, as well as data cleansing, standardization and change detection. Data includes, among other, customer demographic details, their preferences and shopping history.
 
Loyalty Management A combination of two advanced tools:
 
 
1.
Segmentation – tools and rules enabling definition, management and automated maintenance of customer segments, as per demographic and actionable transaction data; and
 
 
2.
Accounts - automated and on-demand, business logic-based aggregation of any measurable customer data – including points, savings, store visits, spend and more.

Promotions Management –Integrates with any loyalty, item catalog or store system, then combines all relevant customer attributes – tiers, segments, meters and others – with business logic and marketing scenarios to enable generation of diverse and highly effective promotions. A vast range of promotions can be set up, including single item, single condition, multi condition, ticket total, and more. Promotions include the ability to handle conflicts between promotions offering rewards based on the same item.  An extensive selection of reward types is available for the members, such as discounted price, free items, member points and coupons.  This module also includes the capability to analyze the effectiveness of the campaigns.
 
Coupon Manager – A module that enables the retailer to define coupons that are issued by the retailer or externally (booklets, vendor coupons, newspaper coupons). Leveraging sophisticated barcode programming and document editing, the retailer is able to set up the coupon with a barcode, a marketing message and image, and then link it to a redeeming promotion. The coupon will be recognized and activated by Retalix Promotion Engine at the POS or any other customer touch-point.
 
Targeted Marketing – Provides a single point of management for development and delivery of promotions and coupons to carefully segmented shoppers. Leverages customer loyalty data and intelligence to accurately design, tailor and deliver the right campaign to the right customer at any given time, then analyzes campaign results to gain valuable insight as a means of improving future customer engagements. This module uses template editors to dynamically design messaging including product promotions and loyalty content, to be communicated through a variety of channels, such as email, SMS, coupons etc.
 
 
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Promotions Engine ( PE) - The very heart of Retalix’s Customer Management & Marketing suite, which transforms granular knowledge about customers into actionable promotion data, and leverages advanced algorithms to assure effective execution of all promotional initiatives.  A real time in-store component that supports multiple POSs and touch points and provides promotions execution on demand, the PE communicates with the central Customer Management & Marketing software, typically located on the central servers, in order to validate loyalty member cardholders and to obtain customer loyalty information required for the real time personalized reward calculation, at any store and at any touch point.
 
Customer Portal - Web-based application for shoppers and loyalty club members.  It enables retailers to advertise loyalty programs, offers, promotions, newsletters etc. shoppers can use it to update loyalty member personal details and preferences as well as to view their loyalty status (points, tier, visits, savings etc).  The Portal is also another channel enabling retailers to provide shoppers with a wide coupon offering, with the ability to select and to add to their electronic wallet to be conveniently redeemed later at the store POS.
 
Retalix Analytics - A reporting solution based on a set of powerful, web-based components, enabling fast high-performance analysis of shared multidimensional information on a variety of Key Performance Indicators, or KPIs.

The Merchandising and Central Management Suite

We provide a suite of comprehensive, modular software solutions which focuses around assortment, merchandise and inventory management for the retail chain or the retail store.  This suite spans a wide set of processes - from analyzing and forecasting the demand, to item purchasing management, and through management of the right assortment to the right stores, including items, pricing and promotions, as well as orders, inventory and replenishment management.

The Merchandising Suite is integrated with our Store and Sales Channel solutions as well as with our Customer Management and Marketing suite, and our Supply Chain Management and Logistics suite, and includes the following solutions:

Item, Assortment, Price and Promotions Management

Extensive functionality of centrally setting and managing the retail chain item catalog, pricebook and assortment – “which items are sold in which prices, and at which stores they are available”. This module includes extensive maintenance of the retailer Master Data Management (MDM) of items, suppliers, store hierarchy etc., as well as distribution mechanisms of this data across the chain.

·
Promotions Management a flexible tool for constructing a wide variety of item promotions across the chain, including data management, multiple promotion conflict resolution, mass coupons etc., integrating with powerful online implementation capabilities at the various store touch points and other sales channels.
 
 
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Inventory Management & Demand-Driven Replenishment Solutions:
 
·
Retalix 10 Inventory Management centrally links demand analytics, replenishment and order planning to give retailers continuous, real-time visibility of both operational inventory and financial value across all store and headquarters locations. The solution is used to manage all aspects of a store's inventory activities within the stores, or on an enterprise level through Web-based interface or online mobile/handheld devices. This solution includes transactions such as: stock count, order generation and review, receiving, returns, transfers between stores, adjustments and more. Also included are abilities to calculate perpetual (“theoretical”) inventory, provide financial inventory valuation, and generate extensive reports. Retalix 10 Inventory Management is part of the Retalix 10 Store Suite, is based on its innovative architecture, and is available in both “thin” (centrally based) or “thick” (installed at the store) deployment options.
 
·
Retalix Store , a store back-office application, is used in North America by Tier 2 and Tier 3 retailers. It has price management and competitive pricing features, Direct Store Delivery (DSD) management (receiving from suppliers) and reconciliation, inventory management and POS connectivity to most existing POS systems.
 
·
Demand-Driven Replenishment (formerly known as Retalix DAX) is a demand forecasting and store replenishment solution, designed specifically for food and fast-moving consumer goods retailers, to optimize inventory management and positions, reduce out-of-stocks, decrease losses from spoilage or damaged goods, and streamline the order process. In addition, Demand Driven Replenishment (DDR) provides a long term store order forecast which is used as input in upstream ordering processes at the distribution centers enabling multi-echelon optimized replenishment, encompassing both distribution centers and stores.
 
 
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Procurement and Supplier Management Solutions:

·
Retalix Purchasing Management (formerly “InSync”) - a centralized procurement solution for retailers and wholesalers that handles “just-in-time” turns, promotions, forward buys and purchase orders between retailers/wholesales and suppliers. The solution allows our customers to view and manage transactions, costing, movement and forecasting data and to make immediate decisions for inventory and margin optimization. Functionality includes online continuous replenishment, inventory tracking and evaluation, recommended ordering, multiple product sourcing, and forecasting.
 
·
Order Management & Billing (OMB) is an enterprise-wide system for streamlining store/warehouse orders - spanning from order entry (manual or automated) and warehouse integration, through configurable costing and invoice processing back to the store.  OMB is integrated with Retalix Purchasing Management and Warehouse Management applications.
 
·
Invoice Reconciliation is a fully automated invoice reconciliation system that integrates a retailer’s accounts payable function with purchasing and receiving, allowing confirmation of invoices in advance of payments to suppliers, through the use of electronic data interchange (EDI) and electronic funds transfer (EFT) technology.
 
  HQ- General Chain Management Solutions

·
Retalix HQ is a retail headquarters system used by Tier 1 through Tier 3 retailers. It has powerful price generation and competitive pricing features, DSD management and reconciliation and POS connectivity to most existing POS systems. Retalix HQ is a client-server solution, and conforms to multiple database types.
 
·
Retalix HQ for Convenience Stores and Fuel retailers (HQC) is a Microsoft .NET web-based application that provides large and mid-size convenience store/fuel chains with a comprehensive, modular solution addressing their retail headquarters needs, including item, price and promotions management, store hierarchy and POS keyboards management, store sales journal and audit, inventory document management and alert capabilities and reporting and analysis. HQC is tightly integrated with StorePoint allowing for fully synchronized information flow between the head-office and the stores.
 
Supply Chain Management and Logistics Suite

Retalix offers a suite of supply chain management and logistics software solutions that provide retailers and distributors a range of applications designed to optimize and manage the flow of goods through complex supply chain networks: from suppliers -- to multi-facility warehouses and distribution centers --  to retail chains. The Retalix software offerings include warehouse management solutions (WMS), transportation management solutions (TMS) and a fully integrated enterprise management application (ERP – Retalix Power Enterprise).

Retalix Warehouse Management (WMS)

  Retalix WMS enables companies to manage complex warehouse facility operations efficiently, increase warehouse service levels and reduce operating expenses.   Retalix WMS utilizes barcode scanning and wireless RF technologies to reduce errors in receiving, picking and packing, shipping and returns. Voice technology enables further automation of the warehouse for Retalix WMS users with hands-free picking devices. WMS also includes optimal storage management, order fulfillment, product replenishment notification, labor forecasting, task management and advanced real-time inventory control.
 
 
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Retalix Transportation Management Solutions (TMS)

Retalix TMS solutions include Transportation Optimization, Dock Scheduling and Yard Management.   These solutions enable distributors and retailers to integrate and manage every aspect of the transportation process to increase profits, while reducing errors and expenses.   Transportation Optimization optimizes inbound and outbound warehouse shipments, reduces transactions and lowers related costs. Dock Scheduling and Yard Management solutions   provide centralized scheduling tools to sync with distribution and warehouse schedules to reduce manual process and dramatically improve dock and yard productivity.
 
Retalix Power Enterprise

Retalix Power Enterprise is a fully integrated ERP application that provides food service distributors and retailers a complete solution to manage and run their business.  The wide breadth of modules in Retalix Power Enterprise fall into key business needs: Financials (Accounts Payables, Accounts Receivables, General Ledger) Inventory Management, WMS, Supply Chain, Customer Relationship Management (CRM), Business Intelligence (BI) and e-business.  Collectively these modules allow for a seamless flow of information eliminating time-consuming processes, while optimizing inventory levels and warehouse flows, improving cash flows and providing real-time operational reports and views.    Retalix Power Enterprise is tightly integrated with a variety of Retalix solutions including WMS, TMS, Power Mobile and Retalix Purchasing.

