UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to _______________
COMMISSION FILE NUMBER 0-20181
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SAPIENS INTERNATIONAL CORPORATION N.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NETHERLANDS ANTILLES
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
----------------------
Kaya Richard J. Beaujon z/n
P.O. Box 837 Willemstad
Curacao, Netherlands Antilles
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Shares, par value The Nasdaq National Market
(euro) 2.30 per share The Tel Aviv Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
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10,987,115 Common Shares, par value (euro) 2.30 per share
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [X]
TABLE OF CONTENTS
PART I
Page
----
Item 1. Identity of Directors, Senior Management and Advisers 3
Item 2. Offer Statistics and Expected Timetable 3
Item 3. Key Information 3
Item 4. Information on the Company 12
Item 5. Operating and Financial Review and Prospects 24
Item 6. Directors, Senior Management and Employees 30
Item 7. Major Shareholders and Related Party Transactions 36
Item 8. Financial Information 37
Item 9. The Offer and Listing 37
Item 10. Additional Information 38
Item 11. Quantitative and Qualitative Disclosure about Market Risk 42
Item 12. Description of Securities Other Than Equity Securities 43
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies 43
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds 43
Item 15. Controls and Procedures 43
Item 16. Reserved
PART III
Item 17. Financial Statements 44
Item 18. Financial Statements 44
Item 19. Exhibits 44
2
THE "COMPANY" INCLUDES, WHERE APPROPRIATE, SAPIENS INTERNATIONAL CORPORATION
N.V., ITS DIRECTLY WHOLLY OWNED SUBSIDIARY, SAPIENS INTERNATIONAL CORPORATION
B.V., AND EACH OF THEIR OPERATING SUBSIDIARIES.
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 CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data and
should be read in conjunction with the Company's consolidated financial
statements for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, and
notes thereto, and with Item 5, "Operating and Financial Review and Prospects."
The selected financial data set forth below as of and for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998 has been derived from the
consolidated financial statements of the Company which have been prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") and which have been audited by Kost, Forer and Gabbay, a member of Ernst
& Young Global. Certain financial data for 2000 and 2001 have been reclassified
to conform to the 2002 presentation.
NOTE REGARDING THE REVERSE STOCK SPLIT:
The Company implemented a 1-for-5 reverse stock split of its common stock on
June 16, 2003 to meet the listing requirements of The Nasdaq Stock Market, Inc.
("Nasdaq"). On January 15, 2003, Nasdaq informed the Company that its common
stock ("Common Shares") would be delisted from the Nasdaq National Market (the
"National Market") due to the Company's failure to maintain compliance with the
$1.00 minimum bid price requirement for continued listing on the National Market
(the "Minimum Bid Price Requirement"). The Company requested and was granted a
hearing before a Nasdaq Listing Qualifications Panel (the "Panel") in order to
present a definitive plan to regain compliance with the Minimum Bid Price
Requirement, and thereby avoid the delisting of the Common Shares from the
National Market.
On February 18, 2003 the Company's Board of Directors approved a definitive plan
to regain compliance with the Minimum Bid Price Requirement by implementing a
1-for-5 reverse stock split of the Common Shares (the "Reverse Stock Split").
This plan to implement a Reverse Stock Split was presented to a Nasdaq Listing
Qualifications Panel at a hearing on February 27, 2003. On March 25, 2003 Nasdaq
notified the Company that it approved of its plan to implement the Reverse Stock
Split and that the Company's common stock would continue to be traded on the
National Market provided that the Company regained compliance with the Minimum
Bid Price Requirement by June 16, 2003 and maintained compliance for at least
ten consecutive days thereafter.
On June 11, 2003, at a Special General Meeting, the Company's Shareholders
approved the implementation of the Reverse Stock Split and amendments to the
Company's Articles of Association that were required to effect the Reverse Stock
Split. As a result of the Reverse Stock Split, the Company's authorized capital
of (euro)48,300,000 became divided into 20 million Common Shares (instead of 100
million) and the par value of the Common Shares was changed to (euro)2.30
(instead of (euro)0.46). On June 16, 2003 the Common Shares began trading on
Nasdaq in compliance with the Minimum Bid Price Requirement.
All historical share amounts and per share data have been retroactively restated
to reflect the Reverse Stock Split.
3
SELECTED FINANCIAL DATA: Year Ended December 31,
--------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(In thousands; except per share data)
Revenues:
Products $ 37,181 $ 47,390 $ 43,995 $ 33,924 $ 42,008
Consulting and other services 33,799 44,440 28,749 29,511 22,820
-------- -------- -------- -------- --------
Total revenues 70,980 91,830 72,744 63,435 64,828
-------- -------- -------- -------- --------
Cost of revenues:
Cost of products 12,690 16,354 30,283 23,711 22,567
Cost of consulting and other services 21,611 29,333 20,652 18,902 13,543
-------- -------- -------- -------- --------
Gross profit 36,679 46,143 21,809 20,822 28,718
Operating Expenses:
Research and development, net 4,112 5,021 10,317 5,458 6,017
Selling, marketing, general and administrative, net 22,921 27,880 46,682 28,725 23,782
Aborted Merger Costs 0 0 1,252 0 0
Restructuring Costs 0 2,019 2,558 0 481
-------- -------- -------- -------- --------
Total operating expenses 27,033 34,920 60,809 34,183 30,280
-------- -------- -------- -------- --------
Operating income (loss) 9,646 11,223 (39,000) (13,361) (1,562)
-------- -------- -------- -------- --------
Financial income (expenses), net 457 412 (632) (3,187) (971)
Other expenses, net 328 220 403 665 1,173
Income (loss) before taxes on income 9,775 11,415 (40,035) (17,213) (3,706)
-------- -------- -------- -------- --------
Taxes on income (benefit) 55 (1,678) (1,949) 726 1,408
Minority interests in (income) losses of a subsidiary (15) 25 0 (31) (39)
-------- -------- -------- -------- --------
Net income (loss) 9,735 13,068 (38,086) (17,970) (5,153)
-------- -------- -------- -------- --------
Dividends on preferred shares 645 418 107 0 0
-------- -------- -------- -------- --------
Net income (loss) to shareholders of common shares 9,090 12,650 (38,193) (17,970) (5,153)
-------- -------- -------- -------- --------
Basic net earnings (loss) per share $ 2.40 $ 3.05 ($ 8.46) ($ 3.91) ($ 1.03)
Weighted average number of shares
used in computing basic earnings (loss) per share 3,793 4,163 4,511 4,600 4,998
(in thousands)
-------- -------- -------- -------- --------
Diluted net earnings (loss) per share $ 2.15 $ 2.65 ($ 8.46) ($ 3.91) ($ 1.03)
-------- -------- -------- -------- --------
Weighted average number of shares
used in computing diluted net earnings (loss) per share 4,277 4,911 4,511 4,600 4,998
(in thousands)
4
At December 31,
-----------------------------------------------
BALANCE SHEET DATA: 1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(Dollars in thousands)
Cash and cash equivalents $20,222 $ 8,735 $17,038 $16,087 $22,001
Working capital 21,028 30,319 7,890 1,637 9,615
Total assets 73,324 85,105 92,400 68,380 65,152
Long term debt and other liabilities 7,273 7,930 7,430 7,365 7,787
Total stockholders' equity 33,115 51,414 18,896 10,207 15,895
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
We operate globally in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section lists some, but not all,
of those risks and uncertainties that may have a material adverse effect on our
business, financial condition or results of operations.
CONTINUING ADVERSE CONDITIONS IN THE MARKET FOR INFORMATION TECHNOLOGY SOLUTIONS
MAY LEAD TO DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES AND COULD HARM OUR
BUSINESS AND RESULTS OF OPERATIONS, AS WELL AS THE PRICE OF OUR SHARES.
Sapiens products and services are generally used by organizations with large
information technology budgets and needs. The economic slowdown that has
affected the markets in which we operate has had a particularly significant
impact on the information technology sector. In response to this difficult
economic environment, a number of our customers and potential customers have
reduced their information technology budgets, leading to a decline in demand for
our products. We believe that these adverse market conditions, and the response
of certain of our customers and potential customers to these recent
developments, have had a negative impact on our revenues and on the price of our
shares. Should these market conditions persist, our business and results of
operations could suffer further and the price of our shares could be harmed.
IF WE FAIL TO REMAIN TECHNOLOGICALLY COMPETITIVE, WE COULD LOSE CUSTOMERS OR
MARKET SHARE.
The market for the Company's solutions is characterized by rapidly changing
business conditions and customer requirements. The introduction of solutions
embodying new technology and the emergence of new customer requirements can
render existing technology obsolete and unmarketable. The Company's ability to
anticipate changes in technology and customer requirements and to successfully
develop and introduce new and enhanced solutions on a timely basis will be
significant factors in the Company's ability to grow and to remain competitive.
Substantial expenditures are required for research and development and new
product introduction. There can be no assurance that the Company will have
sufficient resources to make such investments, or that these investments will
bring the full advantages or any advantage as planned. If the Company is unable,
for technological or other reasons, to develop solutions on a timely basis in
response to the changing demands of its industry, the Company's business and
financial results could be materially adversely affected. The Company has in the
past experienced limited delays introducing its technology and enhancements, and
there can be no assurance that it will not encounter technical or other
difficulties that could delay introduction of new technologies or enhancements
in the future. There can be no assurance that the Company will be successful in
developing and marketing enhancements that incorporate new technology on a
timely basis, or that its new solutions will adequately address the changing
needs of the marketplace, which could have a material adverse effect on our
results of operations and financial condition.
5
IMPLEMENTING OUR NEW STRATEGY OF FOCUSING ON THE MARKET FOR SOFTWARE SOLUTIONS
IN THE INSURANCE AND FINANCIAL SERVICES INDUSTRIES COULD TAKE LONGER THAN
ANTICIPATED OR COULD FAIL, WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
LONG-TERM GROWTH.
In October 2001, we announced a new strategic initiative focusing on the
insurance and financial services industries. Our goal is to rise to a position
of global leadership in delivering strategic business software solutions to this
market. Implementing this new strategy requires us, among other things, to
design appropriate software solutions, maintain sufficient sales and marketing
resources, recruit, train and hire sufficient professional services personnel
and face intense competition. Our failure to meet any one or more of these
challenges may lead to delays in, or to the failure of, our new strategy, which
could have a material adverse affect on our short and medium term results and on
our capability to grow and achieve our long-term goals.
THE SOFTWARE SOLUTIONS MARKET WE ADDRESS IS EXPECTED TO EVOLVE RAPIDLY, AND IF
WE ARE NOT ABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR
CUSTOMER NEEDS, OUR COMPETITIVE POSITION WILL BE IMPAIRED.
The market for the solutions we provide is expected to evolve rapidly. However,
estimates of our market's expected growth are inherently uncertain and are
subject to many risks and assumptions. Moreover, many of our customers operate
in markets characterized by rapidly changing technologies and business plans.
Rapid changes in the needs of these customers and changing technologies make it
difficult for us to predict their demands. We are particularly susceptible to
those changes since our software is used in a wide array of operating
environments, which are constantly evolving. As a result, we may not be able to
develop, on a timely basis or at all, solutions that meet our customers' needs
or desires. In addition, various sectors of our market are served by competitors
who may respond more effectively to market developments and customer needs. We
cannot assure you that the market for our solutions will grow or that we will be
able to respond to changes in the market, evolving customer needs or our
competition. If the market for our solutions does not develop as we expect or if
we fail to respond to market and competitive developments, our business
prospects and competitive position will be impaired.
THE FAILURE OF OUR NEW SOLUTIONS TO ACHIEVE MARKET ACCEPTANCE OR DELAYS IN OUR
CURRENT OR FUTURE EFFORTS TO DEVELOP SOFTWARE SOLUTIONS COULD ERODE OUR
COMPETITIVE POSITION.
The failure to successfully develop, enhance or modify our software solutions,
or the failure to do so on a timely basis, could limit our revenue growth and
competitive position. We may need to rapidly develop and introduce additional
software and enhancements to our existing solutions to satisfy our current
customers and maintain our competitive position in the marketplace. We may also
need to modify our software so that it can operate with new or enhanced software
introduced by other software vendors. The failure to introduce new, enhanced or
modified software on a timely basis could prevent our solutions from achieving
market acceptance. We have experienced in the past, and may experience in the
future, delays in the timing of the introduction of new solutions. To support
our software development, enhancement or modification, we may find it necessary
to license or acquire new technologies, which may not be available to us on
acceptable terms, if at all.
WE ARE DEPENDENT ON THE SUCCESS OF OUR TWO MAIN SUBSIDIARIES IN THE U.S. AND
U.K.
Our two main subsidiaries, which are located in Cary, North Carolina and London,
England, account for more than 70% of annual revenues. While we are committed to
the continued growth of these operations, as well as our operations in France,
Germany, Japan Switzerland and Israel, there can be no assurance that our main
operations will continue to perform at their current level. Furthermore, a
significant downturn in the business of either of our two main subsidiaries
would have a material adverse impact on our financial results.
WE COMPETE AGAINST COMPANIES WITH SIGNIFICANTLY GREATER RESOURCES THAN OUR OWN.
The market for software solutions and related services, and for business
solutions for the insurance industry, in particular, is highly competitive. Our
principal competitors generally have significantly greater resources than our
own. Price reductions or declines in demand for our solutions and services,
whether as a result of competition, technological change, changes in the level
of application development, reengineering or maintenance performed internally by
our customers or potential customers would have a material adverse effect on our
results of operations and financial position. Additional factors that may cause
actual results to differ materially from our
6
expectations include industry specific factors; our ability to continuously
develop, introduce and deliver commercially viable solutions and technologies,
and the market's rate of acceptance of the solutions we offer; our ability to
keep pace with market and technology changes and to compete successfully; and
our ability to manage the competitive risks associated with the strategic
alliances that we have entered into.
OUR BUSINESS INVOLVES LONG-TERM, LARGE PROJECTS, SOME OF THEM FIXED-PRICE
PROJECTS, THAT INVOLVE UNCERTAINTIES, SUCH AS ESTIMATED PROJECT COSTS AND PROFIT
MARGINS.
Our business is characterized by relatively large projects or engagements that
can have a significant impact on our total revenue and cost of revenue from
quarter to quarter. A high percentage of our expenses, particularly employee
compensation, is relatively fixed. Therefore, a variation in the timing of the
initiation, progress or completion of projects or engagements, especially at or
near the end of any quarter, can cause significant variations in operating
results from quarter to quarter.
Some of our solutions are sold as fixed-price projects with delivery
requirements spanning more than one year. If our actual cost-to-completion of
these projects differs significantly from the estimated costs, there could be a
material adverse effect on our results of operations and financial position.
Similarly, delays in executing client contracts may affect our revenue and cause
our operating results to vary widely. Some of our solutions may be priced in
excess of $1 million and are delivered over periods of time ranging from several
months to a few years. Payment terms are generally based on periodic payments or
on the achievement of milestones. Any delays in payment or in the achievement of
milestones may have a material adverse impact on our financial position.
The sales cycle for our solutions is long and variable, typically ranging
between six months to twelve months from initial contact with the potential
client to the signing of a contract. Occasionally, sales require substantially
more time. This variability may adversely affect our operating results in any
particular quarter.
OUR BUSINESS INVOLVES BUSINESS-CRITICAL SOLUTIONS WHICH EXPOSE US TO POTENTIAL
LIABILITY CLAIMS.
Our products focus on organizations' business-critical applications including
those related to core business solutions for the insurance and financial
services industries and specialized redevelopment issues such as the adoption of
the single European currency. Since our customers rely on our software to
operate, monitor and improve the performance of their critical software
applications, they are sensitive to potential disruptions that may be caused by
the use of, or any defects in, our software. As a result, we may be subject to
claims for damages related to software errors in the future. Liability claims
could require us to spend significant time and money in litigation or to pay
significant damages. Regardless of whether we prevail, diversion of key
employees' time and attention from the business, incurrence of substantial
expenses and potential damage to our reputation might result. While the terms of
our sales contracts typically limit our exposure to potential liability claims,
and we carry errors and omissions insurance against such claims, there can be no
assurance that such insurance will continue to be available on acceptable terms,
if at all, or that such insurance will provide us with adequate protection
against any such claims. A significant liability claim against us could have a
material adverse effect on our results of operations and financial position.
IF EXISTING CUSTOMERS DO NOT MAKE SUBSEQUENT PURCHASES FROM US OR IF OUR
RELATIONSHIPS WITH OUR LARGEST CUSTOMERS ARE IMPAIRED, OUR REVENUE COULD BE
NEGATIVELY AFFECTED.
Our existing customers are a key asset of the Company, and we depend on repeat
product and service revenues from our base of customers. There can be no
assurance that our existing customers will enter into new project contracts with
the Company or that they will continue using our enabling technologies. If our
revenue stream from existing customers were to decline significantly, it would
have a material adverse impact on our operating results.
The relationships with two large customers of our North American subsidiaries -
OneBeacon Insurance Company and Computer Sciences Corporation - and two large
customers of our subsidiary in the United Kingdom - Liverpool Victoria and EDS
Credit Services - are the sources of a large portion of the revenues of each of
those two subsidiaries. During 2002, revenues from sales to the American
customers constituted 26% of the total revenues of the North American
subsidiaries; and revenues from sales to the British customers
7
constituted 33% of the total revenues of the UK subsidiary. If our sales to
these customers were impaired, our revenue stream could be negatively affected.
We expect that level of revenues from Computer Sciences Corporation will
increase during 2003, thus increasing the possible effect of a subsequent
decline in sales to that customer.
DEFECTS IN OUR TECHNOLOGY WOULD HARM OUR BUSINESS AND DIVERT RESOURCES.
The quality of our products, enhancements and new versions is critical to our
success. Since our software solutions are complex, they may contain errors that
can be detected at any point in its life cycle. Any errors or defects in our
technology could result in:
o delayed or lost revenue;
o failure to attract new customers or achieve market acceptance;
o claims against us;
o diversion of development resources;
o increased service, warranty and insurance costs; and
o negative publicity resulting in damage to our reputation.
While we continually test our products for errors and work with customers to
identify and correct them, errors in our technology may be found in the future.
Testing for errors is complicated because it is difficult to simulate the
breadth of operating systems, user applications and computing environments that
our customers use and because our software is becoming increasingly complex
itself. The costs we may incur in addressing technology errors could be
substantial and could impair our results of operations.
OUR QUARTERLY RESULTS MAY BE IMPACTED BY SEASONAL TRENDS AND OTHER SHORT-TERM
FACTORS.
The operating results of many software and services companies reflect seasonal
trends, and we expect to be affected by such trends in the future. Although we
have not experienced consistent seasonal fluctuations in operational results to
date, to the extent that our operations in Europe continue to generate a high
percentage of our total revenues, we anticipate that we may experience
relatively weak demand in the third quarter as a result of reduced activities in
Europe during the summer months.
Variations in our revenue and operating results could occur as a result of a
number of other factors, such as the budgeting and purchasing practices of our
customers, the length of the customer product evaluation process, the timing of
our customers' system conversions, the timing and cost of new product
introductions and product enhancements, and the timing of any acquisitions and
associated costs. Employee hiring and utilization rates may also affect our
revenues and results of operations.
OUR INTERNATIONAL OPERATIONS INVOLVE INHERENT RISKS, SUCH AS FOREIGN CURRENCY
FLUCTUATIONS AND COMPLIANCE WITH VARIOUS REGULATORY AND TAX REGIMES.
Most of the Company's revenues are derived from international operations that
are conducted in local currencies as well as dollars. Changes in the value of
such local currencies or the dollar relative to such local currencies will
affect the Company's financial position. Gains and losses on translations to
dollars of assets and liabilities will contribute to fluctuations in the
Company's financial position. The Company engages in currency-hedging
transactions intended to reduce the effect of fluctuations in foreign currency
exchange rates on the Company's financial position. However, there can be no
assurance that any such hedging transaction, if entered into, will materially
reduce the effect of fluctuation in foreign currency exchange rates on such
results or on the dollar price at which the Common Shares are publicly traded.
In addition, if for any reason exchange or price controls or other restrictions
on the conversion of foreign currencies were imposed, the Company's financial
position could be adversely affected.
Other potential risks that may impact the Company's international business
activities include longer accounts receivable payment cycles, the burdens of
complying with a wide variety of foreign laws and changes in
8
regulatory requirements, although such factors have not had a material adverse
effect on the Company's financial position to date.
WE HAVE IMPLEMENTED A 1-FOR-5 REVERSE STOCK SPLIT TO MAINTAIN OUR NASDAQ
LISTING, WHICH COULD DAMAGE OUR LIQUIDITY AND INVESTOR CONFIDENCE IN OUR COMMON
STOCK, AND WE MAY AGAIN FAIL TO MEET NASDAQ'S MINIMUM BID REQUIREMENT.
The Company implemented a 1-for-5 reverse stock split of its common stock on
June 16, 2003, to meet the listing requirements of Nasdaq. In January 2003,
Nasdaq informed the Company that its Common Shares would be delisted from the
Nasdaq National Market (the "National Market") due to the Company's failure to
maintain compliance with the $1.00 minimum bid price requirement for continued
listing on the National Market (the "Minimum Bid Price Requirement"). In March
2003, Nasdaq approved the Company's plan to implement the reverse stock split in
order to regain compliance with the Minimum Bid Requirement. Nasdaq notified the
Company that its common stock would continue to be traded on the National Market
provided that the Company regained compliance with the Minimum Bid Price
Requirement by June 16, 2003 and maintained compliance for at least ten
consecutive days thereafter.
As a result of the reverse stock split, on June 16, 2003 the Common Shares began
trading on the National Market in compliance with the Minimum Bid Price
Requirement. Compliance was maintained for nine consecutive days before the
filing of this report. The implementation of the reverse stock split could have
a negative impact on the value of our common stock by allowing additional
downward pressure on the stock price as its relative value becomes greater
following the reverse stock split. In addition, liquidity of our Common Shares
could be adversely affected by the reduced number of shares that would be
outstanding after the reverse stock split. It is our intent to comply with and
meet the requirements for continued National Market listing. However, there can
be no assurance that the Company will maintain long-term compliance with the
Minimum Bid Price Requirement. If we fail to maintain such compliance, our
Common Shares could be delisted, which could have a material adverse effect on
our standing with current and future investors. There can be no assurance that
the Panel will decide to allow us to remain listed or that our actions will
prevent the delisting of our common stock from the National Market.
IF WE FAIL TO MEET OTHER STANDARDS FOR CONTINUED LISTING OF OUR COMMON STOCK ON
THE NASDAQ NATIONAL MARKET, THE COMMON STOCK COULD BE DELISTED FROM THE NATIONAL
MARKET.
In addition to maintaining compliance with the Minimum Bid Price Requirement, a
company must continue to comply with other requirements in order to remain
listed on the National Market. There can be no assurance that we will continue
to meet all such requirements, one of which could be maintaining a required
minimum shareholders' equity of at least $10 million. As at December 31, 2002,
the Company's shareholders' equity was $15.9 million, while as at March 31,
2003, shareholders' equity decreased to $13.9 million. There can be no assurance
that the Company's shareholders' equity will be maintained above $10 million or,
if not so maintained, that the Company will meet an alternative continued
listing standard. Failure to meet one of Nasdaq's continued listing standards
could result in the delisting of our common stock from the National Market.
WE HAVE A HISTORY OF LOSSES, AND WE ANTICIPATE THAT OUR EXPENSES WILL INCREASE
IN THE FORESEEABLE FUTURE AS A RESULT OF PLANNED EXPANSION OF OUR MARKETING
EFFORTS AND RESEARCH AND DEVELOPMENT ACTIVITIES
We incurred net losses of approximately $18 million and $5.2 million for the
years ended December 31, 2001 and December 31, 2002, respectively. We cannot
predict the extent of our future losses and when, or if, we may become
profitable on a sustained basis. We anticipate that our expenses may increase
substantially in the foreseeable future as we seek to increase our sales and
marketing activities, and to continue to develop our technology and introduce
new solutions. These efforts may prove more costly than we currently anticipate
and we may not succeed in increasing our revenues sufficiently to offset these
higher expenses. If we fail to increase our revenues at a greater rate than our
expenses, we will not be able to achieve profits.
