Orcadian Engy Regulatory News (ORCA)

2 Apr 2007 07:14

Orca Interactive Ltd02 April 2007 Orca Interactive Ltd Preliminary Results for the year ended 31 December 2006 Ra'anana, Israel, 2 April 2007 - Orca Interactive Ltd ("Orca"), a global leaderin the IPTV middleware market, announces its preliminary results for the yearended 31 December 2006. Financial Performance: * Revenue of $3.3 million (2005: $5.3 million) - Second half revenue of $2.4 million (2005: $2.3 million) * Gross profit of $2.7 million (2005: $4.7 million) * Gross margin of 80.4% (2005: 87.9%) * Net loss of $5.3 million (2005: $3.5 million) * Net cash of $17.0 million at year end * Order book of $7.3 million at year end Operational Performance: * New wins with Sonaecom and ON Telecom * Further progress with Orca's Interactive Alliance partner programme * Continued product investment during 2006: Orca's product was ranked #2 in a worldwide innovation survey published by ABI Research in October 2006 Haggai Barel, CEO of Orca Interactive, said: "Consolidation remains a feature of our market and the timing of revenuestherefore remains difficult to predict. However, the current year has startedbrightly and our backlog is strong. We have strengthened our channelrelationships during 2006 and are confident in the prospects for our businessthis year." Enquiries: Orca Interactive LtdHaggai Barel, Chief Executive Officer +972 9 769 9400 Financial DynamicsJames Melville-Ross / Matt Dixon +44 20 7831 3113 About Orca Interactive Orca Interactive (LSE: ORCA) is a leading provider of IPTV middleware andapplications for broadband network operators and service providers. Orca enablestriple-play providers to deliver a full array of attractive video-over-IPservices that generate new revenue streams and strengthen customer loyalty.Leveraging a flexible telco-grade middleware platform, Orca empowers operatorsto deliver broadcast TV, video on demand (VOD), personal video recording (PVR),home media and other compelling interactive services. Orca's SI-enabledsolutions are designed for easy outsourcing of integration services by anoperator's preferred systems integrator. Orca has formed strategic partnershipswith leading players across the IPTV value chain to ensure best-of-breedsolutions with low total cost of ownership. For more information, please visitwww.orcainteractive.com. Chief Executive's Review Financial performance Revenue for the year ended 31 December 2006 was $3.3 million, compared to $5.3million in 2005. Whilst first half revenues of $0.9 million were materiallybelow the $3.0 million reported in 2005, revenues in the second half comparedfavourably at $2.4 million against the $2.3 million in the equivalent period in2005. This first half decline was partly caused by a substantial drop in revenues fromthe Americas, from $3.3 million in 2005 to $568,000 in 2006. 2005 revenues inthis region were boosted by the license deal with Lucent, but the merger ofLucent with Alcatel in 2006 impacted decision making on new technologies. M&Aactivity in the telecoms sector also resulted in delays to technology purchasingdecisions. The strongest revenue growth was seen in Europe and the Middle East, whererevenues grew by 40% from $1.9 million in 2005 to $2.7 million in 2006, owing tonew license agreements with a number of European operators. Overall gross profit for the fiscal year was $2.7 million (2005: $4.7 million),a margin of 80.4% (2005:87.9%). Total operating expenses for the year were broadly flat at $8.7 million (2005:$9.0 million). Included in these were Research and Development costs which grewto $3.0 million (2005: $2.6 million) as we continued to ensure that our productsand technologies remained at the forefront of the market. General andAdministrative costs declined from $2.0 million in 2005 to $1.5 millionpredominantly due to the existence of a one off expense relating to a bad debtin 2005. Our operating loss therefore increased to $6.1 million (2005: $4.3 million) and,after net interest income from our cash balances, our net loss increased from$3.5 million in 2005 to $5.3 million in 2006. This resulted in a net loss pershare of $0.15 (2005: $ 0.10 net loss per share). Operating cash outflow during the period was $4.0 million (2005: $2.3 million).At 31 December 2006, the Company had cash balances of $17.0 million. As at 31 December 2006, the Company had 74 employees, a decrease of 6.3%compared to 31 December 2005. Partnerships Orca's IPTV Interactive Alliance gained further momentum during the year withseven new partners joining the alliance, including Code baby, a global leader ininteractive virtual agent solutions and Ruckus Wireless, an innovator of smartWi-Fi technology and systems. By selecting Orca and its Interactive Alliancepartners, IPTV operators can enjoy rapid time to market, decreased total cost ofownership and subscriber satisfaction through these pre-integrated, certifiedand interoperable solutions. Orca also continued to sign up and train new SystemIntegrators that act as sales channels both globally and in specific regions. New business wins During 2006, Orca launched its Hybrid DVB-T/IP Solution in association withleading Next Generation Network Equipment Vendor, Nortel. The commercial launchincluded the deployment of a triple play service of IPTV, Video-over-IP andbroadband Internet access by a large European telecommunications serviceprovider. The deal consisted of an initial purchase of 50,000 Orca RiGHTvTMmiddleware licenses and professional services. In November 2006, we announced that Orca had been selected by major Portuguesetelecommunications provider, Sonaecom, for Portugal's first IPTV Service.Orca's RiGHTv IPTV middleware has been deployed by Clix, Sonaecom's mass marketbrand. Clix SmarTV will offer live broadcast television and radio channels, anelectronic programming guide, video on demand and subscription video on demand.The service has been successfully deployed in the cities of Lisbon and Porto.All major cities in Portugal will be covered in the full commercial deploymentthat is expected to reach a large subscriber base in 2007. These wins were