Retalix Power Mobile Solutions

               Our Logistics suite includes tools which automate routine tasks, eliminate paper and improve communication by providing real time data between drivers and central office employees supporting ERP and WMS applications.    Retalix Power Sell and Sales Force Automation (SFA) solutions enable salespeople to enter orders remotely and access key customer information through laptops and PDAs. Power Delivery is a proof of delivery tool that confirms orders, accepts and processes returns. Power Vending automates the management of vending machines. These mobile solutions are integrated with Retalix WMS, TMS and Power Enterprise Solutions, and help integrate sales and delivery operations outside the warehouse.

SaaS (Software-As-A-Service) and Cloud

Since 2002, we have been offering enterprise level and store level applications, such as electronic payments, sales analysis, product and price management, demand driven replenishment, loyalty management, reporting, BI, mainly, at the time, to small and medium size (Tier 3 and Tier 4) retailers through a SaaS delivery mechanism. Retalix offers these services with an option of subscription-based services, also known as “pay-as-you-go”.

In the last couple of years, we have been seeing accelerated adoption of high-tier retailers replacing on-premise solutions with SaaS solutions, and we now offer our SaaS solutions to all tier retailers.

We have been expanding our SaaS offering. In July 2011, we acquired MTXEPS, a leading provider of innovative, secure, end-to-end electronic payment software solutions for retailers, delivered via SaaS and in-store models, an acquisition aimed at enhancing our market leadership in offering retailers comprehensive, advanced solutions across all customer touch points and sales channels, and enhancing our SaaS offering. In addition, in early 2012, we launched the Retalix 10 Store Suite as a new Service-On-Demand from the cloud. Our Mobile applications also make extensive use of the cloud.
 
 
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Our SaaS offering enables retailers of all sizes to simplify their IT infrastructure and operations, reduce maintenance, IT resources and capital expenditure, and enjoy the benefits of per-demand scalability and elasticity, as well as accelerated time-to-market. Additionally, smaller retailers can thus afford access to enterprise applications that have been only accessible to large retailers.

StoreNext Solutions

Our StoreNext solutions are tailored to smaller regional grocery and convenience store chains and independent operators.  The StoreNext solution offering set for the Tier 3 and Tier 4 grocery market includes feature rich, robust traditional in-store solutions such as our ISS45 and ScanMaster packaged POS software, both being Windows-based open platform software systems designed for the independent and regional chain grocery sectors in the United States, with configurable functions enabling selection of only the subset of capabilities needed. In the convenience store vertical market, StoreNext offers the Retalix StorePoint system, again tailored and packaged for smaller operators. StoreNext also provides a variety of management and enterprise level applications, such as reporting, electronic payments, sales analysis, product and price management, demand forecasting and store replenishment on a SaaS basis and accessible over the Web or private data lines. StoreNext supplements these offerings with best-of-breed POS and server hardware and peripherals, as well as ancillary solutions, such as self-checkout and loss prevention. StoreNext sells and supports its customers primarily through its reseller channels, covering the United States, Canada and the Caribbean, enabling a wide net of sales and support capabilities. This set of specialized solutions, support and channels enables Retalix to efficiently reach and sell to smaller retailers.

StoreNext Israel offers collaborative solutions that provide retailers, suppliers and other trading partners, with the ability to exchange data and collaborate electronically in order to achieve greater efficiencies throughout the supply chain. Having established this community and facilitating its interaction, StoreNext provides suppliers with aggregated retailer data, as well as aggregated market share and other such information.

Our Product Led Services
 
Retalix Global Services comprise of two main units:

 
·
Delivery services provide configuration and customization services of our products to our customers. These services include solution design and implementation of our products from the initial project phases all the way to going live at our customer’s site. We also provide product customization and configuration services, to assure maximum adaptation to our customer business processes and maximum accommodation of their business logic. Our delivery services enable retailers to enhance their current information systems and to manage upgrades and conversions. We provide custom application development work for customers billed on a project or time and material basis. We monitor our customization projects on a regular basis to determine whether any customized requirements should become part of our product offerings. For example, we have incorporated many changes requested by our tier 1 retail food customers into our POS product offerings.
 
 
·
SI Services, which are structured around six main services practices covering all project life cycle – from business consulting and project initiation, through testing, training, rollout and ongoing support:
 
 
·
SI Testing;
 
·
Training and Documentation;
 
·
Support Services;
 
·
Deployment Services;
 
·
Program Management; and
 
·
Business Consultancy.
 
 
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Our SI services delivery and engagement model can range in size and scope to present a flexible model to best fit our customer’s needs from shared delivery through turnkey projects and up to fully managed services. In a shared delivery we accompany and take part in the customer efforts by assigning Retalix experts. Turnkey projects are where we take responsibility over specific service domains or for a specific period, like new version rollout and/or testing/support/training. For fully managed services we take long term responsibility for specific activities (usually a few years). Our SI business is conducted on a global basis, with onsite and offsite capabilities.

Principal Markets and Customers
 
The following table provides a breakdown by geographical market of our revenues and relative percentages during the last three fiscal years (dollars in thousands):
 
   
2009
   
2010
   
2011
 
                                     
Israel
  $ 21,284       11.1 %   $ 24,621       11.9 %   $ 25,688       10.9 %
United States
  $ 112,739       58.6 %   $ 110,724       53.4 %   $ 123,606       52.4 %
International*
  $ 58,370       30.3 %   $ 72,029       34.7 %   $ 86,746       36.7 %
                                                 
Total
  $ 192,393       100 %   $ 207,374       100 %   $ 236,040       100 %
* The International geographical market includes revenues from customers in Europe
  $ 39,296       20.4 %   $ 41,341       19.9 %   $ 50,888       21.5 %
        
See "Operating Results—Comparison of 2009, 2010 and 2011" under Item 5.A of this annual report for a breakdown of our revenues by category of activity.
 
The following list is a representative sample of companies that purchased an aggregate of at least $200,000 of our products and services in 2010 and 2011 combined.
 
Grocery
 
Convenience Stores and Fuel Retailers
 
Distributors
         
A.S. Watson (Europe, Asia)
Big Y (US)
Carrefour (Europe)
Blue Square (Israel)
Costco (US)
Dairy Farm (Hong Kong)
Delhaize (Europe)
Hannaford Bros. (US)
Hy-Vee (US)
Intermarche (Europe)
Morrisons (UK)
Overwaitea (Canada)
Sainsbury's (UK)
The Southern Co-Op (UK)
SaveMart (US)
Shoprite Checkers (South Africa)
Shuphersal (Israel)
Supermarketen B.V.  (Netherlands)
SuperValu Inc (US)
Tesco (Global)
Wincor Belgium
Woolworths (Australia, South Africa)
Zen Nihon (Japan)
Coles (Australia)
Foodstuffs (Australia)
Autogrill (Italy)
 
BP (Global)
Casey's General Stores Inc.  (US)
Delek (Israel)
Husky Oil (Canada)
IKEA (Global)
Love's (US)
Paz (Israel)
PetroChina (China)
Pilot Corporation (US)
Sasol Oil (South Africa)
The Pantry (US)
 
 
Food Services of America (US)
Metcash (Australia)
Odom Corp. (US)
MassDiscounters (South Africa)
Euro Car Parts (UK)
Coca Cola Bottlers (Puerto Rico)
 
 
 
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Sales and Marketing

We market and sell our products and services through direct sales, distributors and local business partners.

We market and sell our products and services to high tier retailers, convenience store chains and major fuel retailers as well as other FMCG retailers through a direct sales force in the United States, Europe, Asia, Australia, South Africa and Israel, augmented by a combination of channel partners and integrators. In the United States, we target Tier 3 and Tier 4 food retailers indirectly through our channel partners, mainly through our StoreNext initiatives. For Tier 1 and 2 customers we also provide a range of product led services.

Direct Sales

Our direct sales force, consisting of experienced account executives, account managers, technical pre-sales engineers and sales personnel in the field, are located in the United States, Europe, Asia, Australia, South Africa and Israel. Our sales force sells our products and services directly to general merchants, supermarkets, convenience stores, fuel and general merchandise retailers and distributors as well as other FMCG retailers within these regions and also relies on trade shows, promotions and referrals to obtain new customers.
 
Marketing Alliances
 
We participate, from time to time, in marketing programs and other forms of cooperation with several companies, including Microsoft, HP, IBM and others.

We work closely and have a partner relationship with Microsoft, where we are considered a Strategic Global independent software vendor, or ISV. We cooperate on both in technological and marketing aspects.

We also cooperate with HP in both technological and marketing aspects.

In 2001, we joined IBM Corporation’s ISV, business partner program designed to promote marketing partnerships between independent software vendors and IBM. We work with IBM on several large accounts, as well as in our StoreNext business in the United States. We are included on IBM’s ISV partner list.

We may also explore additional such relationships with other major players in the future.

Partner Sales

We have or periodically put in place distribution agreements for the sale of some of our products and services with partners in various places around the globe including Australia, Bermuda, Canada, Chile, China, Finland, Greece, the Balkans, Japan, Mexico, New Zealand, Norway, the Philippines, Russia, South Africa, Switzerland, the United Kingdom, the United States and Venezuela. Some of these partners operate regionally in countries in addition to the country in which they are headquartered.
 
 
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We believe that qualified partners can be an effective sales channel for our products and services in their respective markets sometimes assisting us to overcome language and cultural barriers. We intend to continue to recruit partners and distributors in countries where we have identified sufficient sales potential and a suitable market profile.