9
THE TERMS OF OUR BANK DEBT INCLUDE A NUMBER OF RESTRICTIVE COVENANTS WHICH, IF
BREACHED, COULD RESULT IN ACCELERATION OF OUR OBLIGATION TO REPAY OUR DEBT.
Our loan agreements contain a number of conditions and limitations on the way in
which we can operate our business, including limitations on our ability to raise
debt, sell or acquire assets and pay dividends. Our loan agreements also contain
various covenants which require the Company to maintain certain financial ratios
related to shareholders' equity and operating results that are customary for
companies of comparable size. These limitations and covenants may force us to
pursue less than optimal business strategies or forego business arrangements
which could have been financially advantageous to us or our shareholders. There
can be no assurance that we will continue to fulfill these conditions and
covenants.
Our failure to comply with the covenants and restrictions contained in our loan
agreements could lead to a default under the terms of these agreements. If a
default occurs and we are unable to renegotiate the terms of the debt, the
lenders could declare all amounts borrowed and all amounts due to them under the
agreements due and payable. If we are unable to repay the debt, the lenders
could foreclose on our assets that are subject to liens and sell our assets to
satisfy the debt. As a result of negotiations regarding the extension of our
loan agreements, the assets of our subsidiaries in the United States and United
Kingdom are subject to floating liens. Foreclosure on these assets could have a
material adverse effect on our results of operations and financial condition.
OUR LIQUIDITY MAY BE NEGATIVELY AFFECTED AND THE HOLDINGS OF CURRENT
SHAREHOLDERS MAY BE DILUTED DUE TO OUTSTANDING OBLIGATIONS TO INVESTORS IN THE
DISCONTINUED OPERATIONS OF A SUBSIDIARY.
In February 2001, management decided to discontinue the operation of the
subsidiary eZoneXchange.com, Inc. ("eZone"), held by Sapiens and other
investors. The private placement to such investors in April 2000 was accompanied
by a Put/Call Agreement giving the investors a put option on Sapiens shares as
an exchange for its shares in eZone. Following the discontinuation of eZone's
operation, Sapiens and the investors amended the Put/Call Agreement. As a result
of the amended agreement, if the market price of our Common Shares reaches $10,
the investors will have the right to have the Company repurchase a portion of
their shares in eZone in exchange for approximately 363,000 Common Shares of the
Company. In addition, as provided in the original Put/Call Agreement, during the
period from May 4, 2004 through May 3, 2005, the investors will have the right
to put some or all of their remaining shares in eZone to the Company in return
for both cash (approximately $3) and Common Shares of the Company (at a value of
approximately $2.5 million). If the investors fully exercise their put rights,
the Company's liquidity would be negatively affected due to the reduction in our
cash reserves and the holdings of current shareholders would be diluted by at
least 3.4%.
ALTHOUGH WE PROTECT OUR INTELLECTUAL PROPERTY RIGHTS VIGOROUSLY, THERE CAN BE NO
ASSURANCE THAT THESE MEASURES WILL BE SUCCESSFUL.
In accordance with industry practice, the Company relies upon a combination of
contractual provisions and intellectual property law to protect its proprietary
technology. The Company believes that because of the dynamic nature of the
computer and software industries, copyright protection is less significant than
factors such as the knowledge and experience of the Company's management and
personnel. The Company seeks to protect the source code of its products as trade
secret information and as an unpublished copyright work. The Company also relies
on security and copy protection features in its proprietary software. The
Company distributes its products under software license agreements which grant
customers a personal, non-transferable license to use the Company's products and
contain terms and conditions prohibiting the unauthorized reproduction or
transfer of the Company's products. In addition, the Company attempts to protect
trade secrets and other proprietary information through agreements with
employees, consultants, and distributors. Although the Company intends to
protect its rights vigorously, there can be no assurance that these measures
will be successful. If we fail to protect our rights, and others are able to
improperly use our products without licensing them from us, this failure may
have a material adverse effect on our results of operations and financial
condition.
WE DEPEND UPON KEY PERSONNEL, THE LOSS OF WHOM WOULD HARM OUR OPERATIONS.
Our success depends, to a significant extent, upon the continued performance and
services of our executive officers and other key sales, marketing, software
engineers and support personnel. The loss of the services of any
10
of our executive officers, for example, Yitzhak Sharir, our President and Chief
Executive Officer, or key personnel, would be disruptive to our operations. It
would be difficult and time consuming to replace them. We do not maintain key
person life insurance policies on any of our officers. Any of these individuals
may voluntarily terminate his employment with Sapiens. Our inability to retain
executive officers or key employees could have a material adverse affect on our
results of operations and financial condition.
ANY ACQUISITIONS OR ATTEMPTED ACQUISITIONS WILL DIVERT MANAGEMENT ATTENTION AND
FINANCIAL RESOURCES AND MAY HARM OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
As part of our growth strategy, we intend to consider acquiring complementary
technologies, products and businesses. Attempted acquisitions may divert
management, operational and financial resources from the conduct of our core
business. As a result, if we pursue this growth strategy, the efforts of
management will be diverted from their other operational responsibilities, and
we may not complete any attempted acquisition. If we use capital stock, our
existing shareholders may experience dilution. If we use cash or debt financing,
our financial liquidity will be reduced, the holders of our debt would have
claims on our assets ahead of holders of our ordinary shares and our business
operations may be restricted by the terms of any debt, including restrictions on
our ability to pay dividends on our ordinary shares. In addition, an acquisition
may involve nonrecurring charges or amortization of significant amounts of
goodwill and other intangible assets, which would adversely affect our ability
to achieve and maintain profitability.
WE INTEND TO RELY UPON TAX BENEFITS FROM THE STATE OF ISRAEL, BUT THOSE TAX
BENEFITS MAY NOT BE AVAILABLE TO US AS ANTICIPATED.
Our subsidiary, Sapiens Technologies Ltd., which is incorporated in Israel, was
granted "Approved Enterprise" status by the Israeli government for six
investment programs in 1984, 1991, 1993, 1995, 1998 and 2000 under the Law for
Encouragement of Capital Investments, 1959. We are eligible for certain tax
benefits based on this status. In order to receive these tax benefits, the
Company must comply with two material conditions: (a) it must invest a certain
amount in fixed assets and (b) it must finance a certain portion of these
investments out of equity capital. We believe that the Company has complied with
these conditions. However, confirmation that we have complied with these
conditions from the Israeli government's Investment Center with respect to the
2000 program has not yet been received.
If the Investment Center determines that we failed to comply with these
conditions, these past benefits may be canceled, reduced or rendered unavailable
to us, which could have a material adverse effect on our results of operations
and financial condition.
CONDUCTING BUSINESS IN ISRAEL ENTAILS CERTAIN INHERENT RISKS THAT COULD HARM OUR
BUSINESS.
We have offices and research and development facilities in the State of Israel.
Political, economic and military conditions in Israel directly affect our
operations. We could be adversely affected by any major hostilities involving
Israel, the interruption or curtailment of trade between Israel and its trading
partners or a significant downturn in the economic or financial condition of
Israel. The future of the peace process is uncertain and has deteriorated due to
recent violence between Israelis and Palestinians. In addition, several
countries still restrict business with Israel and with companies doing business
in Israel. We could be adversely affected by adverse developments in the peace
process or by restrictive laws or policies directed towards Israel or Israeli
businesses.
All male permanent residents of Israel between the ages of 18 and 48 are, unless
exempt, obligated to perform reserve duty in the Israeli Defense Forces,
currently consisting of approximately 30 days of service annually. Additionally,
all such residents are subject to being called to active duty at any time upon
the outbreak of hostilities. Many of the Company's employees are currently
obligated to perform annual reserve duty. While the Company has operated
effectively under these requirements since its establishment, no assessment can
be made as to the full impact of such requirements on the Company's business or
work force and no prediction can be made as to the effect on the Company of any
expansion of such obligations.
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FORMULA SYSTEMS (1985) LTD. MAY EXERCISE CONTROL AND INFLUENCE CORPORATE ACTIONS
THAT ARE POTENTIALLY IN CONFLICT WITH THE COMPANY'S OTHER PUBLIC SHAREHOLDERS
Formula Systems (1985) Ltd. ("Formula"), whose shares trade on The Nasdaq
National Market and the Tel Aviv Stock Exchange, directly owns 5,491,677 or 50%
of our currently outstanding Common Shares. Formula is and may continue to be in
a position to exercise control over most matters requiring shareholder approval.
Formula may use its share ownership or representation on the Company's board of
directors to substantially influence corporate actions that conflict with the
interests of the Company's other public shareholders including, without
limitation, changing the size and composition of the board of directors and
committees of the Company's board of directors, causing the issuance of further
securities of the Company, amending the Company's governing documents or
otherwise controlling the outcome of shareholder votes. Further, actions by
Formula with respect to the disposition of the shares they beneficially own, or
the perception that such actions may occur, may adversely affect the trading
price of the shares on the Nasdaq National Market.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company, which was incorporated in the Netherlands Antilles in 1990, has a
registered office located at Lanhuis Joonchi, Kaya Richard J. Beaujon z/n,
Curacao, Netherlands Antilles. Our telephone number is: (011) 599-97366-277.
Intertrust (Curacao) N.V. is the Company's agent in Curacao and serves as a
member of our Board of Directors.
At the time of its formation through 1997, the Company marketed and supported a
comprehensive software development tool originally known as "SAPIENS," later
renamed "ObjectPool" and now known as Sapiens eMerge(TM). The software tool,
whose software technology remains one of our key assets, involved an innovative,
object and rules-based approach to software application development that
substantially improved software development productivity while significantly
reducing the cost and time required to build applications that previously had to
be developed and maintained using procedural programming languages.
In 1998, the Company made a strategic shift from "tool provider" to "solution
provider". These solutions, which integrate our software technology, project
methodology and consulting expertise, offer our customers comprehensive
solutions to their pressing information technology ("IT") needs, such as
adaptation to the Internet, reengineering of existing software applications or
the changeover to the euro, the single European currency.
In October 2001, the Company announced a new strategic initiative in the
insurance and financial services industries. Our goal is to rise to a position
of global leadership in delivering strategic business software solutions to the
insurance industry.
B. BUSINESS OVERVIEW
Sapiens is a global provider of IT solutions that modernize business processes
to enable insurance and other leading companies to quickly adapt to change.
Sapiens' modular solutions align IT with business demands for speed, flexibility
and efficiency. Sapiens' solutions consist primarily of our technology,
methodology and consulting services, which address the complex issues related to
the life-cycle of enterprise business applications. Sapiens solutions have
evolved into scalable insurance applications for leading organizations such as
AXA, AVIVA, Liverpool Victoria, OneBeacon, USAA, Fortis, Principal Financial
Group, Prudential, and the Surplus Line Association of California. Sapiens has
also developed its service offerings to include a strategy-based discovery and
analysis blueprint that helps improve the IT impact on a customer's business
objectives.
We enable our customers to gain competitive edge while maximizing the value of
their investments in existing "IT" systems. Our core technology, Sapiens
eMerge(TM), covers rapid application development and re-engineering, legacy to
Web integration and application integration with other back-end and front-end
systems and processes. We believe that our understanding of the insurance
marketplace and broad experience in evolving legacy
12
systems, backed by our business logic and rules-based approach, help our
customers gain a competitive edge in the rapidly changing business world.
Our goal is to rise to a position of global leadership in delivering strategic
business solutions to the insurance industry. We plan to achieve this objective
by combining our domain expertise and extensive experience in deploying robust,
high volume solutions in order to deliver to our clients customizable business
frameworks for life and pensions insurance, general insurance and loans and
mortgages. The cornerstone of our strategic vertical focus and solution
offerings remains Sapiens eMerge(TM), our technology-rich platform that has
evolved and matured over the course of thousands of man-years of research and
development efforts. Sapiens eMerge, which serves hundreds of our clients
worldwide, accelerates business solution development, legacy lifecycle
management and maintenance.
We market our solutions globally through our direct sales force and through
marketing alliances with global IT providers, such as IBM and EDS. Sapiens has
been a Premier partner with the IBM Corporation for over 10 years and works
cooperatively with it on world-class solutions, joint development, testing,
validation and marketing. Through this and other business alliances, Sapiens has
developed extensive knowledge in mainframe and mid-range systems, including
CICS, DB2, MQSeries and the WebSphere e-business platform. We recently achieved
the highest level of certification for IBM's e-business Application Framework
and are a member of the IBM's Insurance Application Architecture (IAA) group.
These alliances enable us to reach a broader base of customers while
complementing our partners' offerings.
INDUSTRY BACKGROUND
The insurance industry is at a crossroads, struggling to meet heightened needs
of intermediaries and customers that have grown to expect information and
answers at Internet speed. Add to this increased competition, legislative and
regulatory requirements, recent disasters, the economic downturn and escalating
operational costs and you will understand the complex challenges insurance
organizations face today.
Insurance companies must be agile and efficient to survive. However, existing
technology 'cannot support these marketplace demands. Starting from scratch is a
risky, costly and daunting proposition.
While current systems may be outdated, they are still an important part of an
organization's ability to sustain its business model -- removing them can cause
a significant loss of business productivity as well as the logic that
constitutes part of "corporate memory".
In addition, organizations worldwide are struggling to keep pace with the
rapidly changing business environment. Mergers and acquisitions, new
internet-related business models aimed at improving service levels and
operational efficiencies, as well as regulatory reforms, are driving IT to some
of its most serious challenges ever. The velocity of business change has
increased across the board, while traditional IT shops are unequipped to address
these challenges.
Businesses try to address these challenges in a variety of ways. Certain
companies opt to dedicate significant in-house IT resources to solve these
issues. In many cases, however, organizations lack the requisite internal
resources and know-how. As a result, many of these organizations rely on the
expertise of external IT service providers.
OUR BUSINESS SOLUTIONS FOR THE INSURANCE INDUSTRY
Sapiens' new management team has focused the company's resources on delivering
solutions to help the insurance industry become more agile in the face of these
new dynamics.
By creating interdisciplinary teams and partnering with leading insurance
companies, Sapiens has formulated INSIGHT, a suite of modular business solutions
that make use of existing assets to quickly and cost-effectively modernize
business processes -- which are the key to survival in the current, difficult
insurance landscape.
13
The Sapiens INSIGHT is designed for the general (property and casualty) and life
insurance markets. These solutions can be customized to match specific legacy
systems and business requirements, while providing pre-configured functionality.
These solutions can be used independently or collectively as follows:
* POLICY INSIGHT
Policy INSIGHT(TM) is a fully functional policy administration solution that
makes it easier for brokers and agents to do business with carriers. This
web-enabled solution reduces the cost of doing business through automation and
optimizes risk selection through the use of rules based underwriting. Policy
INSIGHT is designed to improve internal efficiencies by automating policy
lifecycle processes and by allowing business analysts to quickly respond to
changing rate and regulation issues. The solution also provides functionality
supporting the rapid development and launch of new products to keep pace with
competitive pressures and market opportunities.
* CLAIMS INSIGHT
Claims INSIGHT(TM) is a framework-based solution that effectively manages and
improves the information flow of claim handling across an insurance provider's
entire organization. This solution uses highly accessible business rules and XML
standards and allows the use of a company's existing legacy assets. Thus, the
solution improves operational efficiency and enables better and more versatile
customer service capabilities, with the goal being a significant reduction in
the total claims payout.
* CLOSED BOOKS INSIGHT
Closed Books INSIGHT(TM) is a solution for life insurance companies seeking ways
to reduce the cost of maintaining long-term closed books of business. Sapiens
provides customizable solutions that enable companies to efficiently administer
policies and claims relating to lines of business that are no longer current.
Lower ongoing cost of ownership is achieved by replacing "old" systems (which
reflect out-dated business models and working practices with long processing
cycles and limited on-line functionality) with modern technology and a browser
user interface.
We collaborate with our clients to tailor the INSIGHTsolutions to achieve the
unique operational performance goals of each organization. In addition, Sapiens
has executed independent projects for the insurance market, providing enhanced
information access and visibility to empower the sales, agent and broker
community, thus acceleratin transaction processing for improved customer service
and business efficiency.
Developed around "eMerge," Sapiens' business-rules engine, INSIGHT modules
transform core processes by translating them into business-rules. The evolution
to a rules-based system allows for rapid interactive development by technical
and business personnel, empowering business users to make changes using
English-like rules rather than application code. Sapiens' insurance solutions
are compatible with a variety of platforms including IBM zSeries and iSeries, HP
UNIX and Intel based servers. They are also built on open architecture standards
such as .NET and J2EE, and platforms such as IBM WebSphere.
SERVICES
OUTSOURCING OF APPLICATION MAINTENANCE. Sapiens' outsourcing services evolved
from the Company's strong, long-term relationships with its customers. Sapiens
is currently servicing multi-year outsourcing contracts with blue-chip customers
involving mission-critical systems. The outsourcing projects can be performed
either on or off the customers' premises. Sapiens' asset discovery solution
contributes to the maintenance and management of an enterprise's IT environment.
IT SERVICES. Sapiens provides customers with specialized IT services in many
areas, including project management and technical assistance. Sapiens' dedicated
professionals work together with the customer for the duration of the entire
project, collectively undertaking design, development and deployment tasks,
coupled with hands-on-training, to achieve a rapid software solution that is
totally representative of the customer's business and IT goals.
In a typical process of IT solution delivery, the following services are
offered:
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PLANNING - SOLUTION CONCEPTION PHASE
"BLUEPRINT" - a comprehensive mapping process of customer requirements,
from e-business strategy to application architecture.
PILOT/PROOF OF CONCEPT - a working model is built to demonstrate that
Sapiens can deliver a solution that meets the customer's requirements
within a very short period of time.
DEVELOPMENT PHASE
For solution development and testing, the customer is offered the
options of developing (1) jointly with Sapiens staff, (2) in-house or
(3) through full outsourcing to Sapiens.
Sapiens' RAAD methodology is used to facilitate rapid and correct
development. Joint Application Development, or JAD, sessions are part
of the methodology, requiring business users to actively participate in
the process of application requirements definition and iterative
testing.
Sapiens practices what is commonly referred to in the IT industry as
"knowledge transfer" by directly training developers, using one-on-one,
classroom or "train the trainer" scenarios. Training occurs either at
on-site customer premises or at Sapiens offices worldwide.
Ongoing solution support is offered at customer premises, Sapiens
premises or a combination of both. Short-term and long-term support
contracts are available.
ONGOING MAINTENANCE
Technology maintenance includes ongoing version upgrades and feature
enhancements within versions designated as "releases". There are four
tiers of technology support:
First tier -customer site
Second tier - local support center
Third tier -international support center, or ISC, located at
our facilities.
Fourth tier - Sapiens R&D located at our facilities.
Reinforcing all service offerings described above are Sapiens'
technology experts worldwide.
Sapiens project managers with significant Sapiens eMerge delivery
experience oversee the entire solution planning and development
process, practicing project management and control while ensuring
adherence to project scope and established methodology.
Solution engagements can be performed on both a fixed cost and
time/materials basis.
OUR RAAD METHODOLOGY
Sapiens' unique rapid architectured application development ("RAAD") methodology
provides an ARCHITECTURED approach to Rapid Application Development ("RAD") that
provides for the rapid and evolutionary development of the enterprise's
e-business solution. Sapiens' proven field experience in RAD projects and in
large-scale mission-critical system development has matured to create a
methodology that supports both RAD and traditional processes under one
architectured methodology.
The iterative and evolutionary process of Sapiens' RAAD Methodology accommodates
solutions of varying scope, from small-scale solutions to large-scale
enterprise-wide mission critical solutions. Practices are collectively applied
to facilitate both traditional processes that warrant the structured and formal
delivery of
15
solution deliverables, together with RAD processes that support iterative and
progressive prototyping for the early development of working components.
Sapiens' RAAD methodology is applied throughout the engagement process, from the
initial capture of business requirements through to implementation of our
solution. It incorporates ongoing management involvement and active user
participation throughout all phases of solution definition, development, test
and implementation. Joint application development, or JAD, sessions are
conducted throughout the development process, ensuring business user
participation and continuing refinement of the developed solution. These
sessions complement the Sapiens eMerge which allows users to review and test a
fully-working solution while it is under development.
OUR CORE TECHNOLOGY
Sapiens' solutions are empowered by Sapiens eMerge(TM), a core development and
deployment technology that is designed to express business logic in a
declarative manner with business rules, thus providing a unified and open
platform for complete business software solutions. A key advantage of Sapiens
eMerge is the ability to extend the productive life of existing legacy systems,
while simultaneously providing a rapid migration path to new generation Internet
and e-commerce technologies. The use of advanced, rapid application development
technology allows enterprise-specific enhancements to be made in a shortened
timeframe and with a vastly reduced maintenance burden when compared to other
technologies.
Sapiens eMerge is based on a multi-tier architecture and operates in
multi-platform environments, encompassing many hardware vendors, operating
system environments and databases. Platforms supported include IBM's S/390
(zSeries), AS/400 (iSeries) and HP-UNIX. Sapiens eMerge supports databases such
as VSAM, IMS, DB2, IDMS, Oracle and Informix. Since Sapiens eMerge exemplifies
open systems and cross-platform capabilities, solutions developed with it can be
seamlessly migrated from platform to platform and from database to database.
Development, deployment, integration and administration of e-business
applications are all accomplished via Sapiens eMerge's technology components, as
presented below, providing customers with flexible, scalable and robust systems.
The following are some key features of our core technology that are common to
the full range of our solutions:
THE SAPIENS eMERGE OBJECT
The key building block of Sapiens eMerge is the object. An object is a unit of
data containing information about a particular aspect of a business. Each object
also contains a set of business rules controlling its character and interaction
with other objects. For example, a product object within an inventory
application will contain information about the product's name, price,
identification number, quantity on hand, etc. Encapsulated within the object are
rules that dictate when the product should be reordered, and how its price
should be calculated.
RULES
The rules within a Sapiens eMerge application are modeled after the business
rules by which an organization runs. Each rule is typically a one or two-line
statement that declares a discrete business task. Since each rule resides within
an object, it is necessary to define the rule only once. In contrast,
traditional programming methods require numerous lines of procedural code to
perform the same tasks and force developers to repeat the underlying business
logic in multiple programs within an application. Consequently, developers using
Sapiens eMerge technology are free to concentrate their efforts on the business
objectives of an application rather than being tied to the tedious tasks of
procedural programming.
Since these rules are encapsulated within the Sapiens eMerge objects, they are
easily identifiable and maintainable. In contrast to traditional programming,
developers need not review large volumes of code when modifying a Sapiens
eMerge-based application. They simply revise the straightforward rules that
govern the behavior of the application.
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The Sapiens eMerge rules engine features a power of inference called "positive
thinking." Due to this feature, the Sapiens eMerge rules need only be stated in
their standard, positive form. Non-standard implications of the rules are
automatically inferred. For example, a positive rule within an inventory
application may dictate that each item ordered should be subtracted from the
inventory on hand. In traditional programming, the non-standard operations
associated with this, such as adjusting inventory when the amount of an item
ordered is changed, or the item is deleted or replaced, must be specified and
coded by means of a lengthy and detailed process. However, with Sapiens eMerge
this is not necessary, since the rules engine automatically infers these
operations.
In summary, Sapiens eMerge rules reduce complexity by stating what has to be
done rather than how it should be done. This reduces the number of instructions
that are given by the application developer from a long and complicated set of
machine instructions (procedural programming) to a greatly reduced number of
functional statements. The "how" part of the application is generated
automatically by Sapiens eMerge technology's power to infer. Positive thinking
also ensures the integrity of an application because the Sapiens eMerge rules
engine, rather than requiring developers to work manually, automatically
addresses the non-standard, "negative" implications of the business logic.
THE SAPIENS eMERGE REPOSITORY
The Sapiens eMerge repository contains all of the information that comprises an
application. The information within the repository includes all Sapiens eMerge
objects and rules, screen and report layouts, database mapping information and
security profiles. The repository is governed by its own set of rules and
objects that control the contents of the repository. The developer of a Sapiens
eMerge application simply populates the repository with application
specifications, which are then governed by the repository's own rules and
objects. Cross-referencing is supported, making application maintenance easy.