in addition to those announced in the first half of the yearwith Jazztel in Spain and NewNet Telecoms in Georgia. Product development We recently presented our Product Catalog at the IPTV World Forum in London.Designed to help IPTV operators support new types of pricing methods forservices and innovative bundles, the Product Catalog is an enhanced businessmanagement system that is aimed at driving growth through enhanced revenuegeneration and customer loyalty. We also launched a new User Interface during the year to address the futureneeds of IPTV subscribers. The new Orca SUI incorporates easy-to-access advanced features that guide theuser to an active, on-demand experience and help operators to generate revenuesby luring and retaining subscribers. Orca's product was ranked second in a worldwide innovation survey published byABI Research in October 2006. Offer talks On 12 January 2007, following press speculation in Israeli, the Companyannounced that it had received preliminary approaches expressing an interest inmaking an offer for the Company. Discussions in this regard are continuing anddue diligence information has been provided. The Company would like to reiteratethat there can be no certainty that any formal offer for the Company will beforthcoming. Further updates will be provided in due course. Current trading and outlook On 26 March 2007, Orca announced that ON Telecoms, a Greek alternative telecomsprovider, had selected Orca's RiGHTv middleware in a pioneering IPTV deployment.Powered by Orca's latest version of RiGHTv middleware, the ON Telecoms IPTVservice includes live TV (a hybrid of DVB-T and IP channels), on-demand servicessuch as video on demand and super fast broadband up to 10 Mbps. ON Telecomsbegan offering its Greek IPTV solution just four months after starting theproject. This further demonstrates Orca's ability to enable innovative operatorsto design solutions and launch successful IPTV rollouts in a short time tomarket. Consolidation continues to be a feature of our market and the timing of revenuestherefore remains difficult to predict. However, the current year has startedbrightly and our backlog is strong. We are hopeful of recognizing revenue inthe current year with the Israeli franchise of the Global Media company,dependent on the successful delivery of our product. We have strengthened ourchannel relationships during 2006 and are confident in the prospects for ourbusiness this year. Haggai Barel CEO BALANCE SHEETS U.S. dollars in thousands, except share and per share data 31 December Note 2005 2006ASSETS CURRENT ASSETS: Cash and cash equivalents 3 $ 961 $ 1,878 Short-term available-for-sale-marketable securities 4 6,395 9,166 Trade receivables 1,568 698 Other accounts receivable and prepaid expenses 511 331 Total current assets 9,435 12,073 NON-CURRENT ASSETS: Long-term available-for-sale marketable securities 5 13,938 5,963 Property and equipment, net 6 488 394 Investment in an associate 7 - 2,425 Total non-current assets 14,426 8,782 Total assets $ 23,861 $ 20,855 LIABILITIES AND EQUITY CURRENT LIABILITIES: Trade payables $ 480 $ 425 Deferred revenues 599 321 Other accounts payable and accrued expenses 8 2,954 1,947 Advances from customers, net of work in process 9 - 3,045 Parent company 16 336 234 Total current liabilities 4,369 5,972 SEVERANCE PAY LIABILITY 10 266 199 Total liabilities 4,635 6,171 EQUITY: 12 Share capital - Ordinary shares of NIS 0.01 par value - Authorized: 55,000,000 shares at 31 December 2005 and 2006; Issued and outstanding: 35,477,299 shares and 35,573,299 shares at 31 December 2005 and 2006, respectively 81 82 Additional paid-in capital 45,755 46,411 Net unrealized loss reserve (163) (86) Foreign currency translation adjustments - 13 Accumulated deficit (26,447) (31,736) Total equity 19,226 14,684 $ 23,861 $ 20,855 The accompanying notes are an integral part of the financial statements. STATEMENTS OF OPERATIONS U.S. dollars in thousands, except share and per share data Year ended 31 December Note 2005 2006 Revenues 14 $ 5,325 $ 3,339 Cost of revenues 15a 643 655 Gross profit 4,682 2,684 Operating expenses: Research and development, net 15b 2,585 3,001 Selling and marketing 15c 4,430 4,224 General and administrative 15d 1,979 1,514 Total operating expenses 8,994 8,739 Operating loss (4,312) (6,055) Financial income, net 15f 794 854 Loss before share in losses of an associate (3,518) (5,201) Share of losses of an associate - (88) Net loss $ (3,518) $ (5,289) Basic and diluted net loss per share $ (0.10) $ (0.15) Weighted average number of shares used in computing basic and diluted net loss per share 35,412,746 35,533,652 The accompanying notes are an integral part of the financial statements. STATEMENTS OF CHANGES IN EQUITYU.S. dollars in thousands, except share data Net Foreign Total Additional unrealized currency recognized Ordinary shares paid-in income translation Accumulated income and Shares Amount capital (loss) adjustments deficit Total expenses Balance as of 1 January 2005 35,323,799 $ 81 $ 45,425 $ - $ - $ (22,929) $ 22,577 Issuance of shares upon exercise of employees' share options, net 153,500 *) - 42 - - - 42 Unrealized losses on - - - (163) - - (163) $ (163) available-for-sale marketable securities Share-based compensation - - 288 - - - 288 Net loss - - - - - (3,518) (3,518) (3,518) Balance as of 31 December 35,477,299 81 45,755 (163) - (26,447) 19,226 $ (3,681)2005 Issuance of shares upon exercise of employees' share options, net 96,000 1 25 - - - 26 Cancellation of issuance - - 455 - - - 455 expenses (see Note 12c) Unrealized income on available-for-sale marketable securities - - - 77 - - 77 $ 77Share-based compensation - - 176 - - - 176 -Foreign currency translation - - - - 13 - 13 13adjustments Net loss - - - - - (5,289) (5,289) (5,289) Balance as of 31 December 35,573,299 $ 82 $ 46,411 $ (86) $ 13 $ (31,736) $ 14,684 $ (5,199)2006 *) Represents an amount lower than $ 1. The accompanying notes are an integral part of the financial statements. STATEMENTS OF CASH FLOWS U.S. dollars in thousands Year ended 31 December 2005 2006 Cash flows from operating