Competition

The competition in the market for software solutions and services supporting our customers remains strong but largely constant versus the last few years. Our principal competition in the supermarket and grocery market for in-store solutions has traditionally come from integrated IT vendors such as IBM, NCR and Wincor-Nixdorf (which usually provide their software integrated with their hardware), as well as local or regional software providers. On the enterprise level, our principal competitors are Oracle and SAP, as well as in-house developed solutions. We also experience competition from both independent retail industry focused software vendors such as JDA and Aldata. In addition, we anticipate future competition from new market entrants that develop retail food software solutions. In the convenience store and fuel market, our competition includes Radiant Systems (now part of NCR), Pinnacle Systems, Gilbarco, VeriFone and Wincor-Nixdorf. In the supply chain management markets, our competition includes Manhattan Associates, Oracle, Red Prairie and SAP, as well as companies such as AFS Technologies Inc., Vermont Information Processors and Vormittag Associates Inc. Some competitors, such as Wincor-Nixdorf and IBM, are also our marketing partners in several market sectors or locations.

The market for retail software systems is highly competitive and subject to rapidly changing technology. We believe that the primary competitive factors impacting our business are as follows:

 
·
retail and business know-how and expertise;
 
 
·
breadth and innovation of product offerings;
 
 
·
advanced product architecture which enables retailers to cater to their customers seamlessly and efficiently across a multitude of existing and emerging touch points;
 
 
·
product led services business model;
 
 
·
interoperability of solutions and solution components;
 
 
·
suitability for multi-national, multi-concept retailers;
 
 
·
proven track record in the high volume, high complexity segments within which we compete;
 
 
·
established reputation with key customers;
 
 
·
products that balance feature/performance requirements with cost effectiveness;
 
 
·
scope and responsiveness of professional services and technical support;
 
 
·
compatibility with emerging industry standards;
 
 
·
ease of upgrading and ease of use; and
 
 
·
timeliness of new product introductions.
 
 
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Suppliers
 
We sell software and hardware manufactured by third parties to some of our customers, such as point of sale and other store-level computer hardware, mobile computer terminals, scanning equipment, printers, equipment used in warehouses, etc. We buy these hardware components from various suppliers including HP, DataLogic, Fujitsu, IBM, LXE, Motorola and Vocollect.
   
C. Organizational Structure
 
We have the following subsidiaries and related companies:
 
Subsidiary
 
Country of
Residence
 
Proportion of voting
power held
 (%)
   
Proportion of ownership
interest held
(%)
 
                 
Retalix Holdings Inc.
 
United States
   
100
     
100
 
Retalix USA Inc.(1)
 
United States
   
100
     
100
 
Retail Control Systems Inc. (1)
 
United States
   
100
     
100
 
StoreNext Retail Technology LLC (1)
 
United States
   
100
     
100
 
MTXEPSLLC (1)
 
United States
   
100
     
100
 
PalmPoint Ltd.
 
Israel
   
100
     
100
 
Tamar Industries M. R. Electronic (1985) Ltd. (2)
 
Israel
   
100
     
100
 
StoreAlliance.com Ltd. (3)
 
Israel
   
51
     
51
 
StoreNext Ltd. (4)
 
Israel
   
51
     
51
 
TradaNet Electronic Commerce Services Ltd. (4)
 
Israel
   
51
     
51
 
DemandX Ltd. (4)
 
Israel
   
51
     
51
 
P.O.S. (Restaurant Solutions) Ltd.
 
Israel
   
100
     
100
 
Retalix Israel (2009) Ltd. (5)
 
Israel
   
100
     
100
 
Kohav Orion Advertising and Information Ltd.
 
Israel
   
100
     
100
 
Retalix (UK) Limited
 
United Kingdom
   
100
     
100
 
Retalix Italia S.p.A
 
Italy
   
100
     
100
 
Retalix France SARL
 
France
   
100
     
100
 
Retalix Australia PTY Ltd.
 
Australia
   
100
     
100
 
Retalix Japan Ltd.
 
Japan
   
100
     
100
 
Retalix Technology (Beijing) Co., Ltd.
 
China
   
100
     
100
 
_____________________

(1)
Held through our wholly-owned subsidiary, Retalix Holdings Inc.
(2)
Holds 26.8% of the issued share capital of StoreAlliance.Com, Ltd. and 100% of the issued share capital of Retalix Israel (2009).
(3)
Including holdings through our wholly-owned subsidiary, Tamar Industries M. R. Electronic (1985) Ltd.
(4)
Wholly owned by our subsidiary, StoreAlliance.com Ltd.
(5)
Held through our wholly-owned subsidiary, Tamar Industries M. R. Electronic (1985) Ltd. (formerly named Net Point Ltd.)
      
StoreAlliance.com Ltd. is a Retalix subsidiary in which as of December 31, 2011 we held approximately 50.5% interest directly and through one of our wholly owned subsidiaries. In addition there are three other Israeli shareholders in StoreAlliance.com Ltd.: Discount Investment Corporation Ltd.; Isracard, a subsidiary of Bank Hapoalim, one of Israel’s largest banks; and the Central Bottling Company Ltd. (Coca Cola Israel). In addition, approximately 270,000, or the Subsidiary Plan, and 36,000, or the Subsidiary 2004 Plan, ordinary shares of  StoreAlliance.com Ltd., or approximately 7.7% and 1%, respectively, of its issued and outstanding share capital, were reserved for issuance upon the exercise of options granted to our StoreAlliance.com Ltd. employees.  As of December 31, 2011, 65,000 options under the Subsidiary Plan were exercised, 27,033 options under the Subsidiary 2004 Plan were outstanding and all unexercised options were forfeited.  An additional 90,000 ordinary shares of StoreAlliance.com Ltd., or approximately 2.3% of its issued and outstanding share capital, are reserved for issuance upon the exercise of options granted to employees of Coca Cola Israel.

 
43

 
 
D. Property, Plants and Equipment

Our Israeli corporate headquarters are located in Ra’anana, Israel, where we occupy approximately 9,600 square meters of office space, of which approximately 6,500 square meters represent ownership rights under a long-term lease from the Israel Lands Administration, and approximately 3,100 square meters are leased from other third parties for shorter terms.
 
In addition to our corporate headquarters in Ra’anana, Israel, we currently lease approximately 50,400 square feet of office space in Plano, Texas that serves as our U.S. headquarters. We also lease offices in Arizona, Kansas, Michigan, Nebraska, Ohio, Oklahoma, Pennsylvania and Texas, as well as in Stevenage, England, Bollengo, Italy, Paris, France, Sydney, Australia, Tokyo, Japan, China (Beijing) and Petah-Tikva, Israel. We believe our facilities are adequate for our current and planned operations.
ITEM 4A – UNRESOLVED STAFF COMMENTS
 
None.
ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes to those financial statements included elsewhere in this annual report.

A. Operating Results
 
Overview
 
We generate revenues from the sale of licenses and maintenance for our software, SaaS, services (both delivery and SI as described above), and the sale of complementary third party software and computer hardware equipment as well as its related third party maintenance (such as point of sale and other store-level computer hardware, mobile computer terminals, scanning equipment, printers, etc.) mainly to lower tier customers.

In 2011, we executed on the strategy formulated and articulated the previous year. We believe that the strategy is sound. All of the major growth engines that we defined, Retalix 10 Store Suite (which was announced in January 2011); value-added services leveraging our products and retail expertise; new adjacent markets arising from both new geographies and the blurring of the retail segments; and building on our efforts in providing SaaS, contributed to our growth in 2011 and continue to be the foundations for our business looking forward. This contribution came across most territories and business units.
 
The investments in the above growth engines, as well as other infrastructure, were made and continue to be made, in parallel to our growing revenues and profitability, successfully delivering customer projects and signing new customers.

On a more tactical level, we continue to enhance our sales pipeline and execution of our strategy, by undertaking a combination of the following factors:

 
·
a focus on our growth engines;
 
·
the enhancement of our customer facing and sales teams;
 
·
structured and continuously improved  sales process;
 
·
a unique and broader offering to the market via the addition of our new services offering; and
 
·
the large total addressable market available to Retalix attained by virtue of our new products and services and the blurring of the retail segments.
 
 
44

 
 
Application of Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include our accounts and the accounts of our subsidiaries.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions.

We believe that the accounting policies discussed below are critical to our financial results and to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Allocation of expenses

We make estimates and judgments to classify certain expenses to various expense line items in our statement of income.  Whether we classify a particular expense as a cost of revenues or as an operating expense affects the amount of our gross profit but does not affect our operating income.  Using our time reporting data, which reflects the type and quantity of work performed by our employees in our various business activities, we classify our expenses applying certain guidelines and principles as follows:  first, we classify all billable customer work as cost of revenues; second, we classify all research and development work related to our product enhancement activities as research and development expenses.  Finally, we classify expenses as sales and marketing or as general and administrative specifically based on their nature. Certain overhead costs are attributed to the various expense line items based on the portion of each cost group's employees in the time reporting data.
   
Revenue recognition

Our revenue recognition policy is critical because our revenue is a key component of our results of operations. We derive our revenues from the licensing of integrated software products. To some extent we also derive revenues from the sale of complementary third party software and hardware equipment as well as its related third party maintenance. We derive the majority of our revenues from maintenance and other professional services which are principally software changes and enhancements requested by customers, system integration services, SaaS as well as on-line application, information and messaging services, mostly associated with products sold by us and which we classify as revenues from services.

Determining whether and when some of the criteria required to recognize revenue have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific objective evidence of fair value exists for each undelivered element and to determine whether and when each element has been delivered. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
 
 
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Revenues from sales of software license agreements are recognized when all of the criteria in ASC 985-605, “Software Revenue Recognition”, are met. Revenues from products and license fees are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, no further obligations exist and collectability is probable.

