FORM 20-F
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934; |
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OR |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003; |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________ to ___________ |
Commission File Number: 0-29442
FORMULA SYSTEMS (1985) LTD. |
(Exact name of registrant as specified in its charter) |
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Israel |
(Jurisdiction of incorporation or organization) |
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3 Abba Eban Boulevard, Herzlia 46725, Israel |
(Address of principal executive offices) |
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Securities registered or to be registered pursuant to Section 12(b) of the Act: |
None |
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Securities registered or to be registered pursuant to Section 12(g) of the Act: |
American Depositary Shares |
(Title of class) |
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: |
American Depositary Shares |
(Title of Class) |
As of December 31, 2003, the registrant had 10,800,000 outstanding ordinary shares, NIS 1 par value, of which 575,327_were represented by American depositary shares as of such date.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 x
P A R T I
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Some of the statements in this annual report, including those in the Risk Factors, Operating and Financial Review and Prospects and Business Overview sections, are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements about our plans, objectives, strategies, expectations, intentions, future financial performance and other statements that are not historical facts. We use words like anticipates, believes, expects, future intends, and similar expressions to mean that the statement is forward-looking. You should not unduly rely on these forward-looking statements, which apply only as of the date of this annual report. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described under Risk Factors.
Beginning with the fiscal year ended December 31, 2002, we prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, commonly referred to as U.S. GAAP. Prior to 2002, we prepared our consolidated financial statements in accordance with accounting principles generally accepted in Israel, referred to as Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain respects. As a result, we have restated certain figures in our financial statements relating to prior periods. In accordance with U.S GAAP, we use the United States dollar as our reporting currency. Prior to 2002, we presented our consolidated financial statements in New Israeli Shekels, or NIS, that have been adjusted to reflect changes in the Israeli consumer price index, referred to as the Israeli CPI.
As used in this annual report, references to dollar refer to the United States dollar and references to NIS refer to New Israeli Shekels.
As used in this annual report, references to we, our, ours and us refer to Formula Systems (1985) Ltd. and its subsidiaries, unless otherwise indicated. References to Formula refer to Formula Systems (1985) Ltd.
All trademarks appearing in this annual report are the property of their respective holders.
1
TABLE OF CONTENTS
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
3 |
3 |
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ITEM 3. KEY INFORMATION |
3 |
ITEM 4. INFORMATION ON THE COMPANY |
16 |
47 |
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63 |
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72 |
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ITEM 8. FINANCIAL INFORMATION |
77 |
ITEM 9. THE OFFER AND LISTING |
78 |
ITEM 10. ADDITIONAL INFORMATION |
80 |
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
92 |
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. |
93 |
93 |
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ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
93 |
ITEM 15. CONTROLS AND PROCEDURES |
93 |
ITEM 16. [RESERVED] |
94 |
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT |
94 |
ITEM 16B. CODE OF ETHICS |
94 |
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
94 |
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
95 |
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
95 |
ITEM 17. FINANCIAL STATEMENTS |
96 |
ITEM 18. FINANCIAL STATEMENTS |
96 |
ITEM 19. EXHIBITS |
96 |
99 |
2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
A. Selected Financial Data
The following tables present our consolidated statement of operations and balance sheet data for the periods and as of the dates indicated. We derive the consolidated statement of operations data for the years ended December 31, 2001, 2002 and 2003, and the balance sheet data as at December 31, 2002 and 2003 from our consolidated financial statements included elsewhere in this annual report. Our consolidated financial statements have been audited by Ziv Haft certified public accountants (Isr.) BDO member firm. The consolidated income statement data for the years ended December 31, 1999 and 2000 and the consolidated balance sheet data for the years ended December 31, 1999, 2000 and 2001 is derived from our audited financial statements not included in this annual report. You should read the selected consolidated financial data together with our consolidated financial statements included elsewhere in this annual report. See Item 5. Operating and Financial Review and Prospects.
3
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Year Ended December 31, |
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2003 |
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2002 |
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2001 |
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2000 |
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1999 |
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$ |
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(In thousands, except per share data) |
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Consolidated
Statement of Operations |
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Revenues |
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$ |
366,830 |
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$ |
283,310 |
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$ |
387,682 |
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$ |
402,469 |
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$ |
334,078 |
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Cost of revenues |
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230,500 |
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186,908 |
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261,346 |
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239,506 |
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196,479 |
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Gross profit |
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136,330 |
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96,402 |
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126,336 |
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162,963 |
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137,599 |
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Research and development costs, net |
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17,368 |
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15,967 |
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21,287 |
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20,465 |
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12,924 |
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Selling, general and administrative expenses |
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107,103 |
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85,292 |
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151,345 |
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142,006 |
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93,345 |
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Restructuring and non-recurring costs |
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-- |
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1,829 |
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10,998 |
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2,444 |
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-- |
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Operating income (loss) |
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11,859 |
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(6,686 |
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(57,294 |
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(1,952 |
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31,330 |
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Financial income (expenses), net |
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(3,676 |
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3,605 |
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2,680 |
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8,467 |
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5,813 |
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Gain on realization of shareholdings,net |
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2,756 |
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4,668 |
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773 |
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66,651 |
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59,816 |
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Other expenses, net |
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90 |
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2,100 |
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36,719 |
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315 |
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9,553 |
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Income (loss) before taxes on income |
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10,849 |
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(513 |
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(90,560 |
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72,851 |
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87,406 |
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Taxes on income |
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2,540 |
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2,014 |
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6,239 |
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13,131 |
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19,985 |
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Equity in losses of affiliated companies, net |
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(1,071 |
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(2,327 |
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(9,926 |
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(5,633 |
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(1,738 |
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Minority interest in losses (profit), net |
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(4,118 |
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2,448 |
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46,864 |
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(16,108 |
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(21,034 |
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Net income (loss) |
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3,120 |
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(2,406 |
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(59,861 |
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37,979 |
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44,649 |
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Earnings (loss) per share: |
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Basic earnings (loss) |
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0.29 |
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(0.24 |
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(6.42 |
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4.07 |
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4.82 |
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Diluted earnings (loss) |
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0.24 |
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(0.24 |
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(6.42 |
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4.06 |
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4.79 |
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Weighted average number of shares |
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Basic |
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10,037 |
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10,171 |
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9,325 |
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9,322 |
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9,272 |
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Diluted |
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10,285 |
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10,171 |
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9,325 |
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9,363 |
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9,325 |
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As of December 31, |
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2003 |
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2002 |
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2001 |
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2000 |
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1999 |
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$ |
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(In thousands) |
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Consolidated Balance Sheet Data: |
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Total assets |
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528,915 |
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467,245 |
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454,544 |
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551,901 |
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446,760 |
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Total liabilities |
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284,660 |
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241,766 |
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192,532 |
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158,259 |
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146,613 |
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Shareholders equity |
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176,004 |
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153,349 |
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166,421 |
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229,672 |
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178,222 |
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B. Capitalization and Indebtedness
Not applicable.
4
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The trading price of our ordinary shares could decline due to any of these risks.
We may experience significant fluctuations in our annual and quarterly results, which makes it difficult for investors to make reliable period-to-period comparisons and may contribute to volatility in the market price for our ordinary shares and American Depositary Shares.
Our quarterly and annual revenues, gross profits and results of operations have fluctuated significantly in the past and we expect them to continue to fluctuate significantly in the future. The following events may cause fluctuations:
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acquisitions and dispositions of companies and consolidation of our subsidiaries; |
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the size, time and recognition of revenue from significant contracts; |
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timing of product releases; |
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timing of contracts; |
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timing of completion of specified milestones and delays in implementation; |
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changes in the proportion of service and license revenues; |
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price and product competition; |
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increases in selling and marketing expenses, as well as other operating expenses; |
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adverse economic conditions and currency fluctuations; |
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the global business slow-down and the decline in capital spending in the information technology sector; and |
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consolidation of our customers. |
5
A substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. If our projected revenue does not meet our expectations, we are likely to experience an even larger shortfall in our operating profit relative to our expectations. The gross margins of our subsidiaries also will vary both among themselves and over time. As a result, changes in the revenue mix from these subsidiaries may affect quarterly operating results. In addition, we may derive a significant portion of our net income from transactions which involve equity issuances by our subsidiaries, the sale of equity securities of our subsidiaries or the sale of proprietary software technology. These events do not occur on a regular basis and their timing is difficult to predict. As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication for future performance. Also, it is possible that our quarterly and annual results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our ordinary shares will likely decrease.
Capital spending on information technology, or IT, solutions has declined significantly. This global trend affected our operating results. If IT spending continues to slow down, our business might be seriously harmed.
We have been affected by global economic changes, in particular the sharp decline in capital spending in the information technology sector and the IT business slow-down in North America and Europe, as well as in Israel. Uncertainties in the North American, European and Israeli markets have influenced the purchasing patterns of leading software developers who delayed their planned orders and caused developers to reduce the amount of their planned license commitments. These changes in purchasing patterns in the IT industry directly affect our operating results. Our revenues decreased from $402.5 million in 2000 to $387.7 million in 2001 and to $283.3 million in 2002. In 2003, as a result of a slight recovery of the market, and the impact of the consolidation of the results of operations of Sapiens International Corporation N.V., this trend changed, and our revenues increased to $366.8 million. However, due to the IT business slow-down, we cannot assure you that we will be able to continue increasing our revenues or keep our revenues at the same level as in 2003.
If Formula Vision fails to repay its debt to us under the debentures, our business, financial condition and results of operations would be materially adversely affected.
One of our major assets is comprised of debentures issued to us by Formula Vision Technologies (F.V.T.) Ltd., or Formula Vision, in December 2001 and March 2002, in connection with the sale of private companies held by us to Formula Vision. In January 2004, we exchanged a portion of the debentures for 59.4% of Formula Visions outstanding share capital. Following the exchange of a portion of the debentures, the aggregate amount of the debentures is $43.2 million. We evaluate, periodically, the quality of the indebtedness, the financial strength of Formula Vision and its ability to meet the repayment schedule of the loan. However, in the event that Formula Vision fails to repay the loan under the terms of the debentures, our business, financial condition and results of operations would be materially adversely affected.
Our success depends upon the development and maintenance of strategic alliances.
We established relationships with strategic partners to provide international marketing presence and name recognition, as well as the resources necessary to implement many of our IT services. We are dependent upon our strategic partners for the marketing and selling of certain of our proprietary software solutions. Recently, due to the IT business slow-down, we have encountered difficulties in entering into new partnerships. If we cannot maintain our existing relationships with these partners or if we fail to establish effective, long-term relationships with additional partners, or if our partners enter into relationships with our competitors, our ability to market our proprietary software solutions in international markets may be limited. If this happens, our growth, if any, might be delayed or slowed-down. As a result our business, financial condition, and results of operations could be seriously harmed.
6
If our products fail to compete successfully with those of our competitors, we may have to reduce the prices of our products, which in turn, may adversely affect our business.
We face competition, both in Israel and internationally, from a variety of companies, including companies with significantly greater resources than us who are likely to enjoy substantial competitive advantages, including:
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longer operating histories; |
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greater financial, technical, marketing and other resources; |
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greater name recognition; |
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well-established relationships with our current and potential clients; and |
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a broader range of products and services. |
As a result, they may be able to respond more quickly to new or emerging technologies or changes in customer requirements. They may also benefit from greater purchasing economies, offer more aggressive product and service pricing or devote greater resources to the promotion of their products and services. In addition, in the future, we may face further competition from new market entrants and possible alliances between existing competitors. We also face additional competition as we continue to penetrate international markets. As a result, we cannot assure you that the products and solutions we offer will compete successfully with those of our competitors. Furthermore, several software development centers worldwide, like in India, offer software development services at much lower prices than we do. Due to the intense competition in the markets in which we operate, software products prices may fluctuate significantly. As a result, we may have to reduce the prices of our products, which in turn, may adversely affect our business.
If we fail to compete for acquisitions and investments, we may be unable to grow.
As part of our strategy, we intend to pursue acquisitions of, and investments in, other companies. If and when acquisition or investment opportunities occur, we expect to compete for these opportunities with other established and well-capitalized entities. We cannot assure you that we will be able to locate potential acquisition or investment opportunities in Israel or internationally on terms which are favorable to us. If we fail to consummate further acquisitions or investments in the future our ability to grow may be harmed.
7
Any future acquisitions of companies or technologies may distract our management and disrupt our business.
Our strategy includes selective acquisitions of, and investments in, companies offering products and services suitable for integration into our business. We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. We may engage in discussions and negotiations with companies about our acquiring or investing in those companies businesses, products, services or technologies. We cannot assure you that we will be able to identify future suitable acquisition or investment candidates, or if we do identify suitable candidates, that we will be able to make the acquisitions or investments on commercially acceptable terms or at all. If we acquire or invest in another company, or if any of our subsidiaries acquires control in another subsidiary or affiliate, the acquirer could have difficulty assimilating that companys personnel, operations, technology or products and service offerings into its own. The key personnel of the acquired company may decide not to work for the acquirer. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. We may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing shareholders.
We intend to pursue acquisitions outside of Israel as part of our expansion strategy. These acquisitions, as well as any future acquisitions of companies located outside of Israel, would pose additional risks, including monitoring a management team from a great distance and integrating a potentially different business culture. Our failure to successfully integrate these new businesses could harm our business. In addition, the investigation of acquisition candidates outside of Israel involves higher costs than those associated with pursuing domestic acquisitions, and we cannot assure you that these investigations will result in transactions.
If we fail to raise capital for our subsidiaries, we may be required to borrow money on unfavorable terms.
Our business strategy involves raising capital for our subsidiaries through public or private offerings. Our ability to raise capital for our subsidiaries depends upon market and other conditions which are beyond our control. If we fail to raise capital for our subsidiaries, it may hinder their growth. We may therefore be required to seek alternative capital raising methods, including borrowing money on terms which are not favorable to us. In the past, due to difficulties we encountered in raising capital for our subsidiaries, we were required to borrow monies from banks. Difficulties in raising capital on favorable terms, may materially and adversely affect our business, operating results and financial condition.
The terms of our credit facilities contain 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 and sell or acquire assets. Our loan agreements also contain various covenants which require us 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 to our shareholders.
8
Some of our assets, consisting of approximately 50% of outstanding share capital of our subsidiaries, Matrix IT Ltd. and BluePhoenix Solutions Ltd., are pledged to banks. If we are unable to repay the debt, the lenders could foreclose on our assets that are subject to liens and sell these holdings to satisfy the debt.
Marketing our products and services in international markets may require increased expenses and greater exposure to risks that we may not be able to successfully address.
We intend to continue to focus our efforts on selling proprietary software solutions in international markets. We expect to continue devoting significant resources to these efforts. If we are unable to continue achieving market acceptance for our solutions or otherwise continue to successfully penetrate international markets, our business will be harmed. In 2002 and 2003, we received approximately 45% and 53% of our total revenues from customers located outside of Israel. The expansion of our existing operations and entry into additional international markets will require significant management attention and financial resources. We are subject to a number of risks customary for international operations, including:
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changing product and service requirements in response to the formation of economic and marketing unions, including the European Union; |
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economic or political changes in international markets; |
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greater difficulty in accounts receivable collection and longer collection periods; |
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unexpected changes in regulatory requirements; |
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difficulties and costs of staffing and managing foreign operations; |
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the uncertainty of protection for intellectual property rights in some countries; |
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multiple and possibly overlapping tax structures; and |
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currency and exchange rate fluctuations. |
If we fail to address the strain on our resources caused by changes in our company, we will be unable to effectively manage our business.
Our business has grown in complexity over the past few years. The growth of our business, as well as the corporate organizational changes, have placed and will continue to place a strain on our personnel and resources. Our ability to manage any future changes or growth, depends on our ability to continue to implement and improve our operational, financial and management information control and reporting systems on a timely basis and to expand, train, motivate and manage our work force. If we cannot respond effectively to changing business conditions, our business, financial condition and results of operations could be materially adversely affected.
9
If we are unable to attract, train and retain qualified personnel, we may not be able to achieve our objectives and our business could be harmed.
In order to achieve our objectives, we may need to hire additional qualified software, administrative, operational, sales and technical support personnel. The process of attracting, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. We may not be able to compete effectively for the personnel we need. Our future success depends on our ability to absorb and retain senior employees and to attract, motivate and retain highly qualified professional employees. We expect to recruit most of our software and systems personnel in Israel. In addition, our operations are dependent on the efforts of certain key management. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our business.
If we fail to estimate accurately the costs of fixed-price contracts, we may incur losses.
We derive a portion of our revenues from engagements on a fixed-price basis. We price these commitments upon estimates of future costs. We bear the risk of faulty estimates and cost overruns in connection with these commitments. Our failure to accurately estimate the resources required for a fixed-price project, to accurately anticipate potential wage increases, or to complete our contractual obligations in a manner consistent with the project plan could materially adversely affect our business, operating results, and financial condition. In addition, we may agree to a price before the design specifications are finalized, which could result in a fixed price that is too low, resulting in lower margins or losses to us.
If our tools or solutions do not function efficiently, we may incur additional expenses.
In the course of providing our software solutions, we conduct testing to detect the existence of failures, errors and bugs. In addition, we have instituted a quality assurance procedure for correcting errors and bugs in our tools. The amount of failures, errors and bugs detected to date, and the cost of correcting them, have not been significant. However, if our solutions fail to function efficiently or if errors or bugs are detected in our tools, we might incur significant expenditures in an attempt to remedy the problem. The consequences of failures, errors, and bugs could have a material adverse effect on our business, operating results, and financial condition.
If we fail to satisfy our customers expectations regarding our solutions, our contracts may be cancelled and we may be the subject of damages claims.
In the event that we fail to satisfy our customers expectations from the results of the implementation of our solutions, or if we fail to timely deliver our solutions to our customers, these customers may suffer damages. When this occurs, customers can cancel our contracts. Any cancellation of a contract could cause us to suffer damages, since we might not be paid for costs that we incurred in performing services prior to the date of cancellation. In addition, from time to time we may be subject to claims as a result of not delivering our products on time or in a satisfactory manner. Such claims may lead to material damages.
10
If we are unable to accurately predict and respond to market developments or demands, our business will be adversely affected.
The IT business is characterized by rapidly evolving technology and methodologies. This makes it difficult to predict demand and market acceptance for our services and products. In order to succeed, we need to adapt the products and services we offer to technological developments and changes in customer needs. We cannot guarantee that we will succeed in enhancing our products and services or developing or acquiring new products and services that adequately address changing technologies and customer requirements. We also cannot assure you that the products and services we offer will be accepted by customers. If our products and services are not accepted by customers, our future revenues and profitability will be adversely affected. Changes in technologies, industry standards, the regulatory environment, customer requirements and new product introductions by existing or future competitors could render our existing products and services obsolete and unmarketable, or require us to enhance our current products or develop new products. This may require us to expend significant amounts of money, time and other resources to meet the demand. This could strain our personnel and financial resources.
If we are unable to retain control in our subsidiaries, we would cease to consolidate them and our operating results may fluctuate significantly.
We currently hold a controlling interest in our subsidiaries through our direct equity holdings. From time to time, if and when required, we enter into voting agreements with other shareholders of the companies, in order to retain control of our subsidiaries. As a result of our controlling interests in the subsidiaries, we consolidate their operating results with ours. If we are unable to maintain a controlling interest in our subsidiaries, as a result of equity issuances by subsidiaries, failure to reach voting agreements or otherwise, we would cease to consolidate the operating results of these subsidiaries. This may result in significant fluctuations of our consolidated operating results.
We are exposed to significant claims for damage caused to our customers information systems.
Some of the products and services we provide involve key aspects of clients information systems. These systems are frequently critical to our clients operations. As a result, our clients have a greater sensitivity to failures in these systems than do clients of other software products generally. We have never been the subject of a material damages claim related to our products and services. However, if a clients system fails during or following the provision of products or services by us, or if we fail to provide customers with proper support for our software products, we are exposed to the risk of a claim for substantial damages being filed against us, regardless of our responsibility for the failure. When possible, we limit our liability under our product and service contracts. We cannot guarantee that these limitations of liability, if any, would be sufficient to protect us against legal claims. We maintain general liability and professional liability insurance coverage. However, we cannot assure you that our insurance coverage will be sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. If we lose one or more, large claims against us that exceed available insurance coverage, our business, operating results and financial condition may be materially adversely affected. In addition, the filing of legal claims against us in connection with contract liability may cause us negative publicity and damage to our reputation.
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If third parties assert claims of infringement against us, we may suffer substantial costs and diversion of managements attention.
Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlap. We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. Although our products and services have never been the subject of an infringement proceeding, we cannot predict whether third parties will assert claims of infringement against us. Any claims, with or without merit, could:
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require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component. |
Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.
Our success and ability to compete are substantially dependent upon our internally developed technology. Substantially all of our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. In general, we have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. We have placed, and in the future may place, certain of our software in escrow. The software may, under specified circumstances, be made available to our customers. We have provided our software directly to customers. This may increase the likelihood of misappropriation or other misuse of our software.
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Two shareholders control a significant portion of our ordinary shares and influence the outcome of matters that require shareholder approval.
Dan Goldstein, our chairman of the board, and his brother, Gad Goldstein, our president and a member of our board, own, in the aggregate, 21.5% of our outstanding ordinary shares. As a result, Dan Goldstein and Gad Goldstein are able to influence significantly the outcome of those matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This share ownership may have the effect of delaying or preventing a change in control. In addition, potential conflicts of interest may arise in the event that we enter into agreements or transactions with these persons. Although Israeli law imposes certain procedures (including shareholder approval) for approval of certain related party transactions, we cannot assure you that these procedures will eliminate the possible detrimental effects of these conflicts of interest. If certain transactions are not approved in accordance with required procedures under applicable Israeli law, these transactions may be void or voidable. See Item 7.B. Related Party Transactions Transactions between Formula and Formula Vision.
The market price of our ordinary shares and American Depositary Shares may be volatile and you may not be able to resell your shares at or above the price you paid, or at all.
The stock market in general has experienced during recent years extreme price and volume fluctuations. The market prices of securities of technology companies have been extremely volatile, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations could adversely affect the market price of our ordinary shares and American Depositary Shares, or ADSs. During 2002, for example, the market price of our ADSs fluctuated between $8.16 and $16.92, and in 2003, the market price of our ADSs fluctuated between $6.71 and $18.05. The market price of the ordinary shares and the ADSs may fluctuate substantially due to a variety of factors, including:
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any actual or anticipated fluctuations in our or our competitors quarterly revenues and operating results; |
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shortfalls in our operating results from levels forecast by securities analysts; |
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public announcements concerning us or our competitors; |
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results of integrating investments and acquisitions; |
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the introduction or market acceptance of new service offerings by us or our competitors; |
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changes in product pricing policies by us or our competitors; |
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changes in security analysts financial estimates; |
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changes in accounting principles; |
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sales of our shares by existing shareholders; and |
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the loss of any of our key personnel. |
In addition, economic, political and market conditions and military conflicts and in particular, those specifically related to the State of Israel, may affect the market price of our shares.
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We may be adversely affected if the market prices of our publicly traded subsidiaries decrease.
A significant portion of our assets is comprised of equity securities of publicly and non-publicly traded companies. Our publicly traded subsidiaries are BluePhoenix Solutions Ltd. (formerly known as Crystal Systems Solutions Ltd.), Magic Software Enterprises Ltd., Matrix IT Ltd., Sapiens International Corporation N.V. and Formula Vision. The stock prices of these publicly traded companies have been extremely volatile, and have experienced fluctuations due to market conditions and other factors which are beyond our control. Fluctuations in the market price and valuations of our holdings in these companies may affect the value of our assets. In addition, the stock prices of many technology companies fluctuate significantly for reasons that may be unrelated to operating results. If the value of our assets decreases significantly as a result of the above, our business, operating results and financial condition, may be materially and adversely affected.
Future sales of our shares in the public market or issuances of additional securities could cause the market price for our ordinary shares and ADSs to fall.
As of June 24, 2004, we had 10,800,000 ordinary shares outstanding, of which 462,036 were represented by ADSs. Of the 10,800,000 shares outstanding, 2,332,263 shares are held by affiliates. In addition, we have reserved 64,500 ordinary shares for issuance under our option plans. We intend to register for resale these reserved ordinary shares upon issuance. If a large number of our ordinary shares held by affiliates are sold in a short period, the price of our ordinary shares would likely decrease.
We do not intend to pay dividends.
In August 2001, Formula distributed to its shareholders a dividend in kind of Formula Visions (formerly known as Mashov Computers Ltd.) shares held by Formula, which was distributed in the form of cash to holders of our ADSs. Other than this distribution, Formula has never declared or paid cash dividends on its ordinary shares. We currently intend to retain any future earnings to finance operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future. However, in certain circumstances, we might consider a distribution of dividends in the future.
Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Although we do not believe that we were a passive foreign investment company for U.S. federal income tax purposes during 2003, we cannot assure you that we will not be treated as a passive foreign investment company in 2004 or in future years. We would be a passive foreign investment company if 75% or more of our gross income in a taxable year is passive income. We would also be a passive foreign investment company if at least 50% of our assets in a taxable year produce, or are held for the production of, passive income. Passive income includes interest, dividends, royalties, rents and annuities. If we are or become a passive foreign investment company, many of you will be subject to adverse tax consequences, including having gain realized on the sale of our ordinary shares or ADSs be treated as ordinary income, as opposed to capital gain income, and having potentially punitive interest charges apply to such sale proceeds. A decline in the value of our ordinary shares or ADSs may result in our being a PFIC. United States shareholders should consult with their own tax advisors with respect to the United States tax consequences of investing in our ordinary shares.
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For a discussion of how we might be characterized as a PFIC and related tax consequences, see Item 7. Taxation--United States Federal Income Tax Considerations.
Our operating profit may decrease if the rate of inflation in Israel exceeds the rate of devaluation of the New Israeli Shekel against the dollar or against the euro.
Most of our revenues from sale of our products and services are in dollars and euros or are linked to the dollar or the euro, while a substantial portion of our expenses, principally salaries and related personnel expenses, are in New Israeli Shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel exceeds the rate of devaluation of the NIS in relation to the dollar or the euro or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the dollar or euro cost of our operations and decreasing our operating profit. In recent years, the rate of devaluation of the NIS against the dollar, as well as the rate of devaluation of the NIS against the euro, have exceeded the rate of inflation, a reversal from prior years. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the dollar or against the euro. If the dollar or euro cost of our operations in Israel increases, our operating profit will be adversely affected. To date, we have not engaged in significant hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar and the euro against the NIS. However, we cannot assure you that these measures will adequately protect us from adverse effects arising from the impact of inflation in Israel.
Risks Relating to Operations in Israel
Political, economic, and military conditions in Israel could negatively impact our business.
Our headquarters and principal research and development facilities are located in Israel. Although we generate approximately 53% of our revenues from international markets, we are, nonetheless, directly influenced by the political, economic and military conditions affecting Israel. Major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition. Furthermore, several countries restrict business with Israeli companies. In addition, all nonexempt male adult citizens of Israel, including some of our officers and employees, are obligated to perform military reserve duty and are subject to being called for active duty under emergency circumstances. While we have operated effectively under these requirements since our incorporation, we cannot predict the full impact of such conditions on us in the future, particularly if emergency circumstances occur. If many of our employees are called for active duty, our operations in Israel and our business may be adversely affected.
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The tax benefits available to us from government programs may be discontinued or reduced at any time, which would likely increase our taxes.
Certain of our subsidiaries received grants in the past and receive tax benefits under Israeli government programs. To maintain the eligibility for these programs and benefits, we must continue to meet specified conditions, including making specified investments in fixed assets. Some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay increased taxes. If these tax benefits and programs are terminated or reduced, we could pay increased taxes in the future, which could decrease our profits.
It may be difficult to serve process and enforce judgments against our directors and officers in Israel.