Unlike passive repositories, which merely document applications, the Sapiens
eMerge repository is automatically synchronized with its associated applications
and acts as their dynamic knowledge base. This knowledge base is easily copied
and migrated across multiple platforms. This cross-platform flexibility enables
Sapiens customers to scale their applications in accordance with their changing
needs.
MULTI-TIER ARCHITECTURE
The Company's technology is based on a multi-tier architecture, which includes
PRESENTATION, BUSINESS LOGIC and DATA. The presentation layer houses the client
technology, including character-based 3270 terminals, Windows-based clients and
Web browsers. The business logic layer contains the Sapiens eMerge objects and
rules, and may reside on various server platforms, including mainframe, AS/400,
UNIX and HP-UX. The third layer accommodates the application data, which may be
stored in a wide range of database management systems, including DB2, Oracle,
Informix, IMS, VSAM and others.
Each tier is independent and may be replaced or modified without affecting the
other tiers. This architecture allows customers to move their applications by
simply moving the business logic layer from one server platform to another
without affecting the presentation and data layers. This enables the flexible
movement of applications within a heterogeneous computing environment. For
example, customers may choose to adopt the latest Internet browser in their
presentation layer or change their database management systems without impacting
the business logic and functionality of their applications.
SAPIENS eMERGE BUSINESS INTEGRITY SERVER
SAPIENS eMERGE BUSINESS INTEGRITY SERVER, central to all Sapiens' solutions, is
a reliable and scalable enterprise class transaction server, able to handle
heavy workloads with thousands of users and millions of daily transactions.
SAPIENS eMERGE BUSINESS INTEGRITY SERVER , in its "knowledgebase", a powerful
object-oriented data dictionary, contains the aforementioned application
definition-objects and business rules.
SAPIENS eMERGE BUSINESS INTEGRITY SERVER resides on a server and runs under a
number of operating systems and working environments, as follows:
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--------------------------------------------------------------------------------
SERVERS OPERATING SYSTEMS/WORKING ENVIRONMENTS
--------------------------------------------------------------------------------
IBM iSeries (AS/400) OS/400
--------------------------------------------------------------------------------
HP Unix Servers HP-UX
--------------------------------------------------------------------------------
IBM zSeries (S/390) z/OS, OS/390 (CICS, IMS/DC, TSO, Batch), VM/CMS
--------------------------------------------------------------------------------
An application developed using SAPIENS eMERGE BUSINESS INTEGRITY SERVER is
portable. For example, if an application is developed in HP-UX, it can be
seamlessly migrated to IBM iSeries or zSeries.
SAPIENS eMERGE i.way INTERACTION SERVER
Our "i.way" product is based on the SAPIENS eMERGE BUSINESS INTEGRITY SERVER
with the addition of HTTP and interaction servers. i.way enables scalable,
enterprise-wide access to data in distributed environments. By using various Web
standards (HTML, CSS, SSL, etc.) and Java, i.way provides a personalized user
experience on a standard Web browser. Sapiens i.way is deployed on the Windows
2000 platform.
i.way accelerates development productivity and shortens implementation time
through the following features and functions:
o i.way enables customers to access their applications via an
Inter/intra/extra-net Web site.
o Application forms are automatically generated as HTML pages enriched with
Java applets and scripts for display on the Web client.
o Users may dynamically modify the appearance of, and control interaction
within, application forms by defining external components.
o Performance is maximized as only the changed data is transmitted via XML,
while the static HTML forms are cached in memory.
o The user interaction logic - both for presentation and for session flow,
are defined in a declarative manner and stored centrally in the Sapiens
eMerge knowledge base repository along with all other application
definitions.
o Multithreading is supported - at runtime, a separate session thread is
allocated for each user session, with a local knowledge base per session
created at the middle tier. This enhances performance without losing the
productivity edge of centrally managed Web development.
Furthermore, the Web development solution provides for remote administration and
monitoring of servers and applications via a Web browser. Among the server and
application administration tools are tools for monitoring server usage and load,
for tuning the environment for optimal performance, for event notification, and
managing sessions and users.
SAPIENS eMERGE DEVELOPMENT WORKBENCH
SAPIENS eMERGE DEVELOPMENT WORKBENCH is a fully integrated environment to
develop applications from the initial analysis stage through the testing and
maintenance of working applications. SAPIENS eMERGE DEVELOPMENT WORKBENCH
combines rules-based technology, state-of-the-art user interfaces (GUI + WUI),
and graphical modeling tools to model, define, test and modify objects,
attributes and rules covering the entire back office and Web front-end life
cycle, in one controlled workgroup environment.
Object modeling is graphically performed to define the business model,
presentation forms, all application entities (Classes and Compound Classes), and
the relationships between all application entities. Presentation forms can be
developed for screens and menus, as well as Web pages, where the presentation
created can be commonly used in both client/server environments and in Web
browsers without necessitating changes.
Business rules that define all validations, operations and events to be
triggered are defined using a high level declarative language, instead of
procedural coding. This raises the level of abstraction in applications,
translating
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into clearer, more modular and maintainable applications. Additionally, the
business rule concept enables encapsulation of rules within the presentation
layer. Thus, functions such as navigation, flow, validity checks, help, and
browse can be encapsulated and controlled by the business rules.
The Sapiens eMerge Development Workbench runs on the Windows 2000/XP platform
connected to the server development environment and is constantly synchronized
with application changes, thereby reducing maintenance.
SAPIENS eMERGE INTEGRATION TOOLS
The SAPIENS eMERGE Integration Tools integrate SAPIENS eMERGE applications with
legacy, back-office applications and Web environments non-intrusively, thereby
avoiding disruption of operational systems. SAPIENS eMERGE Integration Tools
connect Sapiens eMerge applications to external J2EE and .NET applications, Web
Services, 3270 and 5250 legacy applications, external DBMS's, MQSeries and XML.
SAPIENS eMERGE BUSINESS COMPONENTS
SAPIENS eMERGE BUSINESS COMPONENTS provide Sapiens eMerge with openness to .NET
and J2EE compliant applications. Through SAPIENS eMERGE BUSINESS COMPONENTS,
..NET and J2EE application clients can access Sapiens eMerge applications by
exposing Sapiens eMerge objects as components with properties and behaviors
(methods) that can be invoked. To these applications, Sapiens eMerge objects
appear as classes that can be manipulated and integrated as application
components. Sapiens eMerge BUSINESS COMPONENTS provides Sapiens eMerge with the
features needed to successfully integrate within emerging Web application
serving platforms such as IBM's WebSphere, BEA's Weblogic and Microsoft's
Enterprise Server.
SAPIENS eMERGE XML ADAPTER
Sapiens eMerge XML Messaging enables Sapiens eMerge applications to expose a set
of message based services to other parties, as well as invoke message based
services from other parties. The messages are formatted as XML documents.
Some of the key features provided by Sapiens eMerge XML Messaging include:
platform and protocol support, ability to interpret and build XML schema and
component based documents, rule based message processing and easy integration.
SAPIENS eMERGE LEGACY ADAPTER
SAPIENS eMERGE LEGACY ADAPTER meets the requirements for full, non-intrusive
legacy integration. The development environment automates much of the process of
building an interface between the legacy application and an e-business
application. The runtime environment is robust and efficient, and is transparent
to the user of the e-business application.
The key benefit of using LEGACY ADAPTER as opposed to a standard legacy renewal
tool (such as one based on screen scraping technology), is that once the proper
mapping is done, Sapiens eMerge sees the legacy application as an object that
can have new business rules applied to it, just like any other Sapiens eMerge
object. New objects can be also added that interact with the legacy objects.
This, in effect, enables business processes embedded in the legacy application
to participate as equal peers in a complex integration scenario.
The LEGACY ADAPTER solution is based on an Sapiens eMerge application that
communicates with the legacy application as a 3270 or 5250 terminal. The aim is
not to mimic the legacy application, but rather to provide a contemporary
application that uses the legacy application screens as an external data source.
Thus, instead of modifying the legacy application, it can be accessed through
the interface it already has: its 3270 or 5250 screens. In the development
process, LEGACY ADAPTER uses tree controls and a customized LEGACY SCREEN
EDITOR.
19
DBMS ADAPTER
The SAPIENS eMERGE DBMS ADAPTER enables application developers to incorporate
external data into Sapiens eMerge applications. As there is a complete
separation between the presentation, process and data layers, external data
resides in a database maintained by any supported DBMS. DBMS Adapter makes
external data appear as native Sapiens eMerge data, so that access to the
external data is transparent to both the application and the end user. Thus, the
full strength of Sapiens eMerge can be applied to external data.
IBM MQSERIES ADAPTER
Sapiens eMerge databases and applications can be accessed from any program or
application that uses the MQSeries messaging system. These programs and
applications function as clients and the Sapiens eMerge application functions as
a server. The client application can run in any environment that offers MQSeries
messaging. There is no need to install any Sapiens eMerge software on the client
computer.
KEY BENEFITS TO SAPIENS CUSTOMERS
o FAST TIME TO MARKET (HIGH ROI). Sapiens' combination of a RAD methodology,
rules-based development tools and experienced consultants has resulted in
significant productivity increases at customer sites. Declarative development
with business rules replaces traditional programming methods, addressing the
full application life cycle, meaning that no programming code development is
required. This represents a reduction in logic specification and application
maintenance of 5 to1 and dramatically enhances the quality of the delivered
application since most "bugs" arise in the non-standard logic.
o DOMAIN EXPERTISE. Sapiens supports its target markets with the domain
expertise of its consultants, the proven methodologies developed by Sapiens
Technologies and Sapiens' accumulated experiences with customers in these
markets.
o STRONG R&D DIVISION. Sapiens' research and development (R&D) division plays
a central role in the Company. R&D is responsible for developing the enabling
technologies used in the Company's solutions. Approximately 10% of the Company's
revenues are redirected to R&D to ensure the development of innovative
technologies for continued growth.
o EXTEND VALUE OF LEGACY SYSTEMS. Sapiens' solutions enable organizations to
capitalize on existing large-scale applications and data by non-intrusively
integrating them with new e-business applications and technologies. Sapiens
solutions not only extend the productive life of legacy systems but
simultaneously provide a migration path to next-generation technologies.
o CROSS-PLATFORM CAPABILITY AND SCALABILITY. Sapiens' solutions are designed
for an extensive list of computing platforms and technologies including: Windows
2000 and XP; IBM systems including AS/400 and S/390; and various UNIX systems.
Sapiens' solutions, with their rules-based approach, allow organizations to
create, deploy, integrate and maintain new applications within existing systems
or onto different platforms much more quickly and efficiently than by
traditional line-by-line programming methods. The platform-independent nature of
Sapiens' solutions allows them to be scaled according to the needs of the
organization.
CUSTOMERS
The Company markets its solutions primarily to corporate clients and government
entities with large information technology budgets and ongoing maintenance and
development needs.
The Company believes that the customers listed on the following table, arranged
by industry, are representative of its international customer base. The country
in which the Company does business or has done business with the customer is
indicated for each name.
20
INSURANCE
AXA Global Risks - UK Israel Defense Forces (Mamram)
AXA Insurance - UK Israel National Police
Aegon Insurance - UK Ministry of Construction & Housing
Berlinische Leben - Germany Ministry of Labor & Social Affairs
Canada Life (Albany) - Canada Ministry of Defense (Malan)
Delta Lloyd General Insurance - UK Ministry of Health
Allianz Group (ELVIA Vie Leben Vita)- Ministry of Transportation
Switzerland National Insurance Institute
Fortis - USA JA Chiba Keizairen - Japan
Helvetia Patria Versicherungen - Switzerland KRUS-Farmers' National Insurance - Poland
ING Canada - Canada Social Security Office of Thailand
Liverpool Victoria - UK State of Arkansas - USA
MediRisk - Israel
Menora Insurance Company - Israel MANUFACTURING
Mutuelle du Mans Assurances (MMA) - France
Nationale Nederlanden - The Netherlands 3M - Europe
Nissan Kasai - Japan ALPS Electric - Japan
Norwich Union - UK Canon France - France
OneBeacon Insurance Company - USA Dunaferr Rt - Hungary
Principal Life Insurance - USA Haworth, Inc. - USA
Royal London Insurance - UK Honda - Japan
Scottish Provident - UK International Paper - USA
Surplus Line Ass'n of California - USA Kawasaki Heavy Industries - Japan
The Prudential - UK Kirin Brewery - Japan
US Automobile Association - USA Mazda Parts - Europe
Virginia Farm Bureau - USA Mercedes-Benz Schweiz AG - Switzerland
PZL - Poland Renault - France
FINANCIAL SERVICES Stomana Metal Industries - Bulgaria
TDK Corporation - Japan
Abbey National Mortgage Finance - UK
Banco Credicoop - Argentina TRANSPORTATION
Banco Sudameris - Brazil
Bank Hapoalim B.M. - Israel Belgian National Railway (NMBS/SNCB) -
Bank Leumi B.M. - Israel Belgium
Bank of Ireland - Ireland
Bank Slaski S.A. - Poland Canada Maritime - Canada
Barclays Retail Financial Services - UK InterContainer-Interfrifo - Switzerland
Canadian Imperial Bank of Commerce - Canada Natural AG (Cronat) - Switzerland
Capital Bank (NWS Bank Plc) - UK Norfolk Southern Railway - USA
National Australian Group - Australia and UK
PKO BP S.A. Bank - Poland RETAIL
Principal Financial Group - USA
Woolwich Direct - UK Argos - UK
Sanwa Bank - Japan Groupe Andre - France
Thomas Cook Financial Services - Canada HAC Kimisawa Co. - Japan
JA Kumamoto Agricultural - Japan
GOVERNMENT & UTILITIES
MISCELLANEOUS
Ameritech - USA
Computer Sciences Corporation - USA American Assn. of Retired Persons - USA
ELMU-Budapesti Elektromos Muvek - Hungary Six Continents (Bass Hotels -Holiday Inn) - USA
Houston Industries - USA AOL Time Warner : Southern Progress - Oxmoor
Government of Israel: House Media Services - USA
Civil Service Commission JD Williams & Company - USA
Israeli Air Force Mega Sports Corporation - Japan
Panasonic UK - UK
21
For information regarding the principal markets in which the Company competes,
see Note 15 to the Company's financial statements.
COMPETITION
The market for e-business software solutions is highly competitive and
characterized by rapidly changing technology, evolving industry standards and
customer requirements, and frequent innovations. The following is a breakdown of
the competition that we face in each of our primary markets:
RAPID APPLICATION DEVELOPMENT
Our competitors in the application development and e-commerce marketplaces
include tool vendors and system integrators. RAD Tool vendors with that we
compete include Versata, Software AG, HNC (Blaze), ARTEch (GeneXus), Magic and
Lansa. Consultants and system integrators that offer competing solutions include
IBM, EDS, Cap Gemini, Computer Associates International, Andersen Consulting,
and KPMG.
LEGACY EVOLUTION
Our competitors in the legacy evolution marketplaces include tool vendors and
system integrators. Tool vendors that we compete with include SAGA Systems,
Seagull, Neon, Relativity, Merant, SEEC, Most, Intercomp and IBM.
Web consultants and system integrators that offer competing solutions include
IBM, Cap Gemini, Xpedior, Sapient, Cambridge Technology Partners, Computer
Associates International, Andersen Consulting, USWeb/CKS and EDS.
SALES AND MARKETING
To reach the broadest potential customer base, the Company has pursued multiple
distribution channels, including a direct sales force and relationships with
system integrators and, in certain geographic areas, with distributors.
The Company has marketing and sales personnel located in its operations in the
United States, the United Kingdom, France, Germany, Canada, Japan, and Israel.
The direct sales force focuses on large organizations within select industries.
It also coordinates sales activities with system integrators such as Cap Gemini,
CSC and IBM. These partnerships allow Sapiens to further expand its own
solutions and to gain access to specific types of domain.
The Company employs a variety of business development and marketing techniques
to communicate directly with current and prospective clients. These techniques
include exhibiting at trade shows and industry conferences, disseminating
product brochures and other literature, direct-mail marketing, authoring
articles, and hosting user conferences and business forums for customers and
prospective customers on technology and industry issues.
CUSTOMER TRAINING AND SUPPORT
The Company believes that a high level of post-contract customer support is
important to the successful marketing and sale of the Company's solutions. The
Company employs a team of technical specialists who provide the full range of
training and support services. The typical direct sale to a client includes
initial maintenance, training and consulting services. In addition,
substantially all of the clients for whom the Company has developed an
application elect to enter into an ongoing maintenance and support contract with
the Company, which is typically for twelve-month intervals and entitles the
customer to technology upgrades, when generally made available and technical
support. The Company also offers introductory and advanced classes and training
programs available at the Company's offices and customer sites.
On a worldwide basis, the Company's authorized distributors, value-added
resellers and system integrators also provide customers with training, product
support and consulting services. Each of the Company's software distributors is
capable of providing training in its respective country. In addition, many
international partners and distributors, particularly independent software
vendors, operate their own technology training programs.
22
C. ORGANIZATIONAL STRUCTURE
We operate globally through our operating subsidiaries. The following chart
shows the corporate structure of our Company and our material operating
subsidiaries. Unless indicated otherwise, each subsidiary is wholly-owned by its
parent.
------------------- SAPIENS INTERNATIONAL N.V
| (Netherland Antilles)
| |
| |
eZoneXchange SAPIEN INTERNATIONAL B.V ---------------
(77%) (Amsterdam) |
(Delaware) | Sapiens
| Japan
| (90%)
|
|
---------------------------------------------------------------------------------------------
| | | | | | | | |
| | | | | | | | |
Sapiens Sapiens Sapiens Sapiens Sapiens Sapiens Sapiens Sapiens Sapiens
Americas Canada UK France Switzerland Germany Belgium Israel Tech.
(Delaware) (Ontario) (Israel) (Israel)
Note 1. State or country of incorporation indicated in parentheticals, if
necessary
2. Unless indicated otherwise, the ownership interest is 100%.
D. DESCRIPTION OF PROPERTY
The Company leases office space in the United States, Canada, United Kingdom,
France, Israel, Switzerland, Germany, Belgium, and The Netherlands. The lease
terms are generally five to ten years. The Company believes that its existing
facilities are adequate for its current needs.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our financial
statements and the notes thereto. Certain matters discussed below and throughout
this annual report are forward-looking statements that are based on our beliefs
and assumptions as well as information currently available to us. Such
forward-looking statements may be identified by the use of the words
"anticipate," "believe," "estimate," "expect," "may," "will," "plan" and similar
expressions. Such statements reflect our current views with respect to future
events and are subject to certain risks and uncertainties. While we believe such
forward-looking statements are based on reasonable assumptions, should one or
more of the underlying assumptions prove incorrect, or these risks or
uncertainties materialize, our actual results may differ materially from those
described herein. Please read the section above entitled "Risk Factors" to
review conditions that we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements and keep in
mind the other cautionary statements appearing in Item 5 and elsewhere in this
annual report.
The Company's discussion and analysis of its financial condition and result of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with Generally Accepted Accounting Principles
in the United States ("US GAAP"). The preparation of these financial statements
required the Company to make estimations and judgments, in accordance with US
GAAP, that affect the reporting amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing
23
basis, the Company evaluates its estimates, including those related to revenue
recognition, bad debts, goodwill and other intangible assets, capitalized
software development costs, deferred taxes, income taxes and legal
contingencies. The Company based its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the
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.
The following accounting policies form the basis of the above-referenced
estimates and judgments that the Company made in preparing its consolidated
financial statements.
REVENUE RECOGNITION
Revenues earned under software licensing agreements with end-users are
recognized when all criteria outlined in Statement of Position No. 97-2
"Software Revenue Recognition" ("SOP No. 97-2") (as amended) are met. Revenue
from license fees is recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable.
The Company and its subsidiaries generally do not grant rights of return.
Where software arrangements involve multiple elements, revenue is allocated to
each element based on vendor specific objective evidence ("VSOE") of the
relative fair values of each element in the arrangement, in accordance with the
"residual method" prescribed by Statement of Opinion No. 98-9. "Modification of
SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions"
("SOP No. 98-9"). The Company's VSOE used to allocate the sales price to
consulting, training and maintenance is based on the price charged when these
elements are sold separately. License revenues are recorded based on the
residual method.
Under the residual method, revenue is recognized for the delivered elements when
(1) there is VSOE of the fair values of all the undelivered elements other than
those accounted for using long-term contract accounting, and (2) all revenue
recognition criteria of SOP 97-2, as amended, are satisfied.
The Company's project business derives a significant portion of its revenue from
fixed price contracts. Revenues from fixed-price contracts are recognized based
on Statement of Opinion No. 81-1 "Accounting for Performance of Construction
Type and Certain Production Type Contracts" ("SOP 81-1"), which requires the
accurate estimation of the cost, scope and duration for each project. Revenue
and related cost for these projects are recognized on percentage of completion,
using the input measure to assess the percent completed with revisions to
estimates reflected in the period in which changes become known. If the Company
does not accurately estimate the resources required or the scope of work to be
performed, or does not manage its project properly within the projected periods
of time or satisfy its obligations under the contract, then project margins may
be significantly and negatively affected, which may result in losses on existing
contracts. Any such resulting reductions in margins or contract losses in a
large, fixed-price contract may have a material adverse impact on the Company's
results of operations.
Consulting and other service revenue includes also training and post-contract
maintenance service. Revenues from consulting, maintenance and training services
are recognized ratably over the contractual period or as services are performed.
BAD DEBT
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers was to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances would be
required.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Goodwill that arose from acquisitions prior to July 1, 2001 was amortized until
December 31, 2001 on a straight-line method over their estimated useful lives.
The Federal Accounting Standards Board issued Statement of Financial
24
Accounting Standards No. 141 ("SFAS 141") and No. 142 ("SFAS 142") in June 2001.
SFAS 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and broadens the criteria
for recording intangible assets separate from goodwill. SFAS 142 requires the
use of a non-amortization approach to account for purchased goodwill and certain
intangibles. We adopted these pronouncements effective January 1, 2002. As of
such date, we ceased the use of amortization associated with purchased goodwill.
CURRENCY FLUCTUATION
We expect that a significant portion of our revenues will continue to be
denominated in the GBP and the euro, and a smaller portion will be denominated
in the Japanese yen and the New Israeli Shekel ("NIS"). As a result, movements
in the exchange rates between the US dollar and the euro, the US dollar and the
Japanese yen and the US dollar and the NIS could have a material adverse impact
on our revenues and results of operations within Europe, Japan and Israel.
We regularly assess our interest rate and currency exchange exposures and
determine whether to adjust or hedge our position. We may use derivative
instruments to hedge or adjust our exposures. As a matter of policy we do not
enter into transactions of a speculative or trading nature. Interest rate and
foreign exchange exposures are monitored by tracking actual and projected
commitments and through the use of sensitivity analysis.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Our policy on capitalized software costs determines the timing of our
recognition of certain development costs. In addition, this policy determines
whether the cost is classified as a development expense or cost-of-license fee.
Management is required to use professional judgment in determining whether
development costs meet the criteria for treatment as immediate expenses or as
capitalized development costs.
DEFERRED TAXES
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company determines that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period in which such determination is
made. Likewise, should the Company determine that it will not be able to realize
all or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset will be charged to income in the period in which such
determination is made.
INCOME TAXES
The Company, through its operating subsidiaries, operates within multiple tax
jurisdictions and may be subject to tax audit in these jurisdictions. These tax
audits can involve complex issues, which may require an extended period of time
to resolve. In management's opinion, adequate provisions for income taxes have
been made for all years.
LITIGATION
We are currently involved in certain legal proceedings and claims that arose in
the ordinary course of business. As discussed in Note 11 of our consolidated
financial statements, as of December 31, 2002, we have accrued our estimate of
the probable costs for the resolution of these claims. This estimate has been
developed in consultation with outside counsel handling our defense in these
matters and is based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies. We do not expect these
claims and/or proceedings to have a material adverse effect on our consolidated
financial position. It is possible, however, that future results of operations
for any particular quarterly or annual period could be materially affected by
changes in our assumptions related to these claims and proceedings.
25
RESULTS OF OPERATIONS
REVENUES. Product revenues are comprised of sales of licenses, license upgrades,
specially designed products for the insurance industry such as "Policy INSIGHT,"
"Closed Books INSIGHT" and "Claims INSIGHT," application development and
re-engineering projects, and platform and/or computing environment migration
projects. These projects are performed either on a fixed-price or time and
materials basis. Service revenues include mainly consultants on a time and
materials basis and maintenance support.