Revenues from software licenses that require significant customization, integration and installation are recognized based on ASC 605-35, “Construction-type and production-type contracts”, according to which revenues are recognized on a percentage of completion basis. Percentage of completion is determined based on the “Input Method” and when collectability is probable. Upon delivery, if uncertainty exists about customer acceptance, revenue is not recognized until acceptance is provided. Provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of the losses is identified. As of December 31, 2011, no such estimated losses were identified.

Where software license arrangements involve multiple elements, the arrangement consideration is allocated using the residual method. Under the residual method, revenue is recognized for the delivered elements when (1) Vendor Specific Objective Evidence, or VSOE of the fair values of all the undelivered elements exists, and (2) all revenue recognition criteria of ASC 985-605, as amended, are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Our VSOE of fair value for maintenance is based on a consistent statistical renewal percentage derived from the majority of maintenance renewals. Revenues from maintenance services are recognized ratably over the contractual period or as services are performed.

Certain of the Company’s multiple element arrangements include hardware that functions together with software to provide the essential functionality of the product. Accordingly, such arrangements entered into or materially modified on or after January 1, 2011 are no longer accounted for in accordance with the FASB’s software revenue guidance rather they are accounted for in accordance with the new guidance issued in October 2009 by the Financial Accounting Standards Board, ASU 2009-14 “Certain Revenue Arrangements That Include Software Elements”. Although ASU 2009-14 did not have a material impact to the Company’s financial statements, the amended guidance could be important to the Company in the future due to the integration of Perceptive Software and the anticipated growth of its business. The adoption of ASU 2009-14 did not result in a change in the amounts or timing of revenue recognition for the following Company’s multiple deliverable arrangements that contain software components:

 
·
Software included within the equipment component that was considered incidental under the previous guidance and will continue to be accounted for as part of the sale of the equipment under the amended guidance.

 
·
Software that was not considered incidental under previews guidance, and does not function together with the non-software components to deliver the equipment’s essential functionality under the new guidance, will continue to be accounted for under the industry-specific software revenue recognition guidance.
 
For all software revenue arrangements containing software that is “more than incidental” to the product as a whole that were entered into prior to January 1, 2011 and that have not been subsequently materially modified, as well as multiple element software arrangements without hardware, the Company allocates revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on VSOE of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If the Company is unable to establish VSOE of fair value for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, the Company recognizes the arrangement fee ratably over the PCS period or over the product's estimated economic life, as applicable.
 
 
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In April 2010, the FASB issued an amendment to the accounting and disclosure for revenue recognition - milestone method. This amendment, effective for fiscal years beginning on or after June 15, 2010 (early adoption was permitted), provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. The adoption of the amendment by us did not have material impact on our consolidated financial statements.

Revenues from professional services that are not bundled or linked to a software sale are recognized as services are performed in accordance with the provisions of ASC 605-20 “Services”.

Hardware sales are recognized on a gross price basis, in accordance with ASC 605-45, 605-45 “Principal Agent Considerations.

In cases where the products are sold to smaller retailers, through resellers, revenues are recognized as the products are supplied to the resellers in accordance with the provisions of ASC 605-15, “Products”. In specific cases where resellers have the right of return or we are required to repurchase the products or in cases when we guarantee the resale value of the products, revenues are recognized as the products are delivered by the resellers.

Revenues from SaaS and on-line application, information and messaging services, are recognized as rendered in accordance with the provisions of ASC 605-20.

Deferred revenue includes transactions for which payment was received from customers, for which revenue has not yet been recognized as well as obligations related to the provision of maintenance services.

The Company recognizes revenues net of Value Added Tax.

Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Should changes in conditions cause management to determine that these guidelines are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Goodwill and Intangible Assets

ASC 350, “Intangibles - Goodwill and Other”, requires that goodwill and intangible assets with an indefinite life be tested for impairment on adoption and at least annually thereafter. Goodwill and intangible assets with an indefinite life are required to be written down when impaired, rather than amortized as previous accounting standards required. Goodwill and intangible assets with an indefinite life are tested for impairment. Goodwill impairment testing is a two-step process. The first step involves comparing the fair value of a company’s reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
 
 
47

 

In September 2011, the FASB amended the guidance for goodwill impairment testing. According to this amendment, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. We have not yet adopted this amendment.

Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit.

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relations, acquired developed technologies and trade names, and values of open contracts. In addition, other factors considered are the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

If we do not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of depreciation and amortization expense may not appropriately reflect the actual impact of these costs over future periods, which will affect our net income.

Fair values are determined by using a discounted cash flow methodology for each business unit. The discounted cash flow methodology is based on projections of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit. We also consider factors such as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements. Additionally, the discounted cash flow analysis takes into consideration cash expenditures for further product development.  We perform our annual impairment tests in the fourth quarter.  In the fourth quarter of 2011, as a result of our analysis, we determined that the fair value of each unit supported its carrying amount.  We also conduct a sensitivity analysis to assess whether impairment would occur if certain parameters, such as the unit’s projected growth rate and its weighted average cost of capital, were adversely changed to a reasonable degree based on market conditions and determined that the fair value of each unit supported its carrying amount even under such revised assumptions.
 
Stock based compensation
 
ASC 718 “Compensation – Stock Compensation” requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.   We selected the Black-Scholes option pricing model as the appropriate fair value method for our stock-options awards based on the market value of the underlying shares at the date of grant. We recognize compensation costs using the accelerated vesting attribution method that results in an accelerated recognition of compensation costs in comparison to the straight line method.

In addition, we use historical stock price volatility as the expected volatility assumption required in the Black-Scholes option valuation model. As equity-based compensation expense recognized in our consolidated statements of income is based on awards ultimately expected to vest, such expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
 
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We account for equity instruments issued to third party service providers (non-employees) in accordance with the fair value based on an option-pricing model, pursuant to the guidance in ASC No. 505-50 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services”.

Accounting for stock based compensation requires significant subjective judgment. Such judgment is implemented in this context in choosing the appropriate pricing model upon which the fair value of stock based compensation is measured as well as a variety of factors involved in the fair value computation, such as volatility, rate of forfeiture, etc.

Should economic events or our business or operational characteristics change, or should there be a change in the habits of our employees with respect to stock option exercises and forfeitures, future determinations as to fair value may change the value attributed to stock based compensation and impact our results of operations.

Tax provision
 
We operate in a number of countries and, as such, fall under the jurisdiction of a number of tax authorities. We are subject to income taxes in these jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on our balance sheet. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is provided for if it is more likely than not that some portion of the deferred tax assets will not be recognized. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business. In our opinion, sufficient tax provisions have been included in our consolidated financial statements in respect of the years that have not yet been assessed by tax authorities. On a quarterly basis, we also reassess the amounts recorded for deferred taxes and examine whether any amounts need to be added or released.
 
Additional discussion of accounting characteristics

Our functional currency

Our consolidated financial statements are prepared in U.S. dollars in accordance with U.S. generally accepted accounting principles. The currency of the primary environment in which we operate is the U.S. dollar. We mainly generate revenues in dollars or in non-dollars currencies linked to the dollar. As a result, the dollar is our functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (stated below) reflected in the statements of income (loss), the following exchange rates are used: (1) for transactions – exchange rates at transaction dates or average rates of the period reported and (2) for other items (derived from non-monetary balance sheet items such as depreciation and amortization, changes in inventories, etc.) – historical exchange rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate.

The functional currency of Retalix Italia, StoreAlliance.com Ltd., StoreNext Ltd., TradaNet Electronic Commerce Services Ltd., DemandX Ltd., or, collectively, the StoreAlliance group, is their local currency (Euro and New Israeli Shekel, respectively). The financial statements of Retalix Italia are included in our consolidated financial statements translated into dollars in accordance with ASC 830 “Foreign Currency Translation” (“ASC 830”). Accordingly, assets and liabilities are translated at year end exchange rates, while operating results items are translated at average exchange rates during the year. Differences resulting from translation are presented in shareholders’ equity under “accumulated other comprehensive income (loss)”. The financial statements of the StoreAlliance group are included in our consolidated financial statements translated into dollars in accordance with ASC 830. Accordingly, assets and liabilities are translated at year end exchange rates, while income statement items are translated at average exchange rates during the year. Differences resulting from translation are presented in shareholders’ equity under “accumulated other comprehensive income (loss)”.
 
 
49

 

Sources of Revenue
 
We derive our revenues from the licensing of integrated software products, and to some extent also from the sale of complementary third party software and hardware equipment, all of which we classify as revenues from product sales. We also derive revenues from maintenance and other services which are principally software changes and enhancements requested by customers and system integration services, all associated with our software products, which we classify as revenues from services. In addition, we provide SaaS and business flow communication services between retailers and suppliers, data analysis and supply chain information services to suppliers as well as manufacturers and on-line application services primarily to small independent retailers. We do business through subsidiaries in the United States, Israel, the United Kingdom, Italy, France, Japan, China and Australia.

Our relationships primarily with our large customers are long-term in nature, as they involve the supply of products that require considerable customer commitment, attention and investment of financial and human resources.

During 2009, 2010 and 2011, none of our customers accounted for 5% or more of our total revenues.

Product Sales

Product sales consist of the sale of software mainly through perpetual license agreements with direct customers, integrators, distributors and dealers as well as third party hardware.  Such hardware could typically be point of sale and other store level computer hardware, mobile computer terminals, scanning equipment, printers, optical equipment used in warehouses, etc.

Services

Revenues from services consist of:

 
·
Maintenance – consists primarily of technical support and use of help-desk services, dealing primarily with difficulties or failures occurring from erroneous use of software products bugs, etc. In some cases the maintenance includes unspecified upgrades, which are mainly bug fixes. We provide maintenance services primarily based on annual arrangements or, alternatively, through dedicated-team arrangements based on professional personnel fully dedicated to the customer and directed by him primarily in the context of performance of change requests and for relatively long periods of time. In some cases, we provide maintenance services on a per-call basis.
 