We are organized under the laws of the State of Israel. All of our executive officers and directors are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions instituted in Israel.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated in Israel on April 2, 1985. We maintain our principal executive offices at 3 Abba Eban Boulevard, Herzlia 46725, Israel and our telephone number is 011-972-9-959-8800. Our agent in the United States is Corporation Service Company and its address is 2711 Centerville Road, Suite 400, Wilmington, DE 19808. In 1991, we completed our initial public offering of ordinary shares on the Tel Aviv Stock Exchange, or the TASE. In October 1997, we completed the listing of our ADSs on the Nasdaq National Market.
Since our inception, we have acquired controlling interest and have invested in companies which are engaged in the IT solutions and services business. We, together with our subsidiaries and affiliates, are known as the Formula Group.
We have adopted a strategy of seeking opportunities to realize gains through the selective sale of investments and minority interest in our subsidiaries and affiliates to outside investors. We believe that this strategy provides us with capital to support the growth of our subsidiaries, as well as increasing shareholder value. We expect to continue to develop and enhance the products, services and solutions of our subsidiaries, and to continue to pursue additional acquisitions of, or investments in, companies that provide IT services and proprietary software solutions.
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Capital Expenditures and Divestitures
Certain of our investment and financing activities are described below. For additional information relating to our investment and financing activities during 2002 and 2003, see Item 5.B. Liquidity and Capital Resources.
In March 2001, we completed a $10 million investment in convertible preferred shares of Sapiens International Corporation N.V., or Sapiens, a publicly held company traded on the Nasdaq National Market, representing approximately 24% of the outstanding share capital of Sapiens on an as converted basis. Under the agreement with Sapiens, we were also granted an option to invest up to an additional $10 million on the same terms as our initial investment, subject to certain adjustments. In December 2002, we exercised the option and invested $10 million in Sapiens in exchange for a discount conversion price of $0.83 per common share. As part of the transaction, we converted all of our preferred shares into common shares at the discount price. Since 2002, we purchased an additional 916,217 shares of Sapiens in the open market for aggregate consideration of $3.4 million. As a result, we currently hold 50.2% of Sapiens outstanding share capital.
In September 2001, we purchased 37.3% of the outstanding share capital of Liraz Systems Ltd., or Liraz, an international software and services company publicly traded on the TASE. The aggregate consideration we paid for this transaction was $5.6 million. In October 2001, we published a special public tender offer pursuant to which we purchased an additional 6.0% of the outstanding share capital of Liraz for aggregate consideration of $589,000. During 2002, we purchased 514,832 shares of Liraz in the open market. Following these transactions, we held 57.9% of Lirazs outstanding share capital. In November 2002, we sold to BluePhoenix Solutions Ltd., or BluePhoenix, in a share exchange transaction, our entire shareholdings in Liraz. For more information about this share exchange transaction, see Restructuring of Our Corporate StructureSale of Liraz Shares to BluePhoenix below.
Agreements with Shamrock, FIMI and IDB
In September 1999, we entered into an agreement with Shamrock Holdings of California Inc., or Shamrock, pursuant to which we granted to Shamrock an option, until March 2000, to invest in companies in which we hold, directly or indirectly, at least 25% of the outstanding equity. In addition, we granted to Shamrock an option to exchange the securities it purchased under the above option for Formulas ordinary shares, exercisable within a 45 day period, beginning upon the elapse of 27 months from the date of purchase of the securities or from the date of the agreement, such period to vary based on the securities involved. The exchange ratio was to be based upon the original price paid for the securities subject to the exchange and the market price on the TASE of Formulas ordinary shares at the time of the exchange, subject to certain requisite adjustments. Notwithstanding the above, we had the discretion to purchase the securities to be exchanged for cash instead of exchanging them for Formulas ordinary shares.
In October 1999, we entered into agreements with the First Israel Mezzanine Investors Ltd., or FIMI, and Israel Discount Bank, or IDB, each on the same terms in all material respects as the agreement with Shamrock.
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In September 1999, an extraordinary general meeting of Formulas shareholders approved the issuance to Shandol Ltd., a subsidiary of Formula at that date, of options to purchase 1 million ordinary shares, in order to ensure the availability of ordinary shares, if the above exchange options are exercised. For information regarding the terms of the options, see Item 6.E. Share Ownership.
In August 2000, an extraordinary general meeting of Formulas shareholders approved the grant of additional options to Shandol to purchase 500,000 ordinary shares, to ensure the availibility of ordinary shares for different purposes while conducting various transactions, including the availability of ordinary shares, if the above exchange options are exercised. In December 2003, Shandol exercised these options to purchase 500,000 ordinary shares. The shares purchased upon exercise of the options were sold by Shandol in transactions on the TASE.
In November 2001 and January 2002, Shamrock exercised the exchange option with respect to its investment in certain companies of the Formula Group. In consideration for the securities held by Shamrock, Shandol transferred to Shamrock 1,000,000 of our ordinary shares and an aggregate of approximately $1.6 million. In January 2002, Shamrock sold these shares to Dan and Gad Goldstein. See Item 7. Major Shareholders and Related Party Transactions.
In April 2002, FIMI and IDB exercised the exchange option with respect to their investment in certain companies of the Formula Group in an aggregate amount of $4.7 million (including accrued interest). In connection therewith, we entered into an agreement with FIMI and IDB, pursuant to which we exchanged the amount of $4.7 million with a convertible debenture issued by Formula. The convertible debenture may be converted into Formulas ordinary shares during a 4-year period. The conversion price shall be $19 per share, subject to adjustments, but in no event less than a minimum price agreed to between the parties. The principal of the convertible debenture shall be payable in semi-annual installments beginning 30 months from the date of issuance of the debenture, unless FIMI and IDB request to postpone this date until the end of the 4-year period. The principal bears interest at an annual rate of 5% to be paid quarterly.
In connection with the exercise of the option by Shamrock, we agreed to extend until October 2006, the term of the put option with respect to the securities held by Shamrock in ESI Expert Systems Industries Ltd., or ESI, and in ESIs subsidiaries. In addition, we agreed to extend the put option to securities held by Shamrock in additional Formula Visions protfolio companies. It was agreed that Shamrocks put option, if exercised, shall be exercised for cash. We also agreed to extend until December 2005, the term of the option granted to FIMI and IDB to exchange the securities held by them in Transtech Control Ltd., or Transtech, for Formulas ordinary shares. The options granted to Shamrock, FIMI and IDB with respect to Sintecs shares were replaced in November 2002 by options relating to Matrix shares, as described under Restructuring of Our Corporate Structure - Sale of New Applicom, Sintec and Sivan to Matrix, below.
As part of the agreement between us and Formula Vision described below, we transferred to Formula Vision our rights and obligations with respect to the transferred companies under our agreements with each of Shamrock, FIMI and IDB. These companies are ESI and Transtech. If Shamrock, FIMI or IDB exercises the option to exchange these securities in the transferred companies for Formulas shares and to the extent exercised, Formula Vision assumed all the rights and undertakings in connection with the exercise of the option.
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Restructuring of Our Corporate Structure
In 1999, we commenced a restructuring process, which continued through 2003, to simplify our corporate structure and business environment by combining some smaller subsidiaries to create a smaller number of larger subsidiaries with greater operating efficiencies. As part of the restructuring process, we took the following steps:
In November 2000, we completed a public tender offer of the ordinary shares of ForSoft Ltd., or ForSoft, pursuant to which we purchased all of the ordinary shares of ForSoft held by the public for an aggregate of $38.0 million. Following the completion of the tender offer, ForSofts shares ceased to be traded on the Nasdaq National Market.
In December 2000 and July 2001, we acquired convertible notes of Thoughtbubble Productions Inc. for aggregate consideration of $4.35 million. In December 2001, we transferred to New Applicom Ltd., or New Applicom, our rights under the convertible notes of Thoughtbubble.
In January 2001, we completed a public tender offer to purchase the ordinary shares of Formula Vision held by the public. The aggregate consideration we paid for the tendered shares was $11.6 million. Following this tender offer we increased our holdings in Formula Vision to 74.5% of Formula Visions outstanding share capital.
In January 2001, Formula Vision completed a purchase of 84.6% of the outstanding share capital of Sivan Training and Systems Ltd. (formerly Makor Haformaika Ltd.), or Sivan, then a publicly-traded company, for aggregate consideration of $13.6 million. As part of this transaction, Formula Vision sold its entire share ownership in Mentortech Inc., representing approximately 99.5% of the share capital of Mentortech, to Sivan, for aggregate consideration of $12 million.
In March 2001, Formula Vision distributed to its shareholders a dividend in kind of its major assets, consisting of securities of Magic Software Enterprises Ltd., or Magic, and Sivan. As a result, we received 6,700,315 ordinary shares of Magic, representing a 22.7% interest in Magic, and 8,144,604 ordinary shares of Sivan, representing a 63.0% interest in Sivan.
During May until July 2001, we purchased from ForSoft and from one of its subsidiaries their entire interest in several providers of software solutions for niche markets, Forsoft Export (1999) Ltd., nextSource Inc., Formula Retail Solutions Ltd., F.T.S. Formula Telecom Solutions Ltd., F.I.S. Software Ltd. and N.I.P. Nikuv International Projects Ltd. We paid an aggregate of $18.3 million for these acquisitions.
In July 2001, Formula announced a distribution of a dividend in kind to its shareholders, consisting of Formula Visions shares held by Formula, and representing approximately 72% of the outstanding share capital of Formula Vision. The distribution of Formula Visions shares was completed in August 2001.
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Transactions with Formula Vision. In July 2001, Formula granted to Formula Vision an option to purchase our interests in certain privately-held companies that develop products and services aimed primarily for sale in international markets. The spin-off of Formula Visions shares and the grant of the option were aimed to simplify the corporate structure of the Formula Group and to enable Formulas shareholders to separately hold interests in publicly-traded companies through the holding of Formula shares, and in smaller, privately-held companies, through the holding of Formula Visions shares.
In November 2001, Formula Vision exercised the option granted by Formula in July 2001, to acquire the entire interest held by us in privately held companies. Under this transaction, we transferred to Formula Vision our entire interest, including related obligations, in the following companies: 51.0% interest in F.I.S. Software Ltd., 78.0% interest in Formula Retail Solutions Ltd., 50.1% interest in F.T.S. Formula Telecom Solutions Ltd., 72.0% interest in N.I.P. Nikuv International Projects Ltd., 36.0% interest in Enformia Software Ltd., 1.0% interest in Babylon Ltd., 0.85% interest in Demantra Ltd., 100.0% interest in Forsoft Export (1999) Ltd., 80.3% interest in Airport Systems Technologies Ltd., 68.0% interest in Transtech Control Ltd., 50.0% interest in ESI, 34.0% interest in GeoSim Systems Ltd., 100.0% interest in Shandol, our interest in the first and second venture capital funds, Formula Ventures and our 100.0% interest in the funds management company, Formula Ventures Ltd. The aggregate consideration paid by Formula Vision was $58.9 million, reflecting the book value of the transferred companies as of June 30, 2001, plus amounts invested by Formula prior to the closing of the transaction.
Under the agreement with Formula Vision, Formula Vision issued to us, in December 2001, a series of debentures of $58.9 million in the aggregate, linked to the Israeli CPI and bearing interest at an annual rate of 5%. Formula Vision is required to repay the debentures in five annual installments, subject to adjustments based on the income of Formula Vision during each of the five years. The payments on account of the debentures plus linkage differences will be no less than 30% and no more than 70% of the income arising from the sale of the transferred companies in any calendar year. Income for these purposes is defined as the amounts received by Formula Vision, if any, in consideration for a sale of any of the transferred companies in any given calendar year, less selling expenses, as well as amounts received by Formula Vision from distributions to be made by any of the transferred companies in any given calendar year. Payments to be made on account of the debentures, in any given calendar year, shall be no less than 20% of the annual profit as recorded in the financial statements of Formula Vision. Any amounts which remain outstanding will be payable at the end of the 5-year period. In connection with this transaction, we lent to Formula Vision on March 31, 2002 an additional $19.4 million and Formula Vision issued to us an additional series of debentures for this amount, with similar terms as the debentures issued in December 2001.
In the event that during the term of the indebtedness, Formula Vision issues to a third party convertible debentures, Formula is entitled to convert the indebtedness into the same class of convertible debentures, having the same terms of the convertible debentures issued to the third party.
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In addition, Formula is entitled, during a 3-year period, to repurchase from Formula Vision up to 10% of the shares sold in each of the transferred companies, at the same purchase price set out in the agreement between the parties.
As part of the agreement between us and Formula Vision, we also transferred to Formula Vision our rights and obligations with respect to the transferred companies under our agreements with each of Shamrock, FIMI and IDB. These companies are ESI and Transtech. If either of Shamrock, FIMI or IDB exercises the option to exchange the securities in these transferred companies for Formulas shares and to the extent exercised, Formula Vision assumed all the rights and undertakings in connection with the exercise of the option.
In January 2004, Formula exchanged approximately $35 million of the aggregate amount of the debentures for 38,000,000 shares of Formula Vision issued to Formula and constituting 59.4% of the outstanding share capital of Formula Vision. The price per share was NIS 4.11 ($0.93) which reflects the average closing price of Formula Visions shares on the TASE during the 30 days preceding Formulas resolution approving the transaction. Following the exchange of a portion of the debentures, the outstanding amount of the debentures is $43.2 million. Management believes that by holding a controlling interest in Formula Vision, Formula would benefit from capital gains generated by Formula Vision from realization of its assets. Based on this determination, it was in the best interests of Formula to exchange a portion of the debentures for a 59.4% interest in Formula Vision. For more information, see Item 7.B. Related Party Transactions Transactions between Formula and Formula Vision.
In December 2001, we completed a purchase of 85% of the outstanding share capital of Matrix IT Ltd., or Matrix, a company publicly traded on the TASE. As consideration, Formula transferred to Matrix, Formulas entire share ownership in ForSoft. As part of this transaction, Matrixs principal shareholders acquired substantially all of the assets of Matrix, such that upon the closing of the transaction, Matrixs assets consisted solely of cash and cash equivalents in the amount of $8 million. As a result, following the closing of the transaction, the activities of ForSoft became the entire operations of Matrix. In connection with this transaction, Formula agreed to guarantee a loan in the amount of $8.34 million extended by a commercial bank to the principal shareholders of Matrix. In addition, the borrowers pledged to the bank the shares they hold in Matrix. During the three-year loan period, the borrowers are prohibited from selling Matrixs shares to their affiliated parties. Formula undertook to pay to the bank at the termination of the loan period, the difference, if any, between the loan amount and the sale proceeds of the pledged Matrix shares.
Sale of Liraz to BluePhoenix. In November 2002, we sold to BluePhoenix, in a share exchange transaction, 3,912,999 ordinary shares of Liraz, representing our entire 57.9% interest in Liraz. In consideration, BluePhoenix issued to us 2,343,113 BluePhoenix ordinary shares. The number of shares issued to us by BluePhoenix was calculated based on an exchange ratio of 1:1.67, such that BluePhoenix issued to us one BluePhoenix share for every 1.67 shares of Liraz. As part of this transaction, BluePhoenix purchased from certain additional shareholders of Liraz an aggregate of 1,896,303 Liraz ordinary shares for BluePhoenix shares, based on the same exchange ratio as in the transaction between BluePhoenix and us. As a result, BluePhoenix owned approximately 86.0% of the outstanding share capital of Liraz. Following this transaction, BluePhoenix purchased from the public all the remaining outstanding shares of Liraz through two public tender offerings. In March 2003, Liraz shares ceased to be traded on the TASE.
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Sale of New Applicom, Sintec and Sivan to Matrix. In November 2002, we completed a sale to Matrix of our entire shareholdings in New Applicom, Sintec and Sivan, then publicly held companies traded on the TASE, for aggregate consideration of $29.7 million. In this transaction, we sold to Matrix 3,870,498 shares of New Applicom, representing approximately 60.8% of New Applicoms outstanding share capital, for an aggregate of $16.9 million, 15,330,309 shares of Sintec, representing Sintecs entire outstanding share capital, for an aggregate of $12.5 million, and 8,930,100 shares of Sivan, representing approximately 69.0% of Sivans outstanding share capital, for an aggregate of $346,000. The shares we sold to Matrix were comprised of (i) shares previously held by us; (ii) shares that we purchased from third parties in October 2002; and (iii) shares that we bought in tender offers we published in October 2002. The price per share paid to us by Matrix for each of New Applicoms, Sintecs and Sivans shares previously held by us and those we purchased from third parties was equal to the equity per share of each of the companies.
The shares that we purchased from third parties in October 2002 and sold to Matrix were bought in the following transactions:
(i) 552,789 shares of New Applicom that we purchased in exchange for 1,436,096 shares of Matrix. As part of this transaction, we granted to the selling shareholders a put option to sell to us Matrixs shares during the fourth quarter of 2003 for cash at an exercise price based on the cost of New Applicoms sold shares;
(ii) an aggregate of 4,200,000 shares of Sintec that we purchased in exchange for 2,180,780 shares of Matrix. As part of this transaction, we granted to the selling shareholders a put option to sell to us Matrix shares during the fourth quarter of 2003 and the first quarter of 2004 at a cash price based on the cost of Sintecs sold shares. This option was previously granted to the selling shareholders in 1999 with respect to Sintecs sold shares; and
(iii) an aggregate of 1,100,000 shares of Sintec that we purchased in exchange for 608,080 shares of Matrix. As part of this transaction, we granted to the selling shareholders a put option to sell to us Matrix shares during November 2003 for cash.
During the fourth quarter of 2003, the selling shareholders exercised the put options described above and sold to us an aggregate of 4,224,956 shares of Matrix for aggregate consideration of $10 million.
As part of the sale of the shares of New Applicom, Sintec and Sivan to Matrix, we published in October 2002, cash tender offers for the shares of New Applicom, Sintec and Sivan not owned by us. As a result, Sintecs shares ceased to be traded on the TASE. Following the closing of the tender offers, we sold to Matrix the shares that we purchased in the tender offers for the same purchase price we paid for the tendered shares; $3.7 for each New Applicom share, $0.8 for each Sintec share and $0.15 for each Sivan share. In November 2002, Matrix published tender offers for the shares of New Applicom and Sivan held by the public. In June 2003, Matrix published an additional tender offer to purchase the shares of New Applicom, in which Matrix purchased the remaining outstanding share capital of New Applicom held by the public. In January 2004, Matrix published an additional tender offer to purchase the shares of Sivan, in which Matrix purchased the remaining outstanding share capital of Sivan held by the public. Matrix currently holds the entire share capital of New Applicom, Sintec and Sivan.
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B. Business Overview
General
We are a global information technology, or IT, solutions and services company based in Israel. We are principally engaged in providing software consulting services, developing proprietary software products and providing computer-based business solutions. We currently deliver our solutions in over 50 countries worldwide to clients with complex IT services needs, including a number of Fortune 1000 companies. We operate in two principal business areas, IT services and proprietary software solutions. Following is a description of our business areas:
IT Services
We design and implement IT solutions which improve the productivity of our customers existing IT assets. In delivering our IT services, we at times use proprietary software developed by members of the Formula Group. We provide our IT services across the full system development life cycle, including definition of business requirements, system analysis, technical specifications, coding, testing, training, implementation and maintenance. We perform our projects on-site or at our own facilities.
Proprietary Software Solutions
We design, develop and market proprietary software solutions for sale in selected niche markets worldwide. We regularly seek opportunities to invest in or acquire companies with attractive proprietary software solutions under development which we believe to have market potential. The majority of our investments and acquisitions in this area have been in companies with products beyond the prototype stage. In addition, we selectively invest in companies with proven technology where we believe we can leverage our experience to enhance product positioning and increase market penetration. We provide our management and technical expertise, marketing experience and financial resources to help bring these products to market. We also assist the members of our group to form teaming agreements with strategic partners to develop a presence in international markets.
The Formula Group
Formula is the parent company of subsidiaries and affiliates, referred to collectively as the Formula Group. We currently hold a controlling interest in our subsidiaries through our equity holdings. From time to time, if and when required, we enter into voting agreements with other shareholders of the companies, in order to retain control of our subsidiaries. We appoint a majority of the boards of directors of our subsidiaries through our equity holdings and, if required, through voting agreements with shareholders who are often members of our management or of our subsidiaries management. We provide our subsidiaries with our management, technical expertise and marketing experience to help them to penetrate their respective markets.
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We direct the overall strategy of our subsidiaries. While the subsidiaries each have independent management, we monitor the growth of our subsidiaries through the active involvement in the following matters:
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strategic planning; |
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marketing policies; |
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senior management recruitment; |
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investment and budget policy; |
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financing policies; and |
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overall ongoing monitoring of each subsidiarys performance. |
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We promote the synergy and cooperation among our subsidiaries by encouraging the following: |
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transfer of technology and expertise; |
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leveling of human resources demand; |
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combining skills for specific projects; |
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formation of critical mass for large projects; and |
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cross-selling to the groups customer base. |
We, through our subsidiaries, offer a wide range of integrated IT solutions and services, and design, develop and market proprietary software solutions for sale in selected niche markets, both in Israel and worldwide.
Our Subsidiaries
Matrix
Matrix IT Ltd. is one of the largest IT companies operating in Israel, according to Duns 100 Israel Largest Enterprises 2003. Matrix provides advanced IT services to over 500 large corporations and organizations in Israel. Matrixs offerings to the local IT market in Israel include:
Software development and integration services, including:
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Overall planning, analysis, design, development, maintenance and integration of large-scale IT projects; |
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Development of customized information systems and turnkey solutions, addressing specific customers needs. Matrix performs renovation of customers legacy systems based on new technologies available in the market and new concepts arising from changing customers needs. |
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Application development and systems integration of Matrixs systems and of third parties systems in accordance with customers needs. These include: |
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Enterprise systems Matrix provides enterprise resource planning (ERP) projects and supply chain management (SCM) projects to large industrial and commerce companies in Israel. In designing, implementing and integrating these systems, Matrix uses systems and software products developed and marketed by Matrix or by third parties. These products are modular sub-systems, each designed for a different aspect of the customers operations. Matrix bases its solutions upon a large number of sub-systems to deliver fully integrated enterprise solutions. |
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In implementing ERP projects, Matrix mainly uses proprietary software products developed by companies like Oracle, Baan (Invensys) and System Software Associates, Inc. or proprietary software developed by Matrix itself (eTafnit or Tafnit). |
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In implementing SCM projects, Matrix mainly uses proprietary software products developed by companies like Manugistics Inc., or proprietary software developed by Matrix itself (Warehouse Management System). |
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CRM systems Matrix is the Israeli market leader in implementing and integrating customer relationship management (CRM) software solutions. In implementing CRM projects, Matrix mainly uses proprietary software products developed by PeopleSoft Inc. and Microsoft. |
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Customer care and billing (CC&B) systems Matrix implements CC&B systems based on systems developed by third parties. |
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Implementing database, data warehouse, data mining, business intelligence solutions and extract-transform-load, or ETL, solutions of a wide variety of software vendors Matrix is a local distributor in Israel for IBM data management software, a leading solution of relational database management systems. In connection with the sale of IBM data management products, Matrix provides extensive implementation, software development, consulting, training and support services. Matrix is a local distributor in Israel for ETL solutions of Ascential Inc. and for business intelligence solutions of Business Objects SA. |
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Dynamic Internet systems development and maintenance Matrix provides development, setup and ongoing maintenance services for dynamic Internet web sites for governmental authorities, industrial enterprises and commercial business enterprises, such as banks. |
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Migration of legacy systems - Matrix provides migration services for legacy systems, adapting them to new technologies, like Internet and e-commerce environments. Matrix performs downsizing of legacy information systems to Unix, Linux and Windows NT open environments, while adapting computerized processes to the customers business strategy. |
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Consulting and professional services Matrix performs all areas of IT services, including systems analysis and design, software development, testing, training and assimilation of software systems and software products, infrastructures, systems management and maintenance. |
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Outsourcing - Matrix is engaged in outsourcing contracts for performance of a defined portion of applications development, maintenance, operations and management of software and computer facilities for customers systems. Outsourcing a portion or all of their IT functions enables customers to focus on their core business. |
Software Products Distribution
Matrix is one of Israels largest distributors of software products. Matrix markets and supports a large number of international software products designed to enable large organizations to efficiently develop, operate and manage large-scale software systems. Among these software products are:
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Systems management software of BMC Software; |
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Development and testing environments of Compuware Corp; |
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Content management and personalization software of Vignette Corp; |
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Business Intelligence software of Business Objects SA; |
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Messaging and application integration software of IONA Technologies plc.; |
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CRM software of PeopleSoft Inc.; |
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Enterprise application integration software of webMethods Inc.; |
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Linux solutions of Red-Hat Inc. (sold on a subscription basis); |
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Extract, transform and load software of Ascential Software; |
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Knowledge management software of Verity Inc.; and |
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Data management software of IBM. |
Matrix distributes these software products in Israel and provides maintenance, support and training services for these products. In many cases Matrix also integrates these software products into its own application development projects, resulting in comprehensive software solutions.
Computer Hardware and IT Infrastructure
In delivering integrated business solutions, Matrix markets and sells the following:
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IBM Mainframe systems and storage devices; |
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Computer hardware and IT infrastructure for UNIX/NT servers (mainly Hewlett Packard and IBM), personal computers, peripheral devices, LAN, WAN and storage; |
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Active and passive communication infrastructure; |
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Integrated business solutions based on the Unix platform of Hewlett Packard and IBM; |
Matrix also provides its customers with network and infrastructure services for these platforms.
In many instances, Matrix markets the computer hardware as part of an integrated hardware and software solution, under which Matrix designs the system and provides consulting services and ongoing maintenance. In addition, Matrix offers its computer-based business solutions as complete outsourcing projects, in which Matrix installs the system and is solely responsible for its operation.
Computer Training
Matrix is the market leader of computer training in Israel, providing over 500 various courses to the general population and hi-tech professionals in Israel. Matrix has several training centers in Israel, including in Tel-Aviv and Jerusalem. Matrix also operates abroad via its subsidiaries in Turkey and Hungary. Matrix offers a wide array of courses, from basics of computers and programming to the most advanced topics for IT professionals. This unique position enables Matrix to provide its large corporate and government clients with the wide spectrum of IT training coverage they require.
Matrix is an official training center for software products distributed by Microsoft, Oracle, Sun Microsystems, Cisco, Checkpoint Systems Inc., Computer Associates, Red-Hat Inc., Adobe Systems Inc., Autodesk Inc., Interwise and Borland, as well as PeopleSoft CRM and Business Objects. Special courses have been developed for students requiring vocational training and end-users wishing to master the various applications which have become part of every day life.
e-Learning - Matrix has established a virtual campus, through an innovative Internet studying environment that enables people to study at home or at work, needing nothing but their personal computer and a regular Internet connection. The platform combines interactive, synchronous teaching (real-time teaching), with asynchronous teaching (individual independent studying based on recorded lessons).
Markets
Matrixs turnkey solutions, professional services, software products, hardware solutions and training services are provided primarily for the leading organizations and enterprises in Israel, based on various computer environments (like Mainframe, Unix, Linux and Windows operating systems). In delivering these solutions, Matrix has developed significant expertise serving clients in the following vertical markets:
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Banking and finance - Matrix is an Israeli leader of the banking computerization market. Matrix offers integrated systems and applications for the banking industry, as well as software products, hardware solutions and training services, including commercial banking, mortgages, credit card companies and insurance agencies. Matrixs systems and applications are aimed at improving the operating efficiency of banking entities. |
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Public and Defense sector Matrix is one of the largest suppliers of solutions and services to the public sector which includes governmental ministries, the Knesset (Israeli parliament), national authorities, Israeli Defense Force and defense organizations. Matrix has a long-standing reputation for the execution of successful projects for the public sector as well as software products and training services. Additionally, Matrix provides services and solutions to the national infrastructures sector, energy, transport and the health system. |
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Telecommunications - Matrix offers customer relationship management systems, billing and collection systems, dedicated systems and services for telecommunications companies as well as software products, hardware solutions and training services. |
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Commerce and industry sector - Matrix is a market leader in computerization for industries like car imports, construction and real estate, import and marketing of consumer goods, financing and leasing. Matrix executes integration projects for the implementation of ERP and CRM solutions, as well as software products, hardware solutions and training services. |
Customers
Matrixs customers include large enterprises in Israel, such as Israel Electric Company, Social Security, Israeli Defense Force, Mekorot, Amidar, governmental ministries and the Knesset (the Israeli parliament), commercial banks (such as Bank Leumi, Bank Hapoalim, The First International Bank and Discount Bank), loan and mortgage banks (such as Maritime Bank, Bank Tefahot, Jerusalem Bank, Igud Bank), telecommunications services providers (Bezeq, Bezeq International and Barak), credit card companies (Visa, Isracard and Leumicard), leasing companies, insurance companies (such as Harel Hamishmar, Fenix, Clal, Migdal), security agencies, cellular operators (Cellcom, Orange and Pelephone), satellite operators (YES), hi-tech companies (ECI Telecom, Motorola) and media and publishing (Yediot Ahronot).