Total revenues in 2002 increased 2.2% to $64.8 million from $63.4 million in
2001 after a decrease of 12.8% from $72.7 million in 2000. Product revenues in
2002 increased 23.9% to $42.0 million from $33.9 million in 2001 and decreased
23.0% in 2001 from $44.0 million in 2000. Consulting and other service revenues
in 2002 decreased 22.7% to $22.8 million from $29.5 million in 2001 and
increased 2.8% in 2001 from $28.7 million in 2000.
Our product revenues for the year ended December 31, 2002 rose mainly due to
sales to existing customers of upgrades of Sapiens eMerge licenses to version
4.5 coupled with successful results of increased sales and marketing efforts.
The decline in consulting and other service revenues came as a result of lower
revenues from consulting, while revenues from maintenance remained flat.
Consulting revenues decreased primarily because the Company concentrated on
activities with higher profit margins and did not take on activities with lower
profit margins.
Revenues from operations within geographic areas based on our customers'
locations show growth in the United Kingdom subsidiary and the North American
subsidiaries. The UK subsidiary increased its revenues 19.2% in 2002 to $25.4
million from $21.3 million 2001 and 20.3% in 2001 from $17.7 million in 2000.
The North American subsidiaries reported revenues of $20.3 million in 2002, a
9.7% increase from $18.5 million in 2001 as compared with a 22.5% increase in
2001 from $15.1 million in 2000. The Company attributes increased revenues in
these regions to successful marketing, sales and delivery efforts.
Revenues from our French subsidiaries were $3.5 million, down 41.7% from $6.0
million in 2001, which in turn declined 63.9% from $16.6 million in 2000; from
our German subsidiaries, $2.7 million, which declined 43.8% from $4.8 million in
2001, as compared with a decline of 23.8% from $6.3 million in 2000; and from
other small subisidiaries (Switzerland and Japan), $7.2 million, up 5.9 % from
$6.8 million in 2001, as compared with a decline of 40.4% from $11.4 million in
2000. Our Israeli subsidiary showed a slight decline of 4.9% to $5.8 million in
2002 from $6.1 million in 2001 which was an increase of 8.9% from $5.6 million
in 2000.
COST OF REVENUES. Cost of revenues is mainly comprised of labor costs of
software consultants and engineers, direct overhead of professional services,
amortization of capitalized software and royalties to the Office of the Chief
Scientist ("OCS") in Israel. Cost of service revenues also includes depreciation
of fixed assets. Our overall gross profit in 2002 increased 38.0% to $28.7
million from $20.8 million in 2001 after decreasing 4.6% from $21.8 million in
2000. Overall gross profit increased in 2002 mainly as a result of increased
product revenues in the revenues mix. Gross profit as a percentage of revenues
increased by 35.1% to 44.3% in 2002 from 32.8% in 2001, which was an increase of
9.3% from 30.0% in 2000.
Gross profit from product revenues increased 90.2% in 2002 to $19.4 million from
$10.2 million in 2001 after a decrease of 25.5% from $13.7 million in 2000.
Gross margin from product revenues was 46.2% in 2002, an increase of 53.5%
compared with 30.1% in 2001, following a 3.2% decrease from 31.1% in 2000. The
increases in gross profit and gross margin from product revenues resulted
primarily from the relatively high proportion of licenses and license upgrades
accompanied by improved product pricing and delivery efficiencies. The sales of
licenses amounted to $10.2 million, $11.5 million and $5.0 million in the years
2002, 2001 and 2000, respectively.
Royalty expense pursuant to the OCS funding programs, included in cost of
products, increased 6.7% to $1.6 in 2002 from $1.5 million in 2001, and
increased 15.4% in 2001 from $1.3 million in 2000. The growing liability to the
OCS from year to year resulted from the sale of a larger proportion of products
using technologies based on research and development funding by the OCS.
The salaries and other personnel-related expenses component of the costs of
product revenues was 42.1%, 51.9% and 57.7% in the years 2002, 2001 and 2000,
respectively. This positive ratio trend reflect the material contribution
26
of improved efficiency and better utilization of the Company's professional
teams and helped to offset the increased spending on royalties to the OCS. As a
result, gross margins improved consistently from 2000 to 2002.
In addition, capitalized software development costs decreased 32.5% to $2.7
million in 2002 compared with $4.0 million in 2001, which in turn was a 7.0%
decrease from $4.3 million in 2000. Similarly, amortization of capitalized
software decreased 37.0% to $2.9 million in 2002 compared with $4.6 million in
2001, after an increase of 43.8% from $3.2 million in 2000.
Gross profit from consulting, maintenance and other services decreased 12.3% to
$9.3 million in 2002 from $10.6 million in 2001 which was an increase of 30.9%
from $8.1 million in 2000. At the same time, gross margin from consulting,
maintenance and other services improved 13.4% in 2002 to 40.8% from 35.9% in
2001 after a 27.3% increase from 28.2% in 2000, mainly due to improved
utilization of our professional resources and replacement of low margin
consulting services with those that have higher margins. Improved efficiencies
and better utilization of our maintenance professionals also contributed to the
improvement in gross margin from our maintenance services.
RESEARCH AND DEVELOPMENT, NET. Research and development ("R&D") costs are mainly
comprised of labor costs and depreciation of fixed assets net of grants from the
OCS. Net research and development expenditures increased 9.1% in 2002 to $6.0
million from $5.5 million in 2001 after decreasing 46.6% from $10.3 million in
2000. The increased spending on R&D recorded in 2002 as compared with the
previous year, as well as the increased dedication of company resources to new
product development, reflect our efforts to accelerate development of
specially-designed products for the insurance industry such as Policy INSIGHT,
Closed Books INSIGHT and Claims INSIGHT.A portion of our R&D expenditures is
funded by the OCS pursuant to programs entitling the Government to receive
royalties on sales of products developed as a result of R&D projects so funded.
The net R&D expenditure in 2002 and 2001 benefited from OCS funding in the
amounts of $0.7 million and $1.6 million, respectively. Due to the late approval
of the R&D grant in the year 2000, the Company did not record any R&D funding in
2000. See information regarding capitalized software development costs under
"Costs of Revenues" above.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES, NET. Selling,
marketing, general and administrative expenses consist primarily of salaries and
other personnel-related expenses. In addition, selling and marketring expenses
also include commission and other costs associated with our sales and marketing
efforts while general and administrative expenses also include facilities,
communications and external consultants. Selling and marketing, general and
administrative, net ("SG&A") expenses in 2002 decreased 17.1% to $23.8 million
from $28.7 million in 2001, a decrease of 38.5% from $46.7 million in 2000. The
decrease in SG&A expenses in 2002 is the result of continuing the aggressive
cost efficiency program that management implemented beginning in 2001. The
decrease from 2000 to 2001 is primarily due to a decrease in payroll and
headcount-related expenses, mainly in general and administrative (which
accounted for $10.4 million of the decrease) and a $7.6 million decrease in
facilities and other infrastructure expenses. The decrease from 2001 to 2002 is
due to an additional decrease in payroll and headcount related expenses
resulting from additional headcount reduction (which accounted for $1.2 million
of the decrease) and a $3.7 million decrease in expenses related to other
operating expenses. At the same time, marketing, promotional activity and
related expenses were maintained in 2002 in order to support and accelerate the
implementation of the Company's strategy of penetrating the insurance industry
as a targeted market. Expressed as a percent of total revenues, SG&A expenses
decreased to 36.7% in 2002 from 45.3% in 2001 and 64.2% in 2000, representing a
significant factor in our improving overall operating margins over that period.
RESTRUCTURING EXPENSES. On December 31, 2002 we recorded a restructuring charge
in the amount of $0.5 million, compared to no such charge in 2001 and a charge
of $2.6 million in 2000. The restructuring charge in 2002 represented
involuntary termination benefits for approximately 40 employees as part of our
recovery plan for the year 2002. As part of the plan, the employment of 33
additional employees was terminated with no related restructuring charge. The
restructuring plan was aimed at streamlining the Company by improving gross
margins performance and realignment of SG&A organization and costs in order to
better support the needs of our market and customers.
TAXES ON INCOME. The tax expenses in 2002 were $1.4 million, an increase of 100%
compared with tax expenses of $0.7 million in 2001, which in turn represented an
increase of 136.8% over a net tax benefit of $1.9 million in 2000. The increase
in 2002 is due primarily to the agreement with the Israel tax authorities
described in the next paragraph. The Company's entire provision for taxes on
income relates to operations in jurisdictions other than the
27
Netherlands Antilles. The effective income tax rate varies from period to period
as the result of the various jurisdictions in which the Company operates and
where each one has its own system of taxation (not only with respect to the
nominal rate, but also with respect to the allowance of deductions, credits and
other benefits). The Company records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not to be realized.
The Company did not recognize a majority of the deferred tax assets relating to
the net operating losses of the Company's subsidiaries worldwide due to the
uncertainty of the realization of such tax benefits.
In December 2001, Sapiens Technologies Ltd. ("Technologies"), Sapiens Israel
Software Systems Ltd., Sapiens International Corporation N.V. and Sapiens
International Corporation B.V. entered into an agreement with the Israeli Tax
Authorities ("the ITA") following a tax audit. In accordance with this
agreement's provisions, the Company agreed to pay in installments an amount of
approximately $1 million for the tax years through 1999. These payments were
completed in November 2002. In addition, this agreement provided that the
Company would have a contingent tax liability to pay an additional amount (the
"additional amount"). The payment of the additional amount was contingent on
Technologies obtaining certain approvals from the Investment Center regarding
the status of the Approved Enterprise under the Encouragement of Investments
Law. In July 2002, an agreement was reached between Technologies and the ITA,
according to which the additional amount was determined to be $580,000. This
additional amount is payable in 11 installments ending in October 2003.
NET INCOME/LOSS. Net loss for 2002 was $5.2 million, a decrease of 71.1%
compared with a loss of $18.0 million, which in turn represented a decrease of
52.9% from $38.2 million in 2000. The decrease in loss in 2002 was primarily due
to improved gross profit margins and lower operating and financial expenses.
LIQUIDITY AND CAPITAL RESOURCES. Cash, cash equivalents, marketable securities
and short term investments at the end of 2002 were $23.7 million compared with
$16.1 million at the end of 2001 and $10.9 at the end of 2000.
Net cash provided by operations was $5.0 million in 2002 compared with $2.6
million net cash used in operations in 2001 and $21.1 net cash used in
operations in 2000. The material improvement in 2002 versus 2001 and 2000 was
due primarily to two factors: the improved operating results based on aggressive
reduction of costs and increased efficiency throughout the Company's operations;
and a decrease of 40.9% in trade receivables due to successful deliveries
resulting in efficient collection efforts ($10.4 million as at December 31, 2002
compared to $17.6 million as at December 31, 2001). Net cash used in investing
activities was $3.7 million in 2002, compared with $4.3 million in 2001and $3.7
million in 2000. The principal uses of cash were the purchase of property and
equipment, capitalized software development costs and the purchase of short-term
deposits and marketable securities.
Net cash provided by financing activities totaled $4.3 million, compared with
$6.4 million net cash provided by financing activities in 2001 and $33.4 million
in 2000. The sources of cash provided by financing activities were the
investment by Formula Systems (1985) Ltd. ("Formula") of $10 million and a
decrease of $10.6 million in short-term bank debt, of which $7.5 million was the
result of reclassification to long-term debt through agreements with the
Company's lender banks.
In June 2003, the Company received approval from its lender banks to extend its
existing credit lines in the amount of $24 million, of which $16.1 million will
be available until March 31, 2004 and $7.9 million will be available until March
31, 2005
In December 2002, Formula invested an additional $10 million in the Company by
exercising an existing option to purchase Common Shares. See "Related Party
Transactions" under Item 7.
Management believes that available working capital and credit lines will be
sufficient for the next 12 months to support the Company's operating
requirements. The Company may consider other financing alternatives to finance
strategic goals and future growth.
28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information regarding the current
executive officers and directors of the Company.
NAME AGE POSITION
---- --- --------
Ron Zuckerman (1) 46 Chairman of the Board of Directors
Yitzhak Sharir 52 President, Chief Executive Officer and Director
Yuval Hadari 62 Executive Vice President and Chief Financial Officer
David Ofek 50 Executive Vice President, Business Development & Marketing
Amos Shattner 52 Executive Vice President, Technologies and Operations
Michel Berty (1) (2) 64 Director
Kenneth J. Bialkin (1) 73 Director
Dan Goldstein 49 Director
Gad Goldstein 43 Director
L. Robert Libutti (2) 66 Director
Tsvi Misinai 57 Director
Shlomo (Shai) Sole 52 Director
Intertrust (Curacao) N.V. (2) (3) Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Intertrust (Curacao) N.V. is a corporate body organized under the laws of
the Netherlands Antilles. The Articles of Incorporation of the Company
provide that a corporate body may be a member of the Board of Directors.
Ron Zuckerman has served as a director of the Company since May 1991 and assumed
the position of Chairman of the Board of Directors on January 1, 1998. He served
as Chief Executive Officer of the Company from January 1995 until March 31,
2000. Mr. Zuckerman served as Chief Operating Officer of the Company from its
incorporation until April 1994.
Yitzhak Sharir joined the Company as Chief Executive Officer in November 2000.
Prior to joining the Company, Mr. Sharir served as General Manager of Nilit
Industries from 1994 through 2000. Prior to joining Nilit, Mr. Sharir served as
President & CEO of Orlite Industries from 1990 through 1994. Mr. Sharir also
served as Executive V.P. and General Manager of Oshap Technologies (1985-1989),
V.P. Technology of Urdan Industries (1983-1985), and manager of engineering
teams at Israel Aircraft Industries and Israel's Nuclear Research Center.
Yuval Hadari joined the Company as Chief Financial Officer in March 2001. Prior
to joining the Company, Mr. Hadari served as V.P. Finance and Chief Financial
Officer of Nilit Ltd. from 1996 to February 2001 and Chief Financial Officer of
Scitex Europe S.A. from 1991 through 1995.
David Ofek joined the Company as Executive Vice President, Business Development
& Marketing in 2002. Prior to joining the Company, he served as the Chief
Executive Officer of Objet Geometries Ltd., an affiliate of Scitex Corporation
Ltd., for two years. Before Objet Geometries, Mr. Ofek was employed by other
companies in the Scitex Corporation group for 15 years. His positions included
President & CEO of Scitex Europe S.A.
Amos Shattner joined the Company as Executive Vice President, Technologies and
Operations in March 2001. Prior to joining the Company, Mr. Shattner most
recently served as Chief Executive Officer of Varicom Communications. Mr.
Shattner serves as a director of Index Madadim Benleumiim, an Israeli public
company.
Michel Berty has served as a director of the Company since March 1997. Mr. Berty
served as Chairman and Chief Executive Officer of Cap Gemini America from 1993
through March 1997; and as General Secretary of the Cap Gemini Group from 1986
to 1993.
29
Kenneth J. Bialkin has been a director of the Company since August 1992. Mr.
Bialkin has been a partner at Skadden, Arps, Slate Meagher & Flom LLP for more
than five years. Mr. Bialkin is a director of Citigroup, OSHAP, Municipal
Assistance Corporation for the City of New York, and Tecnomatix.
Dan Goldstein has served as a director of the Company since March 5, 2001, the
date on which the first private placement transaction described below under
"Related Party Transactions" was completed. Pursuant to the terms of the private
placement, Mr. Goldstein filled the vacancy caused by the resignation of Mr.
Harold Leach. In 1982, Mr. Goldstein founded the first company in the Formula
Group. Since then he has been CEO and Chairman of the Group and serves as a
director in other companies in the Group.
Gad Goldstein has served as a director of the Company since July 2002. Mr.
Goldstein has been President of Formula Systems (1985) Ltd. ("Formula") since
1995 and a director of Formula since 1985. Between 1985 and 1995, Mr. Goldstein
was Vice President of Formula. In addition, Mr. Goldstein is Chairman of the
Board of Crystal Systems Solutions Ltd., a Formula Group company, and serves as
a director of other companies in the Group.
L. Robert Libutti has served as a director of the Company since August 1992 and
served Chairman of the Board of Directors from January 1995 through December
1997. Since January 1992, Mr. Libutti has been employed as a private consultant.
From 1988 to 1991, Mr. Libutti served as Programming Systems Director of Market
Strategy for IBM in Somers, New York. From 1984 to 1988, Mr. Libutti served as
Group Director of Market Development for IBM in Paris, France.
Tsvi Misinai is a founder of the Company and has served as a director since
April 1990. Mr. Misinai served as President and Chief Technological Officer of
the Company from its formation in 1990 through March 1997. Mr. Misinai is
currently Chairman of NewFrame Corporation, Ltd., a software company based in
Israel. Since 1990, Mr. Misinai has been a director of Meister Software N.V. Mr.
Misinai worked at the Weizmann Institute of Science located in Rehovot, Israel
(the "Weizmann Institute"), as an initiator and manager of the DB1 project.
Shlomo (Shai) Sole is a founder of the Company and has served as a director
since May 1991. Mr. Sole served as Executive Vice President-Research &
Development from April 1990 through December 1996. Since 1990, Mr. Sole has
served as a director of Meister Software N.V. Mr. Sole worked at the Weizmann
Institute as a researcher and member of the DB1 development team, the
predecessor of Sapiens.
Intertrust (Curacao) N.V. is a corporate body organized and existing under the
laws of the Netherlands Antilles. It has provided the Company with
corporate-related services since April 1990, including but not limited to
serving as the Company's transfer agent and register, maintaining the
corporate-related records of the Company, and filing various corporate documents
with the governmental authorities in the Netherlands Antilles.
All directors of the Company are appointed by the General Meeting of
Shareholders and hold office until suspended or dismissed by the General Meeting
of Shareholders. Executive officers are appointed by the Board of Directors of
the Company and serve at the discretion of the Board of Directors.
By virtue of their deemed beneficial ownership of Common Shares, directors Dan
Goldstein and Gad Goldstein may be deemed to beneficially own over 50% of the
outstanding Common Shares and will be in a position to control the election of
the Company's directors and thus the direction and future operations of the
Company.
Directors Dan Goldstein and Gad Goldstein are brothers. Apart from that
relationship, there are no family relationships among the executive officers or
directors of the Company. The Company has no current intent or plan to change
its compensation arrangements with respect to directors for serving as
directors.
B. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by the Company during the fiscal year
ended December 31, 2002, to all directors and executive officers as a group for
services in all capacities was $2,770,809 which includes amounts set aside or
accrued to provide pension, retirement severance or bonuses and similar
benefits, but does not include amounts expended by the Company for automobiles
made available to its officers or expenses (including business travel and
professional and business association dues) reimbursed to such officers. The
aggregate amount set aside
30
or accrued by the Company during its fiscal year ended December 31, 2001, to
provide pension, retirement severance and similar benefits for directors and
executive officers of the Company was $185,525. The foregoing amounts also
exclude stock option grants to the Company's directors and officers pursuant to
the Company's 1992 Stock Option Plan, which is described below.
The Company has employment agreements with its officers. The Company, in the
ordinary course of its business, enters into confidentiality agreements with its
personnel in Israel and has entered into non-competition and confidentiality
agreements with its officers and high-level technical personnel. The Company
does not maintain key person life insurance on any of its executive officers.
BOARD FEES AND EXPENSES
The Company pays its independent directors the sum of $1,000 for each Board
meeting attended in person and the sum of $500 for each Board meeting
participated in by telephone and for each Committee meeting (however attended).
In addition, if an independent director is required to travel to a meeting, he
is paid $1,000 for a travel day. The Company reimburses all Board members for
reasonable out-of-pocket expenses incurred in connection with their attendance
at Board or committee meetings.
The Company grants to its independent directors options to purchase 20,000
shares of the Company's common stock annually. The options are granted at an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. The term of the options is 10 years and the options vest at a
rate of 25% per annum.
STOCK OPTION AND INCENTIVE PLAN
On April 2, 1992, the Company adopted the 1992 Stock Option and Incentive Plan
(the "1992 Stock Plan"), which was submitted for approval and approved in April,
1992, by the Company's shareholders, pursuant to which, officers, directors, and
employees of the Company will be eligible to receive awards of stock options and
restricted stock. The 1992 Stock Plan is administered by a committee (the
"Committee"), established by the Company's Board of Directors. Options granted
under the 1992 Stock Plan may be "incentive stock options" ("ISOs"), within the
meaning of section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified stock options ("non-Qualified Stock Options").
Restricted stock may be granted in addition to or in lieu of any other award
granted under the 1992 Stock Plan.
In 1992, the Company reserved 100,000 Common Shares for issuance of awards under
the 1992 Stock Plan. In February 1994, the shareholders adopted the resolution
to increase the number of shares reserved for grant under the 1992 Stock Plan by
an additional 200,000 Common Shares. In October 1995 and January 1997 the
Company increased the number of shares available for grant under the 1992 Stock
plan by an additional 200,000 Common Shares each in order to retain and attract
management and other key personnel essential to the Company's achievement of
various performance milestones based on net operating profit, excluding
extraordinary items. In March 1998 and October 1998 the Company increased the
number of shares available for grant under the Plan by an additional 200,000
Common Shares each for the purpose of attracting new talent to the Company. In
January 2000 and November 2000, the Company increased the number of shares
available for grant under the Plan by an additional 400,000 and 800,000 Common
Shares respectively. These increases were necessary in light of the decline in
the market price of the Company's Common Shares, which rendered previous option
grants valueless, and the need to retain the Company's talented personnel under
difficult conditions.
Subject to the provisions of the 1992 Stock Plan, the Committee determines the
type of award, when and to whom awards will be granted, and the number of shares
covered by each award. The Committee also determines the terms, provisions, and
kind of consideration payable (if any), with respect to awards. In addition, the
Committee may authorize loans in connection with the exercise of options under
the 1992 Stock Plan. The Committee has discretionary authority to interpret the
1992 Stock Plan and to adopt rules and regulations related thereto. In
determining the persons to whom awards shall be granted and the number of shares
covered by each award, the Committee takes into account the contribution to the
management, growth and/or profitability of the business of the Company by the
respective persons and such factors as the Committee shall deem relevant,
including the length of employment of the respective persons, the nature of
their responsibilities to the Company, and their flexibility with regard to
location of their employment and other employment-related factors.
31
An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Options granted under the 1992 Stock Plan vest and become
exercisable in cumulative installments of 25% a year beginning with the first
anniversary of the date of the grant, or pursuant to such other schedule as the
Committee may provide in the option agreement. The exercise price of such
options generally will be not less than 100% of the fair market value per share
of the Common Shares at the date of the grant. In the case of ISOs, certain
limitations will apply with respect to the aggregate value of option shares
which can become exercisable for the first time during any one calendar year,
and certain additional limitations will apply to "Ten Percent Stockholders" (as
defined in the 1992 Stock Plan). The Committee may provide for the payment of
the option price in cash, by delivery of other Common Shares having a fair
market value equal to such option exercise price, by a combination thereof or by
any method in accordance with the terms of the option agreements. The 1992 Stock
Plan contains special rules governing the time of exercise of options in the
case of death, disability, or other termination of employment. Options are not
transferable except by will or pursuant to applicable laws of descent and
distribution upon death of the employee.
The 1992 Stock Plan also provides for the granting of restricted stock awards,
which are awards of Common Shares that may not be disposed of, except by will or
the laws of descent and distribution, for such period as the Committee
determines (the "restricted period"). The Committee may also impose such other
conditions and restrictions on the shares as it deems appropriate, including the
satisfaction of performance criteria. The Committee may provide that such
restrictions will lapse with respect to specified percentages of the awarded
shares on successive anniversaries of the date of the award. During the
restricted period, the grantee is entitled to receive dividends with respect to,
and to vote the shares awarded to him or her. If, during the restricted period,
the grantee's continuous employment with the Company terminates for any reason,
any shares remaining subject to restrictions will be forfeited. The Committee
has the authority to cancel any or all outstanding restrictions prior to the end
of the restricted period, including cancellation of restrictions in connection
with certain types of termination of employment.
By its terms, the 1992 Stock Plan terminated on April 2, 2002. On February 18,
2003, the Board of Directors authorized the extension of the 1992 Stock Plan for
an additional 10 years, subject to approval of such extension by the Company's
shareholders. It is desirable that the 1992 Stock Plan remain in effect so that
the Company will be able to attract and retain talented employees. The proposal
to approve the extension of the 1992 Stock Plan will be submitted to the
Company's shareholders at the Annual General Meeting scheduled in August 1993.
As of December 31, 2002, options to purchase 1,580,713 Common Shares (652,988 of
which were held by officers and directors) were outstanding with exercise and
vesting dates beginning in June 1993 and expiring at various dates through
December 2012. As of that date, there were 22,280 shares of restricted stock
that the Company had granted to employees and other eligible grantee (350 of
which were held by current and former officers and directors). As of December
31, 1997, all of the restricted shares had vested under the restricted stock
awards. Restricted stock awards vested at various dates beginning in June 1993.
C. BOARD PRACTICES
Members of the Company's Board of Directors are elected by a vote at the annual
general meeting of shareholders and serve for a term of one year. Directors may
serve multiple terms and are elected by a majority of the votes cast at the
meeting. Each executive officer serves until his/her removal by the Board of
Directors or resignation from office. Non-employee directors do not have
agreements with the Company for benefits upon termination of their service as
directors.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised of three external
directors, nominated by the Board of Directors. During the year 2002, Messrs.
Libutti and Berty and Intertrust (Curacao) N.V. served as members of the Audit
Committee. Its primary function is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing financial information,
internal controls and the audit process. The Committee is governed by a Charter
and meets at regularly scheduled quarterly meetings.
32
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is comprised of three
external directors, nominated by the Board of Directors. During the year 2002,
Messrs. Zuckerman, Bialkin and Berty served as members of the Compensation
Committee. The primary function of the Compensation Committee is to manage the
Company's Stock Option Plan and review and approve all matters relating to the
compensation of the Company's officers and directors. The Committee meets at
regularly scheduled quarterly meetings.
D. EMPLOYEES
Competition for personnel in the Company's industry is intense. The Company
believes that its future success will depend in part on its continued ability to
hire and retain qualified personnel. There can be no assurance that the Company
will be successful in attracting and retaining sufficient numbers of qualified
personnel to conduct its business in the future.
As of December 31, 2002, the Company had a total of 541 employees, including 94
in research and development, 329 in consulting, delivery and technical support;
and 118 in SG&A.
E. SHARE OWNERSHIP
SHARES BENEFICIALLY OWNED
--------------------------
NUMBER PERCENT(1)
--------- ----------
Dan Goldstein (2) 6,696,496 54.9
Gad Goldstein (2) 6,696,496 54.9
Ron Zuckerman (3) 641,800 5.7
Yitzhak Sharir (4) 315,000 2.9
Tsvi Misinai (5) (7) 345,333 3.1
Shai Sole (6) (7) 402,820 3.7
All directors and executive officers
as a group (13 persons) (8) 1,870,353 16.0
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them. The percentages shown are based on 10,994,035
Common Shares issued and outstanding as of June 16, 2003 plus such number
of Common Shares as the indicated person or group had the right to receive
upon the exercise of options which are exercisable within 60 days of June
16, 2003.
(2) Includes (i) 5,491,677 Common Shares and (ii) an option to purchase
1,204,819 Common Shares at an exercise price of $4.15 per share. Dan
Goldstein, an officer and a director of Formula, and Gad Goldstein,
President and director of Formula, each disclaim beneficial ownership of
these shares. See Item 7, "Major Shareholders."
(3) Includes (i) 97,700 Common Shares held by Lako Enterprises S.A., a
corporation ("Lako") as to which Mr. Zuckerman disclaims beneficial
ownership (see below); (ii) 340,800 Common Shares held by Meister Software
N.V. ("Meister"), a Netherlands Antilles corporation, which shares may be
deemed to be beneficially owned by Mr. Zuckerman (see below); (iii) 24,000
Common Shares held of record by Mr. Zuckerman; and (iv) options to purchase
179,300 Common Shares held by Lako to which Mr. Zuckerman disclaims
beneficial ownership. The options have exercise prices ranging from $0.005
to $32.50 per share.
33
A trust (the Bornali Foundation) for the benefit of the estate of Mr.
Zuckerman owns all the outstanding voting shares of Lako. Mr. Zuckerman
disclaims beneficial ownership of the Common Shares held by Lako.
Lako owns 97,600 Common Shares of the Company and 50% of the voting shares
of Century Holdings, Inc., a Panamanian corporation ("Century). Century
owns approximately 31.9% of the voting stock of Meister. By virtue of
Lako's ownership of Century, Mr. Zuckerman may be deemed to have ownership
of Century and thus may be deemed to beneficially own all of the Common
Shares held by Meister.
(4) Includes 300,000 Common Shares that are currently being held in escrow by
the General Counsel of the Company pursuant to a share purchase agreement
between Red Coral Holdings, Inc. and the Company. Mr. Sharir disclaims
beneficial ownership of such Common Shares. Also includes options to
purchase 15,000 Common Shares at an exercise price of $5.70 per share.
(5) Includes (i) 340,800 Common Shares held by Meister, which shares may be
deemed to be beneficially owned by Mr. Misinai(see note (7)); (ii) 233
Common Shares held of record by Mr. Misinai; and (iii) options to purchase
4,300 Common Shares at an exercise price of $11.25 per share.
(6) Includes (i) 340,800 Common Shares held by Meister, which shares may be
deemed to be beneficially owned by Mr. Sole (see Note (7)); (ii) 33,720
Common Shares held of record by a trust (the ADANAC Trust) for the benefit
of Mr. Sole's children, as to which Mr. Sole disclaims beneficial
ownership; and (iii) options to purchase 28,300 Common Shares at exercise
prices ranging from $11.25 to $32.50 per share.
(7) Tsvi Misinai and Shlomo (Shai) Sole beneficially own approximately 23% and
approximately 9.7%, respectively, of the voting stock of Meister. By virtue
of their ownership of Meister and their positions as officers and directors
of Meister (see "Management"), Mr. Misinai and Mr. Sole may be deemed to
beneficially own all of the outstanding Common Shares held by Meister.
(8) Each of the directors and executive officers not separately identified in
the above table beneficially own less than 1% of our outstanding Common
Shares (including options held by each such party and which are vested or
will become vested within 60 days of the date of this annual report) and
have therefore not been separately disclosed.
34
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth, as of June 16, 2003, certain information with
respect to the beneficial ownership of the Company's Common Shares by each
person known by the Company to own beneficially more than 5% of the outstanding
Common Shares, based on information provided to us by the holders or disclosed
in public filings with the Securities and Exchange Commission.
SHARES BENEFICIALLY OWNED
----------------------------
NAME AND ADDRESS NUMBER PERCENT (1)
---------------- ------ --------
Formula Systems (1985) Ltd. ("Formula")(2) 6,696,496 54.9
3 Hagalim Boulevard
Herzlia 46725, Israel
Yarnfield International Limited ("Yarnfield") 1,204,819 11.0
c/o Rothschild Corporate Fiduciary
Services Limited
St. Peter's House, Le Bordage
St. Peter's Port, Guernsey, Channel Islands
(1) The percentages shown are based on 10,994,035 Common Shares issued and
outstanding as of June 16, 2003 plus such number of Common Shares as the
indicated person or group had the right to receive upon the exercise of
options which are exercisable within 60 days of June 16, 2003.
(2) Includes (i) 5,491,677 Common Shares and (ii) an option to purchase
1,204,819 Common Shares at an exercise price of $4.15 per share. Dan
Goldstein is chairman of the board and Chief Executive Officer of Formula
and owns 20.0% of the outstanding shares of Formula. Gad Goldstein is a
director and president of Formula and owns 3.3% of the outstanding shares
of Formula. Messrs. Dan and Gad Goldstein are brothers. Based on the
foregoing, Dan Goldstein and Gad Goldstein each may be deemed to share with
Formula the power to vote and dispose of our Common Shares beneficially
owned by Formula. Each of Dan Goldstein and Gad Goldstein disclaims
beneficial ownership of the Common Shares beneficially owned by Formula.
As a result of the transactions described below under "Related Party
Transactions, significant changes in percentage ownership by the shareholders
listed above. These shareholders do not have different voting rights.
As of December 31, 2002 there were 185 holders of record of the Company's Common
Shares, including 124 holders of record with addresses in the United States.
Based on Formula's holding 50% of the outstanding Common Shares of the Company,
Formula may be considered to control the Company.
B. RELATED PARTY TRANSACTIONS
1. The Company entered into a Share Purchase Agreement, dated January 24, 2001
(the "Share Purchase Agreement"), with Formula and Yarnfield (collectively
the "Investors"). In the Share Purchase Agreement, the Investors agreed to
invest an aggregate of $15 million in the Company in exchange for issuance
of Series F preferred shares (the "Preferred F Shares"). In addition, the
Investors were granted an option to invest up to an additional sum of $15
million, with Formula having an option to invest up to $10 million and
Yarnfield having an option to invest up to $5 million, at any time through
December 25, 2003. The Company's shareholders approved this private
placement transaction in February 2001 and the transaction was closed in
March 2001. Yarnfield is an affiliate of the Magnum Technologies Fund, and
Ron Zuckerman, Chairman of the Board of the Company, is an advisor to
Magnum.
35
In October 2002, the Investors made an offer to the Company (the "Offer")
under which (a) the Investors would convert all their outstanding Preferred
F Shares into Common Shares at a reduced conversion price of $4.15, (b)
Formula would invest an additional $10 million in Common Shares by
exercising an existing option to purchase Common Shares at a reduced
exercise price of $4.15 per Common Share and (c) Yarnfield would assign to
Formula an option Yarnfield held to purchase Common Shares and such option
would be exercisable at the reduced exercise price of $4.15 per Common
Share. The Offer was approved by the shareholders at a Special Meeting held
on November 21, 2002 and the transactions contemplated by the Offer closed
on December 31, 2002. As a result of these transactions, Formula became the
holder of approximately 43.9% of the outstanding Common Shares of the
Company and Yarnfield became the holder of approximately 11.0% of the
outstanding Common Shares.
2. On April 4, 2001, the Company entered into a share purchase and loan
agreement with Red Coral Holdings, Inc. ("Red Coral"), owned by the
Company's President and Chief Executive Officer. According to the terms of
the agreement, Red Coral purchased 300,000 Common shares of the Company for
a purchase price of $975,000. As part of the agreement, the Company granted
to Red Coral a loan in the amount of $975,000 for the purpose of acquiring
the common shares. The term of the loan is six years with accrued interest
at a rate of 4%, which is payable on January 15th of each calendar year.
The interest amount is fully-recourse and fixed. To secure payment of the
loan, Red Coral granted the Company a lien and security interest on all of
the common shares. To secure fulfillment of the terms of the agreement, the
common shares are being held in escrow by the General Counsel of the
Company.
ITEM 8. FINANCIAL INFORMATION
See Item 18.
LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims that arise in the
conduct of its business. In the opinion of management, the amount of liability,
if any, as a result of these claims and proceedings is not likely to have a
material effect on the financial condition or results of operations of the
Company.
In 2000, the Company filed a lawsuit against GIE AGF Systems D'Information
(hereinafter - "AGF SI"), a customer, regarding an unpaid balance related to a
year two thousand project performed during 1998 and 1999. On February 14, 2001
the French court ruled that AGF SI must pay the Company the sum of approximately
$3 million. Following the French court ruling, AGF SI filed an appeal to the
Court of Appeals of Paris. On January 26, 2002, the Company filed a counter
pleading in reply rejecting the claims presented by AGF SI and claiming an
additional amount of approximately $3.5 million in respect with the contract
signed between the parties. The Company, based on the advice of its legal
counsel, believes that the court will not accept AGF SI's appeal.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The Company's Common Shares are quoted on The Nasdaq National Market ("Nasdaq")
and on the Tel Aviv Stock Exchange (the "TASE") under the symbol "SPNS". The
Common Shares began trading on the TASE effective March 6, 2003. Under current
Israeli law, the Company will satisfy its reporting obligations in Israel by
furnishing to the applicable Israeli regulators only those reports the Company
is required to file in the United States.
The table below sets forth the high and low closing prices for the Common Shares
on Nasdaq on an annual basis for the years 1998 through 2000 and on a quarterly
basis for the years 2001 and 2002: On June 16, 2003, the Company carried out the
Reverse Stock Split (see note under Item 3 (I) "Selected Consolidated Financial
Data"). All share prices have been adjusted to reflect the Reverse Stock Split
by multiplying historical prices by five.
36
HIGH LOW
---- ---
1998 (ANNUAL) 47.1875 16.875
----
1999 (ANNUAL) 85.315 41.565
----
2000 (ANNUAL) 110.0 3.595
----
2001
----
First Quarter 8.281 4.219
Second Quarter 7.455 3.28
Third Quarter 6.65 2.70
Fourth Quarter 5.50 2.80
2002
----
First Quarter 6.85 4.65
Second Quarter 6.15 4.50
Third Quarter 5.35 3.95
Fourth Quarter 5.10 3.50
The table below sets forth the high and low closing prices for the Common Shares
on Nasdaq during the most recent six-month period:
HIGH LOW
---- ----
December 2002 4.95 3.50
January 2003 5.15 4.205
February 2003 4.85 3.95
March 2003 4.25 3.75
April 2003 4.00 3.60
May 2003 4.65 3.95
Following the implementation of the Reverse Stock Split, the closing price for
the Common Shares on June 16, 2003 was $4.00.
The closing price for the Common Shares on TASE on June 17, 2003 was NIS 22.42
(the equivalent of $5.11).
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION (THE "ARTICLES")
1. REGISTRATION AND OBJECTIVES. The Company is organized and existing under the
laws of the Netherlands Antilles. Its registered number is: 53368.
The objects and purposes of the Company, which are itemized in Article II of the
Articles, may be summarized as follows:
o to establish, participate in or have any other interest in business
enterprises concerned with the development and commercial operation of
software;
37
o to finance directly or indirectly the activities of the Company, its
subsidiaries and affiliates;
o to borrow and to lend moneys;
o to engage in the purchase and sale of securities, futures, real estate,
business debts, commodities and intellectual property;
o to undertake and promote research and development;
o to guarantee, pledge, mortgage or otherwise encumber assets as security for
the obligations of the Company or third parties; and
o to do all that may be useful or necessary for the attainment of the above
purposes.
2. BOARD OF DIRECTORS. A member of the Board of Directors may vote on a proposal
or transaction in which he/she has a material interest if a majority of the
disinterested directors authorize the proposal or transaction and the material
facts as to the director's self-interest are disclosed to the Board of
Directors. Members of the Board of Directors do not have power, in the absence
of an independent quorum, to vote compensation to themselves. All matters
related to compensation are within the authority of the Compensation Committee,
which is comprised of independent directors.
Our Articles of Association do not grant borrowing powers to directors; nor do
they require directors to resign at a certain age or to purchase a certain
number of shares of the Company's common stock.
3. RIGHTS AND PREFERENCES. The Company has only one class of shares of common
stock ("Common Shares") currently outstanding. All previous issuances of
preferred shares have been converted into Common Shares. The rights and
preferences of the holders of Common Shares are summarized below. The Articles
authorize a class of undefined preferred shares (the "Blank Preferred Shares").
There are no rights associated with the Blank Preferred Shares and none have
been issued.
I. COMMON SHARES
Holders of the Common Shares are entitled to one vote for each whole share on
all matters to be voted upon by shareholders, including the election of
directors. Holders of the Common Shares do not have cumulative voting rights in
the election of directors. All Common Shares are equal to each other with
respect to liquidation and dividend rights. Holders of the Common Shares are
entitled to receive dividends, subject to shareholder approval, out of funds
legally available under Netherlands Antilles law. See "Dividend Policy." In the
event of the liquidation of the Company, all assets available for distribution
to the holders of the Common Shares are distributable among them according to
their respective holdings, subject to the preferences of any shares having a
preference upon liquidation that may be then outstanding. Holders of the Common
Shares have no preemptive rights to purchase any additional, unissued Common
Shares. The foregoing summary of the Common Shares does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions of
the Company's Articles of Incorporation, which are included as an exhibit to the
Registration Statement of which this Prospectus forms a part, and by provisions
of applicable law.
II. DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common Shares
and does not anticipate paying cash dividends in the foreseeable future. It is
the present intention of the Company's Board of Directors to retain all earnings
in the Company in order to support the future growth of its business. Any
determination in the future to pay dividends will be dependent upon the
Company's consolidated results of operations, financial condition, cash
requirements, future prospects and other factors. In addition, the ability of
the Company to pay dividends is subject to the limitations of the Corporate Law
of the Netherlands Antilles, which provides, among other things, that dividends,
while permitted to be paid periodically during a fiscal year, are subject to
being proposed by the Board of Directors of the Company and approved thereafter
at the General Meeting of Shareholders.
38
III. THE BLANK PREFERRED SHARES
There are no preferences or any rights whatsoever associated with the Blank
Preferred Shares. These shares are unissued and are not owned by any of the
current shareholders of the Company. Any issuance of these preferred shares is
solely within the discretion of the Company's Board of Directors. The Company
has undertaken toward the TASE that so long as shares of its Common Stock are
listed for trading on the TASE the Company shall not issue or grant any shares
of a different class of shares than those that are listed for trading on the
TASE. This undertaking does not apply to Preferred Shares as defined in Section
46B(b) of the Israel Securities Law, on the condition that such Preferred Shares
are issued in accordance with the conditions set forth in Section 46A(1)
therein.
4. CHANGING THE RIGHTS OF THE SHAREHOLDERS. The general meeting of our
shareholders decides upon any change in the articles of association. A
resolution to amend the articles of association requires the approval of
the absolute majority of all shares outstanding and entitled to vote.
5. GENERAL MEETINGS. At least one general meeting of our shareholders must be
held each year within nine months of the close of our financial year, which
is the calendar year. General meetings must be held in Curacao. Special
general meetings of shareholders may be called at any time by the Chairman
of the Board or by the Board of Directors upon no less than 10 nor more
than 60 days written notice to the Company's shareholders. Every
shareholder has the right to attend any meeting of shareholders in person
or by proxy and to address the meeting. No action may be taken at any
meeting of shareholders unless a quorum consisting of holders of at least
one-half of the shares outstanding and entitled to vote are present at the
meeting in person or by proxy.
6. LIMITATIONS TO OWN SECURITIES. Our articles of association contain no
limits on the right to own securities.
7. CHANGE OF CONTROL. Our articles of association contain no provisions that
would prevent or delay a change of control of our Company.
8. DISCLOSURE OF OWNERSHIP. By-laws do not exist under Netherlands Antilles
law. Our articles of association contain no provisions requiring a
shareholder to disclose his or her interest at a certain time; however
holders of our shares are subject to the reporting provisions of the
Securities and Exchange Commission.
C. MATERIAL CONTRACTS
1. AMENDMENT OF SHARE PURCHASE AGREEMENT - PRIVATE PLACEMENT OF $10 MILLION
The Company entered into a Share Purchase Agreement, dated January 24, 2001 (the
"Share Purchase Agreement"), with Formula and Yarnfield (collectively the
"Investors"). See "Related Party Transaction" under Item 7. In October 2002, the
Investors made an offer to the Company (the "Offer") under which (a) the
Investors would convert all their outstanding Preferred F Shares into Common
Shares at a reduced conversion price of $4.15, (b) Formula would invest an
additional $10 million in Common Shares by exercising an existing option to
purchase Common Shares at a reduced exercise price of $4.15 per Common Share and
(c) Yarnfield would assign to Formula an option Yarnfield held to purchase
Common Shares and such option would be exercisable at the reduced exercise price
of $4.15 per Common Share. The Offer was approved by the shareholders at a
Special Meeting held on November 21, 2002 and the transactions contemplated by
the Offer closed on December 31, 2002. The terms of the Offer (which constitute
an amendment to the Share Purchase Agreement) are contained in a letter from the
Investors to the Company dated October 20, 2002, a copy of which is being filed
as an Exhibit to this Annual Report.
2. AMENDMENT OF PUT/CALL AGREEMENT
On February 13, 2001, the Company and the investors in eZoneXchange agreed to
amend the terms of the Put and Call Option Agreement that the Company entered
into in connection with the investors' purchase of 600,000 shares of
eZoneXchange for $15 million in April 2000. According to the terms of the
amendment, the investors put 173,100 shares of eZoneXchange to the Company in
return for $4.5 million. As a result, the amount of the principal portion of the
redeemable shares in a subsidiary was decreased by $4.2 million, net of
expenses.
39
In addition, if the market price of the Company Common stock reaches $10 per
share, the investors will have the right to put an additional 192,333 shares of
its eZoneXchange stock in return for the Sapiens Common stock at a price of
$13.75 per share. The remaining portion of the investment in eZoneXchange to be
repaid in shares (approximately $2.5 million) and in cash (approximately $3
million) will continue to be subject to the original terms of the Put and Call
Option Agreement.
D. EXCHANGE CONTROLS
Although there are Netherlands Antilles laws which may impose foreign exchange
controls on the Company and may affect the payment of dividends, interest, or
other payments to non-resident holders of the Company's securities, including
the Common Shares, the Company has been granted an exemption from such foreign
exchange control regulations by the Central Bank of the Netherlands Antilles.
Other jurisdictions in which the Company conducts operations may have various
currency or exchange controls. In addition, the Company is subject to the risk
of changes in political conditions or economic policies which could result in
new or additional currency or exchange controls or other restrictions being
imposed on the operations of the Company. As to the Company's securities,
Netherlands Antilles law and the Company's Articles of Incorporation impose no
limitations on the right of non-resident or foreign owners to hold or vote such
securities.
E. TAXATION
See "Results of Operations - Taxes on Income" under Item 5 for disclosure
regarding payments made to the Israeli Tax Authorities.
The following discussion is a summary of certain anticipated tax consequences of
an investment in the Common Shares under U.S. Federal income tax laws and
Netherlands Antilles tax laws. The discussion does not deal with all possible
tax consequences relating to an investment in the Common Shares. In particular,
the discussion does not address the tax consequences under state, local and
other (e.g., non-U.S., non-Netherlands Antilles) tax laws. Accordingly, each
prospective investor should consult its tax advisor regarding the tax
consequences of an investment in the Common Shares. The discussion is based upon
laws and relevant interpretations thereof in effect as of the date of this
annual report on Form 20-F, all of which are subject to change.
1. UNITED STATES FEDERAL INCOME TAXATION
The following discussion addresses the U.S. Federal income taxation of a U.S.
person (e.g., a U.S. citizen or resident, a U.S. corporation, and an estate or
trust subject to U.S. tax on all of its income regardless of source) (a "U.S.
Investor") making an investment in the Common Shares. Persons other than U.S.
Investors may be subject to tax rules that differ significantly from those
summarized below. Such persons are advised to consult their tax advisors
regarding the tax considerations incident to an investment in the Common Shares.
A U.S. Investor receiving a distribution on the Common Shares will be required
to include such distribution in gross income as a taxable dividend to the extent
such distribution is paid from earnings and profits of the Company as determined
under U.S. Federal income tax purposes, as a non-taxable return of capital to
the extent of the U.S. Investor's basis in the Common Shares and then as gain
from the sale or exchange of a capital asset, provided that the Common Shares
constitute capital assets in the hands of the U.S. Investor. Dividends received
on the Common Shares will not be eligible for the corporate dividends received
deduction.
Gain or loss on the sale or exchange of Common Shares will be treated as capital
gain or loss (if the Common Shares are held as a capital asset). Such capital
gain or loss will be long-term capital gain or loss if the U.S. investor has
held the Common Shares for more than one year at the time of the sale or
exchange.
2. NETHERLANDS ANTILLES TAXATION
Under the laws of the Netherlands Antilles as currently in effect, a holder of
Common Shares who is not resident of, and during the taxable year has not
engaged in trade or business through a permanent establishment in, the
Netherlands Antilles will not be subject to Netherlands Antilles income tax on
dividends paid with respect to the Common Shares or on gains realized during
that year on sale or disposal of such shares; the Netherlands Antilles
40
does not impose a withholding tax on dividends paid by the Company. Under
Netherlands Antilles law, no gift or inheritance taxes are levied if, at the
time of such gift or at the time of death, the relevant holder of Common Shares
was not domiciled in the Netherlands Antilles.
3. UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
The receipt of dividends on the Common Shares by a holder of the Common Shares
(a) made by mail or wire transfer to an address in the United States, (b) made
by a paying agent, broker or other intermediary in the United States or (c) made
by a U.S. broker or a "United States-related" broker to such holder outside the
United States may be subject to U.S. information reporting requirements. Holders
of Common Shares who are not U.S. persons ("non-U.S. holders") generally would
be exempt from these reporting requirements, but may be required to comply with
certification and identification procedures in order to prove their exemption.
Treasury regulations currently in effect do not require backup withholding with
respect to dividends paid by a foreign corporation such as the Company. The U.S.
Treasury Department is considering, however, whether to extend the backup
withholding rules to dividends from certain foreign corporations.
The payment of the proceeds of the disposition of Common Shares by a holder to
or through the U.S. office of a broker generally will be subject to information
reporting and backup withholding at a rate of 20% unless the holder either
certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a holder of Common Shares to or through a non-U.S. office of a
broker will generally not be subject to backup withholding and information
reporting. Information reporting (but not "backup" withholding) may apply,
however, to such a holder who sells beneficial interest in Common Shares through
a non-U.S. branch of a U.S. broker, or through a non-U.S. office of a "United
States-related" broker, in either case unless the holder established an
exemption or the broker has documentary evidence in its files of the holder's
status as a non-U.S. holder. For purposes of these rules, a "United
States-related" broker is a broker or other intermediary that is a controlled
foreign corporation for U.S. Federal income tax purposes or that is a person for
which 50% or more of the gross income from all sources, over a specified
three-year period, is effectively connected with a U.S. trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U. S. Federal income
tax liability, if any) provided that the required information is furnished to
the U.S. Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting requirements
of the Securities Exchange Act of 1934, as amended. Our SEC filings are filed
electronically on the EDGAR reporting system and may be obtained through that
medium. In addition, our SEC filings are available for inspection and copying at
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W. Washington, D.C. 20549, and the Commission's regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part
of the registration statement may be obtained from these offices after payment
of fees prescribed by the Commission. Please call the Commission at
1-800-SEC-0300 for further information on the public reference rooms.
As a foreign private issuer, we are exempt from the rules under the Securities
Exchange Act of 1934, as amended, prescribing the furnishing and content of
proxy statements to shareholders. Because we are a foreign private issuer, we,
our directors and our officers are also exempt from the shortswing profit
recovery and disclosure regime of section 16 of the Exchange Act.
41
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
exchange rates, interest rates or weak economic conditions in the markets in
which we sell our products and services. We have been and we are actively
monitoring these potential exposures. To manage the volatility relating to these
exposures, we may enter into various forward contracts. Our objective is to
reduce, where it is deemed appropriate to do so, fluctuations in earnings and
cash flows associated with changes in foreign currency rates and interest rates.
FOREIGN CURRENCY RISK. We conduct our business in various foreign currencies,
primarily those of Europe and to a lesser extent of Japan, Israel and Canada. We
monitor our foreign currency exposure and, from time to time, may enter into
currency forward contracts to hedge sales transactions. We will use such
contracts to hedge exposure to changes in foreign currency exchange rates
associated with revenue denominated in a foreign currency and anticipated costs
to be incurred in a foreign currency.
INTEREST RATE RISK. Our interest expenses are most sensitive to changes in the
London Interbank Offered Rate (LIBOR) as our short-term borrowings bear a
LIBOR-based interest rate.
As of December 31, 2002, we had approximately $5.3 million outstanding on our
short-term credit agreements and $150 thousand recorded as long-term lease
obligations. The potential loss to the Company over one year that would result
from a hypothetical, instantaneous and unfavorable change of 100 basis points in
the interest rates of all applicable financial assets and liabilities on
December 31, 2002 would not exceed $200 thousand.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
PART III
ITEM 15. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The President and Chief
Executive Officer of the Company and Executive Vice President and Chief
Financial Officer of the Company have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted under the Exchange Act.
(b) CHANGES IN INTERNAL CONTROLS. Since the Evaluation Date, there have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect such controls.
42
ITEM 16. [RESERVED]
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
ITEM 18. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements beginning on pages F-2 through
F-38, as set forth in the following index, are hereby incorporated herein by
reference. Such Consolidated Financial Statements are filed as part of this
Annual Report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3-4
Consolidated Statement of Operations F-5
Consolidated Statement of Changes in Shareholders' Equity F-6-8
Consolidated Statement of Cash Flow F-9-10
Notes to the Consolidated Financial Statements F-11-38
ITEM 19. EXHIBITS
1. Articles of Association of Sapiens International Corporation N.V., as
amended
2. Share Purchase Agreement by and between Sapiens International
Corporation N.V. and Formula System (1985) Ltd. - On File
3. Amendment to Share Purchase Agreement by and between Sapiens
International Corporation and Formula Systems (1985) Ltd.
4. Amendment to Put/Call Agreement between The Israel Mezzanine Fund,
L.P., Israel Discount Bank Ltd. and Sapiens International Corporation
N.V. dated February 13, 2001. - On File.
10 Consent of Independent Auditors
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
43
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certified that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SAPIENS INTERNATIONAL CORPORATION N.V.
By: /s/ YITZHAK SHARIR
-----------------------------------
Yitzhak Sharir
President & Chief Executive Officer
Date: June 27, 2003
44
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Yitzhak Sharir, certify that:
1. I have reviewed this annual report on Form 20-F of Sapiens International
Corporation N.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ YITZHAK SHARIR
----------------------
Yitzhak Sharir
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 27, 2003
45
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Yuval Hadari, certify that:
1. I have reviewed this annual report on Form 20-F of Sapiens International
Corporation N.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ YUVAL HADARI
-------------------------
Yuval Hadari
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: June 27, 2003
46
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
-----------
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF OPERATION F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6 - F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS F-9 - F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-11 - F-38
----------
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
SAPIENS INTERNATIONAL CORPORATION N.V.
We have audited the consolidated balance sheets of Sapiens International
Corporation N.V. ("the Company") and its subsidiaries as of December 31, 2001
and 2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2002, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
/s/ KOST FORER & GABBAY
--------------------------------
Tel-Aviv, Israel KOST FORER & GABBAY
February 26, 2003 A Member of Ernst & Young Global
F-2
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-----------------
2001 2002
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,087 $22,001
Restricted cash deposits (Note 3) 2,500 --
Marketable securities and short-term deposits (Note 4) 50 1,652
Trade receivables (net of allowance for doubtful accounts
of $4,599 and $4,001 as of December 31, 2001 and 2002,
respectively) (Note 5) 17,563 10,405
Other receivables and prepaid expenses (Note 6) 5,534 5,842
------- -------
Total current assets 41,734 39,900
------- -------
PROPERTY AND EQUIPMENT, NET (Note 7) 4,097 3,426
------- -------
OTHER ASSETS:
Capitalized software development costs, net of accumulated
amortization of $20,719 and $21,072 as of December 31, 2001
and 2002, respectively (Note 8a) 8,911 8,170
Goodwill (Note 8) 7,579 8,621
Other, net (Note 9) 6,059 5,035
------- -------
Total other assets 22,549 21,826
------- -------
Total assets $68,380 $65,152
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
2001 2002
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 11a) $ 16,209 $ 5,006
Current maturities of long-term debt (Note 11b) 245 4,477
Trade payables 3,242 2,578
Deferred revenues 1,633 3,683
Other liabilities and accrued expenses (Note 10) 18,768 14,541
-------- --------
Total current liabilities 40,097 30,285
-------- --------
LONG-TERM LIABILITIES:
Convertible subordinated notes and other long-term liabilities (Note 11b) 7,365 7,787
-------- --------
REDEEMABLE SHARES IN A SUBSIDIARY (Note 1c) 10,711 11,185
-------- --------
COMMITMENT AND CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS' EQUITY (Note 15):
Share capital:
Convertible Preferred shares: Authorized - 20,000 and 0 of(euro)681 par value at
December 31, 2001 and 2002, respectively; Issued and outstanding 10,000 and 0 at
December 31, 2001 and 2002, respectively; Aggregate liquidation preference of
approximately $15,000 and $0 as of December 31, 2001 and 2002, respectively 6,361 --
Common shares: Authorized 14,000,000 and 20,000,000 of(euro)2.30 par value at
December 31, 2001 and 2002, respectively; Issued: 4,942,932 and 11,028,909 at
December 31, 2001 and 2002, respectively; Outstanding: 4,901,138 and 10,987,115
at December 31, 2001 and 2002, respectively 10,020 23,773
Additional paid-in capital 80,514 82,648
Deferred stock compensation (68) (21)
Treasury shares (2,423) (2,423)
Note receivable from a related party shareholder (975) (975)
Accumulated other comprehensive loss (5,088) (3,820)
Accumulated deficit (78,134) (83,287)
-------- --------
Total shareholders' equity 10,207 15,895
-------- --------
Total liabilities and shareholders' equity $ 68,380 $ 65,152
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
-------- -------- --------
Revenues (Note 16b):
Products $ 43,995 $ 33,924 $ 42,008
Consulting and other services 28,749 29,511 22,820
-------- -------- --------
Total revenues 72,744 63,435 64,828
-------- -------- --------
Cost of revenues:
Products 30,283 23,711 22,567
Consulting and other services 20,652 18,902 13,543
-------- -------- --------
Total cost of revenues 50,935 42,613 36,110
-------- -------- --------
Gross profit 21,809 20,822 28,718
-------- -------- --------
Operating expenses:
Research and development, net (Note 17a) 10,317 5,458 6,017
Selling, marketing, general and administrative, net 46,682 28,725 23,782
Aborted merger costs 1,252 -- --
Restructuring costs (Note 1b) 2,558 -- 481
-------- -------- --------
Total operating expenses 60,809 34,183 30,280
-------- -------- --------
Operating loss 39,000 13,361 1,562
Financial expenses, net (Note 17b) 632 3,187 971
Other expenses, net 403 665 1,173
-------- -------- --------
Loss before taxes on income 40,035 17,213 3,706
Taxes on income (benefit) (Note 14) (1,949) 726 1,408
-------- -------- --------
38,086 17,939 5,114
Minority interest in earnings of a subsidiary -- 31 39
-------- -------- --------
Net loss 38,086 17,970 5,153
-------- -------- --------
Dividends on Preferred shares (Note 15g) 107 -- --
-------- -------- --------
Net loss to shareholders of Common shares $ 38,193 $ 17,970 $ 5,153
======== ======== ========
Basic and diluted net loss per share (Note 17c) $ 8.46 $ 3.91 $ 1.03
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
PROCEEDS
ADDITIONAL DEFERRED ON
PREFERRED COMMON PAID-IN STOCK ACCOUNT
SHARES SHARES CAPITAL COMPENSATION OF SHARES
-------- -------- ---------- ------------ ---------
Balance as of January 1, 2000 $ 4 $ 8,694 $ 69,593 $ -- $ --
Comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized losses on
available-for-sale marketable
securities, net -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- --
Other comprehensive loss -- -- -- -- --
Total comprehensive loss
Conversion of Preferred shares to
Common shares:
Series "D1" (1) 131 (130) -- --
Series "E" (2) 169 (167) -- --
Series "D2" (1) 104 (103) -- --
Employee stock options exercised -- 166 832 -- --
Warrants exercised -- 2 6 -- --
Compensation expense related to
issuance of warrants to service
providers -- -- 78 -- --
Deferred stock compensation related
to options repriced -- -- 628 (628) --
Amortization expense on re-priced
options -- -- -- 453 --
Deferred tax benefit on exercised
options -- -- 547 -- --
Common shares accrued as dividends
on Preferred shares -- -- -- -- --
Common shares issued as dividends
on Preferred shares
Series "D1" -- 31 326 -- --
Series "E" -- 40 366 -- --
Series "D2" -- 25 286 -- --
Shares issued as payment in respect
of acquisitions adjustments of
SAIC, Syspart and Sapiens Japan -- 2 (317) -- --
Proceeds on account of shares -- -- -- -- 5,000
-------- -------- -------- -------- --------
Balance as of December 31, 2000 $ -- $ 9,364 $ 71,945 $ (175) $ 5,000
======== ======== ======== ======== ========
COMMON ACCUMULATED
SHARES OTHER
TREASURY ACCRUED AS COMPREHENSIVE ACCUMULATED
SHARES DIVIDENDS LOSS DEFICIT TOTAL
--------- ----------- ------------- ----------- --------
$ (2,423) $ 967 $ (3,450) $(21,971) $ 51,414
-- -- -- (38,086) (38,086)
--------
-- -- -- -- (58)
-- -- -- -- (1,143)
--------
-- -- (1,201) -- (1,201)
--------
(39,287)
--------
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
-- -- -- -- 998
-- -- -- -- 8
-- -- -- -- 78
-- -- -- -- --
-- -- -- -- 453
-- -- -- -- 547
-- 107 -- (107) --
-- (357) -- -- --
-- (406) -- -- --
-- (311) -- -- --
-- -- -- -- (315)
-- -- -- -- 5,000
-------- -------- -------- -------- --------
$ (2,423) $ -- $ (4,651) $(60,164) $ 18,896
======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
PROCEEDS
CONVERTIBLE ADDITIONAL DEFERRED ON
PREFERRED COMMON PAID-IN STOCK ACCOUNT
SHARES SHARES CAPITAL COMPENSATION OF SHARES
----------- -------- ---------- ------------ ---------
Balance as of January 1, 2001 $ -- $ 9,364 $ 71,945 $ (175) $ 5,000
Total comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized losses on
available-for-sale
marketable securities, net -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- --
Other comprehensive loss -- -- -- -- --
Total comprehensive loss
Employee stock options exercised -- 1 (1) -- --
Compensation expense related to
issuance of warrants to banks -- -- 203 -- --
Amortization expense on
re-priced ptions -- -- -- 107 --
Issuance of Series "F"
convertible Preferred shares
and warrants, net 6,361 -- 8,518 -- (5,000)
Common shares issued for a note
to a related party -- 655 320 -- --
Payment in respect of
acquisition adjustment of
Syspart -- -- (471) -- --
-------- -------- -------- -------- --------
Balance as of December 31, 2001 $ 6,361 $ 10,200 $ 80,514 $ (68) $ --
======== ======== ======== ======== ========
NOTE ACCUMULATED
RECEIVABLE OTHER
TREASURY FROM A COMPREHENSIVE ACCUMULATED
SHARES SHAREHOLDER LOSS DEFICIT TOTAL
-------- ----------- ------------- ----------- --------
$ (2,423) $ -- $ (4,651) $(60,164) $ 18,896
-- -- -- (17,970) (17,970)
--------
-- -- -- -- (30)
-- -- -- -- (407)
--------
-- -- (437) -- (437)
--------
(18,407)
--------
-- -- -- -- --
-- -- -- -- 203
-- -- -- -- 107
-- -- -- -- 9,879
-- (975) -- -- --
-- -- -- -- (471)
-------- -------- -------- -------- --------
$ (2,423) $ (975) $ (5,088) $(78,134) $ 10,207
======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-7
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
CONVERTIBLE ADDITIONAL DEFERRED
PREFERRED COMMON PAID-IN STOCK
SHARES SHARES CAPITAL COMPENSATION
----------- -------- ---------- ------------
Balance as of January 1, 2002 $ 6,361 $ 10,020 $ 80,514 $ (68)
Total comprehensive loss:
Net loss -- -- -- --
Other comprehensive loss: -- -- -- --
Unrealized losses on
available-for-sale marketable
securities, net -- -- -- --
Foreign currency translation
adjustments -- -- -- --
Other comprehensive loss
Total Comprehensive loss
Employee stock options exercised -- 117 (105) --
Amortization expense on re-priced
options -- -- -- 47
Conversion of Series F Preferred
shares and exercise of warrants (6,361) 13,636 2,725 --
Payment in respect of acquisition
adjustment of Syspart -- -- (486) --
-------- -------- -------- --------
Balance as of December 31, 2002 $ -- $ 23,773 $ 82,648 $ (21)
======== ======== ======== ========
Accumulated unrealized gain from
available- for-sale marketable
securities
Accumulated foreign currency translation
adjustments
Accumulated other comprehensive loss
NOTE ACCUMULATED
RECEIVABLE OTHER
TREASURY FROM A COMPREHENSIVE ACCUMULATED
SHARES SHAREHOLDER LOSS DEFICIT TOTAL
--------- ----------- ------------- ----------- --------
$ (2,423) $ (975) $ (5,088) $(78,134) $ 10,207
-- -- -- (5,153) (5,153)
--------
-- -- -- --
-- -- -- -- (5)
-- -- -- -- 1,273
--------
1,268
--------
1,268 (3,885)
--------
-- -- -- -- 12
-- -- -- -- 47
-- -- -- -- 10,000
-- -- -- -- (486)
-------- -------- -------- -------- --------
$ (2,423) $ (975) $ (3,820) $(83,287) $ 15,895
======== ======== ======== ======== ========
$ 18
(3,838)
--------
$ (3,820)
========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
-------- -------- --------
Cash flows from operating activities:
Net loss $(38,086) $(17,970) $ (5,153)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, amortization and impairment 6,984 9,555 4,818
Amortization of deferred gain on sale - leaseback transaction (226) (3) --
Gain on marketable securities (91) (124) --
Loss (gain) on disposal of property and equipment (8) 417 24
Amortization of compensation expenses related to issuance of
warrants to service providers 78 -- --
Amortization expense on re-priced options 453 107 47
Decrease (increase) in trade receivables (873) 13,372 8,190
Decrease (increase) in other receivables and prepaid expenses (251) (82) 180
Decrease (increase) in deferred income taxes, net (2,636) 50 407
Reduction of income taxes related to employee stock option
exercised 547 -- --
Increase (decrease) in trade payables 2,702 (2,664) (960)
Increase (decrease) in deferred revenues 942 (1,347) 1,805
Increase (decrease) in other liabilities and accrued expenses 9,332 (4,230) (4,509)
Accrued interest on redeemable shares in a subsidiary -- 270 474
Gain on payment of convertible subordinated notes -- -- (409)
Minority interests in earnings of a subsidiary -- 31 39
-------- -------- --------
Net cash provided by (used in) operating activities (21,133) (2,618) 4,953
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,663) (508) (1,011)
Increase in capitalized software development costs (4,250) (3,967) (2,732)
Decrease (increase) in restricted cash -- (2,500) 2,500
Purchase of short-term deposits and marketable securities (6,763) (2,883) (1,618)
Proceeds from sale of marketable securities 12,078 5,573 --
Proceeds from sale of property and equipment 38 96 128
Purchase of other assets (321) -- --
Payment for acquisition of IMA (275) (66) --
Payment for acquisition of Syspart (164) -- (957)
Payment for acquisition of SAIC (401) (41) --
-------- -------- --------
Net cash used in investing activities (3,721) (4,296) (3,690)
-------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------------
2000 2001 2002
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of redeemable shares in a subsidiary 14,675 -- --
Redemption of redeemable shares in subsidiary -- (4,234) --
Proceeds from issuance of Series "F" convertible Preferred shares
and warrants, net -- 9,879 --
Proceeds from exercise of Series "F" convertible Preferred share
warrants 10,000
Proceeds from exercise of options and warrants 819 -- 12
Proceeds on account of shares 5,000 -- --
Increase (decrease) in short-term bank debt, net 13,204 772 (10,621)
Payment of convertible subordinated notes -- -- (2,316)
Principal payment of long-term liabilities (255) (202) (260)
Proceeds from long-term bank loans -- 211 7,500
-------- -------- --------
Net cash provided by financing activities 33,443 6,426 4,315
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (286) (463) 336
-------- -------- --------
Increase (decrease) in cash and cash equivalents 8,303 (951) 5,914
Cash and cash equivalents at the beginning of year 8,735 17,038 16,087
-------- -------- --------
Cash and cash equivalents at the end of year $ 17,038 $ 16,087 $ 22,001
======== ======== ========
Supplemental cash flow activities:
Cash paid during the year for:
Interest $ 1,305 $ 1,440 $ 820
======== ======== ========
Income taxes $ 337 $ 471 $ 1,235
======== ======== ========
Non-cash transactions:
Common shares accrued as dividends on Preferred shares $ 107 $ -- $ --
======== ======== ========
Common shares issued as dividends on Preferred shares $ 1,074 $ -- $ --
======== ======== ========
Revaluation of Syspart acquisition against liability $ -- $ 471 $ --
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1: BUSINESS AND ORGANIZATION
a. General:
Sapiens International Corporation N.V. ("the Company"), which
operates through its worldwide subsidiaries, is a provider of
rapidly deployed business software solutions that support its
clients' core business processes, such as insurance claims
processing, loan/mortgage management and other key business
solutions. These solutions, which are based on the Sapiens
eMerge technology, consist primarily of rapid application
development ("RAD"), integration of legacy systems into new
applications and technologies, mapping and management of
enterprise IT assets, and reengineering services.
The Company focuses on the insurance industry, and is in the
process of developing customizable component-based solutions
for insurance claim processing, closed-books administration,
policy administration and multi-channel connectivity. The
Company also provides a specialized solution for the migration
of European IT systems to the Euro currency.
b. Restructuring costs:
In 2000, the Company recorded restructuring charges of
approximately $2.6 million which was accrued as a short-term
liability as of December 31, 2000 and were paid in 2001. The
restructuring costs consist of employee termination benefits
associated with involuntary terminations of approximately 250
employees. The terminations resulted from the Company's
strategy to reduce costs and restore profitability.
In 2002, the Company recorded restructuring charges at
approximately $0.5 million, all of which was paid in 2002. The
restructuring costs consist of employee termination benefits
associated with the involuntary termination of approximately
40 employees, accounted for in accordance with EITF 94-3,
"Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and
SAB 100, "Restructuring and Impairment Charges" ("SAB 100").
The terminations resulted from the Company's strategy to
reduce costs and restore profitability.
c. Investment in eZoneXchange:
In April 2000, the Company completed a private placement of
600,000 shares of Common stock ("investor's shares") of its
wholly-owned subsidiary, eZoneXchange.com, Inc.
("eZoneXchange"), for $15 million. The investor also received
a warrant to purchase an additional 2.25% of the Common stock
of eZoneXchange at the same private placement share price of
$25 per share. As part of the transaction, the Company entered
into a Put and Call Option agreement pursuant to which the
investors were granted the right (exercisable in whole or in
part) to cause the Company during the put option exercise
period (May 4, 2004 through May 3, 2005) to repurchase the
investors' shares at the principal amount of the investor's
investment plus 5% annual interest accrued thereon from May 4,
2000.
F-11
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1: BUSINESS AND ORGANIZATION (CONT.)
The Put and Call agreement provides that 50% of the
consideration for the investors' shares will be paid in cash
and 50% in Sapiens' Common shares to be valued according to
the average closing market price of Sapiens' Common share over
the 14 day trading period preceding the date of issuance of
the Put consideration. The agreement also included a call
option which grants the Company the option to purchase the
investor's shares at a price of $30 million in the first two
years after the investment date, $37.5 million in the third
year, and $45 million in the fourth year. The purchase price
will be multiplied by the percentage of shares purchased. The
exercise period will last until the earlier of the fourth
anniversary of the investment, an acquisition of, or an IPO of
eZoneXchange.
The amount of $15 million was accounted for as a mezzanine
item under redeemable shares in a subsidiary, net of issuance
expenses.
During February 2001, the Company decided to close the
operations of eZoneXchange.com Inc. In February 2001, the
Company repurchased 173,100 of the investors' shares with a
cash repayment of $4.5 million for principal and interest,
according to an amendment to the Put and Call Option
agreement. As a result, the amount of the principal portion of
the redeemable shares in a subsidiary to be repaid in cash was
decreased by $4.2 million, net of expenses. In addition, in
accordance with the amendment, if the market price of Sapiens'
Common share reaches $10 per share, the investors will have
the right to put 192,333 shares of its eZoneXchange stock in
return for 363,776 Sapiens' Common shares at a price of $13.75
per share. No interest is accrued for the amended portion of
the investment. The remaining portion of the investment to be
repaid in shares (approximately $2.5 million) and the portion
to be paid in cash (approximately $3 million) will continue to
be subject to the original terms of the Put and Call Option
agreement.
The results of eZoneXchange were consolidated with the results
of the Company starting from April 2000.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts in the financial statements. Actual results could
differ from those estimates.
F-12
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
A substantial portion of the Company's financing is made in
U.S. dollars ("dollar"). In addition, a substantial portion of
the Company's and certain of its subsidiaries' costs is
incurred in dollars. A majority of the revenues of the Company
and certain of its subsidiaries is generated in dollars.
Company's management believes that the dollar is the primary
currency of the economic environment in which the Company and
those subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of the Financial Accounting Standard Board No.
52, "Foreign Currency Translation" ("SFAS No. 52"). All
transaction gains and losses of the re-measurement of monetary
balance sheet items are reflected in the statements of
operations as financial income or expenses as appropriate.
The financial statements of foreign subsidiaries whose
functional currency is not the U.S. dollar, have been
translated into U.S. dollars. All balance sheet accounts have
been translated using the exchange rates in effect at the
balance sheet date. Statements of operations amounts have been
translated using the average exchange rate for the period. The
resulting translation adjustments are reported as accumulated
other comprehensive income (loss), in shareholders' equity.
Foreign currency translation differences included in the
financial income (loss) amounted to approximately $(210,000),
$(1,549,000) and $160,000 for 2000, 2001 and 2002,
respectively.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Intercompany
balances and transactions have been eliminated upon
consolidation.
d. Cash equivalents:
Cash equivalents consist of interest-bearing demand deposits,
money market funds and highly liquid debt instruments
originally purchased with a maturity of three months or less.
e. Short-term bank deposits:
Bank deposits with maturities of more than three months but
less than one year are included in short-term bank deposits.
Such bank deposits are stated at cost.
F-13
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. Marketable securities:
Management determines the proper classification of investments
in marketable debt and equity securities at the time of
purchase and reevaluates such designations as of each balance
sheet date. All securities covered by Statement of Financial
Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"),
were designated as available-for-sale. Accordingly, these
securities are stated at fair value, with unrealized gains and
losses reported in a separate component of shareholders'
equity, accumulated other comprehensive loss. Realized gains
and losses on sales of investments, as determined on a
specific identification basis, are included in the
consolidated statement of operations.
g. Property and equipment:
Property and equipment are stated at cost less accumulated
depreciation and depreciated using the straight-line method
over the estimated useful lives of the assets:
Equipment and furniture 4 - 15 years
Computer equipment and software 3 - 5 years
Motor vehicles 3 - 7 years
Leasehold improvements (Over the shorter of
the term of the lease
or the estimated useful life
of the asset)
The Company periodically assesses the recoverability of the
carrying amount of property and equipment and provides for any
possible impairment loss based upon the difference between the
carrying amount and fair value of such assets, in accordance
with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long- Lived
Assets" ("SFAS No. 144"). As of December 31, 2002, no
impairment losses have been identified.
h. Impairment of long-lived assets:
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
i. Capitalized software development costs:
Research and development costs incurred in the process of
developing new products or product improvements, are charged
to expense as incurred, net of participation by the Office of
the Chief Scientist in Israel's Ministry of Industry and Trade
("the OCS").
F-14
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Statement of Financial Accounting Standard No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS No. 86"), requires capitalization
of certain software development costs subsequent to the
establishment of technological feasibility. Based on the
Company's product development process, technological
feasibility is established upon completion of a detailed
program design.
Capitalized software costs are amortized by the greater of the
amount computed using: (i) the ratio that current gross
revenues from sales of the software bear to the total of
current and anticipated future gross revenues from sales of
that software, or (ii) the straight-line method over the
estimated useful life of the software product (three to five
years). The Company assesses the recoverability of this
intangible asset on a regular basis by determining whether the
amortization of the asset over its remaining life can be
recovered through undiscounted future operating cash flows
from the specific software product sold. Based on its most
recent analyses, management believes that no impairment of
capitalized software development costs exists as at December
31, 2002.
j. Goodwill:
Goodwill represents the excess of the costs over the net
assets of businesses acquired. Goodwill that arose from
acquisitions prior to July 1, 2001, was amortized until
December 31, 2001, on a straight-line basis over 3.5 to 10
years. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") the Company ceased
amortizing the goodwill as of January 1, 2002.
SFAS No. 142 requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual
tests in certain circumstances, and written down when
impaired, rather than being amortized as previous accounting
standards required. Goodwill is tested for impairment by
comparing the fair value of each of the Company's reporting
units with its carrying value. Fair values are determined
using discounted cash flows. Significant estimates used in the
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.
During 2001, prior to the adoption of SFAS No. 142 by the
Company, an impairment of goodwill was recorded in accordance
with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") in the amount of $204,000, which was included
in the marketing, selling, general and administrative
expenses.
k. Intangible assets:
Intangible assets that arose prior to July 1, 2001, and are
stated at cost less accumulated amortization. Amortization is
computed using the straight-line method as follows:
Prepaid royalties 15 years
Distribution rights 7 years
Technology, usage rights and other intangible assets 5-8 years
F-15
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Before the adoption of SFAS No. 144 the Company evaluated the
recoverability of long-lived assets annually and the
appropriateness of the amortization period based on the
estimated future undiscounted cash flows derived from the
asset. In 2001, such impairments were indicated and the
Company recognized impairment loss in the amount of $519,000,
which was included in the marketing, selling, general and
administrative expenses
As of December 31, 2002, no impairment losses have been
identified.
l. Revenue recognition:
Product revenues include implementation services contracts
(which include the sale of software technology and services)
and software license sales.
Revenues from implementation services contracts are recognized
based on Statement of Opinion No. 81-1 "Accounting for
Performance of Construction-Type and Certain Production -Type
Contracts" ("SOP No. 81-1"), using contract accounting on a
percentage of completion method based on the relationship of
actual costs incurred to total costs estimated to be incurred
over the duration of the contract. Provisions for estimated
losses on uncompleted contracts are made in the period in
which such losses are first determined, in the amount of the
estimated loss on the entire contract. As of December 31,
2002, no such estimated losses were identified.
Revenues earned under software licensing agreements with
end-users are recognized when all criteria outlined in
Statement of Position No. 97-2 "Software Revenue Recognition"
("SOP No. 97-2") (as amended) are met. Revenues from license
fees are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is
fixed or determinable and collectibility is probable.
The Company and its subsidiaries do not grant rights of
return.
Where software arrangements involve multiple elements,
revenues are allocated to each element based on vendor
specific objective evidence ("VSOE") of the relative fair
values of each element in the arrangement, in accordance with
the "residual method" prescribed by Statement of Opinion No.
98-9. "Modification of SOP 97-2, Software Revenue Recognition
With Respect to Certain Transactions" ("SOP No. 98-9"). The
Company's VSOE used to allocate the sales price to consulting,
training and maintenance is based on the price charged when
these elements are sold separately. License revenues are
recorded based on the residual method.
Under the residual method, revenue is recognized for the
delivered elements when (1) there is VSOE of the fair values
of all the undelivered elements other than those accounted for
using long-term contract accounting, and (2) all revenue
recognition criteria of SOP 97-2, as amended, are satisfied.
F-16
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Consulting and other services revenues also include training
and post-contract maintenance services. Revenues from
consulting, maintenance and training services are recognized
ratably over the contractual period or as services are
performed.
Deferred revenues include amounts received from customers for
which revenues have not yet been recognized.
m. Advertising expenses:
Advertising expenses are charged to the statement of
operations as incurred.
n. Government grants:
Royalty-bearing grants from the Government of Israel for the
funding of research and development projects are recognized at
the time the Company is entitled to such grants on the basis
of the related costs incurred, and are recorded as a reduction
of research and development costs.
o. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). This
Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are
determined based on the differences between financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The
Company and its subsidiaries provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated
realizable value.
p. Concentrations of credit risk:
Financial instruments that potentially subject the Company and
certain of its subsidiaries to concentrations of credit risk
consist principally of cash and cash equivalents, marketable
securities, short-term deposits, and trade receivables. The
Company's cash, cash equivalents and short-term deposits are
invested in deposits with major international financial
institutions. Such deposits in the United States may be in
excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists
with respect to these investments.
The Company's trade receivables are derived from sales to
large and solid organizations located mainly in Europe, North
America and Israel. The Company performs ongoing credit
evaluations of its customers and has established an allowance
for doubtful accounts based upon factors surrounding the
credit risk of specific customers and other information. In
certain circumstances, the Company may require letters of
credit, other collateral or additional guarantees.
F-17
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company's marketable securities include investments in
debentures of non-U.S. Corporations. Management believes that
those Corporations are financially sound, and accordingly,
minimal credit risk exists with respect to these marketable
securities.
q. Fair value of financial instruments:
The estimated fair value of financial instruments has been
determined by the Company using available market information
and valuation methodologies. Considerable judgment is required
in estimating fair values. Accordingly, the estimates may not
be indicative of the amounts the Company could realize in a
current market exchange. The carrying amounts of cash and cash
equivalents, short-term deposits, marketable securities, trade
accounts receivables, short-term bank credit and trade
accounts payable approximate their fair values due to the
short-term maturity of such instruments.
The carrying amounts of the Company's long-term borrowings
arrangements approximate their fair value. Fair values were
estimated using discounted cash flow analyses, based on
prevailing market borrowing rates.
r. Derivative and hedging:
The Company accounts for derivatives and hedging based on
Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
as amended ("SFAS No. 133"). SFAS 133 requires companies to
recognize all of its derivative instruments on the balance
sheet at fair value. The accounting for changes in the fair
value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship.
For those derivative instruments that are designated and
qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as a
fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
For derivative instruments that are designated and qualify as
a fair value hedge, the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in
the same line item associated with the hedged item in current
earnings during the period of the change in fair values.
The Company enters into forward exchange contracts to hedge
certain transactions denominated in foreign currencies. The
purpose of the Company's foreign currency hedging activities
is to protect the Company from risk that the eventual dollar
cash flows from international activities will be adversely
affected by changes in the exchange rates. The Company's
forward contracts did not qualify as hedging instruments under
SFAS No. 133. Changes in the fair value of forward contracts
are reflected in the statement of operations as financial
income or expense.
F-18
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
s. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is calculated based on the
weighted average number of Common shares outstanding during
each year including contingent shares. Diluted net earnings
per share is computed based on the weighted average number of
Common shares outstanding during each year, plus dilutive
potential Common shares considered outstanding during the
year, in accordance with Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS No. 128").
In 2000, 2001 and 2002, all convertible Preferred shares,
outstanding stock options, convertible subordinate notes and
warrants have been excluded from the calculation of the
diluted net loss per Common share because all such securities
were anti-dilutive for the period presented. The total
weighted average number of shares related to the outstanding
convertible Preferred shares, options and warrants excluded
from the calculations of diluted net loss per share was
1,510,658, 3,265,349 and 3,892,357 for the years ended
December 31, 2000, 2001 and 2002, respectively.
t. Stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB No. 25") and FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No.
44") in accounting for its employee stock option plans. Under
APB No. 25, when the exercise price of the Company's share
options is less than the market price of the underlying shares
on the date of grant, compensation expense is recognized.
Under Statement of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"),
pro forma information regarding net income (loss) and net
earnings (losses) per share is required as if the Company had
accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions
for 2000, 2001 and 2002: risk-free interest rates of 6.5% ,
2.5% and 2% respectively, dividend yields of 0% for each year,
volatility factors of the expected market price of the
Company's Common shares of 0.867, 0.82 and 0.97 respectively
and a weighted-average expected life of the options of 6 years
for each year.
The weighted-average fair value of the options at their grant
dates in 2000, 2001 and 2002 was $7.15, $3.45 and $4.48,
respectively. All options were granted at the fair market
value at the date of grant.
F-19
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Pro forma information under SFAS No. 123:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 2001 2002
---------- ---------- ------
U.S. DOLLARS IN THOUSANDS
Net loss to shareholders' of Common shares as
reported $ 38,193 $ 17,970 $5,153
========== ========== ======
Pro forma net loss to shareholders' of Common
shares $ 47,919 $ 19,598 $7,919
========== ========== ======
Pro forma basic and diluted net loss per share $ 10.62 $ 4.26 $ 1.58
========== ========== ======
The Company applies SFAS No. 123 and EITF 96-18 "Accounting
for Equity Instruments that are Issued to Other than Employees
for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF No. 96-18") with respect to warrants and
options issued to non-employees. SFAS No. 123 requires use of
an option valuation model to measure the fair value of the
options at the grant date.
u. Employee rights upon retirement:
The Company has various defined contribution plans for
employees of its subsidiaries around the world. Most of the
plans are those required according to the laws of the country
in which the subsidiary operates. Contributions made under the
plans are invested with financial institutions. Benefits under
the plans are based on contributions from employees and the
Company and earnings on insurance contracts or other
investment instruments in which the contributions are
invested.
Expense for contributions made to these plans was $1,408,000,
$1,346,000 and $1,243,000 for 2000, 2001 and 2002,
respectively.
v. Impact of recently issued accounting standards:
In April 2002, the FASB issued SFAS No. 145, "Rescission of
SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections," ("SFAS No. 145") which rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 amends SFAS No. 44, "Accounting
for Intangible Assets for Motor Carriers." SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. SFAS No. 145 is
effective for fiscal years beginning May 15, 2002. The Company
does not expect the adoption of SFAS 145 to have a material
impact on the Company's results of operation or financial
position.
F-20
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit of Disposal Activities," ("SFAS No.
146") which addresses significant issues regarding the
recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with
exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or
disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a
material impact on the Company's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN
No. 45"), "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, an interpretation of SFAS No. 5, 57 and 107 and
Rescission of FASB Interpretation No. 34 ("FIN No. 34")." FIN
No. 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. FIN No.
45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term
of the related guarantee. It also incorporates, without
change, the guidance in FIN No. 34, "Disclosure of Indirect
Guarantees of Indebtedness to Others," which is being
superseded. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual
periods that end after December 31, 2002 and the provisions
for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's
year-end. The Company does not expect the adoption of FIN No.
45 to have a material impact on its results of operations or
financial position
In January 2003, the FASB issued Interpretation No. 46 (or FIN
46), "Consolidation of Variable Interest Entities." FIN 46
requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structures used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that
do not provide sufficient financial resources for the entity
to support its activities. A variable interest entity often
holds financial assets, including loans or receivables, real
estate or other property. A variable interest entity may be
essentially passive or it may engage in research and
development or other activities on behalf of another company.
The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless
of when the variable interest entity was established. The
Company is evaluating the possible impact of the new
interpretation and does not expect it to have a material
effect on its financial position or result of operations.
F-21
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
w. Reclassification:
Certain 2000 and 2001 figures have been reclassified in order
to conform with the 2002 presentation.
NOTE 3: RESTRICTED CASH DEPOSITS
Restricted cash deposits are maintained with banks as security
for the Company's revolving credit line. In 2001, the Company
was restricted from withdrawing any portion of the secured
balances until repayment of the credit line. In 2002, the
restriction was eliminated as part of the decrease in the
credit line.
Such restricted cash deposits are recorded at cost.
NOTE 4: MARKETABLE SECURITIES AND SHORT-TERM DEPOSITS
At December 31, 2001 and 2002, the Company's short-term
investments were classified as available-for-sale securities
and were carried at fair value. Gross realized gains on sales
of these securities included in earnings in 2000, 2001 and
2002 totaled $163,000, $124,000 and $0, respectively. Gross
realized losses on sales of these securities included in
earnings in 2000, 2001 and 2002 totaled $49,000, $0 and $0,
respectively. As of December 31, 2002, the Company has
short-term deposits of $1,618,000 and marketable securities of
$34,000.
As for pledges see Note 13.
NOTE 5: TRADE RECEIVABLES
The Company's trade receivables are composed of accounts
receivable in the amounts of $11.6 million and $9.9 million as
of December 31, 2001 and 2002, respectively and unbilled
receivables in the amounts of $6 million and $0.5 million as
of December 31, 2001 and 2002, respectively.
NOTE 6: OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
-------------------
2001 2002
------ ------
U.S. DOLLARS IN THOUSANDS
Sales and other taxes receivable $2,068 $2,290
Prepaid expenses 896 1,332
Deferred income taxes 655 860
Government grants 1,018 742
Other 897 618
------ ------
$5,534 $5,842
====== ======
F-22
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7: PROPERTY AND EQUIPMENT, NET
COST ACCUMULATED DEPRECIATION
------------------ ------------------------
DECEMBER 31 DECEMBER 31
------------------ ------------------
2001 2002 2001 2002
------- ------- ------- -------
U.S. DOLLARS IN THOUSANDS
Equipment and furniture $ 2,532 $ 2,231 $ 1,411 $ 1,323
Computer equipment and software 10,560 10,447 8,792 9,042
Motor vehicles 139 198 66 112
Leasehold improvements 1,974 1,989 839 962
------- ------- ------- -------
$15,205 $14,865 $11,108 $11,439
======= ======= ======= =======
Depreciation expense totaled $2,213,000, $2,318,000 and
$1,592,000 for the years ended December 31, 2000, 2001 and
2002, respectively.
As for pledges see Note 13.
NOTE 8: GOODWILL
a. Goodwill amortization amounted to $1,106,000, $1,345,000 and
$0 for 2000, 2001 and 2002, respectively.
b. The unaudited results of operations presented below for the
three years ended December 31, 2000, 2001 and 2002,
respectively, reflect the impact on results of operations had
the Company adopted the non-amortization provisions of SFAS
No. 142 effective January 1, 2000:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
U.S. DOLLARS IN THOUSANDS
Reported net loss $ 38,193 $ 17,970 $ 5,153
Goodwill amortization 1,106 1,345 --
---------- ---------- ----------
Adjusted net loss $ 37,087 $ 16,625 $ 5,153
========== ========== ==========
Basic and diluted loss per share:
Reported loss per-share $ 8.46 $ 3.91 $ 1.03
Goodwill amortization $ 0.24 $ 0.29 $ --
---------- ---------- ----------
Adjusted net loss per-share $ 8.22 $ 3.62 $ 1.03
========== ========== ==========
F-23
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9: OTHER ASSETS
a. Amortization expenses for capitalized software development
costs for 2000, 2001 and 2002 were $3,176,000, $4,606,000 and
$2,858,000 respectively. Amortization expenses are included in
cost of products.
b. Other assets, net of amortization, are comprised of the
following:
COST ACCUMULATED AMORTIZATION
---------------- ------------------------
DECEMBER 31 DECEMBER 31
---------------- ----------------
2001 2002 2001 2002
------ ------ ------ ------
U.S. DOLLARS IN THOUSANDS
Prepaid royalties $2,083 $2,083 $1,239 $1,371
Technology and usage rights 895 863 716 735
Other intangible assets 370 335 146 147
Distribution rights 1,070 1,070 742 935
Long-term deferred income taxes 4,484 3,872 -- --
------ ------ ------ ------
$8,902 $8,223 $2,843 $3,188
====== ====== ====== ======
Amortization of other assets charged to expenses was $489,000,
$563,000 and $68,000 for 2000, 2001 and 2002, respectively.
As for impairments see Note 2h.
c. Estimated amortization expense for the years ended:
DECEMBER 31,
------------
2003 $ 309
2004 170
2005 165
2006 148
2007 and thereafter 190
-----
$ 982
=====
NOTE 10: OTHER LIABILITIES AND ACCRUED EXPENSES
DECEMBER 31,
--------------------
2001 2002
------- -------
U.S. DOLLARS IN THOUSANDS
Employee and related payroll accruals $ 5,402 $ 4,035
Sales and other taxes payable 3,962 2,915
Accrued royalties to the OCS (Note 12a) 2,105 2,776
Accrued expenses 7,299 4,815
------- -------
$18,768 $14,541
======= =======
F-24
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11: DEBT
a. Short-term debt:
The Company has available unsecured revolving credit line
facilities for borrowings of up to a total of $24 million as
of December 31, 2002, of which $16.5 million is available
until March 31, 2003 and $7.5 million is available until March
31, 2005. (As for the renewal of the credit lines see Note
18). Under the terms of these credit line agreements, the
Company and several of its subsidiaries granted floating
charges to the banks and issued cross guaranties in support of
the credit facilities. Additionally, the Company is required
to maintain certain financial ratios. As of December 31, 2002,
the Company maintained these financial ratios. Borrowings
under these agreements in Euro and U.S. dollars bear interest
at rates ranging between the London Interbank Offered Rate
("LIBOR") plus 0.75% to plus 1.95% and borrowings in new
israeli shekel ("NIS") bear interest at the prime rate of
interest in Israel plus 2%. The Company had an unused credit
facility in the amount of approximately $12.5 million as of
December 31, 2002. As for warrants granted under the credit
line agreement, see Note 15j.
A portion of the Company's short-term loans require that the
Company pledge cash or short-term investments and record a
floating charge as collateral for its borrowings (Note 13).
WEIGHTED AVERAGE
INTEREST
-----------------
DECEMBER 31, DECEMBER 31,
----------------- --------------------
2001 2002 2001 2002
------ ------ ------- -------
LINKAGE % % U.S. DOLLARS IN THOUSANDS
--------------- ------ ------ -------------------------
New Israeli 5.46 -- $10,180 $ --
Credit lines shekel *)
Euro **) -- 5 -- 1,146
Short-term loans U.S. dollar *) 3.73 3.5 6,029 2,275
British Pound -- 5.5 -- 1,585
------- -------
$16,209 $ 5,006
======= =======
*) Including non-material amounts linked to the Euro.
**) Including non-material amounts linked to the U.S.
dollar and to the British Pound.
F-25
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11: DEBT (CONT.)
b. Convertible subordinated notes and other long-term liabilities:
DECEMBER 31,
RATE OF ----------------------
LINKAGE INTEREST MATURITY 2001 2002
------------ ------------ ------------- -------- --------
U.S. DOLLARS
% IN THOUSANDS
------------ ----------------------
Convertible subordinated
notes ("Old Notes" - September
conversion price $160 US Dollar 5 2003 $ 6,930 $ 4,205
per Common share) June 2004
through
Long-term loans US Dollar 3.75 March 2005 -- 7,500
Capital lease obligations
(Note 12b) Euro 5 August 2005 167 150
Other long-term debts *) Japanese Yen 1.8 - 3.15 February 2006 484 324
-------- --------
7,581 12,179
Less - current maturities (245) (4,477)
-------- --------
7,336 7,702
Minority interest 29 85
-------- --------
$ 7,365 $ 7,787
======== ========
*) Including non-material amounts linked to other
currencies.
In 2002, the Company executed an early redemption of some of
the convertible subordinated notes in the amount of
approximately $2.7 million, which resulted in a gain of
$409,000 recorded as other income.
Long-term debt maturities after December 31, 2002 are as
follows (U.S. dollars in thousands):
2003 $ 4,477
2004 1,610
2005 6,084
2006 8
--------
$ 12,179
========
Interest expense was $0.4 million, $1.3 million and $1.0
million for 2000, 2001 and 2002, respectively.
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES
a. Sapiens Technologies Ltd. (hereafter - "Technologies") a
subsidiary incorporated in Israel partially finances its
research and development expenditures under programs sponsored
by the OCS of Israel for the support of research and
development activities conducted in Israel.
F-26
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
In exchange for participation in the programs by the OCS, the
Company agreed to pay 3%-3.5% of total net consolidated sales
of software developed within the framework of these programs.
The royalties will be paid up to a maximum amount equaling
100%-150% of the grant provided by the OCS, linked to the
dollar and for grants received after January 1, 1999 bear
annual interest at a rate based on LIBOR. Repayment of such
grants is not required in the event that there are no sales of
products developed within the framework of such funded
programs.
Royalties paid or accrued amounted to $1,257,000, $1,523,000
and $1,569,000 in 2000, 2001 and 2002, respectively.
As of December 31, 2002, the Company had a contingent
liability to pay royalties of approximately $12 million.
b. The Company and its subsidiaries lease various office
equipment, office space, and motor vehicles through operating
and capital leases. Future minimum lease payments for the next
five years and thereafter are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
U.S. DOLLARS IN THOUSANDS
2003 $2,920 $ 57
2004 2,673 83
2005 1,234 10
2006 1,101 --
2007 and thereafter 1,350 --
------ ------
Total future minimum lease payments $9,278 $ 150
====== ======
Rent expense for the years ended December 31, 2000, 2001 and
2002 was $2,892,000, $2,631,000 and $2,489,000, respectively.
c. In 2000, the Company filed a lawsuit against GIE AGF Systems
D'Information (hereinafter - "AGF SI"), a customer, regarding
an unpaid balance related to a year 2000 project performed
during 1998 and 1999. The Company's claim was in respect of a
dispute over the implementation of contracts signed between
the parties regarding the above project. While the Company,
based on the advice of its legal counsel, believed that the
court would rule in its favor and the amounts recorded would
be collected, on February 14, 2001 the French court ruled that
AGF SI must pay the Company the sum of approximately $3
million. In accordance with SFAS No. 5 "Accounting for
Contingencies", as a result of the ruling, the Company
recorded a provision of $2.4 million for selling, marketing,
general and administrative expenses in the fourth quarter of
2000.
F-27
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
Following the French court ruling, AGF SI has filed an appeal
to the Court of Appeals of Paris. On January 26, 2002, the
Company has filed a counter appeal in reply rejecting the
claims presented by AGF SI and claiming an additional amount
of approximately $3.5 million in respect with the contract
signed between the parties. The Company, based on the advice
of its legal counsel, believes that the court will not accept
AGF SI's appeal, therefore the Company did not accrue for such
potential liability.
d. The Company is party to various other legal proceeding and
claims that arise in the ordinary course of business in the
total amount aggregating to approximately $1 million. The
Company based on the advise of its legal counsel, has accrued
for the expected implication of these proceedings and claims
an amount of $0.2 million, in accordance with SFAS No. 5.
e. As for tax assessments, see Note 14c.
NOTE 13: SECURITY INTERESTS AND PLEDGES
The Company and several of its subsidiaries granted floating charges to
the banks and issued cross guaranties in support of the credit
facilities.
All of the Company's leased assets are pledged to the finance companies
that provided the lease financing and the banks providing credit lines.
The Company pledged bank guarantees in the amount of $0.5 million as
security for the rent of its offices in Israel.
NOTE 14: TAXES ON INCOME
a. Net operating losses carryforward:
At December 31, 2002, the Company had net operating loss
carryforwards for U.S. federal income tax purposes of
approximately $7 million and tax credits of $0.2 million,
which are available to offset future federal taxable income
and expire in 2009 to 2020.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitations may result in the
expiration of net operating losses before utilization.
In addition, the Company had a net operating loss
carryforwards relating to non-U.S. subsidiaries totaling
approximately $49.1 million, which are available to offset
future taxable income. Generally, a majority of such amounts
have no expiration date. However, in some cases, amounts
expire in the years 2003 to 2008.
F-28
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14: TAXES ON INCOME (CONT.)
b. Israeli income tax:
Sapiens Technologies Ltd. (hereafter-"Technologies"), has been
granted "Approved Enterprise" status for six investment
programs approved in 1984, 1991, 1993, 1995, 1998 and 2000, by
the Israeli Government under the Law for Encouragement of
Capital Investments, 1959 ("the Law").
Undistributed Israeli income derived from the "Approved
Enterprise" programs entitle Technologies to a tax exemption
for a period of two to four years and to a reduced tax rate of
10% - 25% for an additional period of three to eight years
(depending on the level of foreign-investment in
Technologies). These tax benefits are subject to a limitation
of the earlier of twelve years from commencement of
operations, or fourteen years from receipt of the approval.
Technologies completed the implementation of 1984, 1991, 1993,
1995 and 1998 investment programs. As of December 31, 2002 the
Investment Center has granted final approval to the
implementation of the 1995 and 1998 plans. Technologies has
used all the tax benefits under the 1984 plan and is entitled
for additional benefits under the 1991 plan which commenced in
1992 and will expire in 2002, under the 1993 plan the benefits
period commenced in 1998 and will expire in 2006 and under the
1995 plan the benefits period commenced in 1998 and will
expire in 2008. The benefits have not yet commenced for the
1998 and the 2000 plans.
The law also grants entitlement to claim accelerated
depreciation on machinery and equipment used by the "Approved
Enterprise", during the first five years.
The tax-exempt profits that will be earned by Technologies'
"Approved Enterprises" can be distributed to shareholders,
without imposing tax liability to Technologies only upon the
complete liquidation of Technologies. If these retained
tax-exempt profits are distributed in a manner other than in
the complete liquidation of Technologies they would be taxed
at the corporate tax rate applicable to such profits as if
Technologies had not elected the alternative system of
benefits (depending on the level of foreign - investment in
Technologies) for an "Approved Enterprise". Technologies has
decided not to declare dividends out of such tax-exempt
earnings. Accordingly, no deferred income taxes have been
provided on earnings attributable to the Technologies'
"Approved Enterprise".
Income from sources other than the "Approved Enterprise"
during the benefit period is subject to tax at the regular
corporate tax rate of 36%.
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the above
law, regulations published thereunder and the instruments of
approval for the specific investments in "Approved
Enterprise". In the event of failure to comply with these
conditions, the benefits may be canceled and the Company may
be required to refund the amount of the benefits, in whole or
in part, including interest.
F-29
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14: TAXES ON INCOME (CONT.)
Results of the Company's Israeli subsidiaries for tax purposes
are measured and reflected in real terms in accordance with
the changes in the Israeli Customer Price Index (CPI). As
explained in Note 2b, the financial statements are presented
in U.S. dollars. The difference between the change in the
Israel CPI and in the NIS\U.S. dollar exchange rate causes a
difference between taxable income or loss and the income or
loss reflected in the financial statements. In accordance with
paragraph 9(f) of SFAS 109, the Israeli subsidiaries have not
provided deferred income taxes on this difference between the
reporting currency and the tax bases of assets and
liabilities.
c. Tax assessments
In December 2001, Sapiens Technologies Ltd. and some of the
Company's group entities, have reached an agreement with the
Israeli Tax Authorities ("the ITA") as a result of a tax
assessment. In accordance with the agreement's provisions, the
tax liability for the tax years through 1999 will be increased
by approximately $1 million, which was paid in 12 equal
monthly payments, commencing with the agreement date.
In addition, based on the provisions of the abovementioned
agreement, the Company had a contingent tax liability to pay
an additional amount ("the additional amount") conditioned by
obtaining certain approvals from the "Investment Center"
regarding the status of the "Approved Enterprise", under the
"Law for Encouragement of Capital Investment, 1959" to some of
its plans. In July 2002, a second agreement with the ITA was
reached, and the additional amount was set to be $ 580,000,
payable in 11 payments ending October 2003. This amount
completes Technologies' tax liability for the tax years
through 1999, and is included in the current liabilities.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company and its subsidiaries' deferred tax liabilities and
assets are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2002
--------------------- ---------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
-------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
Gross deferred tax assets 2,478 16,034 3,456 10,904
Less - valuation allowance (1,823) (11,550) (2,596) (7,032)
-------- -------- -------- --------
Net deferred tax asset $ 655 $ 4,484 $ 860 $ 3,872
======== ======== ======== ========
F-30
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14: TAXES ON INCOME (CONT.)
As of December 31, 2002, the Company and its subsidiaries have
decreased the deferred income taxes assets resulting from tax
loss carryforwards and other tax credits and the related
valuation by $4.2 million and $3.7 million, respectively.
Management currently believes that it is more likely than not
that the deferred income taxes regarding the loss
carryforwards and other temporary differences, on which a
valuation allowance has been provided, will not be realized in
the foreseeable future.
Provisions for income tax expense are comprised of the
following:
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
------- ------- -------
U.S. DOLLARS IN THOUSANDS
Current (foreign) $ 383 $ 676 $ 1,001
Deferred (foreign) (2,332) 50 407
------- ------- -------
$(1,949) $ 726 $ 1,408
======= ======= =======
The Company's entire provision for taxes on income relates to
operations in jurisdictions other than the Netherlands
Antilles. The effective income tax rate varies from period to
period because each jurisdiction in which the Company operates
has its own system of taxation (not only with respect to the
nominal rate, but also with respect to the allowance of
deductions, credits and other benefits). In addition, the
provision for income taxes for the fiscal years ended December
31, 2000, 2001 and 2002, does not include the recognition of a
majority of the deferred tax assets relating to the net
operating losses of the Company's subsidiaries worldwide. The
main reconciling item from the statutory tax rate of the
Company to the effective tax rate is the non-recognition of
tax benefits from accumulated net operating losses
carryforward among the various subsidiaries worldwide due to
the uncertainty of the realization of such tax benefits.
e. Israeli tax reform:
On January 1, 2003, a comprehensive tax reform took effect in
Israel. Pursuant to the reform, Israel resident companies are
subject to Israeli tax on income accrued or derived in Israel
or abroad.
In addition, the concept of "controlled foreign corporation"
was introduced, according to which an Israeli company may
become subject to Israeli taxes on certain income of a
non-Israeli subsidiary if the subsidiary's primary source of
income is passive income (such as interest, dividends,
royalties, rental income or capital gains). The tax reform
also substantially changed the system of taxation of capital
gains.
F-31
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: SHAREHOLDERS' EQUITY
a. In June 2003, the Company's shareholders approved a 1-for-5
reverse stock split of the Company's Common shares.
Accordingly, all share and per share data shown in these
financial statements has been retroactively adjusted to
reflect the reverse stock split.
b. In December 2000, the Company entered a memorandum of
understanding with Yarnfield International Limited, an
affiliate of Magnum Technologies Fund ("Magnum"), and Formula
Systems Ltd., for a $15 million investment in exchange for
issuance of Series F convertible Preferred shares. On December
25, 2000 the Company received a $5 million nonrefundable
deposit, for which it would have issued 5 million Common
shares if the agreement would not be approved by shareholders,
or Series F Preferred shares if it would have been approved.
The Company recorded the $5 million cash received as proceeds
on account of shares within the shareholders' equity as of
December 31, 2000.
The Series F convertible Preferred shares were convertible
into Common shares of the Company at any time at a ratio of
$7.5 per Common share. In accordance with an anti dilution
clause, the conversion ratio will be adjusted in two stated
dates, but will never increase, to 110% of the average closing
sale price of the Company's Common shares for the 10 trading
days following August 15, 2001 and March 1, 2002. The
conversion ratio shall not be adjusted to be less than $5.00
per Common share. At maturity, three years from the date of
investment, the Company will redeem all of the remaining
outstanding Series F convertible Preferred shares through
payment of cash or delivery of Common shares, at the Company's
election. If Common shares are issued, the redemption price
will be the average closing sale price of the Company's Common
share for the 30 trading days preceding maturity. The
Company's intention was to redeem the investment in shares.
The investors were also granted warrants to acquire from the
Company additional 10,000 Series F Preferred shares at any
time before December 25, 2003, at an exercise price of $7.50
per share or as adjusted in accordance with the provisions
described above.
The warrant fair value was measured using the Black-Scholes
Option Pricing Model with the following assumptions: risk-free
interest rate of 4% dividend yields of 0%, volatility factors
of the expected market price of the Company's Common shares of
0.7 and expected life of the warrant of 2.5 year.
In February 2001, the Company's shareholders approved the
share purchase agreement, which was signed on January 24,
2001, and the Company issued to the investors an aggregate of
10,000 Series F Preferred shares par value (euro)681 per
share, each of which may be converted into 200 Common shares,
subject to adjustment, at a cash price of $1,500 per Series F
share.
The Series F Preferred shares have all the rights of Common
shares in addition to liquidation preference and conversion
rights.
In addition, the investors have the right for "demand
registrations" of an under written public offering of Common
shares with unlimited piggyback rights.
F-32
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: SHAREHOLDERS' EQUITY (CONT.)
In determining whether an instrument includes a beneficial
conversion option in accordance with EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or
Continently Adjustable Conversion Ratios" ("EITF No. 98-5")
and EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF No. 00-27"), the total
proceeds were allocated to the Preferred shares and the
detachable warrants based on their fair values. As of December
31, 2001, no beneficial conversion feature value was accounted
in respect of the Preferred share.
On August 15, 2001 the conversion ratio was adjusted to $1,139
per Series F Preferred share. Following the adjustment, and in
accordance with the provisions of EITF No. 00-27, no
beneficial conversion feature was recorded, due to
immateriality.
In accordance with the share purchase agreement's provisions,
the conversion price was not adjusted as a result of the
average closing sale price of the Company's Common shares for
the 10 trading days following March 1, 2002.
In December 2002 the Investors converted all of the
outstanding Series F Preferred shares into Common shares at a
reduced conversion service of $4.15, and Formula invested an
additional $10 million in Common Shares by exercising its two
thirds portion of the Investors' option to purchase Common
Shares. The remaining unexercised one third portion of the
Investors' existing option was assigned to Formula by
Yarnfiled and it was agreed that such option would be
exercisable at the reduced exercise price $4.15 per Common
Share. This transaction was accounted for in accordance with
the guidelines of EITF D-42. "The Effect on the Calculation of
Earnings Per Share for the Redemption or Induced Conversion of
Preferred Stock". No deemed dividends were recorded as a
result of the conversion of Series F Preferred shares and
exercise of options due to immateriality.
Ron Zuckerman, Chairman of the Board of the Company, is an
advisor to Magnum.
c. On April 4, 2001, the Company entered into a share purchase
and loan agreement with Red Coral Holdings, Inc. ("Red
Coral"), owned by the Company's President and Chief Executive
Officer. According to the terms of the agreement, Red Coral
purchased 300,000 Common shares of the Company for a purchase
price of $975,000. As part of the agreement, the Company
granted to Red Coral a loan in the amount of $975,000 for the
purpose of acquiring the Common shares. The term of the loan
is six years with accrued interest at a rate of 4%, which is
payable on January 15th of each calendar year. The interest
amount is fully-recourse and fixed. To secure payment of the
loan, Red Coral granted the Company a lien and security
interest on all of the Common shares. To secure fulfillment of
the terms of the agreement, the Common shares are being held
in escrow by the General Counsel of the Company. The issuance
of Common shares was accounted in the shareholders' equity and
the loan amount was deducted from the shareholders' equity as
a note receivable from a shareholder.
In accordance with EITF 95-16 "Accounting for Stock
Compensation Arrangements with Employer Loan Features under
APB Opinion No. 25", the transaction was accounted for as a
fixed award.
F-33
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: SHAREHOLDERS' EQUITY (CONT.)
d. Common shares confer upon their holders voting rights, the
right to receive cash dividends and the right to share in
excess assets upon liquidation of the Company.
e. During the first quarter of 2000, all of the remaining Series
D1, and E referred shares, 1,500 and 1,700, respectively, were
converted to Common shares at the conversion prices and, as a
result, 58,394 and 75,555 Common shares were issued,
respectively.
As of December 31, 2000, the remaining 1,300 Series D2
Preferred shares had been converted to Common shares at the
conversion price and, as a result, 50,608 Common shares were
issued.
In 2000, 114,303 warrants to purchase Common shares were
issued as part of the conversion of Preferred shares.
Upon conversion of all issued Series F Preferred shares, the
remaining authorized Series F Preferred shares were
eliminated.
f. Dividends on Preferred shares:
In 2000, the Company accrued dividends to be paid out in the
form of Common shares on its Series D1, D2 and E Preferred
shares, in the amount of $107,000 thousand. In the course of
the conversion of all of the company's Preferred stock (see
Note 14d), all of the remaining accumulated dividends,
$1,074,000 thousand, were paid by the issuance of 44,049
Common shares.
g. Stock option plan:
Stock options granted under the Company's 1992 Stock Option
and Incentive Plan ("the Plan") to employees, directors and
service providers are exercisable at the fair market value of
the Company's Common shares on the date of grant and, subject
to termination of employment, expire ten years from the date
of grant and are generally exercisable in four equal annual
installments commencing one year from the date of grant.
As of December 31, 2002, approximately 180,423 Common shares
of the Company are still available for future grant. Any
options which are forfeited or cancelled before expiration
become available for future grant under the Plan.
In January 2000 and November 2000, the Company increased the
number of shares available for grants by 400,000 and 800,000,
respectively, and approved grants of such shares. In December
2000, 154,560 previously granted options with exercise price
from $11.25 to $69.375 were repriced to $0 resulting in a new
measurment date in total compensation expense of $628,000 of
which $453,000 was recognized in 2000 for the portion already
vested and $175,000 was deferred to be recognized over the
remaining vesting period ending in 2004. During the years 2001
and 2002, $107,000 and $47,000 of the amount deferred was
recognized, respectively.
F-34
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: SHAREHOLDERS' EQUITY (CONT.)
In December 2000, the Company granted 509,600 Time Accelerated
Restricted Stock Award options (hereinafter - "TARSAP's") to
employees. The TARSAP's include an acceleration feature, based
on the Company's performance in the years 2001 and 2002. As of
December 31, 2002, 410,400 of the options are outstanding, and
75% of the options were vested based on the 2001 and 2002
performance tests. No compensation expense was recorded, since
the fair value was equal to the exercise price at the date of
grant.
A summary of the stock options activities in 2000, 2001 and
2002 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 2001 2002
---------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at
January 1 868,553 $27.50 *)1,790,614 $ 18.3 *)1,569,698 $ 12.5
Granted 1,087,150 $15.50 61,700 $ 4.6 274,300 $ 4.7
Exercised (74,650) $13.35 (560) $ 0 (55,080) $ 0.2
Cancelled and
forfeited (90,439) $49.45 (482,056) $29.75 (208,205) $ 15.7
----------- ----------- -----------
Outstanding at
December 31 *)1,790,614 $ 18.3 *)1,569,698 $ 12.5 *)1,580,713 $11.25
=========== ====== =========== ====== =========== ======
Exercisable options
at December 31 424,833 $16.55 745,647 $ 12.3 908,784 $12.85
=========== ====== =========== ====== =========== ======
*) Including 154,560, 154,000 and 102,100 options repriced to
zero, as of December 31, 2000, 2001 and 2002, respectively.
The options outstanding as of December 31, 2002, have been
classified by range of exercise price, as follows:
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 2002 LIFE (YEARS) PRICE 2002 PRICE
------------------ ------------ ------------ -------- ------------ --------
$ - 102,100 4.86 $ -- 102,100 $ --
$3.25 - $3.75 189,170 9.22 $ 3.55 33,845 $ 3.30
$4.065 - $5.7 837,800 8.31 $ 4.50 396,000 $ 4.15
$11.25 - $16.875 185,825 3.32 $ 12.00 185,825 $ 12.00
$19.375 - $29.375 68,300 7.54 $ 28.75 35,350 $ 28.60
$32.5 - $47.5 143,608 6.07 $ 38.30 128,204 $ 37.55
$61.25 - $69.375 53,910 7.06 $ 67.50 27,460 $ 67.75
--------- -------
1,580,713 $ 11.25 908,784 $ 12.85
========= ======== ======= ========
h. Warrants:
In 1996, 1997 and 1999, warrants were granted to service
providers. As of December 31, 2002, 225,086 warrants are
outstanding.
F-35
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: SHAREHOLDERS' EQUITY (CONT.)
i. In 2001, the Company granted Bank Leumi Le Israel B.M., Bank
Hapoalim Ltd., Mizrahi Bank Ltd. and Bank Discount Ltd.
(collectively the "Banks") 81,000 warrants as part of a
credit-line extension agreement (see Note 10a) at an exercise
price ranging from $4.4 to $6.9 per share. As required by APB
No. 14 "Accounting for Convertible Debt and Debt Issued with
stock purchase warrants", these warrants were measured at fair
value (according to the Black-Scholes option pricing model)
with the following weighted-average assumptions for 2001: risk
free interest rate of 5%, dividend yields of 0%, volatility
factors of the expected market price of the Company's Common
shares of 0.901 weighted-average expected life of the option
of 2 years. Total compensation expense amounted to $203,000,
of which $150,000 and $53,000 were recognized as financial
expense in 2001 and 2002, respectively, over the credit-line
period.
j. The Company does not intend to pay cash dividends in the
foreseeable future.
NOTE 16: GEOGRAPHIC INFORMATION
a. The Company operates in a single segment as a provider of
software solutions. See Note 1 for brief description of the
Company's business. The following data is presented in
accordance with Statement of Financial Accounting Standard No.
131 "Disclosure About Segments of an Enterprise and Related
Information" (SFAS No. 131).
b. Geographic information:
The following is a summary of operations within geographic
areas based on the end customers' location.
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
U.S. DOLLARS IN THOUSANDS
1. Revenues:
U.K $17,744 $21,275 $25,438
North America 15,098 18,523 20,272
France 16,610 5,976 3,450
Germany 6,289 4,798 2,653
Israel 5,633 6,097 5,776
Other 11,370 6,766 7,239
------- ------- -------
$72,744 $63,435 $64,828
======= ======= =======
2. Long-lived assets:
France $ 2,616 $ 2,135 $ 2,426
Dutch Antilles 1,662 1,275 936
Israel 14,043 11,722 10,213
Germany 5,218 4,287 4,988
Other 5,626 3,276 2,816
------- ------- -------
$29,165 $22,695 $21,379
======= ======= =======
F-36
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17: SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
U.S. DOLLARS IN THOUSANDS
Total costs $ 14,567 $ 11,006 $ 9,448
Less - capitalized software
development costs (4,250) (3,967) (2,732)
Less - royalty-bearing grants -- (1,581) (699)
-------- -------- --------
Research and development costs, net $ 10,317 $ 5,458 $ 6,017
======== ======== ========
b. Financial income (expenses):
Financial income:
Interest $ 973 $ 518 $ 778
Foreign currency translation
differences 3,904 3,728 6,511
Realized gain on sale of marketable
securities 163 124 --
-------- -------- --------
5,040 4,370 7,289
-------- -------- --------
Financial expenses:
Interest 1,419 1,818 1,747
Foreign currency translation
differences 4,114 5,277 6,351
Bank charges and others 139 462 162
-------- -------- --------
5,672 7,557 8,260
-------- -------- --------
Financial expenses, net $ 632 $ 3,187 $ 971
======== ======== ========
c. Losses per share data:
The following table sets forth the calculation of basic and
diluted net losses per share.
1. Numerator:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
U.S. DOLLARS IN THOUSANDS
Net loss to shareholders of Common
shares $ 38,193 $ 17,970 $ 5,153
Effect of dilutive securities:
Preferred share dividends *) -- -- --
-------- -------- --------
Numerator for diluted losses per share -
loss available to shareholders of
Common shares $ 38,193 $ 17,970 $ 5,153
======== ======== ========
*) The effect of the inclusion of the convertible Preferred
shares dividends in 2000 would be anti-dilutive.
F-37
SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17: SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)
2. Denominator:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
U.S. DOLLARS IN THOUSANDS
Weighted average number of shares 4,508 4,600 4,999
Common shares to be issued as dividends 3 -- --
------- ------- -------
Denominator for net basic earnings per
share 4,511 4,600 4,999
------- ------- -------
Effect of dilutive securities:
Employee stock options *) -- *) -- *) --
Warrants issued to third parties *) -- *) -- *) --
Convertible Preferred shares *) -- *) -- *) --
Redeemable shares in subsidiary *) -- *) -- *) --
Convertible subordinated notes *) -- *) -- *) --
------- ------- -------
Dilutive potential Common shares -- -- --
------- ------- -------
Denominator for diluted net earnings per
share - adjusted weighted average
shares, assumed conversions and
exercise of options and/or warrants 4,511 4,600 4,999
======= ======= =======
*) Because of the loss in 2000, 2001 and 2002, the effect of
the inclusion of the convertible Preferred shares, options,
warrants, redeemable shares in subsidiary and convertible
subordinated notes would be anti-dilutive.
NOTE 18: SUBSEQUENT EVENTS
In June 2003, the Company extended its credit agreements with Bank
Hapoalim Ltd., Bank Leumi Le Israel Ltd, Discount Bank Ltd. and Mizrahi
Bank Ltd. regarding its existing credit lines in the total amount of
$25.5 million, of which $18 million is available until March 31, 2004
and $7.5 million is available until March 31, 2005. Under the terms of
these credit line agreements, the Company and several of its
subsidiaries recorded floating charges in favour of the banks and
issued cross guarantees in support of the credit facilities.
Additionally, the Company is required to maintain certain financial
ratios.
--------------
F-38