 
·
Development/Enhancement services in the form of short-term projects – primarily fixed price or hourly/daily fee arrangements for the enhancement of our products to accommodate the request of a specific customer. Examples to this type of revenue could be the development of a new report, a simple type of a promotion or a simple interface to an external system based on the needs specified by the customer. These projects are small in volume and in most cases take only days to complete. Such services can also be provided in the context of dedicated-team arrangements, where specified amounts of personnel are dedicated to customers, charged to the customer and paid for, on the basis of daily rates.
 
 
50

 
 
 
·
Development/Enhancement services in the form of long-term projects – consists of relatively significant customizations which are of a longer-term in nature. Such tasks are most commonly performed for existing customers who request relatively complicated enhancements such as complicated promotion programs or complicated customizations required due to new fiscal regulations. Such services can also be provided in the context of dedicated-team arrangements.
 
 
·
SaaS and On-line information services, messaging and application services including communication and business messaging services between retailers and suppliers, provision of market data analysis and operational supply chain information services to suppliers and manufacturers and a variety of remote on-line retail and operational applications sold to retailers through monthly subscription fee arrangements, also referred to as Connected Services. These revenues were not significant in 2009 and prior years. Most of these services are based on periodic subscription fees and thus are recognized over the service period. Some of these services such as EDI messaging services are charged to customers on the basis of volumes of usage.
 
 
·
System Integration services – designed to deliver strategic, value-added services to ensure the highest possible implementation quality. The SI Services are structured around six main services practices covering all project life cycle, from business consulting and program management, through testing, training, rollout and ongoing support. SI services include: Acceptance Testing and Automated Testing; Training and Documentation; Support (help desk, 1 st and 2 nd levels); Deployment/rollout; Program Management; and Business Consultancy.
 
Multiple element agreements

Our sales also consist of multiple element arrangements that in most cases involve the sale of licenses as well as maintenance services and other professional services in regard to the products sold.

Sales to integrators

In some cases, we sell our products and provide our services to integrators to which typical customers outsource their IT activities. In these cases, the integrators are the actual customers in all material respects.

Sales through resellers

We also sell our products, primarily to smaller retailers, through resellers.
 
 
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Cost of Revenues

Cost of revenues is comprised of the cost of product sales and the cost of services. Furthermore, intangible assets created through purchase price allocations such as customer base and technology are amortized to cost of revenues over their expected periods of life. In addition, generally we are obligated to pay the Israeli government royalties at a rate of 3% to 5% on revenues from specific products resulting from grants, up to a total of 150% of the grants received. These royalties are presented as part of our cost of revenues:

 
·
Cost of Product Sales   consists of costs mostly related to cost of third party hardware and software licenses and amortization of intangible assets. Historically, our revenues from hardware sales represented a relatively small portion of our overall revenues.  However, hardware sales constitute a significant portion of StoreNext USA's revenues, in respect of which cost of product sales reflect the significant hardware costs.
 
 
·
Cost of Services consists of costs directly attributable to service sales, including compensation, travel and overhead costs for personnel providing software support, maintenance, development, system integration, market information, messaging, Connected Services and other services. Because the cost of services is substantially higher, as a percentage of related revenues, than the cost of licenses, our overall gross margins may vary from period to period as a function of the mix of services versus products revenues in such periods. The integration of acquired activities which have higher percentages of revenues from services than product sales, as well as lower gross margins for their service related revenues, caused our cost of services to increase over the years.

 
·
Operating Expenses consist of research and development expenses, net, selling and marketing expenses, and general and administrative expenses. In 2009, 2010 and 2011, expenses under ASC 718 resulted in annual compensation expenses of $2.2 million, $3.9 million and $2.3 million, respectively, before taxes.

 
·
Research and Development Expenses, Net consist primarily of salaries, outsource, subcontractors, related benefits, depreciation of equipment for software developers and amortization of intangible assets such as technology and customer base acquired as part of acquisitions of companies or business activities. These expenses are net of the amount of grants, if any, received from the Israeli government for research and development activities. Under Israeli law, research and development programs that meet specified criteria and are approved by the Office of the Chief Scientist are eligible for grants of up to 50% of certain approved expenditures of such programs.  See “Liquidity and Capital Resources--Grants from the Office of the Chief Scientist” below.
 
 
·
Selling and Marketing Expenses consist primarily of salaries, related benefits, travel, trade shows, public relations and promotional expenses. We compensate our sales force through salaries and incentives. As we continue to focus our efforts on selling our products directly, we also pay commissions to some of our sales personnel.
 
 
·
General and Administrative Expenses consist primarily of salaries, related benefits, professional fees, bad debt allowances and other administrative expenses. In 2009 it included expenses incurred in connection with the process that led to the private placement transaction that was closed in November 2009, which appear in our statement of income in a different line-item called indirect private placement costs. In 2011 it included expenses incurred in connection with the merger and acquisition activities.
 
 
·
Other (Income) Expenses, Net consists primarily of gains or losses with respect to ordinary course dispositions of fixed assets, product line and proceeds resulting from investment in a subsidiary.
 
 
·
Financial Income (Expenses), Net consists primarily of interest earned on bank deposits, tax refunds and securities, interest paid on loans, credit from banks, expenses resulting from, net losses or gains on forward contracts or zero cost cylinders and net losses or gains from the conversion into dollars of monetary balance sheet items denominated in non-dollar currencies.
 
Share in Income (Losses) of an Associated Company

Share in income (losses) of an associated company represents our share in the income (losses) of Cell-Time Ltd., StoreAlliance.com Ltd., our subsidiary, held 33.3% of Cell-Time’s shares and sold the shares it held for an immaterial amount during the fourth quarter of 2011.
 
 
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Minority Interests in Losses (Gains) of Subsidiary

Minority interests in losses (gains) of subsidiaries reflect the pro rata minority share attributable to the minority shareholders in losses or gains of our subsidiary, StoreAlliance.com Ltd.

Operating Results

The following table sets forth the percentage relationship of certain statement of operations items to total revenues for the periods indicated:
 
   
Year ended December 31,
 
   
2009
   
2010
 
2011
 
                 
Revenues:
               
   Product sales
    30.2 %     28.0 %     21.6 %
   Services
    69.8       72.0       78.4  
       Total revenues
    100.0       100.0       100.0  
Cost of revenues:
       
   Cost of product sales
    20.5       16.9       13.6  
   Cost of services
    38.8       42.7       45.2  
       Total cost of revenues
    59.3 %     59.6 %     58.8 %
Gross profit
    40.7 %     40.4 %     41.2 %
   Operating expenses:
   
     Research and development expenses, net
    15.1       14.3       13.6  
     Selling and marketing expenses
    9.7       8.4       11.1  
     General and administrative expenses
    10.9       11.9       11.2  
     Other income, net
            (0.1 )     (0.3 )
 Indirect private placement costs
    0.9       -          
                         
       Total operating expenses
    36.6       34.5       35.6  
Income  from operations
    4.1       5.9       5.6  
Financial income, net
    0.9       1.7       0.8  
Income  before taxes on income
    5       7.6       6.4  
Taxes on income
    (1.8 )     (2.2 )     (0.2 )
Minority interests in gains of subsidiaries
    (0.2 )     (0.2 )     (0.4 )
       Net income
    3 %     5.2 %     5.8 %
 
Comparison of 2009, 2010 and 2011

Revenues
 
   
Year ended December 31,
 
   
2009
   
2010
   
2011
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(U.S. $ in millions)
   
% of total revenues
   
% Change
 
                                                 
Product sales
  $ 58.1     $ 58.0     $ 50.9       30 %     28 %     21.6 %     0 %     (12 )%
Services
    134.3       149.4       185.1       70 %     72 %     78.4 %     11 %     24 %
   Total revenues
  $ 192.4     $ 207.4     $ 236       100 %     100 %     100 %     8 %     14 %
 
 
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·
Discussion of 2011 Results Compared to 2010

During 2011, our revenue level was higher than 2010, mainly due to significant increases in services sales, primarily due to the moderate improvement of global economic conditions, and especially in the environment where our large customers operate, as well as our expanded service offering and marketing of our services and improvement of our positioning with existing and new customers offset by a decrease in our product sales. Our services business is usually less affected by adverse market conditions because it stems from the on-going needs of customers, while product sales are usually affected more because of a tendency of customers to postpone the purchase of new products during such periods. Product revenues in 2011 consisted of 46% license sales and 54% hardware sales, compared to 48% and 52%, respectively, in 2010. During 2011, our revenues from license sales declined 15% to $23.4 million, compared to $27.7 million in 2010 as a result of the transition into our new integrated product suite offering, Retalix 10, which was launched in January 2011, and while we built the marketing for this product and customers explored the advantages of the product. In 2011, hardware sales declined 9% to $27.5 million, compared to $30.3 million in 2010 as we improved our revenue mix by focusing on software license and service sales over the resale of hardware from other manufacturers.

The increase in services revenues in 2011 was mainly due to the expansion of our global delivery and system integration units bringing new opportunities and service offering through a higher number of contracts with new customers and increased services to existing customers.  We have several large customers, with which we have relatively significant dedicated team arrangements, which are based on professional personnel exclusively dedicated to and controlled by these customers and which provide maintenance as well as project-oriented services. As a result, service revenues from these large customers cover both maintenance and project-oriented services, and we do not differentiate between the two. Our total revenues from services in 2011 consisted of 34% from maintenance and 66% from professional services, including all services provided through customer-dedicated personnel arrangements. Revenues from our SaaS offerings are also included with the total services revenues.  SaaS is currently a small part of our revenues but we expect it to grow due to new SaaS offerings and marketing of these services and our recent acquisition of MTXEPS.  MTXEPS was integrated into our service offering as part of our Global Payments Group and we expected minimal incremental revenue contribution for the remainder of 2011 from the acquisition of MTXEPS due to the timing of the acquisition, integration efforts, and the fact that we were already receiving revenue from a previous partnership agreement with MTXEPS.