activities: Net loss $ (3,518) $ (5,289) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 295 284 Share-based compensation 288 176 Decrease (increase) in trade receivables, other accounts receivable (623) 1,050 and prepaid expenses Increase (decrease) in trade payables and other accounts payable and accruedexpenses 633 (538) Increase (decrease) in deferred revenues 584 (278) Increase in advances from customers, net of work in progress - 545 Increase (decrease) in accrued severance pay, net 24 (67) Equity in losses of an associate - 88 Net cash used in operating activities (2,317) (4,029) Cash flows from investing activities: Investment in long-term available-for-sale marketable securities (14,012) (492) Proceeds from maturity of short-term available-for-sale marketable securities, net 8,066 5,773 Purchase of property and equipment (289) (190) Net cash provided by (used in) investing activities (6,235) 5,091 Cash flows from financing activities: Refundable grants received from the Chief Scientist Office 292 27 Payments of royalties to Chief Scientist Office (202) (96) Parent company, net (539) (102) Proceeds from exercise of employees' share options, net 42 26 Issuance expenses (109) - Net cash used in financing activities (516) (145) Increase (decrease) in cash and cash equivalents (9,068) 917 Cash and cash equivalents at the beginning of the year 10,029 961 Cash and cash equivalents at the end of the year $ 961 $ 1,878 Supplemental disclosure of cash flows activities: Cash received during the year for: Interest Ub $ 656 $ 855 Non-cash activities: Cancellation of issuance expenses payable $ - $ 455 Investment in associate (see Note 1c) $ - $ 2,500 The accompanying notes are an integral part of the financial statements. NOTE 1:- GENERAL a. Orca Interactive Ltd. ("the Company") was incorporated in Israel andcommenced operations in August 1995. The Company is headquartered in Ra'anana,Israel. The Company's shares are traded on AIM of the London Stock Exchange("LSE"). The Company is a subsidiary of Emblaze Ltd. ("the parent company"), acompany incorporated in Israel and traded on the LSE. b. The Company develops and licenses software for the provision oftelevision and other entertainment services over IP network infrastructures. Asof 31 December 2006, the Company employs 74 employees. c. On 15 October 2006 the Company signed an agreement to become the ownerof 33.33% of the Ordinary shares in an Israeli Franchise ("the Franchise") ofone of the world's leading media companies. The Franchise is engaged in the retail business of rental and sale of DVD andvideo products under an area development agreement and a Franchise agreementwith Blockbuster Video International Corporation The Franchise intends to enter into the video-on-demand/Internet ProtocolTelevision ("IPTV") activities and to establish commercial IPTV services. On the same date and in consideration for the Franchise's shares, a commercialagreement ("the agreement") that was signed between the Company and theFranchise on 29 December 2005 became effective. Under the agreement, the Companywill become the sole provider to the Franchise of an end-to-end IPTV solutionsystem. The two agreements are accounted for as a non-monetary transaction,under which the Company will provide its software and services in considerationfor a 33.33% holding in the Franchise, plus $ 500 in cash. The Company'smanagement, based on a valuation performed by a third party, determined that thefair value of the shares received is approximately $ 2,500. Accordingly, theCompany's management determined that the value of the licenses and the servicesto by provided by the Company to the Franchise is approximately $ 3,000, basedon the value of the shares received plus $ 500 in cash. Revenues from theagreement will be generated from the provision of licenses for the use of theCompany's RiGHTv IPTV middleware, professional services and complementary thirdparty IPTV solution systems. As no work had been performed in this transaction at 31 December 2006, theentire value of the contract in the amount of approximately $ 3,000 was recordedas an advance from customers. d. As for major customers - see also Note 14b. NOTES TO FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES a. The financial statements of the Company have been prepared on ahistorical cost basis, in accordance with International Financial ReportingStandards ("IFRS"). b. The accounting policies adopted by the Company for all periodspresented are in compliance with the IFRS, that are effective at 31 December2006. c. Functional currency and translation: Substantially part of the Company's sales are made outside Israel in non Israelicurrencies, mainly the U.S. dollar. A substantial portion of the Company'sexpenses, mainly selling and marketing expenses is incurred in or linked to U.S.dollars. The funds of the Company are held in U.S. dollars. Therefore, theCompany's management has determined that the U.S. dollar is the currency of theprimary economic environment of the Company, and thus its functional andpresentation currency. Monetary assets and liabilities denominated in non-U.S. dollar currencies (newIsraeli shekels ("NIS") or Euros) are translated into U.S. dollars at theexchange rate on balance sheet date. Transactions in non-U.S. dollar currenciesare translated into U.S. dollars at the exchange rate on the date oftransaction. Transaction differences are included in financing income in thestatements of operations. The functional currency of an associate is the New Israeli Shekel. As at thereporting date, the investment in an associate in the balance sheet istranslated into the presentation currency of the Company ("the dollar") at therate of exchange prevailing at the balance sheet date. Equity losses aretranslated at the weighted average exchange rates for the year. The exchangedifferences arising form the translation are taken directly to a separatecomponent of equity. On disposal of a foreign entity, the deferred cumulativeamount recognized in equity, relating to that particular foreign operation, isrecognized in the statement of income. Data regarding exchange rates for the NIS and Euro in relation to U.S. dollarare as follows: Exchange rate of Exchange rate ofAs of one U.S. dollar one U.S. dollar 31 December 2006 NIS 4.225 Euro 0.75931 December 2005 NIS 4.603 Euro 0.845 d. Cash equivalents: The Company considers all highly liquid investments originally purchased withmaturities of three months or less to be cash equivalents. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) e. Investment in financial assets: The Company accounts for investments in debt securities in accordance withInternational Accounting Standard No. 39, "Financial Instruments: Recognitionand Measurement" ("IAS 39"). The Company determines the classification of itsfinancial assets after initial recognition and, where allowed and appropriate,reevaluates this designation at balance sheet date. Available-for-sale financial assets After initial recognition, available-for-sale financial assets are measured atfair value with gains or losses being recognized as a separate component ofequity until the investment is derecognized or until the investment isdetermined to be impaired at which time the cumulative gain or loss previouslyreported in equity is included in the statement of operations. As of 31 December2005 and 2006, no impairment loss has been identified. The fair value of investments that are actively traded in organized financialmarkets is determined by reference to quoted market prices at the close ofbusiness on the balance sheet date. f. Trade receivables: Trade receivables are recognized and carried at the original invoice amount lessan allowance for any uncollectible amounts. An allowance for doubtful debts isrecorded when there is evidence that the Company will be unable to collect thefull amount. Bad debts are written-off when identified by management. g. Fair value of financial instruments: The carrying amounts of cash and cash equivalents, marketable securities, tradereceivables, other accounts receivable, trade payables and other accountspayable approximate their fair value. h. Property and equipment: Property and equipment are stated at cost, net of accumulated depreciation.Depreciation is calculated by the straight-line method over the estimated usefullives of the assets at the following annual rates: % Computers and peripheral equipment 25-33Office furniture and equipment 6-15Leasehold improvements Over the term of the lease NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The carrying value of the equipment is reviewed for impairment wherever eventsor changes in circumstances indicate that the carrying value may not berecoverable. As of 31 December 2005 and 2006, no impairment losses have beenidentified i. Severance pay: The Company's liability for severance pay pursuant to the Israel's Severance PayLaw is based on the last monthly salary of the employee multiplied by the numberof years of employment, as of the date of severance. The cost of providingseverance pay is determined using an independent actuary. Actuarial gains andlosses are recognized immediately in the statement of operations in the periodin which they occur. The value of the deposited funds is based on the cash surrender value of theinsurance policies. The deposited funds include profits accumulated up to thebalance sheet date. The deposited funds may be withdrawn only upon thefulfillment of the severance pay obligation, pursuant to Israel's Severance PayLaw or labor agreements. Severance pay expense amounted to $ 364 and $ 315 for the years ended 31December 2005 and 2006, respectively. j. Revenue recognition: The Company generates revenues mainly from licensing the rights to use itssoftware products, sales of third party hardware systems, from software licensesthat require customization and from integration and professional services. TheCompany also generates revenues from maintenance, support and training. TheCompany does not grant a right of return to its customers. Revenues from software licensing arrangements and from third party hardwaresystem sales are recognized to the extent that it is probable that the economicbenefits will flow to the Company and the revenues can be reliably measured. Software licenses that require significant customization, integration andprofessional service revenues are recognized on a percentage of completionmethod when no significant acceptance provision is included in the agreementbased on the relationship of actual costs incurred to total costs estimated tobe incurred over the duration of the contract. A provision for estimated losseson uncompleted contracts is recorded in the period in which such losses arefirst identified. As of 31 December 2005 and 2006, no provision for such losseshas been identified. Maintenance and support are recognized on a straight-line basis over the term ofthe maintenance and support agreement. Deferred revenue includes unearnedamounts received under maintenance and support contracts, and amounts receivedfrom customers but not recognized as revenues. Income from interest is recognized as the income accrues. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) k. Research and development: Research costs are expensed to operations as incurred. Development costs arealso expensed to operations as incurred if such costs do not meet the criteriafor capitalization as set forth in IAS 38, "Intangible assets". In the yearsended 31 December 2005 and 2006, no development costs were capitalized. l. Government grants: Royalty-bearing grants and non-royalty-bearing grants from the Government ofIsrael for funding approved research and development projects are recognized atthe time the Company is entitled to such grants, on the basis of the costsincurred. Non-royalty-bearing grants are presented as a deduction from researchand development expenses. Royalty-bearing grants are presented as a deductionfrom research and development expenses when there is reasonable assurance thatthe grants will not be repaid based on estimated future sales. Such grants arerecorded as a liability when repayment is probable. Development grants that were deducted from research and development