Magic
Magic Software Enterprises Ltd. is a leading provider of rapid application development and deployment, business integration technology and business solutions to corporations worldwide. Users of Magics solutions and technology include tens of thousands of independent software vendors, system integrators and corporations worldwide, supported by an extensive global services organization. In addition to technology, Magic also provides its customers with consulting and professional services, and training.
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Magic Core Technology
Magic develops, markets and supports its software development and deployment technology, eDeveloper. eDeveloper enables enterprises to accelerate the process of building and deploying business software applications that can be rapidly customized to meet current and future needs. eDeveloper is based on a revolutionary programming paradigm that eliminates wasted time and repetition from the development cycle. eDeveloper is built around the concept of a smart application engine that provides unique platform and database independence for both Web and client/server deployment. eDeveloper integrates with standard computing architectures, including J2EE and .NET and can act as a bridge between these and other diverse standards like XML and Web services.
eDeveloper significantly reduces maintenance time and costs. Magics research and development department continues to develop and integrate new technologies into eDeveloper to ensure that customers receive a state-of-the-art, efficient, development environment.
In addition, Magic provides customers with an extensive framework for business integration, called the iBOLT Integration Suite. The iBOLT Integration Suite enables companies to utilize their existing business processes and legacy investments, and rapidly customize solutions to meet specific enterprise needs. iBOLT provides affordable enterprise application integration to mid-sized businesses and system integrators. As a comprehensive suite for application integration, iBOLT allows the simple integration and interoperability of diverse solutions, including legacy applications in a quick and efficient manner. iBOLT has been identified by leading industry analysts as a challenger in the market for enterprise application integration solutions.
As a comprehensive suite for application integration, iBOLT includes a robust set of capabilities for handling integration and exchanging transactions in a heterogeneous environment. It includes support for business process management, monitoring and real time reporting.
iBOLT provides integration and connectivity capabilities that include database interoperability, the ability to work with multiple databases in the same process, and the capacity to deploy on a range of systems on varied platforms. iBOLT also includes an assortment of smart connectors and adapters and ready-to-use components.
Magic development and integration products empower customers to significantly improve their business performance and return on investments by enabling the affordable and rapid integration of diverse applications, systems and databases to streamline business processes.
Magics technologies adhere to open standards and deliver high levels of portability and scalability, crucial for todays dynamic business environment, and operate as a uniform application paradigm independent of architecture (Internet, Client/Server, Mobile, LAN/WAN), operating systems (Windows, Linux, UNIX, iSeries), database (DB2, Oracle, Informix, MS SQLServer, Pervasive, etc.), or platform (.NET, J2EE).
Enabling Business
Magic technology and solutions are particularly in demand when time-to-market is critical, budgets are tight, integration with multiple platforms, databases or existing systems and business processes is required, or a high degree of application maintenance and customization is anticipated.
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Magic addresses customers critical business need to respond quickly to changing market demands. Magic creates, deploys and maintains robust business solutions with unrivaled productivity and time to results. Magics unique development methodology enables developers to create better solutions in less time and with fewer resources.
Development communities have become increasingly disjointed, creating an even greater need for a development environment that provides open interfaces to leading technologies and standards. Magics eDeveloper and iBOLT products provide developers with the ability to rapidly build integrated applications in a more productive manner, lowering IT maintenance costs and decreasing time-to-market.
A wide variety of developers use Magics products, including in-house corporate development teams and software houses. Large and medium sized system integrators use Magics products in large customized system integration projects and for developing industry-specific vertical applications.
Professional Services
Magic, together with Magics partners, offers customers application integration and development services that assist customers to maximize their development investments. These services include project management, technical support, installation services, application development, integration, consulting and training. All projects are subject to a rigorous standard for project management and quality assurance.
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Strategic Alliances
Magic forms strategic alliances to help deliver complete solutions to customers. These solutions encompass application integration, development, vertical domain expertise and hardware implementation. Magic maintains strategic alliances with leading vendors, like IBM, iWAY and Pervasive Software. In addition, Magic has alliances with system integrators, software and hardware vendors and consulting organizations. These partnerships enable Magic to better serve its customers worldwide.
Vertical Solutions
Magic also develops, markets, and supports, through its subsidiaries, vertical applications, including long-term care, criminal justice, and multi-facility car and truck rental management solutions.
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Healthcare - Advanced Answers on Demand, Inc. develops and markets application software targeted at the long-term care industry. This comprehensive solution is designed to meet the management information needs of retirement homes, nursing homes, assisted living facilities, continuing care retirement communities, and home health and rehabilitation agencies. |
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Rental Car Leasing - CarPro Systems Ltd. develops, markets and sells CarPro, a solution that includes more than 90% of the functions usually required by multi-facility car and truck rental companies worldwide. CarPro can manage such varied functions as purchasing and selling vehicles, reservations management, leasing and rental arrangements, and fleet control and management. |
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Banking - Nextstep Infotech PVT Ltd. develops and markets Cheq Mate, a banking application that provides most of the functionality needed to run a retail branch, including support for various deposit types, advances, time deposits, bank guarantees, letters of credit and portfolio management. |
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Professional Services - CoreTech is an information technology consulting firm offering flexible and creative solutions in the areas of infrastructure design and delivery, application development, technology planning and implementation services, and supplemental staffing. |
Markets and Customers
Magic markets and sells its products and services in approximately 50 countries worldwide. Industries that are significantly represented in the Magic community base include finance, retail, media, telecommunications, manufacturing, tourism, and government agencies. Tens of thousands of end-users run their business systems on Magic technology. These include adidas-Salomon, Allstate, Athlon Group, Bank of France, Fiat, Nintendo, Club Med, Compass Group PLC, Financial Times, Gannet Media, Hitachi, John Menzies Distribution, Kodak, Matsushita, McDonalds, McKesson HBOC, Menzies World Cargo, Merrill Lynch, Minolta, Nestle Nespresso, Philip Morris, Steelcase, State of Washington, and the United Nations.
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BluePhoenix
BluePhoenix Solutions Ltd. (formerly known as Crystal Systems Solutions Ltd.) develops and markets unique enterprise information technology, or IT, modernization solutions that enable companies to automate the process of modernizing and upgrading their mainframe and distributed IT infrastructure and to effectively compete in todays environment. In 1997, BluePhoenix gained international recognition and global presence by introducing the C-MILL conversion tool, which was developed based on BluePhoenixs generic modernization technology. BluePhoenix delivered C-MILL together with consulting services, training, and support as a comprehensive conversion solution to solve the millennium problem. Until 1999, BluePhoenix derived substantially all of its revenues from the provision of year 2000 conversion projects. In 1999, BluePhoenix began focusing on the development and marketing of new automated software renovation tools.
The combination of BluePhoenixs comprehensive set of products and tools with its expert services methodology provides an efficient and cost-effective process for extending the return on investment of existing enterprise IT assets. BluePhoenix solutions, which include technology for Understanding, Presentment, Migration, Remediation, and Redevelopment, allow companies to fully leverage their current systems and applications, speed up and reduce the cost of the renewal process, and effectively update their systems in order to adapt to new business demands.
BluePhoenix solution portfolio includes invasive and non-invasive software products, software tools and support services that address the most pressing challenges organizations and companies face today.
BluePhoenix solutions enable companies to:
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better understand and manage their IT systems and resources; |
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easily integrate packaged applications and build customized applications; |
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significantly decrease maintenance, human resource, and technology costs; |
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quickly migrate to modern databases, platforms, applications, and programming languages; |
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substantially transform applications and databases in order to address regulatory and business changes; and |
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directly gain access to cutting edge technology and new business channels. |
BluePhoenixs comprehensive enterprise technologies span mainframe, midrange, and client/server computing platforms. BluePhoenix has enhanced its expertise through the successful completion of projects for many large organizations over the past 17 years, establishing credibility and achieving international recognition and presence. Based on BluePhoenix technology and that of its affiliates, BluePhoenix develops and markets software products, tools, and related methodologies. BluePhoenix delivers its tools and methodologies together with training and support in order to provide enterprises with comprehensive solutions, primarily for the modernization of existing IT systems.
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Among the various alternatives to modernization, such as renewing legacy systems, buying packaged software, or rebuilding entire applications, enterprise IT modernization, or EIM, has proven to be the most efficient and viable way for companies to protect their existing investments. BluePhoenix provides a range of solutions designed to efficiently address the challenge of retaining the business knowledge built into the application code while updating the system to reflect new requirements.
The EIM market is divided into the following categories: enterprise IT understanding, enterprise IT presentment, enterprise IT migration, enterprise IT remediation, and enterprise IT redevelopment. BluePhoenix provides solutions for each market area, as follows:
Enterprise IT UnderstandingBluePhoenix understanding solutions provide automated, detailed mapping of system-wide IT activity and the interconnections between all software components. This detailed road map serves as the basis for optimizing the reuse of existing IT systems, tailoring the modernization plan for the companys unique IT environment and corporate requirements, and reducing future ongoing maintenance costs. BluePhoenix IT Discovery application portfolio management system provides fast and convenient access to application inventory, dependency, and operational information. This tool performs the complete audit necessary to enable companies to define and analyze all application assets in order to make informed decisions about ongoing modernization activities.
Enterprise IT PresentmentBluePhoenix enterprise IT presentment solutions enable companies to more effectively use the large amount of information produced by batch reports generated from legacy systems. The presentment process extracts and manages report and document content and then selectively redisplays it in graphical form over the Web. The results are easy to access, read, and distribute, fully secure, and do not require large amounts of storage space. BluePhoenix PowerText provides companies with the ability to define XML (Extensible Markup Language)-based data views from their existing reports. Each data view can be associated with an XSL (Extensible Stylesheet Language) definition used to create a graphical presentation of the data.
Enterprise IT MigrationBluePhoenix comprehensive, integrated set of enterprise IT migration solutions enable companies to standardize and consolidate their IT systems by automatically converting and redeploying applications, databases, platforms, programming languages, and data that are implemented on outdated computing platforms.
Buying a packaged application or rebuilding one can often be an expensive and risky proposition. Therefore, companies often look toward migrating their existing applications. This option is much more cost-effective and time-efficient as it leverages their existing investments in custom applications. Additionally, BluePhoenix migration solutions enable companies to operate their IT systems independently, without relying on previous technology support providers. Thus, the migration process provides significant cost savings on development, maintenance, and human resources. BluePhoenix enterprise IT migration suite includes the following solutions:
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DBMSMigratorAn automated migration tool that converts applications from nonrelational databases, such as IDMS, ADABAS, and VSAM, to relational databases, such as DB2 and Oracle. |
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PlatformMigratorAn automated migration tool that converts a range of platforms, including VSE, MVS, and Bull GCOS, and can be customized to fit the unique IT configuration and business rules of each customer site. |
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LanguageMigratorAn automated migration tool for converting 4GLs (fourth generation languages). BluePhoenix tool is currently capable of converting COBOL, ADSO and COOL:Gen. |
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DataMigratorA Windows-based tool for migrating data between various data system environments. Coupled with a step-by-step proven methodology, the tool provides a fully structured but still versatile automated data migration process |
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eXperantoA software product that enables mainframe applications to operate via the Web and other technology channels. |
Enterprise IT Remediation BluePhoenix integrated set of enterprise IT remediation solutions enable companies to extend the life of their existing IT systems when faced with ongoing regulatory changes and new business requirements. BluePhoenix remediation solutions address a variety of corporate needs and include:
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BluePhoenix RemediatorThe core technology used by all of the BluePhoenix remediation solutions. BluePhoenix Remediator uses a rule-driven approach to automate data field adjustment and identify code associated with various data fields. |
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GTIN/UPCEnablerA comprehensive solution that ensures the success of GTIN (global trade identification number) and 2005 Sunrise compliance projects. The tool accelerates the compliance process and provides enhanced control over large-scale changes. |
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EuroEnablerA highly automated, rules-based tool that enables a step-by-step, comprehensive euro conversion process. The tool fully preserves system and data integrity and helps maintain the usual level of system application development and maintenance throughout the process. |
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LiraEnablerA rule-based tool that enables a step-by-step, comprehensive Turkish Lira conversion process. LiraEnabler provides several distinct benefits that simplify the transition effort and assure the success of the redenomination project. |
Enterprise IT RedevelopmentBluePhoenix enterprise IT redevelopment suite enables companies to efficiently mine, reuse, and rewrite their existing applications, thus incrementally redeveloping their legacy systems, extending them into new technologies, and saving on development and programmer costs. BluePhoenix enterprise IT redevelopment solutions include:
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AppBuilder - BluePhoenix primary redevelopment environment used for managing, maintaining, and reusing the complicated applications needed by large businesses. Enterprises using AppBuilder can build, deploy, and maintain large-scale custom-built business applications for years without being dependent on any particular technology. |
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Visual MainWin for the Unix and Linux platforms (formerly MainWin)An advanced application-porting platform that enables IT organizations to develop applications in Visual C++ and deploy them natively on Unix and Linux without the investment that is usually associated with such an undertaking. |
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BluePhoenix subsidiary, Mainsoft, has entered into a licensing agreement with Microsoft, pursuant to which Microsoft granted Mainsoft access to specified Microsoft source code, including new versions, service packs, and upgrade releases for Windows. Microsoft also granted Mainsoft distribution rights to the Windows object code licensed as a component in Mainsofts products. |
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Visual MainWin for the J2EE platformThis new product, launched in February 2004 is a cross-platform development solution that bridges the .NET/J2EE divide, enabling Visual Basic .NET and C# developers to develop J2EE Web Applications and Web services using the Visual Studio .NET development environment. |
In 2003, BluePhoenix completed the acquisition of the entire outstanding share capital of Liraz Systems Ltd. Lirazs business includes the operations of BluePhoenix Solutions B.V. and its international subsidiaries. Through its subsidiaries, Liraz develops and markets the AppBuilder. Lirazs large install base includes leading international banks and financial institutions, whose information systems operate in various legacy environments.
Following the Liraz acquisition, utilizing the combined broad technology offering and worldwide marketing capabilities of the two companies, BluePhoenix became a leading global player in the enterprise IT modernization market. In March 2003, Gartner, Inc., a leading technology market analyst, placed BluePhoenix in the leader quadrant of the legacy modernization market. BluePhoenix provides its products and services worldwide through 12 offices in 10 countries, 5 full service delivery centers, and representatives.
Customers
BluePhoenix provides its modernization solutions directly or through strategic partners, such as IBM, Capgemini, EDS, Cook Systems, Temenos, Millennium and TACT. Additionally, from time to time, other IT services companies license the technologies for use in modernization projects in various markets. BluePhoenix customers include, among others:
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Financial Services |
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Insurance |
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Other Industries |
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CharlesSchwab |
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Alecta (Sweden) |
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Bell Canada |
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CitiBank (USA) |
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AXA (UK) |
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Department
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Credit Suisse |
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LACERA (USA) |
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Fidelity |
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LBS (Germany) |
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Safeway (USA) |
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Friends Provident |
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Mutual of America |
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Shaw Industries (USA) |
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FSB (Sweden) |
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National
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Underwriters |
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Merrill Lynch |
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Phoenix (Israel) |
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Safeway (USA) |
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RSI (Spain) |
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Siebel |
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SDC (Denmark) |
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Cognos |
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I2 |
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Dassault |
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Mentor Graphics |
Sapiens
Sapiens International Corporation N.V.is a global provider of IT solutions that modernize business processes to enable insurance and other companies to quickly adapt to changes in customers needs and technology and business changes. Sapiens modular solutions align IT with business demands for speed, flexibility and efficiency. Sapiens solutions consist primarily of Sapiens technology, methodology and consulting services, all of which address the complex issues related to the life-cycle of enterprise business applications.
Solutions and Services
Since 2000, Sapiens has been focusing on the insurance industry, delivering customizable solutions for life and pension insurance, general insurance and the provision of loans and mortgages. Sapiens aim is to help the insurance industry become more agile in the face of new dynamics and quickly adapt to changes, while significantly reducing the IT costs. By partnering with leading insurance companies, the company has developed the Sapiens INSIGHT insurance solutions suite that is already helping enterprises adapt to the marketplaces time and cost pressures. Sapiens INSIGHT, designed for the general and life insurance markets, 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:
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Policy INSIGHT - Policy INSIGHT is a fully functional, general insurance 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. |
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Life&Pensions INSIGHT - Sapiens Life&Pensions INSIGHT is a powerful and comprehensive life and pensions solution that serves companies administering life insurance, pension funds, health insurance and saving plans. The system has life, pension and health insurance modules. It includes product management, individual and collective policy administration and funds revaluation with full unit link management. Life&Pensions INSIGHT offers exceptional advantages in addressing emerging trends in the life and pensions insurance sector: |
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The system provides total integration between the insured, their insurance companies, involved agents or brokers and life insurance and pension funds personnel. |
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The system is dynamic, highly customizable and can easily accommodate any change to organizational administrative processes. |
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The system is Web-enabled and thus is able to benefit from the advantages of the Internet and company intranet. |
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The system is multi-company, multi-currency and multi-language. |
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MediRisk INSIGHT - MediRisk INSIGHT is an underwriting solution for life, health and disability insurance. It reduces a customers costs by automating a larger portion of the process of evaluating the risks of new business and by streamlining the procedures for handling new business. By using this solution, an insurance company can make underwriting assessments on new cases sooner and achieve greater consistency in its decision-making. Sapiens markets MediRisk INSIGHT on the basis of licensing and distribution agreements with MediRisk Solutions Ltd., which developed the solution and holds the intellectual property rights to it. |
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Reinsurance INSIGHT - Reinsurance INSIGHT is a sophisticated solution for the insurance market, designed to support carriers and reinsurers in the management of all types of reinsurance for the general (property and casualty) and life insurance markets, according to the rapidly changing requirements of the international reinsurance market. This state-of-the-art, web-enabled solution streamlines and reduces the cost of handling all reinsurance functions through automation. The solution is based on ACORD (Association for Cooperative Operations Research and Development) standards and B2B XML technology, and is designed for a multi- language, multi- currency, multi- company environment. Reinsurance INSIGHT comprises 5 modules: reinsurance configuration and calculations, technical accounting, financial accounting and credit control, underwriting and statistical and actuarial analysis. |
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Claims INSIGHT - Claims INSIGHT is a solution that effectively manages and streamlines the information flow of claim handling across an insurance providers entire organization. This solution uses highly accessible business rules and messaging standards and allows the use of a companys existing information 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. |
37
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Closed Books INSIGHT - Closed Books INSIGHT is a solution for life insurance companies seeking ways to reduce the cost of maintaining long-term closed books of business, that is, lines of business that are no longer current. We provide customizable solutions that enable companies to efficiently administer policies and claims relating to closed books. 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 Web browser user interface |
Sapiens has executed independent projects for the insurance market as well, providing enhanced information access and visibility to empower the sales, agent and broker community, thus accelerating transaction processing for improved customer service and business efficiency.
Sapiens solutions are built on Sapiens eMerge.Sapiens eMerge is a data-driven, rules-based, enterprise-scale transaction engine that facilitates business process integrity, application scalability and high performance. Its foundation is a rules-based development tool and repository that impose easily-coded business rules, lending unconventional speed, visibility, agility and cost-effectiveness to the business software life cycle. The use of Sapiens eMerge reduces the complexity of programming so that new applications and modifications of existing ones can be produced in a much shorter time than through conventional programming.
Outsourcing and IT Services
Sapiens is currently servicing multi-year outsourcing contracts with blue-chip customers involving mission-critical systems. Sapiens performs outsourcing projects either on or off customers premises. Sapiens asset discovery solution contributes to the maintenance and management of enterprises IT environment.In addition,Sapiens provides customers with specialized IT services including project management and technical assistance. Sapiens uses its rapid application development (RAD) methodology to facilitate the development of projects and offers ongoing solution support at customer premises, Sapiens premises or any combination thereof. Sapiens offers both short-term and long-term support contracts.
Customers
Sapiens global, blue-chip customer base is built on years of trust and on-time delivery. Customers include Allianz Group, AXA, Liverpool Victoria, Menora, Norwich Union, OneBeacon, Principal Financial, Prudential, Abbey National, ING and Occidental Fire & Casualty, among others.
38
nextSource Inc.
nextSource Inc. designs, develops and implements web-based, high quality, innovative human capital management solutions. These offerings allow customers to save money while managing the business processes related to sourcing, procuring, and accounting of their workforce.
nextSources human capital management solutions include:
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A web-based vendor management solution for managing customers' internal and external contingent workforce. nextSources Talent Acquisition Management Solution, also known as TAMS makes it easier for customers to find, engage and deploy talented personnel, faster and more effectively, while ensuring competitive labor costs. TAMS streamlines the hiring process, allowing for enhanced communication with candidates, more efficient distribution of open positions to vendors and a decrease in time spent on administrative tasks. |
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Agency services through nextSource's value-added reseller program. This solution provides staffing vendors with opportunities to increase revenue, bringing added value to existing business relationships. nextSource has also created The Multiple Listing Staffing Association, an industry-wide network of independent staffing suppliers working collectively to staff openings for customers with the best candidates in the shortest time intervals. |
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The People Ticker provides businesses with real-time views of market rates for both contingent and full time workers, based upon skill-set, years of experience and geographic location. This one-of-a-kind tool enables corporate customers to truly benchmark their contingent labor costs against the most current information available. |
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The nextSource People Auction utilizes an extensive resume database and comprehensive searching capabilities to provide an online marketplace that links qualified talent with progressive talent seekers. nextSource also offers a unique reverse auction that allows potential candidates to bid on a posted opening thereby driving down the cost to the customer. |
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Human resources, or HR, services, include services of a professional employer organization for payroll processing, benefits administration, recruiting, and other HR related services. nextSource also offers payrolling services to minimize the co-employment risks and eliminate the administrative burdens associated with the employment of independent contractors, retirees, summer interns and other temporary workers. |
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A wide range of procurement services and vendor management services to complement the implementation of nextSource's TAMS solutions and People Ticker solutions. Through its value-added procurement service, nextSource offers a fully outsourced procurement/vendor management solution to customers looking for a complete solution. |
39
Formula Vision
Formula Vision Technologies (F.V.T.) Ltd. is a managing and holding company, guiding a group of privately held IT companies with innovative, proprietary technologies and solutions targeting international markets. Formula Vision holds a controlling interest in some of these privately held companies and a minority interest in the other members of the group.
Formula Visions affiliated companies provide IT solutions for broadly diverse sectors, including telecom and broadcast, aviation, travel, insurance, retail, customer relations management, 3D-modeling, software testing, system reliability applications which meet the demand for Web-based systems, legacy mainframe and mobile networks. Formula Vision provides its affiliated companies with guidance and support at all levels management, strategy, technology, marketing, business intelligence and finance.
Formula Visions companies have built their success on a solid customer base and strategic partnerships with Fortune 500 multinationals, systems integrators, media groups, and service and solution providers worldwide, such as IBM, Oracle, Sun, Cap Gemini Ernst & Young, Peoplesoft, Lockheed Martin and Microsoft.
Formula Visions principal affiliated companies include:
FIS Software
FIS Software Ltd.focuses on developing and delivering global software solutions that enable life and pensions companies to run their businesses more efficiently. FIS solutions are based on ALIS, the companys flagship product. ALIS is a single packaged, comprehensive and modular software platform that incorporates all activities along the policy lifecycle and enables insurers to manage life insurance, pensions and investment products, for individual and group clients in line with the territorial legislation and regulations. Founded in 1984, FIS established its international business in 1999 and employs 320 insurance domain experts and IT software professionals across offices in the UK, France, Spain, Holland, Greece, Israel, South Africa and Australia. Formula Insurance Solutions clients include AXA, Unum Provident, Fidelity Investments, Merrill Lynch, Sun Life, CNP Insurance, Pearl, Swiss Life, Scottish Equitable, Bright Grey, AMP, NPI, Ethiniki, Clal and Eliahu. FIS also has a number of strategic partnerships with leading systems integrators and consulting firms such as IBM and TCS.
F.T.S. - Formula Telecom Solutions
F.T.S. - Formula Telecom Solutions Ltd. is a global provider of convergent telecom management solutions for mobile, fixed-line, and advanced services operators. F.T.S. provides a range of versatile solutions to the market, which include convergent real-time prepaid and postpaid billing and CRM, order management, infrastructure management, electronic bill presentment and payment software, as well as state-of-the-art call center implementations. F.T.S. solutions range from stand-alone modules, through adjunct next-generation platforms, to complete integrated end-to-end systems, offered on a fixed-price basis. F.T.S. customers include, among others, MobilTel, Freenet.de and PT-Mobile 8.
40
Babylon
Babylon Ltd. is a leading provider of information access and translation software. Babylons software provides users with immediate answers to vital questions from multiple sources. Babylon offers 25 dictionaries in 13 languages, professional glossaries from commercial companies and premium content providers (like CNET News, Britannica, Amazon and Accuweather) and thousands of user contributed glossaries in specific areas of expertise. The company currently has over 24 million registered users, growing at a rate of 15,000 new users a day.
Babylons corporate solutions have also successfully penetrated the corporate market, empowering corporations with mission critical information. These solutions enable unified and simplified access to internal information sources (such as product catalogs, ERP, CRM and corporate MIS systems) as well as external sources (like the Internet), providing a one-click productivity tool that improves the efficiency and effectiveness of decision-making. Babylons customers include Ernst & Young, UPS, Coca-Cola, Gillette/Braun, Philips, Ford, AEG, Aventis, Agis, BASF, Deutsche Bank, Amdocs, IBM, Ericsson, Fujitsu Siemens, Nike, Pfizer, and 3M.
Clockwork Solutions
Clockwork Solutions Ltd. modeling tools provide life cycle system-engineering solutions for capital-intensive major industrial companies, military organizations and government agencies throughout the world. Clockwork focuses on the defense, process & petrochemical and power industries, offering products and services to customers such as the US Army, US Air Force, Raytheon, Lockheed Martin, General Dynamics, GE Aircraft Engines, GE Energy, DOW Chemical, Conoco Philips, Chevron Texaco and the Israeli Defense Forces. Clockworks solutions improve the economic performance of systems by reducing costs, increasing production, and operating with greater effectiveness.
Clockworks propriety technology and modeling platform, SPAR, tracks the behaviors of systems over time, exposing effects of equipment aging, maintenance policies, and operating procedures. These unique capabilities enable the users of SPAR technology to relate cause and effect, to quantify risks, and to guide capital investment and major operation and maintenance improvements.
Sintec Media
Sintec Media Ltd. is a developer and manufacturer of broadcast management systems. Sintec Medias product, OnAir, is an all-in-one software system designed to meet the rapidly changing management needs of broadcasters. OnAir is intended for small stations as well as entire networks and station groups, operating multi-channels over multiple regions and time zones. OnAir features a set of powerful sales and content-inventory tools that increase efficiency and raise profits. Sintec Medias customers include the BBC, Canadian Broadcasting Company (CBC) and RTL.
41
Transtech
Transtech Control Ltd. is a market-leading provider of comprehensive airfield control and management systems. Transtechs systems comprise a wide range of solutions, applications, and products for critical airfield operational elements. Transtechs airfield lighting control system is currently operating at more than 100 international, domestic and military airports worldwide. Transtechs innovative ground surveillance system addresses the industrys urgent needs by enhancing airport safety and accommodating increased capacity. The system overcomes the limitations and problems inherent in traditional surveillance systems using technologies based on unique radar and optical sensors. Transtechs systems have been installed in various airports, including JFK Airport, New Denver Airport, Beijing Airport, New Bangkok Airport and San Paolo Airport.