 
·
Discussion of 2010 Results Compared to 2009

Our product revenues in 2010 consisted of 48% license sales and 52% hardware sales, compared to 42% and 58%, respectively, in 2009. During 2010, our revenues from license sales increased 13% to $27.7 million, compared to $24.5 million in 2009. In 2010, hardware sales declined 11% to $30.3 million, compared to $34 million in 2009.

The increase in services revenues in 2010 was mainly due to higher number of contracts with new customers and increased services to existing customers.  Our total revenues from services in 2010 consisted of 41% from maintenance and 59% from professional services, including all services provided through customer-dedicated personnel arrangements as mentioned above.
 
 
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Year ended December 31
 
   
2009
   
2010
   
2011
 
   
U.S. $ in thousands
 
                   
Revenues:
                 
U.S
    112,739       110,724       123,606  
Israel
    21,284       24,621       25,688  
International*
    58,370       72,029       86,746  
Total revenues
    192,393       207,374       236,040  
* The international segment includes revenues from customers in Europe
    39,296       41,341       50,888  
 
 
·
Discussion of 2011 Results Compared to 2010

We conduct business globally and generate revenues from customers located in three geographical markets:  the U.S. region (which includes the United States, Canada and Latin America), International (which includes Europe, Africa, Asia and the Pacific) and Israel. During 2011, our U.S. revenues constituted 52% of total revenues, our international revenues constituted 37% of total revenues, and our Israeli revenues constituted 11% of total revenues, compared to 53%, 35% and 12% in 2010, respectively.
 
During 2011, our U.S. region revenues increased by 11.6% to approximately $123.6 million, as compared to approximately $110.7 million in 2010. The increase is mainly due to growth in maintenance, professional services and an increase in SaaS revenues and was partially offset by a reduction in hardware revenues, as a result of a change in our revenue mix focus.

During 2011, our international revenues increased by 20.4% to $86.7 million, as compared to $ 72 million in 2010, primarily due to an increase in services we traditionally provided and new service offerings. Our international revenues may fluctuate from period to period in the near term, as these sales are still affected to a great extent by a small number of relatively large customers, as well as a result of currency fluctuations and economic uncertainty in Europe.

During 2011, our Israeli revenues increased by 4.4 % to $ 25.7 million, as compared to $ 24.6 million in 2010. The increase was primarily due to an increase in services we traditionally provided and new service offerings.

During 2011, our total revenue level was higher than that of 2010 and reflected an increase in services, due to the improvement of global economic conditions in many areas we are operating in and increasing sales and marketing efforts supported by innovative product offerings. Our services business stems from long-term relationships with existing customers. 

 
·
Discussion of 2010 Results Compared to 2009

During 2010, our U.S. revenues constituted 53% of total revenues, our international revenues constituted 35% of total revenues, and our Israeli revenues constituted 12% of total revenues, compared to 59 %, 30 % and 11 % in 2009, respectively.
 
 
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During 2010, our U.S. region revenues decreased by 2% to approximately $110.7 million, as compared to approximately $112.7 million in 2009. The decrease is mainly due to a reduction in hardware revenues, as a result of a change in our revenue mix focus and the relative market weakness in the United States, offset by increases in maintenance, license revenues and SaaS revenues.

During 2010, our international revenues increased by 24% to $72.0 million, as compared to $ 58.3 million in 2009, primarily due to higher license revenues as well as an increase in services we traditionally provided and new service offerings.

During 2010, our Israeli revenues increased by 15% to $24.6 million, as compared to $ 21.3 million in 2009. The increase was primarily due to an increase in services we traditionally provided and new service offerings.

Cost of Revenues

   
Year ended December 31,
 
   
2009
   
2010
   
2011
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(U.S. $ in millions)
   
% of corresponding revenues
   
% Change
 
                                                 
Product sales
  $ 39.6     $ 35.0     $ 32.0       68 %     60 %     63 %     (11.6 )%     (8.6 )%
Services
    74.5       88.5       106.7       56 %     59 %     58 %     18.8       20.6  
   Total revenues
  $ 114.1     $ 123.5     $ 138.7                               8.2 %     12.3 %
 
During 2011, the cost of product sales decreased by 8.6% to $32 million, compared to $35 million in 2010, primarily due to the corresponding decrease in product sales.

During 2011, the cost of services increased by 20.6% to $106.7 million compared to $88.5 million in 2010, primarily due to an increase in the average number of professional services employees and subcontractors as part of the global delivery and system integration units expansion resulting in higher services revenues.

During 2010, the cost of product sales decreased by 11.6% to $35 million, compared to $39.6 million in 2009, primarily due to the increase in license sales and absolute value decrease in the cost of sale of hardware, which was derived from the decrease in hardware sales.

During 2010, the cost of services increased by 18.8% to $88.5 million compared to $74.5 million in 2009, primarily due to an increase in the average number of professional services employees and subcontractors due to a higher services revenues that required more resources, offset by a decrease in costs due to our ongoing efforts to optimize efficiency and decrease our global cost structure.

In 2011, the cost of product sales as a percentage of product sales was 63%, compared to 60% in 2010, due to the lower portion of licenses in our product revenue mix and the higher portion of hardware in the product revenue mix.  In 2011, the cost of services as a percentage of service sales decreased to 58%, compared to 59% in 2010, due to the improvement in efficiency in our services support offering.   In 2010, the cost of product sales as a percentage of product sales was 60%, compared to 68% in 2009, due to the higher portion of licenses in our product revenue mix and the lower portion of hardware in the product revenue mix.  In 2010, the cost of services as a percentage of service sales increased to 59%, compared to 56% in 2009, due to the increased recruitment to support our service offering growth.
 
 
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  Operating Expenses*
 
   
Year ended December 31,
   
% Change
   
% Change
 
   
2009
   
2010
   
2011
   
2009
   
2010
   
2011
   
2010vs.
2009
   
2011 vs.
2010
 
   
(U.S. $ in millions)
   
% of revenues
             
                                                 
Research and development, net
  $ 29.0     $ 29.7     $ 32.0       15 %     14 %     14 %     2 %     8 %
Selling and marketing
    18.8       17.3       26.2       10       8       11       (8 )     51  
General and administrative
    21.0       24.6       26.6       11       12       11       17       8  
                                                                 
   Total operating expenses
  $ 68.8     $ 71.6     $ 84.9       36 %     34 %     36 %     4 %     18.6 %

 
*
The above table excludes other income or expenses, net and other discrete costs relating to indirect private placement costs.

Our total operating expenses increased as a percentage of revenues from 2010 to 2011 mainly due to increasing in sales and marketing activities with new and existing clients related to introduction of our new Retalix 10 product suite as well as new service offering linked to it, offset by moderate increase in our research and development and general and administrative expenses. Our total operating expenses decreased as a percentage in revenues from 2009 to 2010 mainly due to continuous cost-cutting measures and efficiencies put in place offset by the increase of our average number of employees. For a discussion of the line items on our statement of income called impairment of goodwill, indirect private placement costs, and other income, net, see above under “—Application of Critical Accounting Policies and Use of Estimates—Goodwill and Intangible Assets”, “—Additional Discussion of Accounting Characteristics—Operating Expenses—General and Administrative Expenses”, and “—Additional Discussion of Accounting Characteristics—Operating Expenses—Other (Income) Expenses, Net”, respectively.

Research and Development Expenses, Net consists primarily of salaries and other related expenses for personnel. These expenses are presented net of grants under programs of the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the Government of Israel. (For more information, please see the discussion in Item 5.C below under “Grants from the Office of the Chief Scientist”.) Our considerable research and development expenses reflect our investments in developing our next-generation applications and our recently introduced products, adapting these products to large chain environments as well as integrating our acquired supply chain and warehouse management systems into our suite of products. During 2011, due to the relative recovery in global markets we increased our research and development expenses compared with the prior year mainly due to a higher average number of research and development employees, subcontractors and related costs, focusing on the new introduced product suite and other high priority products based on customers' needs.  As a result of the above, our research and development expenses for 2011 were higher compared to 2010, and higher in 2010 than 2009. We believe that our research and development expenses are now at an appropriate level, although they may fluctuate in the future in accordance with economic conditions, currency changes and our business needs. We intend to continue to invest considerable resources in research and development as we believe that this is essential to enable us to establish ourselves as a market leader in our fields of operation. We view our research and development efforts as essential to our ability to successfully develop innovative products that address the needs of our customers as the market for enterprise-wide retail software solutions evolves.
 
 
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Selling and Marketing Expenses.   During 2011, and the second half of 2010, after reducing many sales and marketing positions during 2009 and the first half of 2010 as part of our cost efficiency measures, we invested significant resources in sales and marketing efforts to maintain and strengthen relationships with new customers that are added to our customer base and in establishing a presence in new markets mainly in Europe and Asia.  Approximately $0.4 million of expenses in 2011, $0.5 million of expenses in 2010 and $0.1 million of expenses in 2009 were attributable to the expense effect stock-based compensation.