expensesamounted to $ 0 and $ 204 for the years ended 31 December 2005 and 2006,respectively. m. Investment in an associate: The Company's investment in its associate is accounted for using the equitymethod of accounting. An associate is an entity in which the Company hassignificant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in thebalance sheet at cost plus post acquisition changes in the Company's share ofnet assets of the associate. Goodwill relating to an associate is included inthe carrying amount of the investment and is not amortized. The statement ofoperations reflects the share of the results of operations of the associate.Where there has been a change recognized directly in the equity of theassociate, the Company recognizes its share of any changes and discloses this,when applicable, in the statement of changes in equity. Profits and lossesresulting from transactions between the Company and the associate are eliminatedto the extent of the interest in the associate. n. Income taxes: The Company accounts for deferred income taxes under the liability method ofaccounting. Under the liability method, deferred taxes are provided based on thedifferences between the financial reporting and tax basis of assets andliabilities and are measured at enacted tax rates that are expected to beapplicable in the year in which the differences reverse. Deferred tax assets inrespect of carryforward losses and other temporary deductible differences arerecognized to the extent that it is probable that they will be utilized. o. Basic and diluted net loss per share: Basic net loss per share is computed based on the weighted average number ofOrdinary shares outstanding during each year. Diluted net loss per share iscomputed based on the weighted average number of Ordinary shares outstandingduring each year, plus dilutive potential Ordinary shares considered outstandingduring the period, except when such potential shares are anti-dilutive. p. Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations ofcredit risk consist principally of cash and cash equivalents, trade receivablesand marketable securities. The majority of the Company's cash and cash equivalents are invested in U.S.dollars with major banks in the United States. Management believes that thefinancial institutions that hold the Company's investments are financially soundand accordingly, minimal credit risk exists with respect to these investments. Trade receivables are mainly derived from sales to customers primarily locatedin Europe. The Company performs ongoing credit evaluations of its customers. Anallowance for doubtful accounts is determined with respect to those amounts thatthe Company has determined to be doubtful of collection. Bad debts arewritten-off when identified by management. The Company relies upon two major customers that, as of 31 December 2006,represent 45% and 10% of the Company's revenues (see also Note 14b). The Company's marketable securities include investments in corporate debentures,foreign government debt, auction rate securities and U.S. government and agencydebt. Management believes that those corporations and governments arefinancially sound and the portfolio is well diversified, and accordingly,minimal credit risk exists with respect to these marketable debt securities. As of 31 December 2006, the Company has no significant off-balance sheetconcentration of credit risk, such as forward exchange contracts, optionscontracts or other foreign hedging arrangements. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) q. Share-based payment transactions: The Company applies the provisions of IFRS 2, "Share-Based Payment". IFRS 2requires an expense to be recognized where the Company buys goods or services inexchange for shares or rights over shares ("equity-settled transactions"), or inexchange for other assets equivalent in value to a given number of shares ofrights over shares ("cash-settled transactions"). The main impact of IFRS 2 onthe Company is the expensing of employees' and directors' share options(equity-settled transactions). The cost of equity-settled transactions with employees is measured by referenceto the fair value at the date on which they are granted. The fair value isdetermined by using the Black-Scholes option-pricing model taking into accountthe terms and conditions upon which the instruments were granted. The cost of equity-settled transactions is recognized, together with acorresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevantemployees become fully entitled to the award ("the vesting date"). Thecumulative expense recognized for equity-settled transactions at each reportingdate until the vesting date reflects the extent to which the vesting period hasexpired and the Company's best estimate of the number of equity instruments thatwill ultimately vest. r. IFRS and IFRIC Interpretations not yet effective: The Company has not early adopted IFRS and IFRIC Interpretations that have beenissued but are not effective as of 31 December 2006. Management expects thatadoption of those pronouncements will not have a material impact on thefinancial position and profit of the Company in the period of initialapplication. NOTE 3:- CASH AND CASH EQUIVALENTS 31 December 2005 2006 Cash in banks $ 886 $ 878 Short-term bank deposits 75 1,000 $ 961 $ 1,878 NOTE 4:- SHORT-TERM AVAILABLE-FOR-SALE MARKETABLE SECURITIES The Company invests in marketable debt securities, which are classified asavailable-for-sale investments. The following is a summary of marketable debtsecurities: 31 December 2005 31 December 2006 Amortized Unrealized Market Amortized Unrealized Market cost losses value cost losses value Corporate debentures $ 3,014 $ (12) $ 3,002 $ 4,018 $ (18) $ 4,000Foreign government debt 1,000 (7) 993 4,500 (34) 4,466Auction rate securities 2,400 - 2,400 700 - 700 Total $ 6,414 $ (19) $ 6,395 $ 9,218 $ (52) $ 9,166 The unrealized losses on the investments in available-for-sale securities are aresult of increases in market interest rates. Since the Company has the abilityand intent to hold these investments until a recovery of fair value, which maybe until maturity, the Company does not consider these investments to beimpaired as of 31 December 2006. As of 31 December 2005 and 2006, short-term available-for-sale marketablesecurities bear average nominal interest of 3.7% and 4.25%, respectively. NOTE 5:- LONG-TERM AVAILABLE-FOR-SALE MARKETABLE SECURITIES The Company's long-term marketable securities are classified asavailable-for-sale. The following is a summary of marketable debt securities: 31 December 2005 31 December 2006 Amortized Unrealized Market Amortized Unrealized Market cost losses value cost losses value Available-for-sale - matureafter one year through threeyears:U.S. government and agency debt $ 6,500 $ (73) $ 6,427 $ 2,500 $ (25) $ 2,475Corporate debentures 5,082 (53) 5,029 1,497 (16) 1,481 Available-for-sale - matureafter three years through fiveyears:U.S. government and agency debt 2,000 (18) 1,982 1,500 (8) 1,492Other 500 - 500 500 15 515 Total $ 14,082 $ (144) $ 13,938 $ 5,997 $ (34) $ 5,963 The unrealized losses on the Company's investments in available-for-salesecurities are a result of the increase in market interest rates. Since theCompany has the ability and intent to hold these investments until a recovery offair value, which may be until maturity, the Company does not consider theseinvestments to be impaired as of 31 December 2006. As of 31 December 2005 and 2006, long-term available-for-sale marketablesecurities bear average nominal interest of 4.6% and 4.39%, respectively. NOTE 6:- PROPERTY AND EQUIPMENT Computers and Office Leasehold Total peripheral furniture improvements equipment and equipmentCost:Balance at 1 January 2005 $ 1,949 $ 62 $ 5 $ 2,016 Additions during the year 287 2 - 289 Balance at 31 December 2005 2,236 64 5 2,305Additions during the year 181 9 - 190Disposals (191) - - (191) Balance at 31 December 2006 2,226 73 5 2,304 Accumulated depreciation:Balance at 1 January 2005 1,489 30 3 1,522Additions during the year 291 4 - 295 Balance at 31 December 2005 1,780 34 3 1,817Additions during the year 280 4 - 284Disposals (191) - - (191) Balance at 31 December 2006 1,869 38 3 1,910 Depreciated cost at 31 December 2006 $ 357 $ 35 $ 2 $ 394 Depreciated cost at 31 December 2005 $ 456 $ 30 $ 2 $ 488 NOTE 7:- INVESTMENT IN AN ASSOCIATE The Company has a 33% interest in the Franchise which it acquired in October2006. The Franchise is a private entity that is not listed on any public exchange. Thefollowing table illustrates summarized financial information of the Company'sinvestment in the associate: 31 December 2006Share of the associate's balance sheet: Current assets $ 614 Non-current assets 4,411 Current liabilities (2,592) Non-current liabilities (8) Net assets $ 2,425 Share of the associate's revenue and losses: Revenue $ 2,343 Losses $ (88) NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES 31 December 2005 2006 Employees and payroll accruals $1,155 $ 979 Accrued expenses 1,195 476 Government authorities - Office of the Chief Scientist 503 473 Other 101 19 $2,954 $1,947 NOTE 9:- ADVANCES FROM CUSTOMERS, NET OF WORK IN PROCESS Advances from customers $ - $ 385 Advance from customers - related party - 3,000 Work in progress - (326) Work in progress - related party - (14) $ - $ 3,045 NOTE 10:- SEVERANCE PAY LIABILITY a. The amounts recognized in the balance sheet are as follows: Defined benefit obligation $ 844 $ 751Fair value of plan assets 578 552Benefit liability $ 266 $ 199 b. Amounts recognized in the statement of operations are as follows: Current service cost $ 252 $ 290Interest cost 49 62Expected return on assets (8) (12)Net actuarial gain (loss) recognized in the year 71 (25) Total expense included in statement of operations $ 364 $ 315 c. Changes in present value of the defined benefit obligation are asfollows: Liability at the beginning of the year $ 635 $ 844Current service cost 252 290Interest cost 49 62Benefits paid (59) (289)Actuarial gains on obligation 13 (217)Foreign exchange differences (46) 61 Liability at the end of the year $ 844 $ 751 NOTE 10:- SEVERANCE PAY LIABILITY (Cont.) 31 December 2005 2006 d. Changes in the fair value of plan assets are as follows: Plan asset at the beginning of the year $ 445 $ 578Expected return 8 12Contribution by employer 265 357Benefits paid from assets (50) (251)Actuarial losses (58) (192)Foreign exchange differences (32) 48 Plan asset at the end of the year $ 578 $ 552 e. The actuarial assumptions used are as follows: Discount rate 6.73% 6.24%Future salary increases 5% 4%Average expected remaining working years 9.0 8.3 NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES a. Operating leases: The parent company has an agreement ("the lease agreement") to lease facilitiesfor its own use and for the use of its Israeli based subsidiaries, under anon-cancelable operating lease agreement, for a period of five years commencingin June 2002. On 1 January 2004, the Company signed with the parent company areimbursement agreement ("the reimbursement agreement") under which, it wasagreed that for the portion of the total facilities allocated to the Company,the Company shall be liable to the parent company for all obligations the parentcompany undertook under the lease agreement. Future minimum rental commitments under the above lease as of 31 December 2006are as follows: 2007 $ 202 Total rental expense amounted to $ 476 and $ 679 for the years ended 31 December2005 and 2006, respectively. NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) b. Royalty commitments: Royalties to the Office of the Chief Scientist ("OCS"): Under the research and development agreement of the Company with the OCS andpursuant to applicable laws, the Company is required to pay royalties at therate of 3% of sales of products developed with funds provided by the OCS, up toan amount equal to 100% of the grants received, plus interest at the 12-monthLIBOR rate. The Company is obligated to repay the Israeli Government for thegrants received only to the extent that there are sales of the funded products. In 2005 and 2006, royalty-bearing grants received and that were included as aliability in the balance sheet