Sales and Marketing
Our subsidiaries conduct sales and marketing efforts primarily through division or product managers. In certain cases, the companies devote sales managers who, aided by their staffs, are responsible for ongoing customer relationships, as well as sales to new customers. In addition, the IT services companies participate in competitive bidding processes, primarily for turnkey and government projects, as well as large IT services contracts. Our subsidiaries attend trade shows and exhibitions in the high technology markets, while further supplementing their sales efforts with space advertising and products and services listing in appropriate directories. In addition, our subsidiaries organize user group meetings for their customers, where new products and services are highlighted. We typically enter into strategic alliances and intend to pursue acquisitions in order to penetrate various international markets and promote sales of our proprietary software solutions in international markets.
The following table summarizes our revenues by operating segments for the periods indicated:
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|
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Software Services |
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Proprietary Software Products |
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Total |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
Year ended December 31, |
|
$ thousands |
|
|||||||||
|
|
|
|
|
|||||||||
|
|
2003 |
|
|
196,782 |
|
|
170,048 |
|
|
|
366,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
171,342 |
|
|
111,968 |
|
|
|
283,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
208,946 |
|
|
178,736 |
|
|
|
387,682 |
|
42
The following table summarizes the revenues from our IT products and services by geographic regions for the periods indicated:
|
|
Year ended December 31, |
|
||||||||||
|
|
|
|
||||||||||
|
|
2003 |
|
2002 |
|
2001 |
|
||||||
|
|
|
|
|
|
|
|
||||||
|
|
$ thousands |
|
||||||||||
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Israel |
|
|
171,108 |
|
|
156,212 |
|
|
219,055 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
International: |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
United States |
|
|
93,695 |
|
|
65,654 |
|
|
93,823 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other (includes various countries, mainly in |
|
|
102,027 |
|
|
61,444 |
|
|
74,804 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
195,722 |
|
|
127,098 |
|
|
168,627 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
|
366,830 |
|
|
283,310 |
|
|
387,682 |
|
||
Competition
The markets for the IT products and services we offer are rapidly evolving and highly competitive. Our ability to compete successfully in IT services markets depends on a number of factors, like breadth of service offerings, sales and marketing efforts, service, pricing, and quality and reliability of services. The principal competitive factors affecting the market for the proprietary software solutions include product performance and reliability, product functionality, availability of experienced personnel, price, ability to respond in a timely manner to changing customer needs, ease of use, training and quality of support.
We face competition, both in Israel and internationally, from a variety of companies, including companies with significantly greater resources than us who are likely to enjoy substantial competitive advantages, including:
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longer operating histories; |
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|
greater financial, technical, marketing and other resources; |
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|
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greater name recognition; |
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|
|
well-established relationships with our current and potential clients; and |
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|
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a broader range of products and services. |
As a result, they may be able to respond more quickly to new or emerging technologies or changes in customer requirements. They may also benefit from greater purchasing economies, offer more aggressive product and service pricing or devote greater resources to the promotion of their products and services. In addition, in the future, we may face further competition from new market entrants and possible alliances between existing competitors. We also face additional competition as we continue to penetrate international markets. As a result, we cannot assure you that the products and solutions we offer will compete successfully with those of our competitors. Furthermore, several software development centers worldwide, such as in India, offer software development services at much lower prices than we do. Due to the intense competition in the markets in which we operate, software products prices may fluctuate significantly. As a result, we may have to reduce the prices of our products.
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Matrixs principal competitors in the domestic Israeli market are Israeli IT services companies and systems integrators, the largest of which are Ness Technologies Inc. and Zeevi Computers Group. Our international competitors in the Israeli marketplace include Compaq, EDS, IBM and Microsoft. These international competitors often use local subcontractors to provide personnel for contracts performed in Israel.
Magics principal competitors in the market for the eDeveloper technology are Visual Basic (Microsoft), Progress, Delphi and Jbuilder (Borland), Oracle, Compuware, Lansa and packaged applications such as SAP and PeopleSoft. The principal competitors in the market for our iBOLT Integration Suite are WebMethods, Tibco, Seeburger, IBMs WebSphere, Microsofts BizTalk, Axway and Mercator.
BluePhoenixs principal competitors consist of system integrators and tool vendors, including leading software developers, who enable customers to replace or modernize their legacy systems. Major system integrators in the market include IBM, Capgemini, and EDS. In addition, BluePhoenix faces competition from niche companies operating in each of the five principal areas of the enterprise IT modernization market (enterprise IT understanding, migration, remediation, redevelopment, and presentment). For example, Micro Focus International markets its solutions to the COBOL market, Software Technologies addresses the Natural/ADABAS arena, and other competitors focus on collecting sufficient information about application portfolios to enable improved working processes. Other solution developers provide legacy and distributed repository solutions that are important for a variety of modernization processes.
Sapiens competitors in the market for solutions offered to the insurance industry fall into several categories. Examples of competitors whose activities we believe are limited to their home country are ePolicy Solutions, Taliant, OneShield, Ascendant One, Insurity, The Innovation Group, Duck Creek and AQS in the United States; Marlborough Sterling Group, Unisys, Sherwood and RebusIs in the United Kingdom; Falmeyer (FJA) and COR AG Insurance Technologies in Germany. Examples of large integrators that have decided to enter the insurance field are Electronic Data Systems and CSC (companies that also have customer or alliance relationships with us in other fields). An example of a competitor that is a local integrator is Ness Technologies in Israel.
Sapiens competitors in the business rule engines and management marketplace include Fair-Isaac (Blaze), Computer Associates, Pegasystems, Haley, Corticon and Versata.
Transtechs competitors in the market of airfield lighting control systems are Siemens and Honeywell, and in the ground surveillance systems market, Transtechs competitors are Sensis and Raytheon.
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F.T.S. principal competitors are Amdocs Ltd., Convergys Corp., CSG Systems International Inc., Portal Software Inc., ADC Telecommunications Inc. and LHS Group Inc. (formerly known as the SchlumbergerSema Group).
FIS principal competitors are Marlborough Stirling, TIA (The Insurance Application), Fineos Corporation, and RebusIS.
Software Development
The software industry is characterized by rapid technological developments. In order to maintain technological leadership, we engage in ongoing software development activity through our subsidiaries, aimed at both creating new proprietary software and services, as well as enhancing and customizing existing products and services. This effort includes introducing new supported programming languages and database management systems; improving functionality and flexibility and enhancing ease of use. We work closely with current and potential end-users, our strategic partners and leaders in certain industry segments to identify market needs and define appropriate product enhancements and specifications.
Intellectual Property Rights
We rely on a combination of trade secret, copyright and trademark laws and non-disclosure agreements, to protect our proprietary know-how. Some members of our group have patents and patent applications pending. Our proprietary technology incorporates processes, methods, algorithms and software that we believe are not easily copied. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of our products or to obtain and use information that we regard as proprietary. We believe that, because of the rapid pace of technological change in the industry, patent and copyright protection are less significant to our competitive position than factors such as the knowledge, ability and experience of our personnel, new product development and ongoing product maintenance and support.
C. Organizational Structure
Dan and Gad Goldstein are co-founders, directors and shareholders of Formula. They are also directors and shareholders of several other companies which, together with us and the other subsidiaries, are known as the Formula Group. Formula is the parent company of the Formula Group.
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The following table presents certain information regarding the control and ownership of our significant subsidiaries, as of June 24, 2004.
Subsidiary |
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Country of Incorporation |
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Percentage Of |
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Matrix IT Ltd. |
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Israel |
|
|
60.9% |
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|
|
|
|
|
|
|
|
Magic Software Enterprises Ltd. |
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Israel |
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50.6% |
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|
|
|
|
|
|
|
|
BluePhoenix Solutions Ltd. |
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|
Israel |
|
|
58.6% |
|
|
|
|
|
|
|
|
|
Sapiens International Corporation N.V. |
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|
Netherlands Antilles Islands |
|
|
50.2% |
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|
|
|
|
|
|
|
|
nextSource Inc. |
|
|
United States |
|
|
100.0% |
|
|
|
|
|
|
|
|
|
Formula Vision Technologies (F.V.T.) |
|
|
Israel |
|
|
59.4% |
|
The ordinary shares of BluePhoenix, Magic and Sapiens are traded on the Nasdaq National Market and on the TASE, and the ordinary shares of Matrix and Formula Vision are traded on the TASE.
D. Property, Plants and Equipment
Our corporate headquarters, as well as the research and development and sales and marketing headquarters of a majority of our subsidiaries, are located in Herzlia, Israel. We lease approximately 70,000 square feet of office space in Herzlia, pursuant to a lease which will expire on October 31, 2005 with an option to extend for an additional 36 months. In addition, several of our subsidiaries lease approximately65,000 square feet of office space in another building in Herzlia pursuant to leases ending in December 2006, with an option to extend for an additional 24 or 48 months. We also lease approximately 130,000 square feet of office space in several other locations in Israel.
We own a 34,000 square feet facility in Or-Yehuda, Israel used for office space of Magic.
In addition, Sapiens leases approximately 45,000 square feet of office space in Rechovot, Israel and several of our subsidiaries lease approximately 184,000 square feet of office space and sales and support premises in the United States, Europe and Asia.
The aggregate amount we paid pursuant to our lease agreements in 2003 was approximately $10.3 million.
We believe that our properties are adequate for our present uses. If in the future we will require additional space to accommodate our growth, we believe that we will be able to obtain this additional space without difficulty and at commercially reasonable prices.
46
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Formula is the parent company of subsidiaries and affiliates, referred to collectively as the Formula Group. We are principally engaged in providing software consulting services, developing proprietary software products and providing computer-based business solutions. We currently hold a controlling interest in five publicly traded subsidiaries: BluePhoenix, Magic, Matrix, Sapiens and Formula Vision. In addition, we wholly own nextSource. We consolidate the results of operations of our subsidiaries with ours. Our operating results are directly influenced by the consolidation and cessation of consolidation of our subsidiaries. This could cause significant fluctuations of our consolidated operating results. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and you should not rely on these comparisons as indications of our future performance.
On December 31, 2001, we sold to Formula Vision our entire shareholdings in several private companies. As a result, we have not consolidated these companies in our balance sheet as of December 31, 2001. Beginning with the first quarter of 2002, we ceased consolidating their result of operations. This has influenced our results of operations in 2002, and among others, our revenues, cost of revenues, software development costs and selling, general and administrative expenses have decreased.
In the first quarter of 2003, our interest in Sapiens exceeded 50% of Sapiens outstanding share capital. As a result, we began consolidating Sapiens results of operations. The consolidation of Sapiens contributed, among others, to the increase in our revenues in 2003 and in our selling, general and administrative expenses.
In January 2004, we acquired a controlling interest in Formula Vision and accordingly began consolidating Formula Visions results of operations, beginning with the first quarter of 2004. Formula Visions revenues in the first quarter of 2004 were $13.5 million and its net loss was $2.8 million.
One of our major assets is comprised of debentures issued to us by Formula Vision, in December 2001 and March 2002, in connection with the sale of the private companies held by us to Formula Vision. In January 2004, we exchanged a portion of the debentures for 59.4% of Formula Visions outstanding share capital. Following the exchange of a portion of the debentures, the aggregate amount of the debentures is $43.2 million. We evaluate, periodically, the quality of the indebtedness, the financial strength of Formula Vision and its ability to meet the repayment schedule of the loan. However, our financial condition could be seriously harmed in the event that Formula Vision fails to repay the loan under the terms of the debentures.
We recognize revenues in two categories: the delivery of software services and the delivery of proprietary software solutions. All of our subsidiaries, including IT services companies and proprietary software solutions companies, recognize revenues from the delivery of software services, and most of them recognize revenues in both revenue categories. We have separated our subsidiaries into these categories in accordance with the category in which each subsidiary has earned most of its revenues. For information with respect to the accounting principles we use in revenue recognition, see Note 1M to our consolidated financial statements.
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We recognize, in non-operating income, gains and losses arising from the sale of previously un-issued capital stock by a subsidiary or an affiliate to outside investors, if the sale changes our ownership percentage in this entity. We measure the gain or loss by the difference between our share in the proceeds from this stock offering and the carrying amount, on an equity basis, of the proportionate reduction in our investment. Transactions of this nature do not occur on a regular basis and it is difficult for us to predict their timing.
Beginning with the fiscal year ended December 31, 2002, we prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, referred to as U.S. GAAP. Under U.S.GAAP, we cannot use adjusted NIS reflecting changes in the Israeli consumer price index, as we have used in the past. Instead, we use nominal values of the NIS translated into dollars as described below. As a result, we have restated certain figures in our financial statements relating to prior periods.
Our functional and reporting currency
Formula and some of our subsidiaries operate primarily in the economic environment of the New Israeli Shekel (NIS). The functional currency of our other subsidiaries is the dollar. We use the dollar as our reporting currency.
We translate our financial statements into dollars, as well as the financial statements of our subsidiaries whose functional currency is the NIS, under the principles described in Financial Accounting Standards Board Statement No. 52. Assets and liabilities have been translated at period-end exchange rates. Results of operations have been translated at the exchange rate at the dates on which those transactions occurred or at an average rate. We present material differences resulting from translation under shareholders equity in the item accumulating other comprehensive income (loss).If gains and losses arising from these translations are immaterial, we record them as financial expenses included in the statements of income. In the consolidation, we present the financial statements of subsidiaries whose functional currency is the dollar, at the original amounts.
Critical Accounting Policies
In preparation of our financial statements, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
48
Revenue Recognition
The revenue recognition policy of each of our significant subsidiaries is material because our revenue is a key component of our results of operations. Our revenue recognition determines the timing of certain expenses, such as commissions and royalties. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Should changes in conditions cause our subsidiaries managements to determine that these guidelines are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Revenues derived from direct software license agreements are recognized in accordance with Statement of Position (SOP) 97-2 Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9), upon delivery of the software when collection is probable, the license fee is otherwise fixed or determinable and persuasive evidence of an arrangement exists. When a project involves significant modification of software, revenue is generally recognized according to the percentage of completion method. Under this method, estimated revenue is generally accrued based on costs incurred to date as a percentage of total updated estimated costs. If our subsidiaries do not accurately estimate the resources required or the scope of work to be performed, or do not manage their projects properly within the planned periods of time or satisfy their obligations under the contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our results of operations. Our subsidiaries recognize contract losses, if any, in the period in which they first become evident.
We recognize revenues from projects billed on a time and material basis, based on SOP 81-1 Accounting for Performance of Construction - Type and Certain Production - Type Contracts, 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. Provision for estimated losses on uncompleted contracts is 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, 2003, no such estimated losses were identified.
We recognize revenues from consulting fees with respect to fixed fee contracts, based upon the percentage of completion method. We recognize contract losses, if any, in the period in which they first become evident.
Revenues from contractual maintenance contract and training are recognized ratably over the contract period.
Revenues from sales of hardware are recognized when the merchandise is delivered to the customer, provided no significant vendor obligations remain.
Our management believes that our revenue recognition policies are in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101).
49
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations.
Debentures
One of our assets is comprised of debentures issued to us by Formula Vision in connection with the sale of private companies held by us to Formula Vision. We evaluate, periodically, the quality of the indebtedness, the financial strength of Formula Vision and its ability to meet the repayment schedule of the loan.As of the date of this annual report, Formula Vision fulfilled all of its payment obligations under the debentures. In the event that Formula Vision fails to repay the loan under the terms of the debentures, our business, financial condition and results of operations would be materially adversely affected.
A. Operating Results
Years Ended December 31, 2002 and 2003
Revenues. Revenues increased 29% from $283.3 million in 2002 to $366.8 million in 2003. The increase in revenues was mainly attributable to the consolidation of Sapiens results of operations beginning with the first quarter of 2003, the significant increase in nextSources revenues and an increase in demand for certain of our products and services. Revenues from the two categories of our operation were as follows: Revenues from the delivery of software services increased from $171.3 million in 2002 to $196.8 million in 2003. Revenues from the sale of proprietary software solutions increased from $112.0 million in 2002to $170.0 million in 2003.
Cost of Revenues. Cost of revenues consists primarily of wages and related expenses and hardware and other materials costs. Cost of revenues increased 23% from $186.9 million in 2002 to $230.5 million in 2003. As a percentage of revenues, cost of revenues decreased from 66% in 2002 to 63% in 2003. The increase in cost of revenues was primarily due to the consolidation of Sapiens results of operations beginning with the first quarter of 2003 and the increase in cost of revenues of nextSource due to the increase in its volume of activities.
Software Development Costs, net. Software development costs consist primarily of wages and related expenses and, to a lesser degree, consulting fees we pay to independent contractors engaged in research and development. Software development costs, net, consist of software development costs, gross, less capitalized software costs. Software developments costs, gross, in 2003 and 2002 were $27.6 million and $20.4 million. In 2003, we capitalized software costs of $10.2 million compared to $4.4 million in 2002. Software development costs, net, increased 9% from $16.0 million in 2002 to $17.4 million in 2003. As a percentage of revenues, software development costs, net decreased from 5.6% in 2002 to 4.7% in 2003. The increase in software development costs was attributed primarily to the consolidation of Sapiens results of operations which was offset by the decrease in software development costs of BluePhoenix and Magic, due to efficiency measures taken by them. Amortization of capitalized software costs were $8.1 million in 2003 and $5.1 million in 2002, which amounts were included in cost of revenues.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of severance and related expenses, travel expenses, selling expenses, rent, utilities, depreciation, amortization and professional fees. Selling, general and administrative expenses increased from $85.3 million in 2002 to $107.1 million in 2003. As a percentage of revenues, selling, general and administrative expenses remained relatively the same in 2002 and 2003. The increase in selling, general and administrative expenses was primarily attributable to the consolidation of Sapiens results of operations.
Restructuring Costs. We had no restructuring costs in 2003 compared to restructuring costs of $1.8 million in 2002. Restructuring costs in 2002 consist primarily of wages and relocation expenses, as well as expenses incurred by Magic related to closing of branches.
Operating Income (Loss). In 2003, we had operating income of $11.9 million compared to operating loss of $6.7 million in 2002. The operating income in 2003 is attributable to the improvement in the operating results of our subsidiaries Magic, BluePhoenix and Matrix which were offset by the operating loss of Sapiens.The operating loss in 2002 is attributable to the operating loss of certain of our subsidiaries which were harmed by the global and local slow-down.
Financial Income (Expenses), net. Financial expenses, net in 2003 were $3.7 million compared to financial income, net of $3.6 million in 2002. Financial income (expenses), net, is influenced by various factors, including our cash balance, changes in the exchange rate of the NIS against the dollar, as well as changes in the Israeli CPI.
Other Expenses, net. Other expenses, net in 2003 and 2002 were $90,000 and $2.1 million. Other expenses, net in 2002 was caused primarily by a partial write off of an investment by BluePhoenix.
Gain on Realization of Shareholdings. Gain on realization of shareholdings in 2003 was $2.8 million compared to $4.7 million in 2002. Gain on realization of shareholdings in 2003 was primarily attributable to the sale of a portion of Magic shares in the market which resulted in gain to Formula of $722,000, gain from a decrease in our shareholdings in Matrix due to the issuance of Matrix shares to former shareholders of New Applicom and the issuance of Matrix shares to the shareholders of an acquired company resulting in gain of $1.1 million, the sale of Matrix warrants in the market which resulted in gain of $300,000 and the sale of Level 8 shares by BluePhoenix which resulted in gain of $376,000 to BluePhoenix. Gain on realization of shareholdings in 2002 was attributable to the sale of Level 8 shares by BluePhoenix which resulted in gain of $5.5 million to BluePhoenix.
Taxes on Income. Taxes on income in 2003 were $2.5 million compared to $2.0 million in 2002. Our effective tax rate relates to a portion of our earnings that we derive from capital gains. These capital gains are partly offset by other capital gains that are tax exempt, as well as by a portion of earnings derived from operations that are tax exempt under the Law of Encouragement of Capital Investments, 1959. Taxes on income are also attributable to certain of our subsidiaries that had taxable income.
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Companys Equity in Results of Affiliates, net. Our equity in losses of affiliates, net were $1.1 million in 2003 compared to $2.3 million in 2002. Our equity in losses of affiliates, net relates to affiliates of BluePhoenix.
Minority Interest, net. Minority interest, net, includes the minority interest in companies which are not wholly owned by the Formula Group during each of the periods indicated. Minority interest in profits of subsidiaries in 2003 was $4.1 million compared to minority interest in losses of subsidiaries of $2.4 million in 2002. This increase in minority interest, net is attributable to the profits of our subsidiaries Magic, BluePhoenix and Matrix which was offset by a loss at Sapiens.
Years Ended December 31, 2002 and 2001
Revenues. Revenues decreased from $387.7 million in 2001 to $283.3 million in 2002. The decrease in revenues was mainly attributable to the sale to Formula Vision of certain of our privately-held subsidiaries at the end of 2001. In addition, in 2002, we had a slight decrease in demand for our products and services. Revenues from the two categories of our operation were as follows: Revenues from the delivery of software services decreased from $208.9 million in 2001 to $171.3 million in 2002. Revenues from the sale of proprietary software solutions decreased from $178.7 million in 2001to $112.0 million in 2002.
Cost of Revenues. Cost of revenues deccreased 28% from $261.3 million in 2001 to $186.9 million in 2002. As a percentage of revenues, cost of revenues remained relatively the same in 2002 and 2001. The decrease in cost of revenues was primarily due to the sale of certain of our privately-held subsidiaries to Formula Vision at the end of 2001.
Software Development Costs, net. Software developments costs, gross, in 2002 and 2001 were $20.4 million and $31.1million. In 2002, we capitalized software costs of $4.4 million compared to $9.9 million in 2001. Software development costs, net, decreased 25% from $21.3 million in 2001 to $16.0 million in 2002. As a percentage of revenues, software development costs, net were 5.5% in 2001 and 5.6% in 2002. The decrease in software development costs was attributed primarily to the sale to Formula Vision, at the end of 2001, of certain of our privately-held subsidiaries characterized by substantial research and development activities. Amortization of capitalized software costs were $5.1 million in 2002 and $6.6 million in 2001, which amounts were included in cost of revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased from $151.3 million in 2001 to $85.3 million in 2002. As a percentage of revenues, selling, general and administrative expenses decreased from 39% in 2001 to 30% in 2002. This decrease was primarily attributable to the efforts of our subsidiaries to reduce their operating expenses, the sale of certain of our privately-held subsidiaries to Formula Vision and cessation of amortization of goodwill in 2002.
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Restructuring Costs. Restructuring costs consist primarily of wages and relocation expenses, as well as expenses related to closing of branches. Restructuring costs were $11.0 million in 2001 and $1.8 million in 2002. Restructuring costs in 2002 reflect primarily Magics restructuring costs. Magic, BluePhoenix and New Applicom contributed $6.6 million, $2.8 million and $1.5 million to the restructuring costs in 2001.
Operating Loss. In 2002, we had operating loss of $6.7 million compared to operating loss of $57.3 million in 2001. The operating loss in 2002 is attributable to the operating loss of certain of our subsidiaries which were harmed by the global and local slow-down.The operating loss in 2001 is attributable to the operating loss of certain of our subsidiaries, like Magic, BluePhoenix and Sintec which were harmed by the global and local slow-down, as well as to losses incurred by some of our privately-held subsidiaries which concentrate in research and development of products aimed for sale in the international markets. These privately-held subsidiaries were sold at the end of 2001 to Formula Vision.
Financial Income, net. Financial income, net in 2002 was $3.6 million compared to $2.7 million in 2001. Financial income (expenses), net, is influenced by various factors, including our cash balance, changes in the exchange rate of the NIS against the dollar, as well as changes in the Israeli CPI.
Other Expenses, net. Other expenses, net in 2002 and 2001 were $2.1 million and $36.7 million. Other expenses, net in 2002 was caused primarily by a partial write off of an investment by BluePhoenix. Other expenses, net in 2001 consist primarily of write off of goodwill by members of our group which include the write off of goodwill of $22.0 million by Magic, $5.0 million by New Applicom and $4.0 million by BluePhoenix. In addition, Formula wrote off $4.8 million with respect to its investment in Thoughtbubble.
Gain on Realization of Shareholdings. Gain on realization of shareholdings in 2002 was $4.7 million compared to $773,000 in 2001. Gain on realization of shareholdings in 2002 was attributable to the sale of Level 8 shares by BluePhoenix which resulted in gain of $5.5 million to BluePhoenix. Gain on realization of shareholdings in 2001 was attributable to gains recorded by our subsidiaries.
Taxes on Income. Taxes on income in 2002 were $2.0 million compared to $6.2 million in 2001. Our effective tax rate relates to a portion of our earnings that we derive from capital gains. These capital gains are partly offset by other capital gains that are tax exempt, as well as by a portion of earnings derived from operations that are tax exempt under the Law of Encouragement of Capital Investments, 1959. Taxes on income are also attributable to certain of our subsidiaries that had taxable income.
Companys Equity in Results of Affiliates, net. Our equity in losses of affiliates, net were $2.3 million in 2002 compared to $9.9 million in 2001. This decrease stems from the sale of subsidiaries affiliates and affiliates of Formula to Formula Vision as part of our restructuring process.
Minority Interest, net. Minority interest, net, includes the minority interest in companies which are not wholly owned by the Formula Group during each of the periods indicated. Minority interest in losses of subsidiaries in 2002 was $2.4 million compared to minority interest in losses of subsidiaries of $46.9 million in 2001. This decrease in minority interest, net is attributable to the improvement of the results of certain of the subsidiaries and the decrease in their losses and to the sale of certain subsidiaries to Formula Vision.
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Impact of Inflation and Currency Fluctuations on Results of Operations
Most of our revenues from sale of our products and services are in dollars and euros or are linked to the dollar or the euro, while a substantial portion of our expenses, principally salaries and related personnel expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel exceeds the rate of devaluation of the NIS in relation to the dollar or the euro or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the dollar or euro cost of our operations and decreasing our operating profit. In recent years, the rate of devaluation of the NIS against the dollar and the rate of devaluation of the NIS against the euro have exceeded the rate of inflation, a reversal from prior years. 2003 was an exceptional year in which the Israeli consumer price index decreased by 2%. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the dollar or against the euro. If the dollar or euro cost of our operations in Israel increases, our operating profit will be adversely affected. From time to time, we enter into hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar and the euro against the NIS. However, we cannot assure you that these measures adequately protect us from adverse effects arising from the impact of inflation in Israel.
Political, Economic and Military Conditions in Israel
Our headquarters and principal research and development facilities are located in Israel. Although we generate approximately 53% of our revenues from international markets, we are, nonetheless, directly influenced by the political, economic and military conditions affecting Israel.Major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition. Furthermore, several countries restrict business with Israeli companies. In addition, all nonexempt male adult citizens of Israel, including some of our officers and employees, are obligated to perform military reserve duty and are subject to being called for active duty under emergency circumstances. While we have operated effectively under these requirements since our incorporation, we cannot predict the full impact of such conditions on us in the future, particularly if emergency circumstances occur. If many of our employees are called for active duty, our operations in Israel and our business may be adversely affected.
B. Liquidity and Capital Resources
Since inception, we have financed our growth and business primarily through cash provided by operations and through public debt and equity offerings, as well as through private and public debt and equity offerings of our subsidiaries. In addition, we finance our business through short-term loans and borrowings available under our credit facilities, and have recently consummated a debt offering.
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Cash
At December 31, 2003 we had cash and cash equivalents and short-term investments of $102.2 million and at December 31, 2002, we had cash and cash equivalents and short-term investments of $102.7 million. At December 31, 2003, we had indebtedness to banks of $89.6 million, of which $67.7 million was current liabilities and $21.9 million was long-term liabilities. At December 31, 2002, we had indebtedness to banks of $95.3 million, of which $87.7 million was current liabilities and $7.6 million was long-term liabilities.