General and Administrative Expenses.   In 2011, our general and administrative expenses increased in comparison to 2010 mainly due to an increase in professional fees and human resource related costs attributed to the significant increase in headcount offset by a decrease in bad debt expenses due to continued collection improvement.  In addition, our general and administrative expenses included expenses incurred in connection with the MTXEPS transaction.  In 2010, our general and administrative expenses increased in comparison to 2009 mainly due to an increase in the average number and cost of general and administrative employees and an increase in professional fees offset by a decrease in bad debt expenses due to improved collections, and an overall decrease of days of sales outstanding, or DSO. Approximately $1.4 million of expenses in 2011, approximately $3 million of expenses in 2010 and approximately $0.5 million of expenses in 2009 were attributable to expenses for stock-based compensation.

Financial Income (Expenses), Net

Financial income (expenses), net, totaled approximately $1.8 million of income in 2011, compared to approximately $3.5 million of income in 2010 and compared to approximately $1.8 million of expenses in 2009. During 2011, we recorded lower interest income and gain on derivative financial instruments compared to 2010, in which we recorded significant interest income of approximately $2 million in interest income related to tax refunds and $0.9 million in bank interest related to our market yield bank deposits in comparison to $1.6 million bank deposits interest income and no tax refunds interest income in 2011. 

Corporate Tax Rate

The general corporate tax rate in Israel is 26% for the 2009 tax year, 25% for the 2010 tax year and 24% for the 2011 tax year. On December 6, 2011, the “Tax Burden Distribution Law” Legislation Amendments (2011) was published in the official gazette, under which the previously approved gradual decrease in corporate tax was cancelled and the corporate tax rate increased to 25% as from 2012 forward. Our effective consolidated tax rate, however, was 3.3% in 2011, primarily due to significant tax benefits received following a tax assessment closing and reduction in our valuation allowance as a result of higher profitability and improvement in the utilization capability of carried forward losses which we previously thought will expire before utilized.  In 2010, our effective consolidated tax rate was 29.3%, primarily due to the high profitability in the company’s subsidiaries which are taxed at a higher tax rate ranging from 30% to 40%. We enjoy lower effective tax rates in Israel primarily because of tax reductions to which we are entitled under the Investments Law, with respect to our investment programs that were granted the status of Approved or Benefited Enterprise under this law. Under our Approved Enterprise investment programs, we are entitled to certain tax exemptions and reductions in the tax rate normally applicable to Israeli companies with respect to income generated from our Approved Enterprise investment programs. We expect to continue to derive a portion of our income from our Approved or Benefited Enterprise investment programs as well as Benefited Enterprises – see further discussion below. The tax benefits for our existing and operating Approved Enterprise or Benefited programs are scheduled to expire by 2022. The period of tax benefits for each capital investment plan expires upon the earlier of 12 years from the Operation / Election Year, or 14 years from the start of the tax year in which approval was received. We cannot assure you that such tax benefits will be available to us in the future at their current levels or at all.
 
 
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Part of our taxable income in Israel has been tax exempt in recent years due to the Approved or Benefited Enterprise status granted to most of our production facilities. We have decided to permanently reinvest the amount of such tax exempt income and not to distribute it as dividends. Accordingly, no deferred taxes have been provided in respect of such income in the financial statements included in this annual report.

The amount of income taxes that would have been payable had such tax exempt income, earned through December 31, 2011, been distributed as dividends is approximately $11.1 million.

As of December 31, 2011, approximately $44.2 million of our accumulated earnings in Israel were tax-exempt. If we were to distribute this tax-exempt income before our complete liquidation, it would be taxed at the reduced corporate tax rate applicable to these profits (10%-25%, depending on the extent of foreign investment in the company), and an income tax liability of up to approximately $11.1 million would be incurred. Our board of directors has determined that we will not distribute any amounts of our undistributed tax-exempt income as a dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved or Benefited Enterprise program as the undistributed tax exempt income is essentially permanent in duration. On April 1, 2005, an amendment to the Investments Law came into effect (including amendment no. 60 thereof, which was adopted in 2008 with retroactive effect), which revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a Benefited Enterprise (rather than the previous terminology of Approved Enterprise) if it is an industrial facility (as defined in the Investments Law) that will contribute to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process – the benefited Enterprise routes do not require pre-approval by the Investment Center of the Israeli Ministry of Industry, Trade and Labor, or the Investment Center. The amendment does not apply to investment programs approved on or prior to March 31, 2005. The Investments Law was further amended on December 27, 2010 and alternative benefit tracks to the ones currently in place under the provisions of the Law were set, as described in more details under Item 10.E. below.

As was applied before, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation.

Net Income Attributable to Controlling Interests. These amounts primarily consisted in 2009, 2010 and 2011 of the minority interests in the gains of StoreAlliance.com Ltd.
B. Liquidity and Capital Resources

We had cash and cash equivalents of approximately $103.7 million, $77.1 million and $38.6 million, as of December 31, 2009, 2010 and 2011, respectively. Our total cash and cash equivalents, short-term bank deposits and short-term and long-term investment in marketable securities, net of short-term bank credit increased to approximately $135.7 million as of December 31, 2011, compared to $134.6 million as of December 31, 2010 and $104.4 million as of December 31, 2009. The increase in 2011 was a result of continued growth of sales, good collection and reduction in Customers DSO, and cost efficiencies measures that were taken offset by the investment of $16.9 million for the MTXEPS acquisition. The increase in 2010 was as a result of increased efforts to collect receivables in parallel to the growth of the sales and significant tax refunds received during the year.  

As of December 31, 2011, we held an auction rate security totaling $1 million at par value. During 2011 the auction rate security resumed trading and an observable price was established, increasing its fair value by $0.5 million through other comprehensive income. Historically, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rates. While we continue to earn interest on this investment at the contractual rates, the estimated market value of this auction rate security no longer approximates par value. In previous years, when the auction rate security was associated with failed auction, we estimated the fair value of this auction rate security based, among other things, on the following: (i) the underlying structure of the security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for the security. The fair market value of the auction rate security at December 31, 2011 was approximately $0.8 million, a decline of approximately $0.2 million from par value. We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of our investment. If the current market conditions deteriorate, we may be required to record unrealized losses in other comprehensive income or impairment charges in 2012 .
 
 
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Net cash provided by operating activities in 2011 was $20.1 million, compared to net cash provided by operating activities of $33.7 million and $39.4 million in 2010 and 2009, respectively. Changes in net cash provided by operating activities throughout the years are caused primarily due to increases in net income and reductions in receivables as a result of our extensive collection efforts while the reduction in our net cash provided by operating activities in 2011 resulted mainly from the contributions from a tax refund in the previous year.

Net cash used in investing activities in 2011, 2010 and 2009 of approximately $60.7 million, $60.1 million and $0.9 million, respectively, was primarily attributable to significant investment in short term deposits which were held as liquid cash balances before, cash spent on property, plant and equipment and cash invested in or received from the disposition of marketable securities in all three years. Net cash used in investing activities in 2011 includes amount of $16.9 million related to acquisition of the MTXEPS business   purchased in consideration of $18.9 million net of cash acquired in the amount of $2 million.

Our capital expenditures (consisting of the purchase of fixed assets and other assets) were $5.3 million, $2.6 million and $3.0 million in 2011, 2010 and 2009, respectively, mostly attributable to purchasing computer and peripheral equipment including software systems and licenses in all three years.

                Net cash provided by financing activities in 2011 amounted to approximately $2.8 million, primarily due to the issuance of share capital to employees and non-employees resulting from the exercise of options. Net cash used in financing activities in 2010 amounted to approximately $0.4 million, primarily due to repayment of long term loans. Net cash provided by financing activities in 2009 amounted to approximately $31.4 million, primarily attributable to a private placement of ordinary shares and warrants for net proceeds in the amount of $31.5 million.

Bank Debt

As of December 31, 2011, we had no outstanding bank loans.

Credit Risk

Other than the foreign currency forward contracts described below, we have no significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. We may be subject to concentrations of credit risk from financial balances, consisting principally of cash and cash equivalents, short-term bank deposits, trade and unbilled receivables and investments in marketable securities. We invest the majority of our cash and cash equivalents, short term deposits and marketable securities in U.S. dollar deposits with major Israeli and U.S. banks, mainly Bank Hapoalim and Bank Leumi in Israel and Wells Fargo in the United States. We adhere to an investment policy determined by our Investment Committee and approved by our Board of Directors, which requires investment in US dollar denominated short term deposits of less than one year.  We believe that the financial institutions that hold our investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments. Most of our revenue has historically been generated from a large number of customers. Consequently, the exposure to credit risks relating to trade receivables is limited. Over the last few years we increased our efforts on direct collection of receivables. We generally do not require collateral. An appropriate allowance for doubtful accounts is included in our accounts receivable.

 
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The fair value of the financial instruments included in our working capital is usually identical or close to their carrying value. The fair value of long-term receivables and other long-term liabilities also approximates the carrying value, since they bear interest at rates close to the prevailing market rates.

We take various measures to compensate for the effects of fluctuations in both exchange rates and interest rates. These measures include traditional currency hedging transactions with respect to a portion of our exposure, as well as attempts to maintain a balance between monetary assets and liabilities in each of our principal operating currencies, mainly the U.S. dollar, the NIS, the Euro, the Australian dollar and the British pound, and may include securing our future cash flows from foreign exchange fluctuations.  Since 2008, we have increased our use of currency hedging, which together with the effects of currency conversions has resulted in financing income of approximately $0.2 million and $0.7 million in 2011 and 2010, respectively.  

We have historically had only limited involvement with derivative financial instruments but have begun to increase our currency hedging. We carry out transactions involving foreign exchange derivative financial instruments (forward exchange contracts and zero cost cylinders). Part of these transactions in 2011 and 2010 qualify for hedge accounting under ASC 815, “Derivatives and Hedging”, while in 2009 we didn’t have any derivatives that qualified for hedge accounting. For information relating to our hedging and other market risks, please see Item 11 “Quantitative and Qualitative Disclosures About Market Risk” below.