amounted to $ 292 and $ 27, respectively. The Company accrued and paid royalties in the net amounts of $ 142 and $ 96 forthe years ended 31 December 2005 and 2006, respectively, relating to therepayment of such grants. As of 31 December 2005 and 2006, the Company has acontingent obligation to pay royalties which amounts to approximately $ 400 and$ 372, respectively. NOTE 12:- EQUITY a. Right of Ordinary shares: Ordinary shares confer upon their holders voting rights, the right to receivecash dividends, and the right to a share in excess assets upon liquidation ofthe Company. b. Share-based payment plans: In 2001, the Company implemented the 2000 stock option plan ("the Plan"). Underthe Plan, 3,000,000 options to purchase Ordinary shares have been reserved forissuance. These options may be granted to consultants, directors and employees.Options granted are mainly vested as follows: 25% after the first year, 25%after the second year, 25% after the third year and 25% after the fourth year,effective from the date of grant. If not exercised, the options will expire onthe tenth anniversary of the date of the grant. The exercise price of theseoptions may not be less than 100% of the fair value of the share at the date ofgrant. Any options which are canceled or forfeited before expiration becomeavailable for future grants. The Company approved in 2005 an increase of 1,136,000 Ordinary shares reservedfor option grants under the Plan. The total amount of Ordinary shares available for future grants as of31 December 2006, amounted to 1,421,085. A summary of the Company's stock activity and related information is as follows: Year ended 31 December 2005 2006 Number Weighted Number Weighted of average of options average options exercise exercise price price Outstanding at the beginning of the 2,594,500 $ 0.82 2,582,000 $ 0.86period Granted 230,000 $ 1.56 320,000 $ 0.67Exercised (153,500) $ 0.28 (96,000) $ 0.28Canceled or forfeited (89,000) $ 1.32 (456,000) $ 1.21 Outstanding at the end of the period 2,582,000 $ 0.86 2,350,000 $ 0.79 Exercisable at the end of the period 1,545,125 $ 0.46 1,575,750 $ 0.66 Options Weighted Options Weighted outstanding average Weighted exercisable average exercise Range of as of remaining average as of price of exercise December 31, contractual exercise December 31, options price 2006 life (years) price 2006 exercisable $ 0.28 - $ 0.39 1,429,625 5.55 $ 0.29 1,223,125 $ 0.28$ 0.77 - $ 1.08 132,000 9.87 $ 1.01 - $ -$ 1.24 - $ 1.49 106,000 1.35 $ 1.35 26,500 $ 1.35$ 1.94 - $ 2.69 682,375 2.07 $ 2.10 326,125 $ 2.07 2,350,000 6.91 $ 0.90 1,575,750 $ 0.66 As of 31 December 2006, the Company's employees also hold 290,226 options toacquire the parent company's Ordinary shares, out of which 253,902 areexercisable. The weighted average fair value of the options granted during 2005 and 2006 wasapproximately $ 0.64 and $ 0.26, respectively. The weighted average share priceat the date of exercise in 2006, was approximately $ 0.46. The fair value of the share options is measured at the grant date using theBlack-Scholes option pricing model taking into account the terms and conditionsupon which the options were granted. The following are the inputs to the modelused for the years ended 31 December 2006 and 2005: risk-free interest rates inthe range of 3.0% - 4.4% and 4.7% - 5.16%, respectively; dividend yield of 0%for each year; a volatility factor of the expected market price of the Company'sOrdinary shares in the range of 50% - 73% and 64% - 82%, respectively; and aweighted average expected life of the option for each year in the range of 2.5 -4 years. In the year ended 31 December 2006, the Company recorded employee benefitexpense in respect of options in the amount of $ 176, with a correspondingincrease in equity (2005-$288). c. Share issuance expenses - During 2006, based on the opinion of its legalcounsel, the Company's management decided to cancel a previously recordedaccrual in the amount of $ 455 for issuance expenses in respect of stamp duty onshares issued in 2004. NOTE 13:- INCOME TAXES a. Measurement of taxable income under the Income Tax (InflationaryAdjustments) Law, 1985: Until 31 December 2005, results for tax purposes in Israel were measured interms of earnings in NIS after certain adjustments for increases in Israel'sConsumer Price Index ("CPI"). Commencing in 2006, the Company has elected to measure its taxable income andfile its tax return under the Israeli Income Tax Regulations (PrinciplesRegarding the Management of Books of Account of Foreign Invested Companies andCertain Partnerships and the Determination of Their Taxable Income), 1986. Suchan election obligates the Company for three years. Accordingly, commencing in2006, results for tax purposes are measured in terms of earnings in U.S.dollars. b. Tax rates: On 25 July 2005, the Knesset (Israeli Parliament) approved the Law of theAmendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, amongothers, a gradual decrease in the corporate tax rate in Israel to the followingtax rates: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 andthereafter - 25%. NOTE 13:- INCOME TAXES (Cont.) c. Tax benefits under the Law for the Encouragement of CapitalInvestments, 1959 ("the Law"): In respect of the Company's production facilities in Israel, the Companysubmitted applications for "Approved Enterprise" status for two investmentprograms under the above Law. The main benefit arising from such status is thereduction in tax rates on income derived from "Approved Enterprises".Consequently, the Company is entitled to two years of a tax exemption and fiveyears of a reduced tax rate (25%) on income from its "Approved Enterprises"beginning from the time that the Company initially has taxable income. Theperiod of tax benefits, is subject to limits of the earlier of 12 years from thecommencement of production, or 14 years from the approval date. As the Companyhad no taxable income, the benefit periods have not yet commenced. The entitlement to the above benefits is conditional upon the Company fulfillingthe conditions stipulated by the above law, regulations published thereunder,and the letters of approval for the specific investments in "ApprovedEnterprises". In the event of failure to comply with these conditions, thebenefits may be canceled and the Company may be required to refund the amount ofthe benefits, in whole or in part, including interest. As of 31 December 2006,the Company had not utilized any of the aforementioned tax benefits. In 2002 the Company completed the implementation of its first investmentprogram, however, due to the Company's changing the scope of the investmentprograms from website management design, the Company's first investment programwas not approved by the Investment Center. The Company's second investmentprogram has been completed this year, but not yet approved. Accordingly, incomethat will not be attributed to the second program may be subject to tax at theregular rate. If tax-exempt profits are distributed to shareholders, they would be taxed atthe corporate tax rate applicable to such profits as if the Company had notelected the alternative system of benefits, currently 25% for an "ApprovedEnterprise". Income from sources other than the "Approved Enterprise" during the benefitperiod will be subject to tax at the regular rate prevailing at that time. A recent amendment to the law, which has been officially published effective asof 1 April 2005 ("the Amendment") has changed certain provisions of the law. Asa result of the Amendment, a company is no longer obliged to implement anApproved Enterprise status in order to receive the tax benefits previouslyavailable under the Alternative Benefits provisions, and therefore there is noneed to apply to the Investment Center for this purpose (Approved Enterprisestatus remains mandatory for companies seeking grants). Rather, a company mayclaim the tax benefits offered by the Investment Law directly in its taxreturns, provided that its facilities meet the criteria for tax benefits set outby the Amendment. A company is also granted a right to approach the Israeli TaxAuthorities for a pre-ruling regarding their eligibility for benefits under theAmendment. Tax benefits are available under the Amendment to production facilities (orother eligible facilities), which are generally required to derive more than 25%of the company's business income from export. In order to receive the taxbenefits, the Amendment states that a company must make an investment in thebenefited enterprise exceeding a minimum amount specified in the law. Suchinvestment may be made over a period of no more than three years ending at theend of the year in which the company requested to have the tax benefits apply tothe benefited enterprise ("the Year of Election"). Where a company requests tohave the tax benefits apply to an expansion of existing facilities, then onlythe expansion will be considered a benefited enterprise and the company'seffective tax rate will be the result of a weighted combination of theapplicable rates. In this case, the minimum investment required in order toqualify as a benefited enterprise is required to exceed a certain percentage ofthe company's production assets before the expansion. The duration of taxbenefits is subject to a limitation of the earlier of seven years from theCommencement Year, or 12 years from the first day of the Year of Election. d. Net operating loss carryforward: The Company has accumulated net operating loss carryforwards for tax purposes asof 31 December 2006 of approximately $ 30,000, which may be carried forward andoffset against taxable income in the future for an indefinite period. Otherdeductible temporary differences are immaterial. Since management believes that it is not probable that these tax losscarryforwards will be utilized in the foreseeable future, no deferred tax assetshave been recorded in respect thereof. NOTE 14:- REVENUES BY GEOGRAPHIC AREAS AND MAJOR CUSTOMERS The Company manages its business on a basis of one reportable segment. a. Revenues classified by geographical destinations based on thecustomer's location: Year ended 31 December 2005 2006 America $ 3,320 $ 568Europe and Middle East 1,944 2,729Far East 61 42 $ 5,325 $ 3,339 NOTE 14:- REVENUES BY GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (Cont.) b. Information about major customers: Year ended 31 December 2005 2006 Customer A 51% 8% Customer B 22% 10% Customer C 10% 8% Customer D - 45% NOTE 15:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS a. Cost of revenues: Year ended 31 December 2005 2006 Salaries and related benefits $ 91 $ 100 Depreciation *) $ 6 $ - b. Research and development expenses, net: Salaries and related benefits $ 1,881 $ 2,387 Depreciation *) $ 180 $ 160 Share-based compensation $ 69 $ 61 c. Selling and marketing expenses: Salaries and related benefits $ 2,386 $ 2,352 Depreciation *) $ 143 $ 130 $ 127 $ 77 Share-based compensation d. General and administrative expenses: Salaries and related benefits $ 751 $ 785 Depreciation *) $ 53 $ 44 Share-based compensation $ 92 $ 38 Bad debts $ 552 $ 3 *) Includes also depreciation expense allocated by the parent companybased on agreements between the parent company and the Company. NOTE 15:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (Cont.) e. Compensation to key management personnel: Year ended 31 December 2005 2006 Salaries and short-term benefits $ 863 $ 960 Share-based compensation $ 138 $ 87 f. Financial income, net: Financial income: Interest on bank deposits and marketable debt securities $ 810 $ 785 Foreign currency translation differences, net 47 95 857 880 Financial expenses: Interest and other bank charges (63) (26) $ 794 $ 854 NOTE 16:- TRANSACTIONS AND BALANCES WITH PARENT COMPANY a. The following transactions with the parent company are included in thestatements of operations (mainly in respect of rental and overhead expenses): Year ended 31 December 2005 2006 Research and development $ 303 $ 370 Sales and marketing $ 292 $ 301 General and administrative $ 175 $ 198 b. Balances with related parties: Current liabilities $ 336 $ 234 - - - - - - - - - This information is provided by RNS The company news service from the London Stock Exchange