Formula has entered into credit facilities with several banks, pursuant to which Formula may borrow from time to time, on a short-term basis, up to an aggregate of $37.0 million. Formulas loan agreements contain a number of conditions and limitations on the way in which Formula can operate its business, including limitations on its ability to raise debt and sell or acquire assets; and prohibition on distribution of dividends at rates that exceed prevailing rates in other companies operating in our area of activity. The loan agreements also contain various covenants which require Formula to maintain certain financial ratios related to shareholders equity and operating results that are customary for companies of comparable size. In addition, the loans provided by the banks will be repayable, at the discretion of the banks, in the event that Dan Goldstein or Gad Goldstein cease to serve in their current positions in Formula.
Some of Formulas assets, consisting of approximately 50% of the outstanding share capital of our subsidiaries, Matrix and BluePhoenix, are pledged to banks.
Our subsidiaries maintain credit facilities with banks in accordance with their cash requirements. These credit facilities include, inter alia, certain covenants related to their operations, such as maintaining a minimum level of shareholders equity and reaching certain operating results targets. Some of our subsidiaries assets are pledged to the lender banks. If any of our subsidiaries does not meet the covenants specified in its credit agreement, and a waiver with respect to the fulfillment of such covenant has not been received from the lender bank, the lender bank may foreclose on the pledged assets to satisfy the debt.
Cash flow provided by operating activities in 2003 was $12.3 million compared to cash flow provided by operating activities of $5.0 million in 2002.
Financing activities
Cash flow used in financing activities in 2003 was $4.6 million compared to cash flow provided by financing activities of $64.8 million in 2002. This was mainly the result of the following transactions:
In 2002, BluePhoenix through its subsidiaries, repurchased 104,465 of its shares for an aggregate of $238,000.
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In May 2002, we completed a public offering pursuant to a prospectus in Israel of $14.8 million of debentures. Options to purchase an aggregate of 2 million of our ordinary shares were attached to the debentures. The debentures are payable in a lump sum in three years, but can be redeemed earlier by the holders at a predetermined redemption price. The nominal interest rate for each year during the three-year term is approximately 5.77%, payable at the end of the three-year period. Principal and interest on the debentures are linked to the Israeli consumer price index. In June 2003, we repurchased $2.4 million aggregate principal amount of the debentures, leaving $14.5 million aggregate principal amount of debentures outstanding. The associated options had a term of one year and were exercisable at a price of $15.8 per ordinary share, linked to the Israeli consumer price index. On May 31, 2003 the options expired. None of these options were exercised.
In August 2002, Matrix completed a public offering of $19.6 million of convertible debentures. Options to purchase 10 million of Matrixs ordinary shares were attached to the debentures.
During 2002, we repurchased 324,780 of Formulas ordinary shares in the open market for aggregate consideration of $3.4 million. During 2003, we sold 300,000 Formula ordinary shares on the TASE for aggregate consideration of $4.8 million.
In the first quarter of 2003, Magic distributed a dividend to its shareholders of 40 cents per share. The aggregate amount distributed by Magic was $11.8 million.
During 2003, Shandol exercised options to purchase 500,000 ordinary shares of Formula for an aggregate exercise price of $7.9 million.
In December 2003, Sapiens completed an offering in Israel of convertible debentures and warrants exercisable into common shares of Sapiens, resulting in gross proceeds to Sapiens of approximately $17.1 million.
Recent financing activities
In the first quarter of 2004, non-affiliates of Sapiens exercised options, resulting in gross proceeds of approximately $1.6 million to Sapiens.
In March 2004, BluePhoenix completed a $5 million private placement to institutional investors. Under the terms of this transaction, BluePhoenix issued to the institutional investors convertible debentures, bearing interest at an annual rate of 2%. In addition, the institutional investors were granted warrants with an aggregate exercise price of $2.85 million exercisable into BluePhoenix ordinary shares. The warrants are exercisable during a period of 5 years commencing in September 2004. Under certain circumstances, the institutional investors may increase their investment by an additional $3 million of debentures and receive warrants on the same terms as the initial warrants, exercisable into such number of BluePhoenix ordinary shares equal to 50% of the ordinary shares into which the debentures are convertible.
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In April 2000, F.I.D. Holdings Ltd. and Israel Discount Bank Ltd. invested $15 million in eZoneXchange.com, Inc., a subsidiary of Sapiens. This private placement was accompanied by a put/call agreement, under which the participating investors were granted the right to require Sapiens to repurchase their shares in eZone, beginning in May 2004, in exchange for cash and Sapiens common shares. In February 2001, eZones operations were discontinued and Sapiens agreed to a partial exercise of the put option, resulting in a payment to the investors of $4.5 million. In March 2004, Sapiens entered into a new agreement with the investors which replaced the put/call agreement and extended the period in which Sapiens may fulfill the terms of the put option. Sapiens agreed to issue to the investors, in a private placement, 750,000 common shares and warrants to purchase an additional 350,000 common shares that are exercisable through December 31, 2007. In addition, Sapiens agreed to pay the investors by May 1, 2005, in two annual installments, an aggregate of $8.6 million plus interest at an annual rate of 7.5%.
Investment activities
Net cash used in investing activities in 2003 were $7.5 million and were comprised of the following transactions:
During 2003, we purchased shares of several of our subsidiaries in the open market, as follows: 64,600 shares of BluePhoenix for an aggregate purchase price of $150,539, 776,154 shares of Magic for an aggregate purchase price of $911,923, 1,401,189 shares of Sapiens for an aggregate purchase price of $1.2 million and 30,396 shares of Matrix for an aggregate purchase price of $46,398.
During the fourth quarter of 2003, we purchased an aggregate of 4,224,956 shares of Matrix for an aggregate purchase price of $10 million, under put options we granted in October 2002 to selling shareholders of New Applicom and Sintec.
During 2003, we sold in the open market 346,364 ordinary shares of Magic for aggregate consideration of $1.4 million, and warrants of Matrix for aggregate consideration of $350,000.
During 2003, our subsidiaries capitalized software development costs in an aggregate amount of $10.2 million.
As a result of the consolidation of Sapiens in 2003, we increased our positive net cash to $20.5 million.
Net cash used in investing activities in 2002 were $60.2 million and were comprised of the following transactions:
During 2002, we purchased shares of several of our subsidiaries in the open market, as follows: 629,467 shares of BluePhoenix for an aggregate purchase price of $2.9 million, 1,015,500 shares of Magic for an aggregate purchase price of $1.5 million, 514,832 shares of Liraz for an aggregate purchase price of $864,000, 1,984,211 shares of Sapiens for an aggregate purchase price of $1.6 million, 1,438,045 shares of Matrix for an aggregate purchase price of $2.1 million, options to purchase 6,381,800 shares of Matrix for an aggregate purchase price of $1.0 million, 695,347 shares of New Applicom for an aggregate purchase price of $2.7 million, 7,944,630 shares of Sintec for an aggregate purchase price of $6.5 million, and 347,307 shares of Sivan for an aggregate purchase price of $55,000.
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In December 2002, we exercised the option granted to us by Sapiens and invested $10 million in Sapiens in exchange for a discount conversion price of $0.83 per common share. As part of the transaction, we converted all of our preferred shares into common shares at the discount price.
In connection with the sale to Formula Vision of our entire interest in certain of our privately-held subsidiaries, we lent to Formula Vision an additional $19.4 million for a second series of debentures issued on March 31, 2002.
In November 2002, we completed a sale to Matrix of our entire shareholdings in New Applicom, Sintec and Sivan, for aggregate consideration of $29.7 million. Under this transaction, we sold to Matrix 3,870,498 shares of New Applicom, representing approximately 60.8% of New Applicoms outstanding share capital, for an aggregate of $16.9 million; 15,330,309 shares of Sintec, representing Sintecs entire outstanding share capital, for an aggregate of $12.5 million; and 8,930,100 shares of Sivan, representing approximately 69.0% of Sivans outstanding share capital, for an aggregate of $346,000. The shares we sold to Matrix were comprised of (i) shares previously held by us; (ii) shares that we purchased from third parties in October 2002; and (iii) shares that we bought in tender offers we published in October 2002. The price per share paid to us by Matrix for each of New Applicoms, Sintecs and Sivans shares previously held by us and those we purchased from third parties was equal to the equity per share of each of the companies. The shares that we purchased in October 2002 from third parties were as follows: (i) 552,789 shares of New Applicom that we purchased in exchange for 1,436,096 shares of Matrix; (ii) an aggregate of 4,200,000 shares of Sintec that we purchased in exchange for 2,180,780 shares of Matrix; and (iii) an aggregate of 1,100,000 shares of Sintec that we purchased in exchange for 608,080 shares of Matrix. As part of the transaction, we published in October 2002, cash tender offers for the shares of New Applicom, Sintec and Sivan not owned by us. Following the closing of the tender offers, we sold to Matrix the shares that we purchased in the tender offers for the same purchase price we paid for the shares; $3.7 for each New Applicom share, $0.8 for each Sintec share and $0.15 for each Sivan share.
In November 2002, we sold to BluePhoenix,in a share exchange transaction, 3,912,999 ordinary shares of Liraz, representing our entire 57.9% interest in Liraz. In consideration therefor, BluePhoenix issued to us 2,343,113 BluePhoenix ordinary shares. The number of shares issued to us by BluePhoenix was calculated based on an exchange ratio of 1:1.67, such that BluePhoenix issued to us one BluePhoenix share for 1.67 shares of Liraz.
Net cash used in investing activities during 2002 and 2003 related primarily to the purchase of fixed assets, investments in subsidiaries and affiliates and acquisitions of new companies by us and our subsidiaries.
Recent investment activities
In 2004, we sold in the open market, 231,182 shares of Magic for aggregate consideration of $1.6 million, and 2,600,000 shares of Matrix for aggregate consideration of $6.1 million.
We believe that the net cash proceeds we raised by financing activities, together with cash flows from operating activities, will be sufficient to meet our cash needs for the next 12 months at the current level of operations. We will consider in the future additional equity issuances, debt issuances or borrowings from banks if necessary to meet cash needs for our growth.
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Commitments and Contingent Liabilities
Liens
We have pledged securities, consisting of approximately 50% of the outstanding share capital of our subsidiaries, Matrix and BluePhoenix, as well as bank accounts in favor of banks under our credit facilities with those banks.
Some of our subsidiaries have floating liens in favor of banks and other financial institutions. In addition, some of our subsidiaries have liens on leased vehicles, leased equipment and other assets in favor of the leasing companies.
Guarantees
We are a guarantor for the completion of certain projects by some of the companies in which we sold our interest to Formula Vision. Some of these guarantees cannot be assigned to third parties. Under our agreement with Formula Vision, we are entitled to indemnification by Formula Vision, if any of these guarantees is exercised.
In connection with the purchase of interest in Matrix, we agreed to guarantee a loan in the amount of $8.34 million extended by a commercial bank to the former principal shareholders of Matrix.
Other Contractual Commitments
In connection with credit facilities we have entered into with various banks, Formula committed, among other things, not to distribute dividends at rates that exceed prevailing rates in other companies operating in our area of activity. In addition, the loans provided by the banks will be repayable, at the discretion of the banks, in the event that Dan Goldstein or Gad Goldstein cease to serve in their current positions in Formula.
In connection with the sale of our interest in certain companies to Formula Vision, Formula Vision assumed all our rights and obligations under the agreements with each of Shamrock, FIMI and IDB with respect to the companies transferred to Formula Vision. For more information, see Item 4.A. -History and Development of the Company-Capital Expenditures and Divestitures.
In connection with the purchase of shares of New Applicom and Sintec from third parties prior to selling these shares to Matrix in October 2002, we granted the sellers certain put options to sell to us Matrixs shares that they received in exchange for the shares of New Applicom and Sintec. During the fourth quarter of 2003, the selling shareholders exercised the put options described above and sold to us an aggregate of 4,224,956 shares of Matrix for aggregate consideration of $10 million. For more information, see Item 4.A. History and Development of the Company-Capital Expenditures and Divestitures-Sale of New Applicom, Sintec and Sivan to Matrix.
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Formula and certain of our subsidiaries have committed not to create a floating charge on our assets.
We entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to certain limitations. For more information, see Item 7.B. Related Party TransactionsIndemnification of Office Holders.
Related Party Transactions
In January 2004, Formula acquired 59.4% of the outstanding share capital of Formula Vision in exchange for approximately $35 million of the debentures issued by Formula to Formula Vision in 2001. The price per share was NIS 4.11 ($0.93) which reflects the average closing price of Formula Visions shares on the TASE during the 30 days preceding Formulas resolution approving the transaction. This transaction is considered a related party transaction since Dan Goldstein serves as the chairman of the board of directors and the chief executive officer of Formula and Formula Vision and was at the time of consummation of the transaction, a controlling shareholder of Formula Vision. In addition, Gad Goldstein serves as a director of Formula and Formula Vision. For more information, see Item 7.B. Related Party Transactions Transactions between Formula and Formula Vision. We believe that the price per Formula Visions share paid by Formula in this transaction reflects a fair value of the shares. We do not believe that the impact of this transaction on our results of operations would have been different if the transaction would have been made with a third party not affiliated with us.
For more information about the transaction between Formula and Formula Vision, see Item 4.A. History and Development of the Company -Capital Expenditures and Divestitures-Restructuring of Our Corporate Structure - Transactions with Formula Vision.
Effective Corporate Tax Rates in Israel
Certain of the companies in the Formula Group have been granted approved enterprise status under the Investment Law. Accordingly, if these companies comply with certain requirements, they are eligible for certain tax benefits for the first seven years in which they generate taxable income. Income derived from these companies approved enterprise programs will be tax exempt for a period of two years after the companies have taxable income. They will also be subject to a 25% company tax rate for the following five years. Under certain circumstances, if the percentage of the share capital that foreign shareholders hold in subsidiaries and affiliates of these companies exceeds 25%, future approved enterprises of the applicable subsidiary or affiliate would qualify for reduced tax rates for an additional three years, after the seven years mentioned above. We cannot assure you that these companies will obtain approval for additional approved enterprises, that the provisions of the Investment Law will not change, or that the above-mentioned shareholding portion will be reached or maintained for each subsequent year. In addition, our equity in affiliated companies net income is not subject to tax in Israel. Gains from changes in holdings in subsidiaries and affiliated companies resulting from issuances to third parties are also not taxable in Israel. These exemptions cause our effective tax rate to fluctuate from period to period.
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On January 1, 2003, Israels tax laws underwent a significant tax reform (Amendment 132 to the Income Tax Ordinance (New Version) - 1961), referred to as the new law. The underlying principle of the new law is to broaden the categories of taxable income, and reduce the tax rates imposed on employment income. Among the key provisions of this reform legislation are (i) changes which may result in the imposition of taxes on dividends received by an Israeli company from its foreign subsidiaries; and (ii) the introduction of the controlled foreign corporation concept according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiarys primary source of income is passive income (such as interest, dividends, royalties, rental income or capital gains). An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries will receive a credit for income taxes paid by the subsidiary in its country of residence.
C. Research and Development, Patents and Licenses
In 2003, we spent on research and development activities $17.4 million, in 2002 we spent $16 million and in 2001 we spent $21.3 million. The increase in the amount spent on research and development activities in 2003 compared to 2002, relates primarily to the consolidation of Sapiens. However, the increase was partially offset by a decrease in the research and development expenditures of certain of our subsidiaries as part of a cost restructuring measures taken by these companies. The decrease in the amount spent on research and development activities in 2002 compared to 2001, relates primarily to the sale to Formula Vision at the end of 2001, of certain of our privately-held subsidiaries characterized by substantial research and development activities. For a description of our research and development activities, see Item 4.B. Business Overview-Software Development.
For information concerning our intellectual property rights, see Item 4.B. Business Overview-Intellectual Property Rights.
D. Trend Information
We have been affected by global economic changes, in particular the sharp decline in capital spending in the information technology sector and the IT business slow-down in North America and Europe, as well as in Israel. Uncertainties in the North American, European and Israeli markets have influenced the purchasing patterns of leading software developers who delayed their planned orders and caused developers to reduce the amount of their planned license commitment. These changes in purchasing patterns in the IT industry affected directly the operating results of some of our subsidiaries, which in turn affected our consolidated operating results. Our revenues decreased from $402.5 million in 2000 to $387.7 million in 2001 and to $283.3 million in 2002. In 2003, as a result of a slight recovery of the market, and the impact of the consolidation of the results of operations of Sapiens, this trend changed, and our revenues increased to $366.8 million. We cannot know whether the global market will recover in the future, and how the economic conditions will continue to affect our business.
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As IT spending is more cautious, we have pursued a strategy aimed at addressing current market needs through the introduction of cost-effective, new and enhanced products. We strive to use our best efforts to take advantage of the current slow-down to prepare our infrastructure to maximize the long-term growth potential of the software market.
E. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31, 2003.
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|
Total |
|
Less than |
|
1-3 |
|
3-5 |
|
More |
|
Other (1) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
$ in thousands |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt obligations |
|
|
83,837 |
|
|
8,999 |
|
|
62,170 |
|
|
8,408 |
|
|
4,260 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations |
|
|
35,076 |
|
|
8,581 |
|
|
12,821 |
|
|
10,672 |
|
|
3,002 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
in respect of the acquisition |
|
|
2,149 |
|
|
165 |
|
|
331 |
|
|
331 |
|
|
1,322 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities reflected on |
|
|
18,555 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
18,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
139,617 |
|
|
17,745 |
|
|
75,322 |
|
|
19,411 |
|
|
8,584 |
|
|
18,555 |
|
|
|
|
(1) |
Other obligations include unrealized gains and sevarance pay, the due date of which is unknown. |
|
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table describes information about our directors and senior management as of June 24, 2004.
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Dan Goldstein |
|
50 |
|
Chairman of the Board, Chief Executive Officer |
|
Gad Goldstein |
|
45 |
|
President, Director |
|
Shai Beilis |
|
56 |
|
Director |
|
Shlomo Nass |
|
44 |
|
Director |
|
Prof. Moshe Zviran (1) |
|
48 |
|
Director |
|
Daphna Kedmi (1) |
|
51 |
|
Director |
|
Bruria Gross Prushansky |
|
51 |
|
Secretary and General Counsel |
|
Naamit Salomon |
|
40 |
|
Vice President, Finance |
|
|
|
|
|
|
|
|
|
||||
|
|||||
(1) Outside director. See Item 6.C. Board Practices Outside Directors; Audit Committee, Internal Auditor, Approval of Certain Transactions, below. |
|||||
62
Dan Goldstein has served as a chairman of our board of directors and our chief executive officer since January 1985. Mr. Goldstein is also the chairman of the board of directors of Matrix and Formula Vision and is a director of BluePhoenix, Magic, Sapiens and of other companies within the Formula Group. Mr. Goldstein holds a BA degree in mathematics and computer sciences and an MA degree in business administration, both from Tel Aviv University. Dan Goldstein is the brother of Gad Goldstein.
Gad Goldstein has served as one of our directors since January 1985. Mr. Goldstein was our vice president from 1985 through 1995 and was appointed our president in 1995. Mr. Goldstein is chairman of the board of BluePhoenix and is also a director of other companies within the Formula Group, including Matrix, Magic, Sapiens and Formula Vision. Mr. Goldstein holds a BA degree in economics and an MA degree in business administration, both from Tel Aviv University. Gad Goldstein is the brother of Dan Goldstein.
Shai Beilis has served as one of our directors since December 1997. Mr. Beilis is also a director of BluePhoenix. From July 1993 to the beginning of 1995, Mr. Beilis served as the managing director of Clal Computers and Technology Ltd., an Israeli information technology company. Mr. Beilis holds a B.Sc. in mathematics and economics from the Hebrew University in Jerusalem and an MA in computer science from the Weizmann Institute of Science.
Shlomo Nass has served as one of our directors since April 2003. Mr. Nass is the president, a partner and a director of I.G.B. - Israel Global Business investment group companies.Mr. Nass performs various public duties, including serving as a member of the excutive committee of Bar-Ilan University, as a member of the court of appeal of the Institute of Certified Public Accountants and as a member of various entities and committees of the Institute of Certified Public Accountants. Mr. Nass also served as a member of the Israeli Securities Authority (as a public representative). Mr. Nass holds a B.Sc. degree in economics and accounting, and an LL.B degree, both from the Bar-Ilan University. Mr. Nass is a certified public accountant, a member of the Israeli Bar and holds a Ph.D. in law.
Professor Moshe Zviran has served as one of our directors since January 2000. He is currently an associate professor at the Tel-Aviv University Graduate School of Management. Professor Zviran holds a BA degree in mathematics and computer sciences and a M.Sc. and Ph.D. in business administration information systems, all from Tel-Aviv University.
Daphna Kedmi has served as one of our directors since January 2000. Since February 2000, Ms. Kedmi has served as general counsel for Nice Systems Ltd. From 1998 until February 2000, Ms. Kedmi served as general counsel for Tadiran Ltd., a major Israeli electronics holding company. In addition, from 1988 until 1998, she served as general counsel of Elisra Electronic Systems Ltd., a defense electronics company. Ms. Kedmi is a member of the Israeli Bar and holds an LL.B. degree from the University of Tel Aviv.
Bruria Gross Prushansky has served as our secretary and general counsel since January 1997. From 1994 until the end of 1996, Ms. Gross Prushansky was in the private practice of law. From 1988 until 1994, Ms. Gross Prushansky was the general counsel of Elite Industries Ltd., a major Israeli food company. Ms. Gross Prushansky, who is a member of the Israeli Bar, holds an LL.B. degree from Tel Aviv University and has an MA degree in business administration from the Recanati executive MBA program of Tel Aviv University.
Naamit Salomon has served as our vice president, finance since August 1997. Ms. Salomon also serves as a director of Magic and Sapiens. From 1990 through August 1997, Ms. Salomon was a controller of two large, privately held companies in the Formula Group. Ms. Salomon holds a BA degree in economics and business administration from Ben Gurion University.
63
B. Compensation
In 2003, we paid to our directors and officers (eight persons) aggregate direct remuneration of approximately $847,800. This amount includes amounts set aside or accrued to provide post-employment benefits.
This amount does not include the following:
|
|
amounts expended by us for automobiles made available to our officers; |
|
|
|
|
|
expenses, including business travel, professional and business association dues and expenses, that we reimburse our officers for; and |
|
|
|
|
|
other fringe benefits that companies in Israel commonly reimburse or pay to their officers. |
The amount also includes payment of directors fees to our non-employee directors. Our employee directors do not receive fees for their services as directors. In 2003, we paid an aggregate amount of $64,758 for post-employment benefits for our executive officers and directors.
In November 2000, options to purchase 16,000 ordinary shares were granted to certain of our officers under the 2000 share option plan. No director has been granted options under this plan. The exercise price of the options is $30.8 per share, as indexed to the Israeli CPI. All of these options are currently exercisable. These options expire on the fifth anniversary of the date of grant.
64
Effective January 1, 1999, all of our executive officers and directors (other than the outside directors) entered into written employment agreements with us pursuant to which, among other things, we pay them a monthly salary in an agreed amount. The salary is linked to the Israeli CPI. Each party may terminate the agreement upon a 90-day notice. In addition, two of our executive officers are entitled to bonuses which aggregate approximately 3.5% of our consolidated net income exceeding $10 million.
C. Board Practices
Pursuant to our articles of association, directors are elected at the annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented at the meeting. Our board is comprised of 6 persons, of which 3 have been determined to be independent within the meaning of the applicable Nasdaq requirements. The board includes two outside directors mandated under Israeli law and subject to additional criteria to help ensure their independence. See -Outside Directors, below. We compensate our outside directors in accordance with the regulations promulgated under the Israeli Companies Law, 1999, referred to as the Companies Law. We compensate Mr. Shlomo Nass in the same amounts we compensate our outside directors. Each director, except for the outside directors , holds office until the next annual general meeting of shareholders. Officers are appointed by our board of directors. For information regarding the employment agreements of our officers, see Item 6.B. Compensation.
Outside Directors
Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are required to appoint at least two outside directors. This law provides that a person may not be appointed as an outside director if the person or the persons relative, partner, employer or any entity under the persons control, has, as of the date of the persons appointment to serve as outside director, or had, during the two years preceding that date, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term affiliation includes:
|
an employment relationship; |
|
|
|
a business or professional relationship maintained on a regular basis; |
|
|
|
control; and |
|
|
|
service as an office holder. |
No person may serve as an outside director if the persons position or other business activities create, or may create, a conflict of interest with the persons responsibilities as an outside director or may otherwise interfere with the persons ability to serve as an outside director. Outside directors are to be elected by a majority vote at a shareholders meeting, provided that either:
|
the majority of shares voted at the meeting, including at least one-third of the shares of non-controlling shareholders voted at the meeting, vote in favor of election of the director; or |
65
|
the total number of shares of non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company. |
The initial term of an outside director is three years and may be extended for an additional three years. The independent directors appointed before the new Companies Law became effective shall serve as outside directors for a term of five years commencing upon their appointment in accordance with the provisions of the Israeli Companies Ordinance [New Version] 1983. These directors may not be reappointed until after two years have passed from the conclusion of their term. At present, Ms. Daphna Kedmi and Prof. Moshe Zviran serve as our outside directors, each of which to hold office until January 2005.
Each committee of a companys board of directors is required to include at least one outside director. However, the audit committee shall include all the outside directors.
An outside director is entitled to compensation as provided in regulations promulgated under the Companies Law and is otherwise prohibited from receiving any compensation, directly or indirectly, in connection with services provided as an outside director.
Audit Committee
The Companies Law requires public companies to appoint an audit committee, comprised of at least three directors, including all of the outside directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee.
In addition, under the applicable NASDAQ rules, we are currently required to have at least two independent directors and to maintain an audit committee, which two out of three of its members are independent of management. Our outside directors qualify as independent directors under the applicable NASDAQ rules and those of the Securities and Exchange Commission. We have established an audit committee, consisting of the two outside directors, Prof. Moshe Zviran and Daphna Kedmi, as well as Shlomo Nass. The board has agreed that Shlomo Nass is an audit committee financial expert as defined by applicable SEC regulations. See Item 16A. Audit Committee Financial Expert.
Under the Companies Law, the audit committee is responsible for overseeing the business management practices of the company in consultation with the companys internal auditor and the independent auditor, making recommendations to the board to improve such practices and approving related party transactions as required by law. In accordance with the Sarbanes-Oxley Act and Nasdaq requirements, our audit committee is directly responsible for the appointment, compensation, retention and oversight of our independent auditors. In addition, the audit committee is responsible for assisting the board in monitoring our financial statements and the effectiveness of our internal controls. We are in the process of implementing a formal audit committee charter embodying these responsibilities.
66
Internal Auditor
Under the Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the companys actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he may not be the companys independent accountant or its representative.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care.
Office Holders Insurance. Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders imposed on the office holder in respect of an act performed in his or her capacity as an office holder, with respect to:
|
a breach of his duty of care to us or to another person; |
|
|
|
a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or |
|
|
|
a financial liability imposed upon him in favor of another person. |
We have obtained an insurance policy covering the Formula Groups directors and officers liability. Our subsidiaries participate in the premium payments of the insurance, on a proportional basis. The total premium Formula paid during 2002 was approximately $40,000.
Indemnification of Office Holders. Our articles of association provide that we may indemnify an office holder against:
|
a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrators award approved by a court concerning an act performed in his capacity as an office holder; and |
|
|
|
reasonable litigation expenses, including attorneys fees, expended by the office holder or charged to him by a court, in proceedings we institute against him or instituted on our behalf or by another person, or in a criminal charge from which he was acquitted, in each case relating to an act performed in his capacity as an office holder. |
67
Limitations on Insurance and Indemnification. The Companies Law provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
|
a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
|
|
|
a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; |
|
|
|
any act or omission done with the intent to derive an illegal personal benefit; or |
|
|
|
any fine levied against the office holder. |
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, in specified circumstances, by our shareholders.
In February 2002, we granted to each of our office holders an indemnification letter, pursuant to which we undertook to indemnify each office holder in respect of certain obligations and expenses. For information concerning the indemnification arrangement with our office holders, see Item 7.B. Related Party Transactions-Indemnification of Office Holders.
Approval of Certain Transactions under the Companies Law
The Companies Law codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holders fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes (i) avoiding any conflict of interest between the office holders position in the company and his personal affairs, (ii) avoiding any competition with the company, (iii) avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and (iv) revealing to the company any information or documents relating to the companys affairs which the office holder has received due to his position as an office holder. Each person listed in the table under Directors and Senior Management above is an office holder. Under the Companies Law, arrangements regarding the compensation of directors require the approval of the audit committee, the board of directors and shareholder approval.
The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holders spouse, siblings, parents, grandparents, descendants, spouses descendants and the spouses of any of the foregoing. In addition, the office holder must also disclose any interest held by any corporation in which the office holder owns 5% or more of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the companys profitability, assets or liabilities.
68
Under the Companies Law, after the office holder complies with the disclosure requirements described above, only board approval is required for any transaction which is not an extraordinary transaction, unless the articles of association of the company provide otherwise, and provided the transaction is not adverse to the companys interest. If the transaction is an extraordinary transaction, the company must receive any approval stipulated by the articles of association, the approval of the companys audit committee and the approval of the board of directors, as well as, under certain circumstances, approval by a meeting of the shareholders of the company. An office holder who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at this meeting or vote on this matter.
The Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights in the company if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval must include at least one-third of the shareholders who have no personal interest in the transaction and are present, in person or by proxy, at the meeting or, alternatively, the total shareholdings of those who have no personal interest in the transaction who vote against the transaction must not represent more than one percent of the voting rights in the company. In certain cases provided in regulations promulgated under the Companies Law, shareholder approval is not required.
In a private placement of securities that will increase the relative holdings of a shareholder that holds five percent or more of the companys outstanding share capital (assuming the exercise or conversion of all securities held by that person that are exercisable for or convertible into shares) or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the companys outstanding share capital, the Companies Law requires that the company receive its shareholders approval. In certain cases provided in regulations promulgated under the Companies Law, shareholder approval is not required.
69
D. Employees
We have approximately 3,500 full-time employees, of whom approximately 3,100 are software professionals. In 2002, we had the same approximate number of employees. In 2001, we had approximately 3,700 full-time employees, of whom approximately 3,300 were software professionals. The number of our employees in 2002 and 2003 remained relatively the same as a result of an increase in the number of employees of Matrix and nextSource in 2003 that was offset by a decrease in the number of employees of Magic and Sapiens due to restructuring measures taken by these subsidiaries including closing of branches and business lines. The decrease in the number of employees in 2002 compared to 2001 relates primarily to the sale of certain of our privately-held subsidiaries to Formula Vision, at the end of 2001.
With respect to our employees in Israel, we are subject to various Israeli labor laws and labor practices, and to administrative orders extending certain provisions of collective bargaining agreements between the Histadrut (Israels General Federation of Labor) and the Coordinating Bureau of Economic Organizations (the Israeli federation of employers organizations) to all private sector employees. For example, mandatory cost of living adjustments, which compensate Israeli employees for a portion of the increase in the Israeli consumer price index, are determined on a nationwide basis. Israeli law also requires the payment of severance benefits upon the termination, retirement or death of an employee. We meet this requirement by contributing on an ongoing basis towards managers insurance funds that combine pension, insurance and, if applicable, severance pay benefits. In addition, Israeli employers and employees are required to pay specified percentages of wages to the National Insurance Institute, which is similar to the United States Social Security Administration. Other provisions of Israeli law or regulation govern matters such as the length of the workday, minimum wages, other terms of employment and restrictions on discrimination. We are also subject to the labor laws and regulations of other jurisdictions in the world where we have employees.
70
E. Share Ownership
The following table presents information regarding the ownership of our ordinary shares by the persons listed in the table under Directors and Senior Management, as of June 24, 2004.
|
|
Shares beneficially owned |
|
Options to purchase |
|
||||
|
|
|
|
|
|||||
Name |
|
Number |
|
Percentage of outstanding |
|
|
|||
|
|
|
|
|
|
|
|
||
Dan Goldstein |
|
|
2,000,034 |
|
18.5 |
% |
|
|
|
Gad Goldstein |
|
|
325,000 |
|
3.0 |
% |
|
|
|
All directors and officers as a |
|
|
2,332,263 |
|
21.6 |
% |
|
16,000(3) |
|
|
|
|
(1) |
Percentages in the above table are based on 10,800,000 ordinary shares outstanding as of June 24, 2004. |
|
|
|
|
(2) |
Each of the directors and executive officers not separately identified in the above table beneficially owns less than one percent of our outstanding ordinary shares (including options held by each of these persons) and have therefore not been separately disclosed. |
|
|
|
|
(3) |
All of these options are currently exercisable at an exercise price of $30.8 per share, as indexed to the Israeli CPI. These options expire in November 2005. |
|
Arrangements Involving the Issue or Grant of Options to Purchase Shares
The 2000 Share Option Plan
In November 2000, we adopted a share option plan under which we may grant options to purchase up to an aggregate of 300,000 ordinary shares to employees and members of our management. Of these options, we granted in November 2000, options to purchase 64,500 ordinary shares to certain of our employees, including options to purchase 16,000 shares granted to certain of our officers and directors. The exercise price of these options is $30.8 per share, as indexed to the Israeli CPI. The options vested over a three-year period from the date of grant. The options expire on the fifth anniversary of the date of grant. As of June 24, 2004, none of these options has been exercised.
Option Plans of Our Subsidiaries
Our operating subsidiaries generally have share option plans pursuant to which qualified directors, employees and consultants may be granted options for the purchase of securities in these subsidiaries. In addition, these subsidiaries may from time to time grant options to third parties as part of a business transaction.
71
Options Granted to Shandol
On August 10, 2000, an extraordinary general meeting of shareholders approved the grant of options to Shandol, a subsidiary of Formula at that date, to purchase 500,000 ordinary shares. Shandol exercised these options in December 2003 and sold the shares in transactions on the TASE. The exercise price of the options was at a price per share that reflects the average price of an ordinary share on the TASE during the 14 trading days preceding the notice of exercise. These options were in addition to options to purchase 1,000,000 ordinary shares previously granted to Shandol and exercised by Shandol in November 2001.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table presents information regarding the ownership of our ordinary shares at June 24, 2004 by each person known to us to be the beneficial owner of more than 5% of our ordinary shares based on information provided to us by the holders or disclosed in public filings with the Securities and Exchange Commission. Except where we indicated otherwise, we believe, based on information furnished by these owners, that the beneficial owners of our shares listed below have sole investment and voting power with respect to the shares.
Name and Address |
|
Shares Beneficially |
|
Percent of |
|
||
|
|
|
|
|
|
||
Dan Goldstein (2) |
|
2,000,034 |
|
|
18.5 |
% |
|
|
|
|
|
|
|
|
|
Bank Leumi LeIsrael B.M. (3) |
|
845,639 |
|
|
7.8 |
% |
|
|
|
|
(1) |
Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire these ordinary shares within 60 days of June 24, 2004, are treated as outstanding only for the purposes of determining the percent owned by this person or group. Percentages in the above table are based on 10,800,000 ordinary shares outstanding as of June 24, 2004. |
|
(2) |
In January 2002, Dan Goldstein purchased 850,000 ordinary shares from Shamrock Holdings of California Inc. |
|
(3) |
Bank Leumi LeIsrael B.M. is publicly traded on the TASE. The major shareholder of Bank Leumi is the Government of Israel (36..9%). Shlomo Eliahu Holdings holds a 10% interest in Bank Leumi, Otzar Hityashvut Hayehudim holds a 4.9% interest and Bank Hapoalim holds 5.4%. |
|
As of June 24, 2004, 10,800,000 ordinary shares were issued and outstanding, excluding 24,780 ordinary shares that we purchased during 2002. At that date, we had approximately 15 shareholders of record. All of our ordinary shares have equal voting rights. However, under applicable Israeli law, the shares we hold have no voting rights and, therefore, are excluded from the number of our outstanding shares.
As of June 24, 2004, 462,036 ADSs were issued and outstanding pursuant to a depositary agreement with The Bank of New York, representing 462,036 of our ordinary shares. As of that date, there were 13 registered holders of ADSs in the United States.
72
B. Related Party Transactions
Purchase of Sintec Media Shares by Formula Vision
In September 2001, Sintec entered into an agreement with Formula Vision, pursuant to which Formula Vision purchased Sintecs entire shareholdings in Sintec Media Ltd., representing 25% of Sintec Media Ltd.s outstanding share capital, for aggregate consideration of $2.6 million. In connection with this transaction, Formula Vision has granted to Sintec an option, exercisable within three years from the date of closing, to purchase up to 10% of the shares sold to Formula Vision, at the same purchase price set out in the agreement between the parties. This transaction is considered a related party transaction since Dan and Gad Goldstein served as directors of Formula Vision and Sintec.
Purchase of T-Soft Shares by Formula Vision
In September 2001, Comsoft Technologies Ltd. entered into an agreement with Formula Vision, pursuant to which Formula Vision purchased Comsofts entire shareholdings in T-Soft Ltd., representing 46% of T-Soft Ltd.s outstanding share capital, for aggregate consideration of $2.8 million. In connection with this transaction, Formula Vision has granted to Comsoft an option, exercisable within three years from the date of closing, to purchase up to 10% of the shares sold to Formula Vision, at the same purchase price set out in the agreement between the parties. This transaction is considered a related party transaction since Dan and Gad Goldstein served as directors of Formula Vision and Comsoft.
Options Granted to Shandol
On August 10, 2000, an extraordinary general meeting of shareholders approved the grant of options to Shandol, a subsidiary of Formula at that date, to purchase 500,000 ordinary shares. Shandol exercised these options in December 2003 and sold the shares in transactions on the TASE. The aggregate exercise price of the options was $7.9 million and was calculated at a price per share that reflects the average price of an ordinary share on the TASE during the 14 trading days preceding the notice of exercise.
Registration Rights Agreements
In 1997, Formula, Dan Goldstein, Gad Goldstein, Aaron Crystal and an additional shareholder, referred to collectively as the holders, entered into a registration rights agreement with BluePhoenix. Under this registration rights agreement, the holders have certain registration rights with respect to their BluePhoenix shares, beginning January 31, 1998. BluePhoenix has agreed that, beginning January 31, 1998, at the request of the holders of a majority of the shares held by the holders, and on no more than two occasions, BluePhoenix will file a registration statement under the Securities Act of 1933, as amended, referred to as the Securities Act, for an offering of the shares with respect to which registration is requested. In addition, if BluePhoenix otherwise proposes to register its ordinary shares under the Securities Act, these holders may request that BluePhoenix register their shares as well, subject to certain limitations. BluePhoenix shall bear all fees and expenses in connection with the registration, except that the holders will pay all fees and expenses of their own counsel and all underwriting discounts and commissions relating to their shares. In accordance with this agreement, in May 2004, BluePhoenix included 100,000 BluePhoenix shares held by each of Dan Goldstein, Gad Goldstein and Aaron Crystal, in a registration statement on Form F-3 filed by BluePhoenix under the Securities Act.
73
In October 2002, Formula and other shareholders of Liraz entered into a registration rights agreement with BluePhoenix as part of a share exchange agreement with those shareholders. Under this agreement, BluePhoenix agreed that, until October 12, 2005, at the request of the holders of at least 20% of the shares issued to Liraz shareholders under the share exchange agreement, and no more than once, BluePhoenix will, subject to certain limitations, file a registration statement under the Securities Act for an offering of their shares with respect to which registration is requested. In addition, if BluePhoenix otherwise proposes to register its ordinary shares under the Securities Act, these holders may request that BluePhoenix registers their shares as well, subject to certain limitations. BluePhoenix shall bear all expenses in connection with the registration, provided that all underwriting commissions shall be paid by the holders selling shares with respect to their shares sold. In accordance with this agreement, in May 2004, BluePhoenix included 100,000 BluePhoenix shares held by Arie Kilman, in a registration statement on Form F-3 filed by BluePhoenix under the Securities Act.
Voting Agreement
Messrs. Dan Goldstein and Gad Goldstein have entered into voting agreements that require them to vote the ordinary shares of BluePhoenix held by them as instructed by Formula. The voting agreements may be terminated by either party upon a prior notice.
Transactions between Formula and Formula Vision
In July 2001, Formula granted to Formula Vision, an option to purchase our interests in certain privately-held companies. On November 28, 2001, Formula Vision exercised the option. Accordingly, we transferred to Formula Vision our entire interest, including related obligations, in certain companies for aggregate consideration of $58.9 million. Under the agreement with Formula Vision, Formula Vision issued to us in December 2001, a series of 5-year debentures of $58.9 million in the aggregate, linked to the Israeli CPI and bearing an interest at an annual rate of 5%. On March 31, 2002, we lent to Formula Vision an additional $19.4 million in consideration for a series of debentures with similar terms of the debentures issued in December 2001.
Formula is entitled, during a 3-year period ending in November 2004, to repurchase from Formula Vision up to 10% of the sold shares of the transferred companies, at the same purchase price set out in the agreement between the parties. As part of the agreement between us and Formula Vision, we also transferred to Formula Vision our rights and obligations with respect to the transferred companies under our agreements with each of Shamrock, FIMI and IDB. This series of transactions is considered a related party transaction since Dan Goldstein serves as the chairman of the board of directors and the chief executive officer of Formula and Formula Vision and was at that time, a controlling shareholder of Formula Vision. In addition, Gad Goldstein serves as a director of Formula and Formula Vision.
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In January 2004, Formula Vision issued to Formula 38,000,000 shares representing 59.4% of Formula Visions outstanding share capital in exchange for $35 million of the amount of the debentures. The transaction was approved by Formulas audit committee and by its board of directors. The price per share reflects the average closing market price of Formula Visions share on the TASE during the 30 days preceding the date of approval of the transaction by Formulas board of directors. In connection with this transaction, following the receipt by Formula Vision of the opinion of the Israeli Securities Authority, referred to as the ISA, regarding this transaction, Formula Vision informed its shareholders that it was the ISAs opinion that the said transaction requires the approval of Formulas shareholders with the special majority required under the Israeli law for approval of related party transactions. In the absence of such approval, if required, Formula may revoke the transaction, and may also claim damages from Formula Vision, without revoking the transaction, provided Formula Vision knew of Messrs. Goldsteins personal interest in the said transaction and knew, or should have known, about the absence of such approval. The ISAs opinion was based on the assumption that Messrs. Goldsteins ability to direct Formulas activity derives mainly from their substantial holdings in Formula, and as such, their positions as office holders cannot be viewed as unrelated to their shareholdings.
The Company is of the view, based on its legal counsels opinion, that Messrs. Goldstein do not hold a controlling interest in Formula under the law.
For more information about the transaction between Formula and Formula Vision, see Item 4.A. History and Development of the Company -Capital Expenditures and Divestitures-Restructuring of Our Corporate Structure.
Indemnification of Office Holders
In February 2002, we granted to each of our office holders an indemnification letter, pursuant to which we undertook to indemnify each office holder in respect of an obligation or expense imposed on the office holder in respect of an act performed in his or her capacity as an office holder, provided, however, that the undertaking is limited to categories of events specified in the indemnification letter and subject to the provisions of any law, as follows:
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(i) a financial obligation imposed on him or her in favor of another person by a court judgment, including a compromise judgment or an arbitrators award approved by court; and |
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(ii) reasonable litigation expenses including attorneys fees, expended by an office holder or charged to the office holder by a court, in a proceeding instituted against the office holder by the company or on its behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of an offense that does not require proof of criminal intent. |
The indemnification described above shall also apply to an obligation or expense imposed on the office holder in respect of an act performed in his or her capacity as an office holder or an employee of one of our subsidiaries. Our undertaking for indemnification is limited to up to 25% of our shareholders equity as it appears in our latest financial statements known at the date of indemnification.
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Our undertaking for indemnification shall not apply to a liability incurred as a result of any of the following:
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(i) a breach by the office holder of his or her duty of loyalty, unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
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(ii) a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly; |
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(iii) any act or omission done with the intent to derive an illegal personal benefit; or |
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(iv) any fine levied against the office holder. |
We shall not be required to indemnify an office holder, if the office holder, or anyone on its behalf, already received payment in respect of a liability subject to indemnification, under an effective insurance coverage or an effective indemnification arrangement with a third party, provided, however, that if such payment made to the office holder does not cover the entire liability subject to the indemnification, we shall indemnify the office holder in respect of the difference between the amount paid to the office holder and the liability subject to the indemnification.
Office Holders Insurance
We have obtained an insurance policy covering the Formula Groups directors and officers liability. Our subsidiaries participate in the premium payments of the insurance, on a proportional basis. The total premium Formula paid during 2003 was approximately $120,000.
Other Transactions
From time to time, in our ordinary course of business, we engage in transactions with our subsidiaries and affiliates. We believe that these agreements are made on an arms length basis upon terms and conditions no less favorable to us, our subsidiaries and affiliates, as we could obtain from unaffiliated third parties. If we engage with our subsidiaries and affiliates in transactions which are not in the ordinary course of business, we receive the approvals required under the Companies Law. These approvals include audit committee approval, board approval and, in certain circumstances, shareholder approval. See Item 6.C. Board Practices.
C. Interests of Experts and Counsel
Not applicable.
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A. Consolidated Statements and Other Financial Information
Financial Statements
The financial statements required by this item are found at the end of this annual report, beginning on page F-1.
Legal Proceedings
We are not involved in any proceedings in which any of our directors, members of our senior management or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries. We are also not involved in any material legal proceedings, except as described below.
In October 2003, a former New Applicom shareholder filed an application with the Tel Aviv, Jaffa District Court to approve a claim filed by him against Matrix, as a class action. The claim relates to the acquisition of New Applicom shares, which Matrix consummated in June 2003. The shareholder alleges that the share price Matrix paid to New Applicoms shareholders in the tender offer was lower than the fair price of New Applicom shares. The maximum amount of the claim is approximately $1.2 million in the aggregate. Under Israeli law, the courts approval is required for the plaintiff to represent all of the shareholders of New Applicom who sold their shareholdings to Matrix pursuant to the tender offer. The plaintiff has applied for such approval in the lawsuit. We believe that the allegations against Matrix in this proceed are without merit and accordingly, filed an application to strike out the claim in limine.
In July 2003, a former Liraz shareholder filed an application with the Tel Aviv, Jaffa District Court to approve a claim filed by him against BluePhoenix, as a class action. The claim relates to the acquisition of Liraz shares, which BluePhoenix completed in March 2003. The shareholder alleges that the share price BluePhoenix paid to Lirazs shareholders in the tender offer and in a subsequent mandatory purchase was lower than the fair price of Liraz shares. The maximum amount of the claim is approximately $5.8 million in the aggregate. In the lawsuit, the plaintiff has applied for the courts approval to represent all of the shareholders of Liraz who sold their shareholdings pursuant to the tender offer and the mandatory acquisition. A preliminary hearing is scheduled for October 2004. We believe that the allegations against BluePhoenix in this proceeding are without merit and intend to vigorously defend the claim and contest the allegations made therein.
Dividend policy
In August 2001, Formula distributed to its shareholders a dividend in kind of Formula Visions (formerly known as Mashov) shares held by Formula. Other than this distributon, Formula has never declared or paid dividends to our shareholders and we do not intend to pay dividends in the future. We anticipate that we will retain all of our future earnings for use in the expansion and operation of our business. However, in certain circumstances, we might consider in the future a distribution of dividends.
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B. Significant Changes
In January 2004, we acquired a controlling interest in Formula Vision and accordingly began consolidating Formula Visions results of operations, beginning with the first quarter of 2004. This has impacted our revenues, operating income and net incme. In the first quarter of 2004, our revenues were $109.1 million and our net income was $2.6 million. Formula Visions revenues in the first quarter of 2004 were $13.5 million and its net loss was $2.8 million.
Except as described above and disclosed elsewhere in this annual report, there has been no material change in our financial position since December 31, 200
A. Offer and Listing Details
Price Range of Ordinary Shares
The following table shows the high and low closing price for our ordinary shares on the TASE, for the periods indicated. The exchange rate reported by the Bank of Israel on June 24, 2004 was NIS 4.509 = $1.00.
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Closing Price Per Share |
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Calendar Period |
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High |
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Low |
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1999 |
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189.90 |
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90.50 |
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2000 |
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355.00 |
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116.60 |
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2001 |
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151.30 |
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48.11 |
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2002 |
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75.80 |
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40.12 |
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First Quarter |
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75.80 |
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54.80 |
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Second Quarter |
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57.10 |
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41.95 |
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Third Quarter |
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56.00 |
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44.06 |
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Fourth Quarter |
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50.20 |
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40.12 |
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2003 |
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79.40 |
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34.03 |
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First Quarter |
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41.33 |
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34.03 |
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Second Quarter |
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63.90 |
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38.05 |
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Third Quarter |
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61.40 |
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50.70 |
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Fourth Quarter |
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79.40 |
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56.70 |
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2004 |
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First Quarter |
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98.40 |
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77.30 |
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January |
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90.50 |
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78.90 |
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February |
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98.10 |
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77.30 |
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March |
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98.40 |
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87.70 |
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April |
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94.70 |
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88.40 |
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May |
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93.40 |
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80.80 |
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June (through June 24) |
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87.97 |
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83.10 |
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Price Range of American Depositary Shares
The following table shows, for the periods indicated, the high and low closing sale prices for the ADSs, as reported by the Nasdaq National Market.
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Closing Price Per Share |
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Calendar Period |
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High |
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Low |
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1999 |
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47.94 |
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22.00 |
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2000 |
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92.19 |
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27.00 |
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2001 |
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38.00 |
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11.25 |
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2002 |
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16.92 |
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8.16 |
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First Quarter |
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16.92 |
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11.73 |
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Second Quarter |
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11.92 |
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8.53 |
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Third Quarter |
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11.67 |
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8.98 |
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Fourth Quarter |
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10.70 |
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8.16 |
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2003 |
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18.05 |
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6.71 |
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First Quarter |
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8.75 |
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6.71 |
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Second Quarter |
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14.35 |
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8.01 |
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Third Quarter |
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14.32 |
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10.75 |
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Fourth Quarter |
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18.05 |
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12.51 |
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2004 |
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First Quarter |
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22.08 |
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16.61 |
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January |
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20.39 |
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16.76 |
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February |
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22.08 |
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16.61 |
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March |
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21.95 |
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19.35 |
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April |
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20.61 |
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18.75 |
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May |
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20.05 |
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17.21 |
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June (through June 24) |
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19.02 |
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18.18 |
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B. Plan of Distribution
Not applicable.
C. Markets
Since our initial public offering in 1991, our ordinary shares have been traded in Israel on the TASE. No U.S. trading market exists for the ordinary shares. Since October 1997, our ADSs are traded on the NASDAQ National Market, under the symbol FORTY.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
79
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are registered with the Israeli Companies Register under the number 52-003669-0. Our objects are specified in our memorandum of association. These objects include:
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operating within the field of informational and computer systems; |
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providing management, consulting and sale services for computers, computer equipment, software for computers and for information systems; |
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the business of systems analysis, systems programming and computer programming; and |
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establishing facilities for instruction and training for computers and digital systems. |
Description of Our Share Capital
Our company share capital consists of ordinary shares. Our articles of association do not restrict in any way the ownership of our ordinary shares by non-residents, except that these restrictions may exist with respect to citizens of countries which are in a state of war with Israel.
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of ordinary shares according to their rights and interests in our profits. We may invest or use for our own benefit all unclaimed dividends. If dividends remain unclaimed for seven years from the date we declared the dividend they lapse and revert back to us. Our board of directors can cause us to pay the dividend to a holder who would have been entitled if the dividend had not reverted back to us. In case of liquidation, after satisfying liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their holdings. This right may be affected by the grant of a preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of the company, unless the companys articles of association require otherwise. Our articles of association provide that our board of directors may declare and pay dividends without any further action of our shareholders.
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Redemption provisions
In accordance with our articles of association, we may issue redeemable shares and accordingly redeem those shares.
Voting, Shareholder Meetings and Resolutions
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to the vote of shareholders. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
We must hold an annual general meeting once a year with a maximum period of fifteen months between the meetings. All other meetings of shareholders other than annual general meetings are considered special general meetings. Our board of directors may call a special general meeting whenever it decides it is appropriate. In addition, shareholders representing 5% of the outstanding share capital may require the board of directors to call a special general meeting. The quorum required for a general meeting of shareholders consists of two or more holders present in person or by proxy who hold or represent at least 25% of the voting power. A meeting adjourned for a lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman of the meeting may decide with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. At the reconvened meeting, if a quorum is not present within half an hour from the time appointed for holding the meeting, the required quorum will consist of two shareholders present in person or by proxy.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority, except in certain circumstances provided for under the Companies Law, which require a majority of at least 75% of the shares present at the meeting. In accordance with the Companies Law, all shareholders meetings require prior notice of at least 21 days.
Under the Companies Law, a shareholder has a duty to act in good faith towards the company in which he holds shares and towards other shareholders and to refrain from abusing his power in the company including voting in the general meeting of shareholders on:
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any amendment to the articles of association |
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an increase of the companys authorized share capital |
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a merger; or |
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approval of some of the acts and transactions which require shareholder approval. |
A shareholder has the general duty to refrain from depriving rights of other shareholders. Any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of association, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The Companies Law does not describe the substance of this duty.
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Transfer of Shares
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by another instrument.
Modification of Class Rights
Under our articles of association, the rights attached to any class unless otherwise provided by the terms of the class including voting, rights to dividends and the like, may be varied by adoption of the necessary amendment to the articles of association, provided that the affected shareholders approve the change by a class meeting in which a simple majority of the voting power of the class represented at the meeting and voting on the matter approves the change.
Election of Directors
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than 50% of the voting power represented at a shareholders meeting have the power to elect all of our directors, other than the outside directors which are appointed by a special majority of shareholders. For a summary of those provisions in our articles of association with respect to the directors, see Item 6. Directors, Senior Management and Employees.
Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law
Mergers
The Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares voting on the proposed merger at a shareholders meeting called on at least 21 days prior notice. In determining whether a majority has approved the merger, shares held by the other party to the merger or any person holding at least 25% of the other party to the merger are excluded from the vote. The Companies Law does not require court approval of a merger other than in specified situations. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli registrar of companies.
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Tender Offers
The Companies law also provides that an acquisition of shares of a public company on the open market must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company. The rule does not apply if there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder, unless there is a 50% shareholder of the company. These rules do not apply if the acquisition is made by way of a merger as opposed to a tender offer. Regulations adopted under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisition of any level of control of the company, or the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public. The Companies Law also provides that if following any acquisition of shares, the acquirer holds 90% or more of the companys shares or of a class of shares, the acquisition must be made by means of a tender offer for all the target companys shares or all the shares of the class, as applicable. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer before the acquisition. If, however, the tender offer to acquire 95% is not successful, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company.
C. Material Contracts
We consider our investment in Sapiens and the transactions with Formula Vision as material contracts. For a summary of the terms of these contracts, see Item 4.A. Information on the Company Capital Expenditures and Divestitures.
D. Exchange Controls
Under current Israeli regulations, we may pay dividends or other distributions in respect of our ordinary shares either in non-Israeli or Israeli currencies. If we make these payments in Israeli currency, they will be freely transferred in non-Israeli currencies at the rate of exchange prevailing at the time of conversion. We expect therefore, that dividends, if any, that we pay to holders of ADSs, will be paid in dollars, net of conversion expenses of the depositary, the Bank of New York and Israeli income taxes. Because exchange rates between the NIS and the dollar fluctuate continuously, a U.S. shareholder will be subject to the risk of currency fluctuations between the date when we declare NIS-denominated dividends and the date when we pay them in NIS. See Item 3.D. Risk Factors.
Non-residents of Israel may freely hold and trade our ADSs or ordinary shares pursuant to the general permit issued under the Israeli Currency Control Law, 1978. Neither our articles of association nor the laws of the State of Israel restrict in any way the ownership of our ordinary shares by non-residents, except that these restrictions may exist with respect to citizens of countries which are in a state of war with Israel.
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E. Taxation
Israeli Taxation
The following is general information regarding Israeli tax laws to which U.S. and other non-Israeli shareholders may be subject. It does not cover all possible tax considerations and therefore you should not rely on this information as legal or professional tax advice. You should consult your own tax advisor as to the particular tax consequences of an investment in our ordinary shares or ADSs, including the effects of applicable Israeli or foreign or other tax laws and possible changes in the tax laws.
To the extent that the discussion is based on legislation yet to be judicially or administratively interpreted, we cannot assure you that the views we express herein will accord with any such interpretation in the future.
Under current Israeli law, individual or corporate shareholders (which are not subject to the provisions of the Inflationary Adjustments Law), selling our ordinary shares are subject to a 15% tax rate on any capital gain accrued after January 1, 2003 when certain conditions are met. However, foreign residents are exempt from capital gains tax on the sale of traded securities of Israeli companies. The foregoing does not apply to companies or individuals which are subject to Chapter II of the Income Tax (Inflationary Adjustments) Law, 1985. In general, Chapter II of the Inflationary Adjustments Law applies to all Israeli companies and individuals, except for those companies which comply with all of the following: (i) they do not generate any business income; (ii) they do not apply for a deduction of financing expenses; and (iii) they are held only by individuals. Notwithstanding the foregoing, dealers in securities in Israel are taxed at regular tax rates applicable to business income. We obtained a ruling from the Israeli income tax authorities confirming that capital gains received upon sale of ADSs will be subject to the same treatment as capital gains received upon sale of our ordinary shares.
Pursuant to the convention between the Government of the United States of America and the Government of Israel with respect to taxes on income (the U.S.-Israel tax treaty), the sale, exchange or disposition of our ADSs or ordinary shares by a person who qualifies as a resident of the United States under the treaty and who is entitled to claim the benefits afforded to him by the treaty, will generally not be subject to Israeli capital gains tax. This exemption shall not apply to a person who held, directly or indirectly, shares representing 10% or more of the voting power in our company during any part of the 12-month period preceding the sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of our shares by a U.S. resident qualified under the treaty, who held, directly or indirectly, shares representing 10% or more of the voting power in our company at any time during the preceding 12-month period would be subject to Israeli tax, to the extent applicable. However, under the treaty, this U.S. resident would be permitted to claim a credit for these taxes, if apply, against the U.S. income tax with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits in accordance with tax treaties.
Non-residents of Israel are subject to income tax on passive income accrued or derived from sources in Israel like dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares (stock dividends) we should generally withhold at source income tax at a rate of 25%, unless a different rate applies under a treaty between Israel and the shareholders country of residence. Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of our ADSs or ordinary shares who is a resident of the United States will be 25% or 12.5% if certain conditions are met including, interalia, that the holder is a corporation which holds, directly or indirectly, shares representing 10% or more of the voting power in our company during the relevant period preceding the date of payment of the dividend. However, under the Law for the Encouragement of Capital Investments, 1959 (the Investments Law), dividends generated by an approved enterprise are taxed at the rate of 15%.
84
United States Federal Income Tax Considerations
Subject to the limitations described herein, this discussion summarizes the material United States federal income tax consequences of the purchase, ownership and disposition of our ordinary shares or ADSs to a United States holder. A United States holder is a holder of our ordinary shares or ADSs who is:
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an individual citizen or resident of the United States; |
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a corporation (or another entity taxable as a corporation for United States federal income tax purposes) created or organized under the laws of the United States or any political subdivision thereof; |
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an estate, the income of which is subject to United States federal income tax regardless of its source; or |
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a trust (i) if, in general, a United States court is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (ii) that has in effect a valid election under applicable United States Treasury regulations to be treated as a United States person. |
Unless otherwise specifically indicated, this discussion does not consider the United States tax consequences to a person that is not a United States holder and considers only United States holders that will own the ordinary shares or ADSs as capital assets.
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, referred to as the Code, current and proposed Treasury regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which are subject to change, possibly with a retroactive effect. This discussion does not address all aspects of United States federal income taxation that may be relevant to any particular United States holder based on the United States holders individual circumstances. In particular, this discussion does not address the United States federal income tax consequences to United States holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, United States holders holding the ordinary shares or ADSs as part of a hedging, straddle or conversion transaction, United States holders whose functional currency is not the United States dollar, insurance companies, tax-exempt organizations, financial institutions, persons who acquired their shares upon the exercise of employees stock options or otherwise as compensation, and persons subject to the alternative minimum tax, who may be subject to special rules not discussed below. Additionally, the tax treatment of persons who are, or hold the ordinary shares or ADSs through, a partnership or other pass-through entity is not considered, nor is the possible application of United States federal estate or gift taxes or any aspect of state, local or non- United States tax laws.
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You are advised to consult your tax advisor with respect to the specific United States federal, state, local and foreign income tax consequences to you of purchasing, holding or disposing of our ordinary shares or ADSs.
Taxation on Distributions on the Ordinary Shares or ADSs
In August 2001, Formula distributed to its shareholders a dividend in kind of Formula Visions (formerly known as Mashov Computers Ltd.) shares held by Formula, which was distributed in the form of cash to holders of our ADRs. Other than this distribution, Formula has never paid dividends, and currently does not intend to pay dividends in the future. If Formula makes distributions in the future, the amount of the distribution with respect to the ordinary shares or ADSs will equal the amount of cash and the fair market value of any property distributed and will also include the amount of any Israeli taxes withheld, as described above under Israeli Taxation. Subject to the discussion below under Tax Consequences if We are a Passive Foreign Investment Company, a distribution paid by us with respect to the ordinary shares or ADSs to a United States holder will be treated as dividend income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for United States federal income tax purposes. Dividends that are received by United States holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (a maximum rate of 15%), provided that such dividends meet the requirements of qualified dividend income. Dividends that fail to meet such requirements, and dividends received by corporate United States holders, are taxed at ordinary income rates. No dividend received by a United States holder will be a qualified dividend (1) if the United States holder held the ordinary share or ADS with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code section 246(c), any period during which the United States holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share or ADS (or substantially identical securities); or (2) to the extent that the United States holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share or ADS with respect to which the dividend is paid. If we were to be a passive foreign investment company, a foreign personal holding company or a foreign investment company (as such terms are defined in the Code) for any year, dividends paid on our ordinary shares or ADSs in such year or in the following year would not be qualified dividends. In addition, a non-corporate United States holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do; in such case the dividend will be taxed at ordinary income rates.
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The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the United States holders tax basis in its ordinary shares or ADSs to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares or ADSs. Corporate holders will not be allowed a deduction for dividends received in respect of the ordinary shares or ADSs.
Dividends paid by us in NIS will be included in the income of United States holders at the dollar amount of the dividend (including any Israeli taxes withheld therefrom), based upon the spot rate of exchange in effect on the date of the distribution. United States holders will have a tax basis in NIS for United States federal income tax purposes equal to that dollar value. Any subsequent gain or loss in respect of NIS arising from exchange rate fluctuations will generally be taxable as United States source ordinary income or loss.
Subject to the limitations set forth in the Code and the Treasury regulations thereunder, United States holders may elect to claim as a foreign tax credit against their United States federal income tax liability the Israeli income tax withheld from dividends received in respect of the ordinary shares or ADSs. The limitations on claiming a foreign tax credit include, among others, computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the United States federal income taxes otherwise payable with respect to each such class of income. In this regard, dividends paid by us will be foreign source passive income for U.S. foreign tax credit purposes or, in the case of a financial services entity, financial services income. United States holders that do not elect to claim a foreign tax credit may instead claim a deduction for the Israeli income tax withheld if they itemize deductions. The rules relating to foreign tax credits are complex, and you should consult your tax advisor to determine whether and to what extent you would be entitled to this credit. A United States holder will be denied a foreign tax credit for Israeli income tax withheld from a dividend received on the ordinary shares or ADSs (i) if the United States holder has not held the ordinary shares or ADSs for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend or (ii) to the extent the United States holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a United States holder has substantially diminished its risk of loss on the ordinary shares or ADSs are not counted toward meeting the required 16-day holding period.
Taxation on Disposition of the Ordinary Shares or ADSs
Subject to the discussion below under Tax Consequences if We are a Passive Foreign Investment Company, upon the sale, exchange or other disposition of our ordinary shares or ADSs, a United States holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the United States holders tax basis in the ordinary shares or ADSs. The gain or loss recognized on the disposition will be long-term capital gain or loss if the United States holder held the ordinary shares or ADSs for more than one year at the time of the disposition. Gain or loss recognized by a United States holder on a sale, exchange or other disposition of ordinary shares or ADSs will be treated as U.S. source income or loss for United States foreign tax credit purposes.
87
A United States holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a United States holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A United States holder may avoid realizing foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a United States holder that receives foreign currency upon disposition of ordinary shares or ADSs and converts the foreign currency into dollars after the settlement date or trade date (whichever date the United States holder is required to use to calculate the value of the proceeds of sale) will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be United States source ordinary income or loss.
Tax Consequences if We are a Passive Foreign Investment Company
We will be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable year is passive income; or (2) 50% or more of the value, determined on the basis of a quarterly average, of our assets in the taxable year produce, or are held for the production of, passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing tests as owning our proportionate share of the other corporations assets and as directly earning our proportionate share of the other corporations income. If we are a PFIC, a United States holder must determine under which of three alternative taxing regimes it wishes to be taxed:
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The QEF regime applies if the United States holder elects to treat us as a qualified electing fund (QEF) for the first taxable year in which the United States holder owns our ordinary shares or ADSs or in which we are a PFIC, whichever is later, and if we comply with certain reporting requirements. If the QEF regime applies, then each year that we are a PFIC such United States holder will include in its gross income a proportionate share of the our ordinary earnings (which is taxed as ordinary income) and net capital gain (which is taxed as long-term capital gain), subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. These amounts would be included in income by an electing United States holder for its taxable year in which our taxable year ends, whether or not such amounts are actually distributed to the United States holder. A United States holders basis in our ordinary shares or ADSs for which a QEF election has been made would be increased to reflect the amount of any taxed but undistributed income. Generally, a QEF election allows an electing United States holder to treat any gain realized on the disposition of his ordinary shares or ADSs as capital gain. |
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Once made, the QEF election applies to all subsequent taxable years of the United States holder in which it holds our ordinary shares or ADSs and for which we are a PFIC, and can be revoked only with the consent of the Internal Revenue Service. The QEF election is made by attaching a completed Internal Revenue Service Form 8621, including the PFIC annual information statement, to a timely filed United States federal income tax return. Even if a QEF election is not made, a U.S. person who is a shareholder in a PFIC must file a completed Internal Revenue Service Form 8621 every year. |
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If a QEF election is made after the first taxable year in which a United States holder holds our ordinary shares or ADSs and we are a PFIC, then special rules would apply. |
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A second regime, the mark-to-market regime, may be elected so long as our ordinary shares or ADSs are publicly traded. Pursuant to this regime, an electing United States holders ordinary shares or ADSs are marked-to-market each year and the United States holder recognizes as ordinary income or loss an amount equal to the difference as of the close of the taxable year between the fair market value of our ordinary shares or ADSs and the United States holders adjusted tax basis therein. Losses are allowed only to the extent of net mark-to-market gain previously included by the United States holder under the election for prior taxable years. An electing United States holders adjusted basis in our ordinary shares or ADSs is increased by income recognized under the mark-to-market election and decreased by the deductions allowed under the election. |
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Under the mark-to-market election, gain on the sale of our ordinary shares or ADSs is treated as ordinary income, and loss on the sale of our ordinary shares or ADSs, to the extent the amount of loss does not exceed the net mark-to-market gain previously included, is treated as ordinary loss. The mark-to-market election applies to the tax year for which the election is made and all later tax years, unless the ordinary shares or ADSs cease to be marketable or the Internal Revenue Service consents to the revocation of the election. |
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If the mark-to-market election is made after the first taxable year in which a United States holder holds our ordinary shares or ADSs and we are a PFIC, then special rules would apply. |
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A United States holder making neither the QEF election nor the mark-to-market election is subject to the excess distribution regime. Under this regime, excess distributions are subject to special tax rules. An excess distribution is either (1) a distribution with respect to ordinary shares or ADSs that is greater than 125% of the average distributions received by the United States holder from us over the shorter of either the preceding three years or such United States holders holding period for our ordinary shares or ADSs, or (2) 100% of the gain from the disposition of our ordinary shares or ADSs (including gain deemed recognized if the ordinary shares or ADSs are used as security for a loan). |
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Excess distributions must be allocated ratably to each day that a United States holder has held our ordinary shares or ADSs. A United States holder must include amounts allocated to the current taxable year and to any period prior to the first day of the first taxable year for which we are a PFIC in its gross income as ordinary income for the current taxable year. All amounts allocated to other years of the United States holder would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The United States holder also would be liable for interest on the deferred tax liability for each such other year calculated as if such liability had been due with respect to each such other year. A United States holder that is an individual is not allowed a deduction for interest on the deferred tax liability. The portions of distributions that are not characterized as excess distributions are subject to tax in the current year under the normal tax rules of the Code. |
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A United States person who inherits shares or ADSs in a foreign corporation that was a PFIC in the hands of the decedent (who was not a non resident alien and did not make either of the elections described above), is denied the otherwise available step-up in the tax basis of such shares or ADSs to fair market value at the date of death. The U.S. person steps into the shoes of the decedent and will be subject to the rules described above. |
We believe that in 2003 we were not a PFIC and currently we expect that we will not be a PFIC in 2004. However, PFIC status is determined as of the end of the taxable year and is dependent on a number of factors, including the value of our assets and the amount and type of our gross income. Therefore, there can be no assurance that we will not become a PFIC for the current fiscal year ending December 31, 2004 or in a future year. We will notify United States holders in the event we conclude that we will be treated as a PFIC for any taxable year to enable United States holders to consider whether or not to elect to treat us as a QEF for United States federal income tax purposes or to mark to market the ordinary shares or ADSs or to become subject to the excess distribution regime.
United States holders are urged to consult their tax advisors regarding the application of the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to-market election.
Information Reporting and Backup Withholding
A United States holder generally is subject to information reporting and may be subject to backup withholding at rate of up to 28% with respect to dividend payments and receipt of the proceeds from the disposition of the ordinary shares or ADSs. Backup withholding will not apply with respect to payments made to exempt recipients, including corporations and tax-exempt organizations, or if a United States holder provides a correct taxpayer identification number (or certifies that he has applied for a taxpayer identification number), certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the United States federal income tax liability of a United States holder, or alternatively, the United States holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service.
Non-United States holders of Ordinary Shares or ADSs
Except as provided below, a non-United States holder of ordinary shares or ADSs (except certain former United States citizens and long-term residents of the United States) will not be subject to United States federal income or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary share or ADS, unless that item is effectively connected with the conduct by the non-United States holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, that item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-United States holder will be subject to tax in the United States if the non-United States holder is present in the United States for 183 days or more in the taxable year of the sale and other conditions are met.
90
Non-United States holders will not be subject to information reporting or backup withholding with respect to the payment of dividends on ordinary shares or ADSs unless the payment is made through a paying agent, or an office of a paying agent, in the United States. Non-United States holders will be subject to information reporting and backup withholding at a rate of up to 28% with respect to the payment within the United States of dividends on the ordinary shares or ADSs unless the holder provides its taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Non-United States holders will be subject to information reporting and backup withholding at a rate of up to 28% on the receipt of the proceeds from the disposition of the ordinary shares or ADSs to, or through, the United States office of a broker, whether domestic or foreign, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-United States holders will not be subject to information reporting or backup withholding with respect to the receipt of proceeds from the disposition of the ordinary shares or ADSs by a foreign office of a broker; provided, however, that if the broker is a U.S. person or a U.S. related person, information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its records of the non-United States holders foreign status or the non-United States holder certifies to its foreign status under penalties of perjury or otherwise establishes an exemption. For this purpose, a U.S. related person is a broker or other intermediary that maintains one or more enumerated U.S. relationships. Backup withholding is not an additional tax and may be claimed as a credit against the United States federal income tax liability of a non-United States holder, or alternatively, the non-United States holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service.
F. Dividend and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents On Display
Formula files annual and submits special reports and other information with the SEC. You may inspect and copy such material at the public reference facilities maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
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The SEC maintains an Internet website at http://www.sec.gov that contains reports and other material that are filed through the SECs Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Formula began filing through the EDGAR system beginning in October 2002.
Formulas ADSs are quoted on the NASDAQ National Market. You may inspect reports and other information concerning Formula at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Information about Formula is also available on its website at http://www.formulasystems.com. Such information on our website is not part of this annual report.
As a foreign private issuer, Formula is exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and Formulas officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, Formula is not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Currency Exchange Rate Fluctuations and Impact of Inflation
In light of the nature of Formulas activities, Formula invests its cash and cash equivalents in short term deposits. As of December 31, 2003, Formula invested substantially all of the cash it held in dollar accounts bearing interest based on LIBOR and in NIS accounts bearing interest based on the Israeli prime rate. In addition, Formula has outstanding short-term loans in dollars and NIS. In May 2002, Formula issued debentures to the public. Principal and interest on those debentures are linked to the Israeli CPI. One of our major assets is comprised of debentures issued to us by Formula Vision.These debentures are also linked to the Israeli CPI.
An increase in value of the NIS against the dollar (after taking into account the rate of inflation or deflation in Israel) may have a negative impact on our operating results and financial condition. In particular, our finance expenses may increase. Depending upon the circumstances, we will consider entering into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS. There can be no assurance that these activities, or others that we may use from time to time, will eliminate the negative financial impact of currency fluctuations and inflation.
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We do not engage in currency speculation. Generally, we do not hold nor have we issued, to any material extent, any derivatives or other financial instruments for trading purposes.
Fluctuations in Market Price of Securities We Hold
We hold securities of several publicly traded companies on the Nasdaq National Market and the TASE. These companies include Magic, BluePhoenix, Matrix, Sapiens and Formula Vision. We consider these holdings as long-term holdings. We are exposed to the risk of fluctuation of the price of these companies securities. All of these publicly traded companies have experienced significant historical volatility in their stock prices. Fluctuations in the market price of our holdings in these companies may result in the fluctuation of the value of our assets. We typically do not attempt to reduce or eliminate our market exposure on these securities.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
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P A R T II
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Our chief executive officer and principal financial officer are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We evaluated these disclosure controls and procedures under the supervision of our chief executive officer and principal financial officer as of December 31, 2003. Based on this evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to information required to be disclosed in our periodic reports to the SEC.
(b) Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has agreed that Mr. Shlomo Nass, a member of our audit committee and an independent member of our board of directors pursuant to the Nasdaq requirements, is an audit committee financial expert, as defined by applicable SEC regulations.
Formula has adopted a code of business conduct and ethics applicable to its executive officers, directors and all other employees. A copy of the code is available to every Formula employee, investors and others upon request to its general counsel. Any waiver of this code for executive officers or directors will be disclosed through the filing of a Form 6-K.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
Our audit committee is responsible for the oversight of our independent auditors work. The audit committees policy is to pre-approve all audit and non-audit services provided by Ziv Haft certified public accountants (Isr.) BDO member firm. These services may include audit services, audit-related services, tax services and other services, as further described below. The audit committee sets forth the basis for its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and setting forth a specific budget for such services. Additional services may be pre-approved by the audit committee on an individual basis. Once services have been pre-approved, Ziv Haft certified public accountants (Isr.) BDO member firm and our management then report to the audit committee on a periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for the services performed.
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Principal Accountant Fees and Services
Formula paid the following fees for professional services rendered by Ziv Haft certified public accountants (Isr.) BDO member firm, for the years ended December 31:
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2003 |
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2002 |
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($ in thousands) |
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Audit Fees |
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211 |
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175 |
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Audit-Related Fees |
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-- |
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85 |
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Tax Fees |
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7 |
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7 |
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All Other Fees |
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-- |
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-- |
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Total |
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218 |
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267 |
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The audit fees for the years ended December 31, 2003 and 2002 were for professional services rendered for the audits of our annual consolidated financial statements, review of our consolidated quarterly financial statements, statutory audits of Formula and its subsidiaries, issuance of comfort letters, consents and assistance with review of documents filed with the SEC.
The audit-related fees for the year ended December 31, 2002 were for accounting consultations and audits in connection with a debenture offering we consummated in Israel.
Tax fees for the years ended December 31, 2003 and 2002 were for services related to the preparation of tax returns and claims for refund.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
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P A R T III
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We have responded to Item 18 in lieu of this item.
The financial statements required by this item are found at the end of this annual report, beginning on page F-1.
Exhibit No. |
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1.1 |
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Memorandum of Association* |
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1.2 |
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Articles of Association as amended on January 7, 2001** |
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2 |
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The description of terms of debentures issued by the Registrant in May 2002, contained in Section 2.3 of the prospectus of the Registrant dated May 23, 2002 *** |
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4.1 |
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Agreement dated October 1, 1999 between the Registrant and Shamrock Holdings of California Inc.**** |
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4.2 |
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Agreement dated January 24, 2001 among the Registrant, Sapiens International Corporation N.V. and Yarnfield International Limited** |
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4.3 |
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Amendment to the agreement among the Registrant, Sapiens International Corporation N.V. and Yarnfield International Limited, dated October 20, 2002 |
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4.4 |
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Agreement dated December 30, 2001 between the Registrant and Formula Vision Technologies (F.V.T.) Ltd. (English summary accompanied by Hebrew original)***** |
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4.5 |
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Agreement dated December 15, 2003 between the Registrant and Formula Vision Technologies (F.V.T.) Ltd. |
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4.6 |
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Form of the 1997 Share Option Plan (English translation from Hebrew original)* |
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4.7 |
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Form of the 2000 Share Option Plan (English translation from Hebrew original)** |
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4.8 |
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Letter of Indemnification, dated February 14, 2002***** |
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Exhibit No. |
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8 |
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List of Subsidiaries |
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12.1 |
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Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act |
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12.2 |
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Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act |
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13.1 |
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act |
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13.2 |
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Certification of the Principal Financial Officer pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act |
97
FORMULA SYSTEMS (1985) LTD.
(An Israeli corporation)
2003 Annual Report
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
2003 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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F-1 |
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CONSOLIDATED FINANCIAL STATEMENTS: |
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F-2 |
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F-4 |
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F-5 |
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F-6 |
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F-11 |
The amounts are stated in U.S. dollars ($).
______________________
_____________
______
To the Shareholders of
FORMULA SYSTEMS (1985) LTD.
We have audited the consolidated balance sheets of Formula Systems (1985) Ltd. and its subsidiaries (the Company) as of December 31, 2003 and 2002 and the consolidated statements of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose consolidated assets constitute approximately 29.25% and 18.54% of total consolidated assets as of December 31, 2003 and 2002, respectively, and whose consolidated revenues constitute approximately 31.82%, 21.82% and 30% of total consolidated revenues for the years ended December 31, 2003, 2002 and 2001, respectively. The financial statements of those subsidiaries were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included in respect of those subsidiaries is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards issued by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit so as to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes the examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements. An audit also includes the assessment of the accounting principles adopted and significant estimates made by management, as well as an evaluation of the overall presentation in the financial statements. We believe that our audits and the reports of the other independent auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003 and 2002, and the related consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with generally accepted accounting principles as applied in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
As discussed in Note 17, there were public reports in early 2004 that Microsoft source code was leaked to the Internet with source traces coming from the Companys subsidiary. While the Companys subsidiary believes its relationship with Microsoft will continue on terms acceptable to the Companys subsidiary, a change in the relationship could materially adversely affect the Companys subsidiary business, result of operations, and financial condition.
Tel-Aviv, Israel
June 28, 2004
|
Ziv Haft |
|
|
|
Certified Public Accountants (Isr.) |
|
|
|
BDO member firm |
F- 1
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS
|
|
December 31, |
|
||||
|
|
|
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
|
|
(U.S. $ in thousands) |
|
||||
|
|
|
|
||||
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
93,456 |
|
|
90,561 |
|
Short-term investments |
|
|
8,773 |
|
|
12,101 |
|
Trade receivables (net of allowances for doubtful debts of $7,090 and $5,365 |
|
|
93,298 |
|
|
67,642 |
|
Other current assets (Note 15A) |
|
|
18,846 |
|
|
19,642 |
|
Inventories |
|
|
2,635 |
|
|
3,590 |
|
|
|
|
|
|
|
|
|
|
|
|
217,008 |
|
|
193,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM INVESTMENTS, LOANS AND RECEIVABLES: |
|
|
|
|
|
|
|
Loan and other investments (Note 3) |
|
|
3,308 |
|
|
3,400 |
|
Investments in affiliates (Note 4) |
|
|
3,373 |
|
|
22,659 |
|
|
|
|
|
|
|
|
|
|
|
|
6,681 |
|
|
26,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBENTURES (Note 2I) |
|
|
80,246 |
|
|
75,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE PAY FUND (Note 9) |
|
|
11,113 |
|
|
8,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET (Notes 5 and 15B) |
|
|
25,756 |
|
|
25,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL (Note 1I) |
|
|
145,672 |
|
|
115,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS, NET (Note 6) |
|
|
42,439 |
|
|
23,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528,915 |
|
|
467,245 |
|
|
|
|
|
|
|
|
|
F- 2
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
|
|
December 31, |
|
||||
|
|
|
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
|
|
(U.S. $ in thousands) |
|
||||
|
|
|
|
||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Liabilities to banks and others (Notes 7, 8 and 15C) |
|
|
67,723 |
|
|
87,752 |
|
Trade payables |
|
|
31,327 |
|
|
26,811 |
|
Other accounts payable (Note 15D) |
|
|
71,092 |
|
|
60,172 |
|
Debenture (Note 2J) |
|
|
14,160 |
|
|
14,279 |
|
Restructuring accrual |
|
|
- |
|
|
2,661 |
|
|
|
|
|
|
|
|
|
|
|
|
184,302 |
|
|
191,675 |
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
Debentures (Note 8) |
|
|
50,983 |
|
|
18,095 |
|
Provision for losses in formerly owned investee |
|
|
1,971 |
|
|
2,512 |
|
Deferred taxes |
|
|
942 |
|
|
871 |
|
Customer advances |
|
|
2,312 |
|
|
491 |
|
Liabilities to banks and others (Note 7) |
|
|
21,900 |
|
|
7,556 |
|
Liability in respect of the acquisition of activities |
|
|
2,149 |
|
|
2,334 |
|
Accrued severance pay (Note 9) |
|
|
15,642 |
|
|
12,048 |
|
Unrealized gains (Note 11) |
|
|
4,459 |
|
|
6,184 |
|
|
|
|
|
|
|
|
|
|
|
|
100,358 |
|
|
50,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
68,251 |
|
|
72,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (Note 13): |
|
|
|
|
|
|
|
Share
capital - ordinary shares of NIS 1 par value (authorized - December |
|
|
3,215 |
|
|
3,101 |
|
Additional paid-in capital |
|
|
99,275 |
|
|
89,396 |
|
Retained earnings |
|
|
91,067 |
|
|
87,947 |
|
Accumulated other comprehensive loss |
|
|
(17,294 |
) |
|
(23,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
176,263 |
|
|
156,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of 24,780 Treasury shares |
|
|
(259 |
) |
|
(3,398 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
176,004 |
|
|
153,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528,915 |
|
|
467,245 |
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 3
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands, except per share amounts) |
|
|||||||
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Revenues (Note 15E) |
|
|
366,830 |
|
|
283,310 |
|
|
387,682 |
|
Cost of revenues |
|
|
230,500 |
|
|
186,908 |
|
|
261,346 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
136,330 |
|
|
96,402 |
|
|
126,336 |
|
Research and development costs, net |
|
|
17,368 |
|
|
15,967 |
|
|
21,287 |
|
Selling, general and administrative expenses |
|
|
107,103 |
|
|
85,292 |
|
|
151,345 |
|
Restructuring and non-recurring costs (Note 15F) |
|
|
- |
|
|
1,829 |
|
|
10,998 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
11,859 |
|
|
(6,686 |
) |
|
(57,294 |
) |
Financial (expenses) income, net (Note 15G) |
|
|
(3,676 |
) |
|
3,605 |
|
|
2,680 |
|
Gain on realization of shareholdings, net (Note 15I) |
|
|
2,756 |
|
|
4,668 |
|
|
773 |
|
Other expenses, net (Note 15H) |
|
|
(90 |
) |
|
(2,100 |
) |
|
(36,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income |
|
|
10,849 |
|
|
(513 |
) |
|
(90,560 |
) |
Taxes on income (Note 14) |
|
|
2,540 |
|
|
2,014 |
|
|
6,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,309 |
|
|
(2,527 |
) |
|
(96,799 |
) |
Equity in losses of affiliated companies, net |
|
|
(1,071 |
) |
|
(2,327 |
) |
|
(9,926 |
) |
Minority interest in losses (earnings) of subsidiaries, net |
|
|
(4,118 |
) |
|
2,448 |
|
|
46,864 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3,120 |
|
|
(2,406 |
) |
|
(59,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share (Note 15K): |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.29 |
|
|
(0.24 |
) |
|
(6.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
0.24 |
|
|
(0.24 |
) |
|
(6.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
(Note 15K): |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,037 |
|
|
10,171 |
|
|
9,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
10,285 |
|
|
10,171 |
|
|
9,325 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 4
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
Share Capital |
|
Additional |
|
Retained |
|
Accumulated |
|
Cost of |
|
Total |
|
||
|
|||||||||||||||
Number of |
|
Amount |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. $ in t h o u s a n d s) |
|
||||||||||||
|
|
|
|
||||||||||||
Balance as of January 1, 2001 |
|
9,322,103 |
|
2,874 |
|
74,583 |
|
157,185 |
|
(4,970 |
) |
- |
|
229,672 |
|
Changes during 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
- |
|
- |
|
- |
|
(59,861 |
) |
- |
|
- |
|
(59,861 |
) |
Currency translation adjustments |
|
- |
|
- |
|
- |
|
- |
|
(11,993 |
) |
- |
|
(11,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
(71,854 |
) |
Issuance of share capital |
|
1,000,000 |
|
226 |
|
12,091 |
|
- |
|
- |
|
- |
|
12,317 |
|
Exercise of employee share options |
|
2,677 |
|
1 |
|
44 |
|
- |
|
- |
|
- |
|
45 |
|
Deferred compensation |
|
- |
|
- |
|
1,637 |
|
- |
|
- |
|
- |
|
1,637 |
|
Capital fund arising from transactions between Formula and certain |
|
- |
|
- |
|
1,575 |
|
- |
|
- |
|
- |
|
1,575 |
|
Dividend in kind |
|
- |
|
- |
|
- |
|
(6,971 |
) |
- |
|
- |
|
(6,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2001 |
|
10,324,780 |
|
3,101 |
|
89,930 |
|
90,353 |
|
(16,963 |
) |
- |
|
166,421 |
|
Changes during 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
- |
|
- |
|
- |
|
(2,406 |
) |
- |
|
- |
|
(2,406 |
) |
Currency translation adjustments |
|
- |
|
- |
|
- |
|
- |
|
(6,734 |
) |
- |
|
(6,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
(9,140 |
) |
Issuance of options in connection with debenture |
|
- |
|
- |
|
1,056 |
|
- |
|
- |
|
- |
|
1,056 |
|
Deferred compensation |
|
- |
|
- |
|
214 |
|
- |
|
- |
|
- |
|
214 |
|
Purchase of treasury stock |
|
(324,780 |
) |
- |
|
- |
|
- |
|
- |
|
(3,398 |
) |
(3,398 |
) |
Elimination of tax benefit resulting from issuance expenses |
|
- |
|
- |
|
(1,804 |
) |
- |
|
- |
|
- |
|
(1,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2002 |
|
10,000,000 |
|
3,101 |
|
89,396 |
|
87,947 |
|
(23,697 |
) |
(3,398 |
) |
153,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
- |
|
- |
|
- |
|
3,120 |
|
- |
|
- |
|
3,120 |
|
Currency translation adjustments |
|
- |
|
- |
|
- |
|
- |
|
6,403 |
|
- |
|
6,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
9,523 |
|
Deferred compensation |
|
- |
|
- |
|
406 |
|
- |
|
- |
|
- |
|
406 |
|
Proceeds from sale of treasury stock |
|
300,000 |
|
- |
|
1,657 |
|
- |
|
- |
|
3,139 |
|
4,796 |
|
Exercise of share options |
|
500,000 |
|
114 |
|
7,816 |
|
- |
|
- |
|
- |
|
7,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 |
|
10,800,000 |
|
3,215 |
|
99,275 |
|
91,067 |
|
(17,294 |
) |
(259 |
) |
176,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 5
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3,120 |
|
|
(2,406 |
) |
|
(59,861 |
) |
Adjustments to reconcile net income (loss) to net cash provided by |
|
|
|
|
|
|
|
|
|
|
Impairment and write down of investments in investees and loans |
|
|
915 |
|
|
1,656 |
|
|
38,448 |
|
Minority interest in earnings (losses) of consolidated subsidiaries |
|
|
4,118 |
|
|
(2,448 |
) |
|
(46,864 |
) |
Equity in losses of affiliated companies, net |
|
|
1,071 |
|
|
2,472 |
|
|
9,926 |
|
Depreciation and amortization |
|
|
18,547 |
|
|
12,906 |
|
|
29,895 |
|
Increase (decrease) in accrued severance pay, net |
|
|
(620 |
) |
|
219 |
|
|
(367 |
) |
Loss (gain) from sale of property and equipment |
|
|
(26 |
) |
|
176 |
|
|
218 |
|
Gain on realization of shareholdings and expiration of options |
|
|
(2,756 |
) |
|
(4,668 |
) |
|
(773 |
) |
Amortization of deferred warrant compensation |
|
|
456 |
|
|
430 |
|
|
3,221 |
|
Erosion, change in accrued interest and capital loss on debentures |
|
|
3,583 |
|
|
(2,945 |
) |
|
- |
|
Erosion (appreciation) in value of long term loans and deposits, net |
|
|
(1,659 |
) |
|
108 |
|
|
(434 |
) |
Deferred taxes |
|
|
827 |
|
|
(410 |
) |
|
1,316 |
|
Accrued interest on redeemable shares in a subsidiary |
|
|
320 |
|
|
- |
|
|
- |
|
Gain on payment of convertible subordinated notes |
|
|
(61 |
) |
|
- |
|
|
- |
|
Increase (decrease) in marketable securities |
|
|
(991 |
) |
|
435 |
|
|
283 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in inventories |
|
|
(265 |
) |
|
1,159 |
|
|
410 |
|
Decrease (increase) in trade receivables |
|
|
(12,649 |
) |
|
14,153 |
|
|
22,178 |
|
Decrease (increase) in other accounts receivable |
|
|
7,913 |
|
|
1,827 |
|
|
(8,756 |
) |
Increase (decrease) in trade payables |
|
|
2,927 |
|
|
(9,483 |
) |
|
12,118 |
|
Increase (decrease) in other accounts payable and restructuring accrual |
|
|
(12,475 |
) |
|
(8,212 |
) |
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,295 |
|
|
4,969 |
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 6
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Acquisition of newly-consolidated subsidiaries (Appendix C) |
|
|
20,481 |
|
|
(1,774 |
) |
|
(17,590 |
) |
Proceeds from realization of investment in previously-consolidated |
|
|
12 |
|
|
(9 |
) |
|
(30,617 |
) |
Investment in debentures |
|
|
- |
|
|
(19,422 |
) |
|
- |
|
Proceeds from repayment of debentures |
|
|
301 |
|
|
2,919 |
|
|
- |
|
Sale of marketable securities, net |
|
|
(2,665 |
) |
|
(1,857 |
) |
|
4,025 |
|
Cash pledged |
|
|
- |
|
|
- |
|
|
(740 |
) |
Purchase of property and equipment |
|
|
(4,887 |
) |
|
(3,382 |
) |
|
(11,136 |
) |
Fulfillment of guarantees |
|
|
- |
|
|
- |
|
|
(196 |
) |
Proceeds from sale of property and equipment |
|
|
1,246 |
|
|
1,160 |
|
|
3,264 |
|
Investment in and loans to affiliated and other companies |
|
|
(1,685 |
) |
|
(17,488 |
) |
|
(36,897 |
) |
Proceeds from sale of investments in and loans to affiliated companies |
|
|
1,581 |
|
|
2,128 |
|
|
10,735 |
|
Purchase of an activity by a consolidated company |
|
|
(429 |
) |
|
(1,330 |
) |
|
- |
|
Purchase of know-how by consolidated companies |
|
|
- |
|
|
(353 |
) |
|
(3,153 |
) |
Investment in bank deposits, net |
|
|
18 |
|
|
(180 |
) |
|
14,304 |
|
Additional investment in previously consolidated company |
|
|
- |
|
|
- |
|
|
(1,559 |
) |
Capitalization of software development and other costs |
|
|
(10,172 |
) |
|
(4,424 |
) |
|
(9,857 |
) |
Purchase of minority interest in subsidiaries |
|
|
(23,599 |
) |
|
(16,231 |
) |
|
(35,018 |
) |
Proceeds from realization of investment in subsidiaries |
|
|
2,846 |
|
|
- |
|
|
- |
|
Proceeds from investments in short term bank deposits, net |
|
|
9,400 |
|
|
- |
|
|
- |
|
Dividends received from affiliated companies |
|
|
- |
|
|
31 |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,552 |
) |
|
(60,212 |
) |
|
(114,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Acquisition of newly - consolidated subsidiaries (Appendix E) |
|
|
- |
|
|
- |
|
|
7,999 |
|
Proceeds from sale of call warrants |
|
|
1,386 |
|
|
2,174 |
|
|
- |
|
Issuance of convertible debt |
|
|
20,977 |
|
|
29,453 |
|
|
- |
|
Purchase of treasury stock |
|
|
- |
|
|
(3,398 |
) |
|
- |
|
Issuance of treasury stock |
|
|
4,796 |
|
|
- |
|
|
- |
|
Issuance of share capital |
|
|
- |
|
|
- |
|
|
12,317 |
|
Exercise of share options |
|
|
7,930 |
|
|
- |
|
|
45 |
|
Dividend to minority shareholders in subsidiaries |
|
|
(4,831 |
) |
|
(128 |
) |
|
(797 |
) |
Short-term bank credit, net |
|
|
(41,344 |
) |
|
37,061 |
|
|
26,558 |
|
Repayment of long-term loans |
|
|
(5,061 |
) |
|
(5,045 |
) |
|
(2,192 |
) |
Receipt of long-term loans |
|
|
19,581 |
|
|
4,841 |
|
|
13,335 |
|
Issuance in a subsidiary to minority shareholders, net |
|
|
479 |
|
|
356 |
|
|
1,104 |
|
Convertible debt issuance expenses in a subsidiary |
|
|
(1,496 |
) |
|
- |
|
|
- |
|
Payment of convertible subordinated notes in a subsidiary |
|
|
(4,144 |
) |
|
- |
|
|
- |
|
Payment of issuance expenses in a subsidiary |
|
|
(361 |
) |
|
- |
|
|
- |
|
Debenture redemption |
|
|
(2,484 |
) |
|
- |
|
|
(40 |
) |
Purchase of treasury stock in a subsidiary by a subsidiary thereof |
|
|
- |
|
|
(482 |
) |
|
(1,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(4,572 |
) |
|
64,832 |
|
|
57,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
2,724 |
|
|
(2,575 |
) |
|
(7,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
2,895 |
|
|
7,014 |
|
|
(63,858 |
) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
|
90,561 |
|
|
83,547 |
|
|
147,405 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
|
93,456 |
|
|
90,561 |
|
|
83,547 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 7
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Appendix A - Supplemental cash flow information:
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year in respect of: |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
6,547 |
|
|
5,616 |
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
|
4,652 |
|
|
5,940 |
|
|
8,986 |
|
|
|
|
|
|
|
|
|
|
|
|
Appendix B - Non-cash activities:
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Transfer of investments and loans against debentures |
|
|
- |
|
|
- |
|
|
37,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets against trade payables |
|
|
80 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in a consolidated company against issuance of share |
|
|
5,101 |
|
|
9,358 |
|
|
1,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization
of investment in a consolidated company against |
|
|
- |
|
|
- |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of activity against long term liability |
|
|
- |
|
|
2,503 |
|
|
1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates and other companies, recorded against |
|
|
807 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of shares from minority shareholders of subsidiary, against |
|
|
- |
|
|
262 |
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization of convertible debenture in a subsidiary |
|
|
229 |
|
|
242 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
shares from minority shareholders of subsidiary |
|
|
- |
|
|
1,310 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization of investment in an exchange shares transaction |
|
|
- |
|
|
6,422 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of technology from affiliated company against loan |
|
|
1,917 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intellectual property rights against settlement of loan |
|
|
642 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued as consideration for purchase of activity |
|
|
121 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 8
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Appendix C - Acquisition of newly-consolidated subsidiaries:
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
Assets and liabilities of subsidiaries consolidated as of |
|
|
|
|
|
|
|
|
|
|
Working capital (other than cash and cash equivalents) |
|
|
(12,519 |
) |
|
1,019 |
|
|
(4,197 |
) |
Liabilities arising from purchase of an activity |
|
|
- |
|
|
(743 |
) |
|
(1,421 |
) |
Investment in affiliates and others including loans |
|
|
(19,014 |
) |
|
(6,232 |
) |
|
(1,684 |
) |
Property and equipment |
|
|
4,074 |
|
|
480 |
|
|
2,466 |
|
Other assets and deferred expenses |
|
|
23,748 |
|
|
413 |
|
|
1,361 |
|
Goodwill arising upon acquisition |
|
|
14,379 |
|
|
6,654 |
|
|
33,173 |
|
Short-term bank credit |
|
|
(207 |
) |
|
- |
|
|
- |
|
Long-term liabilities |
|
|
(8,887 |
) |
|
(77 |
) |
|
(2,746 |
) |
Convertible debentures |
|
|
(12,099 |
) |
|
- |
|
|
- |
|
Minority interest at acquisition date |
|
|
(9,030 |
) |
|
260 |
|
|
(9,093 |
) |
Share capital and call warrants issued to previous shareholders |
|
|
(926 |
) |
|
- |
|
|
- |
|
Capital gain from merger transaction |
|
|
- |
|
|
- |
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(20,481 |
) |
|
1,774 |
|
|
17,590 |
|
|
|
|
|
|
|
|
|
|
|
|
Appendix D - Proceeds from realization of investments in previously-consolidated subsidiaries:
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
Assets and liabilities of consolidated subsidiaries as of date |
|
|
|
|
|
|
|
|
|
|
Working capital (other than cash and cash equivalents) |
|
|
(330 |
) |
|
289 |
|
|
12,344 |
|
Debtor in respect of sale of companies |
|
|
- |
|
|
- |
|
|
(3 |
) |
Investment in affiliate (including loans) |
|
|
2,613 |
|
|
(221 |
) |
|
(4,282 |
) |
Loans to others |
|
|
- |
|
|
- |
|
|
(3,050 |
) |
Property and equipment |
|
|
(360 |
) |
|
- |
|
|
(6,300 |
) |
Other assets and deferred expenses |
|
|
(67 |
) |
|
31 |
|
|
(4,446 |
) |
Goodwill |
|
|
(2,133 |
) |
|
(76 |
) |
|
(21,581 |
) |
Long-term liabilities |
|
|
201 |
|
|
(14 |
) |
|
18,804 |
|
Loss (gain) from realization of investments in subsidiaries |
|
|
(27 |
) |
|
- |
|
|
3,982 |
|
Minority interest |
|
|
91 |
|
|
- |
|
|
4,762 |
|
Dividend in kind |
|
|
- |
|
|
- |
|
|
6,971 |
|
Debentures |
|
|
- |
|
|
- |
|
|
21,492 |
|
Unrealized gain |
|
|
- |
|
|
- |
|
|
1,924 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(12 |
) |
|
9 |
|
|
30,617 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the financial statements.
F- 9
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Appendix E - Acquisition of newly-consolidated subsidiaries(*):
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities of subsidiaries consolidated as of |
|
|
|
|
|
|
|
|
|
|
Working capital (other than cash and cash equivalents) |
|
|
- |
|
|
- |
|
|
(307 |
) |
Goodwill realized |
|
|
- |
|
|
- |
|
|
(1,943 |
) |
Minority interest at acquisition date |
|
|
- |
|
|
- |
|
|
(2,383 |
) |
Unrealized gain |
|
|
- |
|
|
- |
|
|
(3,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
- |
|
|
- |
|
|
(7,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
(*) |
In the framework of the reverse acquisition of a subsidiary into a listed company shell. The Company considers this activity to be a financing activity because, in substance, it constitutes a flotation of the subsidiary on the stock market. |
The accompanying notes form an integral part of the financial statements.
F- 10
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
A. |
General: |
|
|
|
Formula Systems (1985) Ltd. (Formula) was incorporated in Israel in 1985. Since 1991, the Companys shares have been traded on the Tel Aviv Stock Exchange (the TASE) and since 1997, through American Depositary Shares (ADS) under the symbol FORTY on the NASDAQ National Market in the United States. Each ADS represents one ordinary share of the Company. |
|
|
|
Formula, through its subsidiaries (collectively, the Company or the Group) is engaged in the development, production and marketing of information technology (IT) solutions and services. The Group operates in two principal business segments, IT Services and Proprietary Software Solutions. For a description of the segments - see Note 15J. |
|
|
|
The following table presents certain information regarding the control and ownership of Formulas significant subsidiaries and material investments, as of the dates indicated: |
|
|
|
Percentage of ownership and control |
|
|||||
|
|
|
|
|
|
||||
|
|
|
December 31, |
|
December 31, |
|
|||
|
|
|
|
|
|
|
|||
|
Name of Investee or subsidiary: |
|
% |
|
|||||
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
Matrix IT Ltd. (Matrix) |
|
72.15 |
|
|
65.2 |
|
|
|
|
BluePhoenix
Solutions Ltd. (BluePhoenix) |
|
58.8 |
|
|
58.35 |
|
|
|
|
Magic Software Enterprises Ltd. (Magic) |
|
52.9 |
|
|
52.6 |
|
|
|
|
nextSource Inc. |
|
100 |
|
|
100 |
|
|
|
|
Sapiens
International Corporation N.V. |
|
50.69 |
|
|
47.48 |
|
|
|
|
The above list consists only of active companies that are held directly by Formula. |
F-11
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (cont.):
A. |
General (cont.): |
|
|
|
Accounting Principles |
|
|
|
The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) as applied in the United States. |
|
|
|
Functional and Reporting Currency |
|
|
|
The currency of the primary economic environment in which the operations of Formula and most of its subsidiaries are conducted is the New Israeli Shekel (NIS). The functional currency of the remaining subsidiaries is the United States dollar (dollar). Formula has elected to use the dollar as its reporting currency. |
|
|
|
The financial statements of Formuls and most of its subsidiaries whose functional currency is the NIS have been translated into dollars under the principles described in Financial Accounting Standards Board Statement No. 52, Foreign Currency Translation. Assets and liabilities have been translated at period-end exchange rates. The results of operations have been translated at the exchange rates at on the dates on which the transactions occurred or at average exchange rates. Differences resulting from translation are presented under shareholders equity, in the item accumulated other comprehensive income (loss). Accordingly, the financial statements of subsidiaries whose functional currency is the dollar are presented in the consolidated financial statements at their original amounts. |
|
|
|
Use of Estimates and Assumptions in the Preparation of the Financial Statements |
|
|
|
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. |
|
|
|
The actual results may differ from these estimates. |
|
|
B. |
Principles of Consolidation: |
|
|
|
The consolidated financial statements include the Formulas financial statements as well as those of its subsidiaries in which it has a controlling interest. Inter-company transactions and balances have been eliminated on consolidation. |
|
|
C. |
Cash and Cash Equivalents: |
|
|
|
Cash equivalents are considered by the Company to be highly-liquid investments, including, inter alia, short-term deposits with banks, the maturity of which did not exceed three months at the time of deposit and which are unrestricted. |
F-12
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (cont.):
D. |
Investments: |
|
|
|
Investments in affiliates over which the Company exercises significant influence are accounted for under the equity method. Investments in non-marketable securities of companies in which the Company does not have the ability to exercise significant influence over operating and financial policy are recorded at cost. Investments in marketable securities are classified as trading, and unrealized gains or losses thereon are reported in the statement of income in accordance with Statement of Financial Accounting Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and Equity Securities. See Note 1I in respect of the treatment of goodwill. Investments in other companies are accounted for under the cost method. |
|
|
|
Investments are periodically reviewed to determine whether an impairment in value has occurred that is of a non-temporary nature, in which case the investment is written down to its fair value. |
|
|
E. |
Provision for Doubtful Accounts: |
|
|
|
The provision for doubtful accounts was calculated on the basis of specific receivables, where, in the opinion of Group management, doubt exists as to their collectability. |
|
|
F. |
Inventory: |
|
|
|
Inventory is comprised of hardware and software. |
|
|
|
Inventory is valued at the lower of cost or market value. Cost is determined on the first in - first out basis. |
|
|
G. |
Debentures: |
|
|
|
Debentures from investments sales relate to the transaction carried out on December 31, 2001. The debentures were issued by Formula Vision Technologies (F.V.T.) Ltd. (Formula Vision), in connection with the sale of non-public companies held by Formula to Formula Vision. |
|
|
|
Formula evaluates periodically, the financial strength of Formula Vision and its ability to meet the repayment schedule of the loan (see Note 2I). |
|
|
H. |
Property and Equipment, net: |
|
|
|
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over their estimated useful lives. The following are the annual depreciation rates: |
|
|
|
% |
|
|
|
|
|
|
|
Computers and equipment |
|
6 - 33 (mainly 33) |
|
|
Motor vehicles |
|
15-33 (mainly 15) |
|
|
Buildings |
|
4 |
|
|
Leasehold improvements |
|
10 - 20 (mainly 20) |
|
F-13
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (cont.):
I. |
Goodwill: |
|
|
|
Goodwill reflects the excess of the purchase price of subsidiaries acquired over the fair value of net assets acquired. Until December 31, 2001, goodwill was amortized in equal annual installments, over a period of 10 years. In the event it was determined that goodwill is not recoverable, its book value was written off and charged to the statement of operations as goodwill impairment. |
|
|
|
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires goodwill to be tested for impairment on an annual basis and more frequently in certain circumstances, and written down when impaired rather than being amortized as required by previous accounting standards. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless those lives are determined to be indefinite. |
|
|
|
SFAS 142 is effective for fiscal years beginning after December 15, 2001. In accordance with SFAS 142, the Company ceased amortizing goodwill totaling $105 million as of the beginning of 2002. |
|
|
|
During 2002 the Company completed its transitional impairment review of goodwill. Based on the impairment tests performed, there was no impairment of goodwill as of January 1, 2002. The Company has selected December 31st as the date on which it will perform its annual goodwill impairment test. As of December 31, 2003 and 2002, no impairment was required. There can be no assurance that future goodwill impairment tests will not result in a charge to net income. |
|
|
|
The following table presents the impact of SFAS 142 on net earnings (loss) and net earnings (loss) per share had the accounting standard been in effect during the years 2001-2003 (in US$thousands, except per-share amounts): |
|
|
|
Year ended December 31, |
|
|||||||
|
|
|
|
|
|||||||
|
|
|
(U.S. $ in thousands) |
|
|||||||
|
|
|
|
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net earnings (loss) as reported |
|
|
3,120 |
|
|
(2,406 |
) |
|
(59,861 |
) |
|
Amortization of goodwill |
|
|
- |
|
|
- |
|
|
10,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) as adjusted |
|
|
3,120 |
|
|
(2,406 |
) |
|
(48,929 |
) |
|
Basic net earnings (loss) per share as reported |
|
|
0.29 |
|
|
(0.24 |
) |
|
(6.42 |
) |
|
Basic net earnings (loss) per share as adjusted |
|
|
0.29 |
|
|
(0.24 |
) |
|
(5.25 |
) |
|
Diluted net earnings (loss) per share as reported |
|
|
0.24 |
|
|
(0.24 |
) |
|
(6.42 |
) |
|
Diluted net earnings (loss) per share as adjusted |
|
|
0.24 |
|
|
(0.24 |
) |
|
(5.25 |
) |
F-14
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (cont.):
J. |
Software Development Costs: |
|
|
|
Development costs of software, which is intended for sale, are incurred after the establishment of the technological feasibility of the relevant product, and capitalized. Technological feasibility is determined when detailed program design is completed and verified in accordance with the provisions of SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed of the FASB. |
|
|
|
Software development costs incurred before technological feasibility has been established are charged to the statement of income when incurred. |
|
|
|
Amortization of capitalized software development costs begins when the product is available for general release to customers. Annual amortization is calculated according to the higher of the straight-line method over the remaining useful life of the product or based on the ratio of current gross revenues to current and anticipated future gross revenues. At present, amortization is computed under the straight-line method, mainly over a period of 3 years. During the year ended December 31, 2003, consolidated subsidiaries capitalized software development costs aggregating $10.2 million (2002 - $4.4 million, 2001 - $9.9 million) and amortized capitalized software development costs aggregating $8.1 million (2002 - $5.1 million, 2001 - $6.6 million). |
|
|
|
Management estimates that the total capitalized costs do not exceed the net realizable value of the software product. |
|
|
|
In the event that unamortized software development costs exceed the net realizable value of the product, they are written down to net realizable value. |
|
|
K. |
Other Intangible Assets: |
|
|
|
Other intangible assets are comprised of distribution rights and acquired technology and are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Distribution rights and acquired technology are amortized over a period of 5 and 8 years, respectively. |
|
|
L. |
Impairment in Value of Long-Lived Assets: |
|
|
|
The Companys long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets held and used is measured by a comparison of the carrying amount of the assets 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. As of December 31, 2003 and 2002, no impairment losses have been identified. |
F-15
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (cont.):
L. |
Impairment in Value of Long-Lived Assets (cont.): |
|
|
|
|
|
In 2001, the Groups long-lived assets were reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 121 Accounting for the Impairment of Long-lived Assets. Based on managements analysis, impairment losses of $1,279 thousand were identified in 2001. |
|
|
|
|
M. |
Revenue Recognition: |
|
|
|
|
|
Revenues derived from direct software license agreements are recognized in accordance with Statement of Position (SOP) 97-2 Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9), upon delivery of the software when collection is probable. Where the license fee is otherwise fixed or determinable it constitutes persuasive evidence that an arrangement exists. |
|
|
|
|
|
When a project involves significant modification of software, revenue is generally recognized according to the percentage of completion method. Under this method, estimated revenue is generally accrued based on costs incurred to date as a percentage of the total updated estimated costs. |
|
|
|
|
|
The Company recognizes revenues from projects as follows: |
|
|
|
|
|
(i) |
Revenue from projects billed on a time and material basis is recognized in accordance with SOP 81-1 Accounting for Performance of Construction - Type and Certain Production - Type Contracts, using contract accounting on a percentage of completion method, on the basis of the relationship between actual costs incurred and the total costs that are expected to be incurred over the duration of the contract. Provision is made for estimated losses and uncompleted contracts, in the amount of the estimated losses on the entire contract in the period in which such losses first become evident. As of December 31, 2003, no such estimated losses were identified. |
|
|
|
|
(ii) |
Revenue from fixed fee contracts is also recognized in accordance with the percentage of completion method. The Company recognizes contract losses, if any, in the period in which they first become evident. |
|
|
|
|
Revenues from consulting services, consist of billable hours for services provided, are recognized as the services are rendered. |
|
|
|
|
|
Revenues from maintenance and training contracts are recognized relatively over the contract period. |
|
|
|
|
|
Revenues from sale of hardware are recognized when the merchandise is delivered to the customer, provided no significant vendor obligations remain. |
|
|
|
|
|