As of December 31, 2011, we held an auction rate security, or ARS, totaling $1 million at par value. As explained in note 1d to our audited consolidated financial statements included elsewhere in this annual report, in previous years the ARS was associated with failed auctions and we had determined fair value of this security based on a valuation model. During 2011, the ARS returned to having an active market trading and an observable price was established, increasing its fair value by $0.5 million through other comprehensive income.

Our management believes that our financial reserves will be sufficient to fund our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.  Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and any capital requirements consequent to our ongoing strategic assessment.  Although our cash balance has been increasing in recent years and we raised funds in a private placement in the fourth quarter of 2009, to the extent that our existing financial reserves and cash generated from operations are insufficient to fund future investments in, or acquisitions of, complementary businesses, products or technologies, if any, we may need to raise additional funds through public or private equity or debt financing. Such funds may not be available on reasonable terms, if at all, especially if the current uncertainty in the global markets continues.

Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets

We generate a majority of our revenues in dollars or in dollar-linked currencies, but some of our revenues are generated in other currencies such as the NIS, British Pounds, Australian Dollars or Euros. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses are generated in dollars or in dollar-linked currencies, but a significant portion of our expenses such as salaries or hardware costs are generated in other currencies such as NIS, British Pounds, Australian Dollars or Euros. In addition to our operations in Israel, we are expanding our international operations. Accordingly, we incur and expect to continue to incur additional expenses in non-dollar currencies. As a result, some of our financial liabilities are denominated in these non-dollar currencies. Most of the time, our non-dollar assets are not totally offset by non-dollar liabilities. Due to the foregoing and to the fact that our financial results are measured in dollars, our results could be adversely affected as a result of a strengthening or weakening of the dollar compared to these other currencies. During 2011, 2010 and 2009 we incurred net non-dollar currency loss of $187,000, a gain of $375,000 and gain of $1,054,000, respectively.
 
 
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Some portions of our expenses, primarily expenses associated with employee compensation, are denominated in NIS unlinked to the dollar. A devaluation of the NIS in relation to the dollar has the effect of decreasing the dollar value of any asset of ours that consists of NIS or receivables payable in NIS, unless such receivables are linked to the dollar. Such devaluation also has the effect of reducing the dollar amount of any of our expenses or liabilities which are payable in NIS, unless such expenses or payables are linked to the dollar. Conversely, any increase in the value of the NIS in relation to the dollar has the effect of increasing the dollar value of any of our unlinked NIS assets and the dollar amounts of any of our unlinked NIS liabilities and expenses. In addition, some of our expenses, such as salaries for our Israeli based employees, are linked to some extent to the rate of inflation in Israel. An increase in the rate of inflation in Israel that is not offset by a devaluation of the NIS relative to the U.S. dollar can cause the dollar amount of our expenses to increase.

The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation in Israel adjusted for the devaluation:
 
Year Ended
December 31,
 
Israeli Inflation
Rate
%
   
NIS Devaluation
(Revaluation)
Rate against the
U.S. dollar
%
   
Israel Inflation
Adjusted for the
Devaluation of the
NIS against the U.S.
dollar
%
 
                   
2007 
    3.4       (9.0 )     12.4  
2008 
    3.8       (1.1 )     4.9  
2009 
    3.9       (0.7 )     4.6  
2010
    2.7       (6.0 )     8.7  
2011
    2.2       7.7       (5.7 )

Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and, in particular, larger periodic devaluations or revaluations may have an impact on our profitability and period-to-period comparisons of our results. We believe that inflation in Israel has not had a material effect on our results of operations but that the recent appreciation of the dollar against the NIS has a material effect on our results of operations.

See further discussion under Item 11 “Quantitative and Qualitative Disclosures About Market Risk” below.
 
Principal Capital Expenditures

See “Item 4.A History and Development of the Company Principal Capital Expenditures.”
 
 
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C. Research and Development, Patents and Licenses, Etc.

Research and Development

We believe that our research and development efforts are essential to our ability to successfully develop innovative products that address the needs of our customers as the market for enterprise-wide software solutions evolves. As of December 31, 2011, our research and development staff consisted of 307 employees, of whom 237 were located in Israel and the remaining 70 were located primarily in the United States. See also Item 5.A. Research and Development Expenses, Net.

Proprietary Rights

We have one patent application pending for shopping with a personal device.  We have no issued patents.  Our success and ability to compete are dependent in part on our proprietary technology. We rely on a combination of copyright, trademark and trade secret laws and non-disclosure agreements to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property. Some of our products utilize open source technologies. These technologies are licensed to us on varying license structures but may include the General Public License. This license and others like it pose a potential risk to products that are integrated with these technologies. See further discussion under Item 3.D - “Risk Factors”.

Grants from the Office of the Chief Scientist

Until 2008 we received grants under programs of the Office of the Chief Scientist, or the OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel. In the years 2009, 2010 and 2011, no grants were received. We currently do not expect to receive material grants from the OCS in the near future.  This governmental support is conditioned upon our ability to comply with certain applicable requirements and conditions specified in the OCS’s programs, in the OCS rules and in the provisions of the Law for the Encouragement of Research and Development in the Industry, 1984, and the regulations promulgated thereunder, or the Research and Development Law.

Under the Research and Development Law, research and development programs that meet specified criteria and are approved by the research committee of the OCS are eligible for grants of up to 50% of certain approved expenditures of such programs, as determined by said committee.

In exchange, the recipient of such grants is required to pay the OCS royalties from the revenues derived from products incorporating know-how developed within the framework of each such program or derived therefrom (including ancillary services in connection therewith), up to an aggregate of 100% of the dollar-linked value of the total grants received in respect of such program, plus interest. The royalty rates applicable to our programs range from 3% to 3.5%.   As of December 31, 2011, the maximum royalties we might be required to pay in the future on account of projects funds by the OCS is $4.4 million.

The Research and Development Law generally requires that the product developed under a program be manufactured in Israel. However, some of the manufacturing volume may be performed outside of Israel, subject to notification to the Chief Scientist in the case of the transfer of up to 10% of a grant recipient’s approved Israeli manufacturing volume outside of Israel, or subject to the approval of the Chief Scientist in the case of the transfer of additional manufacturing volume outside of Israel in excess of 10%. In case of any transfer of manufacturing outside of Israel, the grant recipient is required to pay royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The Research and Development Law further permits the OCS, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the OCS whether to approve a program and the amount and other terms of benefits to be granted. For example, the increased royalty rate and repayment amount might be required in such cases.
 
 
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The Research and Development Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the research committee. Such approval is not required for the sale or export of any products resulting from such research or development. The Research and Development Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to prior approval. The OCS may approve the transfer of government-funded know-how outside Israel in the following cases: (a) the grant recipient pays a portion of the sale price paid in consideration for such know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its government-funded know-how; or (c) such transfer of know-how arises in connection with certain types of cooperation in research and development activities.

The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the OCS of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the OCS to comply with the Research and Development Law. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research and Development Law.

The funds available for OCS grants out of the annual budget of the State of Israel were reduced in the past, and the Israeli authorities have indicated that the government may further reduce or abolish OCS grants in the future. Even if these grants are maintained, we cannot predict what would be the amounts of future grants, if any, that we might receive.

D. Trend Information

We believe that the retail market is a market in transformation. The key trends we have identified are the following:

 
·
A shift to focusing on the consumer: value driven, informed and empowered consumers are more vocal than ever in defining how, where, when and how they want to shop;
 
·
the need for speed, innovation and differentiation in order to cope with increased competition;
 
·
the need for personalization and retention at the consumer level;
 
·
competition in the market for software solutions and services supporting our customers remains strong but largely constant versus the last few years;
 
·
a blurring of retail segments.  For instance, in the search for growth opportunities, food retailers engage in non-food segments and vice versa;
 
·
the need for retailers and distributors to be able to convert their customer / market data into actionable knowledge, providing their consumers and suppliers with relevant, in context, optimized offerings and promotions; and
 
·
the continued need for operational efficiencies, as evidenced by the market need for SaaS and cloud based solution.
 
 
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To transform, retailers require sophisticated retail information systems, ideally being fed by real time transaction and customer data, efficiently executing and tracking their operational tasks, such as order optimization, inventory management, merchandising and price-book management while at the same time providing visibility into the supply chain processes.  Another aspect of such transformation in the market is that the retailers are looking for modular solutions that can operate, among other things, on the cloud, as well as SaaS solutions.

We believe our strategy, our growth engines (as detailed in Item 4B – “Our Market Opportunity” and below) and a number of other activities we are undertaking, address these key trends and that we are positioned to assist our customers address their highly competitive environments.

Taking into account the above and the key trends driving the future opportunities in retailing, the main growth engines, aimed to enhance our pipeline and increase our sales were defined:

 
·
the Retalix 10 Store Suite, which was designed to address our transforming retail market and the trends therein, for instance by using its modular architecture that enables it an option to be deployed on the cloud;
 
·
value-added services leveraging our expertise in our products and the market in which we operate;
 
·
leveraging our existing market position and expertise to penetrate new adjacent markets arising from and the blurring of the retail segments, as well as new territories; and
 
·
leveraging our acquisition of MTXEPS to increase our foothold in providing SaaS solutions and to address the increase need for these type of services.

The investments in the above growth engines, as well as other infrastructure were made, and continue to be made, in parallel to our growing revenues and profitability, successfully delivering customer projects and signing new customers.

E. Off Balance Sheet Arrangements

None.

F. Tabular Disclosure of Contractual Obligations

The following table presents further information relating to our liquidity as of December 31, 2011: