o | |
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _______________
OR
o | |
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report. . . . . . . . . . .
Commission file number 000-20181
SAPIENS INTERNATIONAL CORPORATION N.V.
(Exact name of Registrant as specified in its charter)
NETHERLANDS ANTILLES
(Jurisdiction of incorporation or organization)
Landhuis Joonchi
Kaya Richard J. Beaujon z/n
P.O. Box 837
Curaçao, Netherlands Antilles
(Address of principal executive offices)
Roni Giladi, Chief Financial Officer
Tel: +972-8-938-2721
Fax:+972-8-938-2880
Rabin Science Park
PO Box 4011
Nes Ziona 74140 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:None
Title of Class: | Name of each exchange on which registered: | |
Common Shares, par value € 0.01 per share | NASDAQ Capital Market | |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, par value € 0.01 per share
None(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report
As of December 31, 20052008 the issuer had 12,810,10221,591,088 Common Shares, par value € 0.01 per share, outstanding.
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YesoNox
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yesxo Noox
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesxNoo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
oLarge Accelerated Filer | oAccelerated Filer | xNon-Accelerated Filer | |||
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
x U.S. GAAP | o International Financial Reporting Standards as issued | o Other |
| by | |
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17o Item 18o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox
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Item 16F. | Change in Registrant's Certifying Accountant | 66 | ||||
Corporate Governance | 66 | |||||
PART III |
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Signatures | 69 | |||||
Definitions
In this annual report, unless the context otherwise requires:
References to “Sapiens,” the “Company,” the “Registrant,” “us,” “we” and “our” refer to Sapiens International Corporation N.V. (the “Registrant”), a Netherlands Antilles company, and its consolidated subsidiaries.
References to “our shares,” “Common Shares” and similar expressions refer to the Registrant’s Common Shares, par value € 0.01 per share.
References to “dollars”, “US dollar”dollars” or “$” are to United States Dollars.
References to “NIS” are to New IsraelIsraeli Shekels, the Israeli currency.
Cautionary Statement Regarding Forward-Looking Statements
Certain matters discussed in this annual report are forward-looking statements that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those described herein. Please read the risks discussed in Item 3 – “Key Information” under the caption “Risk Factors” and cautionary statements appearing elsewhere in this annual report in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.
We undertake no obligation publicly to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
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OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
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KEY INFORMATION |
A. | Selected Financial |
The following tables summarize certain selected consolidated financial data for the periods and as of the dates indicated. We derived the statement of operations financial data for the years ended December 31, 2003, 20042006, 2007 and 20052008 and the balance sheet data as at December 31, 20042007 and 20052008 from our consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of operations financial data for the years ended December 31, 20012004 and 20022005 and the balance sheet data as of December 31, 2001, 20022004, 2005 and 20032006 are derived from our audited financial statements not included in this annual report. Certain financial data for 2001previous years set forth below were reclassified to conform to the 2002 presentation, certain financial data for 2003 were reclassified to conform to the 2004 presentation and certain financial data for 2004 were reclassified to conform to the 2005later years’ presentation. You should read the selected consolidated financial data together with our consolidated financial statements included elsewhere in this annual report and with Item 5, “Operating and Financial Review and Prospects.” Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
Note regarding the Reverse Stock Split:
We implemented a 1-for-5 reverse stock split of our Common Shares on June 16, 2003 to meet the listing requirements of the Nasdaq National Market (“Nasdaq”). On January 15, 2003, Nasdaq informed us that our Common Shares would be delisted from Nasdaq due to our failure to maintain compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq (the “Minimum Bid Price Requirement”). We requested and were granted a hearing before a Nasdaq Listing Qualifications Panel in order to present a definitive plan to regain compliance with the Minimum Bid Price Requirement, and thereby avoid the delisting of the Common Shares from Nasdaq.
On February 18, 2003, our Board of Directors approved a definitive plan to regain compliance with the Minimum Bid Price Requirement by implementing a 1-for-5 reverse stock split of the Common Shares. We presented this plan to implement a reverse stock split to the Nasdaq Panel at a hearing on February 27, 2003. On March 25, 2003, Nasdaq notified us that it approved of our plan to implement the reverse stock split and that our shares would continue to be traded on Nasdaq provided that we regained compliance with the Minimum Bid Price Requirement by June 16, 2003 and maintained compliance for at least ten consecutive days thereafter.
On June 11, 2003, at a Special General Meeting, our shareholders approved the implementation of the reverse stock split and amendments to our Articles of Association that were required to effect the reverse stock split. As a result of the reverse stock split, our authorized capital of €48,300,000 became divided into 20 million Common Shares (instead of 100 million) and the par value of the Common Shares was changed to €2.30 (instead of €0.46). On June 16, 2003, we achieved compliance with the Minimum Bid Price Requirement and we have maintained such compliance through the date of this annual report.
Although we maintained compliance with the Minimum Bid Requirement, at the end of the second quarter of 2005, our shareholders’ equity was below $10,000,000 which is the required minimum shareholders’ equity for continued listing on the Nasdaq National Market. As a result of a notice we received from Nasdaq, we applied to transfer the listing of our shares from the Nasdaq National Market, and on September 28, 2005, our shares began to trade on the Nasdaq Capital Market (formerly known as the Nasdaq SmallCap Market).
At the end of the first quarter of 2006, our shareholders’ equity was $2.2 million. On June 5, 2006, we received a letter from Nasdaq indicating that we fail to comply with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. On June 27, 2006, we submitted to Nasdaq a plan to achieve and sustain compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market.
All historical share amounts and per share data in this annual report have been retroactively restated to reflect the reverse stock split.
On August 26, 2004, at the Annual General Meeting, our shareholders approved an increase in the number of authorized Common Shares to 30,000,000 and a change in the par value of all authorized shares to one Eurocent (€0.01). As a result, the total nominal capital of the Company is € 310,000, reflecting 30,000,000 Common Shares and 1,000,000 Preferred Shares.
Selected Financial Data: | Year Ended December 31, | ||||||||||||||||
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2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||
(In thousands, except per share data) | |||||||||||||||||
Revenues: | |||||||||||||||||
Products | $ | 26,781 | $ | 13,295 | $ | 10,423 | $ | 5,632 | $ | 4,137 | |||||||
Consulting and other services | 21,023 | 26,109 | 33,888 | 36,763 | 39,397 | ||||||||||||
Total revenues | 47,804 | 39,404 | 44,311 | 42,395 | 43,534 | ||||||||||||
Cost of revenues: | |||||||||||||||||
Cost of products | 15,274 | 8,809 | 6,302 | 3,277 | 2,482 | ||||||||||||
Cost of consulting and other services | 11,490 | 16,037 | 22,499 | 22,306 | 23,975 | ||||||||||||
Impairment of capitalized software development costs | 901 | - | - | - | - | ||||||||||||
Total cost of revenues | 27,665 | 24,846 | 28,801 | 25,583 | 26,457 | ||||||||||||
Gross profit | 20,139 | 14,558 | 15,510 | 16,812 | 17,077 | ||||||||||||
Operating Expenses: | |||||||||||||||||
Research and development, net | 2,531 | 2,723 | 2,451 | 3,502 | 3,884 | ||||||||||||
Selling, marketing, general and administrative | 19,260 | 16,245 | 13,558 | 12,513 | 10,708 | ||||||||||||
Restructuring Costs | - | 1,113 | 758 | - | - | ||||||||||||
Total operating expenses | 21,791 | 20,081 | 16,767 | 16,015 | 14,592 | ||||||||||||
Operating (loss) income | (1,652 | ) | (5,523 | ) | (1,257 | ) | 797 | 2,485 | |||||||||
Financial expenses, net | 2,410 | 1,788 | 2,230 | 2,798 | 2,236 | ||||||||||||
Other expenses (income), net | 552 | (12 | ) | - | 109 | (32 | ) | ||||||||||
Income (loss) before taxes on income | (4,614 | ) | (7,299 | ) | (3,487 | ) | (2,110 | ) | 281 | ||||||||
Taxes on income | 217 | 1,798 | 325 | 338 | 584 | ||||||||||||
Minority interests in earnings of a subsidiary and other | 11 | 2 | 13 | 96 | 41 | ||||||||||||
Net loss | 4,842 | 9,099 | 3,825 | 2,544 | 344 | ||||||||||||
Settlement of redeemable shares in a subsidiary | 299 | - | - | - | - | ||||||||||||
Net loss to shareholders of Common Shares | $ | 5,141 | $ | 9,099 | $ | 3,825 | $ | 2,544 | $ | 344 | |||||||
Basic and diluted net loss per share | $ | 0.46 | $ | 0.76 | $ | 0.29 | $ | 0.14 | $ | 0.02 | |||||||
Weighted average number of shares | |||||||||||||||||
used in computing basic and diluted loss per share | 11,273 | 11,982 | 13,395 | 18,218 | 21,550 |
2
Selected Financial Data: | Year Ended December 31, | ||||||||||||||||
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2001 | 2002 | 2003 | 2004 | 2005 | |||||||||||||
(In thousands, except per share data) | |||||||||||||||||
Revenues: | |||||||||||||||||
Products | $ | 33,924 | $ | 42,008 | $ | 32,580 | $ | 26,781 | $ | 13,295 | |||||||
Consulting and other services | 29,511 | 22,820 | 19,738 | 21,023 | 26,109 | ||||||||||||
Total revenues | 63,435 | 64,828 | 52,318 | 47,804 | 39,404 | ||||||||||||
Cost of revenues: | |||||||||||||||||
Cost of products | 23,711 | 22,567 | 17,489 | 16,578 | 11,306 | ||||||||||||
Cost of consulting and other services | 18,902 | 13,543 | 11,118 | 10,186 | 13,540 | ||||||||||||
Impairment of capitalized software development costs | - | - | - | 901 | - | ||||||||||||
Total cost of revenues | 42,613 | 36,110 | 28,607 | 27,665 | 24,846 | ||||||||||||
Gross profit | 20,822 | 28,718 | 23,711 | 20,139 | 14,558 | ||||||||||||
Operating Expenses: | |||||||||||||||||
Research and development, net | 5,458 | 6,017 | 3,656 | 2,531 | 2,723 | ||||||||||||
Selling, marketing, general and administrative | 28,725 | 23,782 | 21,539 | 19,260 | 16,245 | ||||||||||||
Restructuring Costs | - | 481 | - | - | 1,113 | ||||||||||||
Total operating expenses | 34,183 | 30,280 | 25,195 | 21,791 | 20,081 | ||||||||||||
Operating loss | 13,361 | 1,562 | 1,484 | 1,652 | 5,523 | ||||||||||||
Financial expenses, net | 3,187 | 971 | 958 | 2,410 | 1,788 | ||||||||||||
Other expenses (income), net | 665 | 1,173 | (244 | ) | 552 | (12 | ) | ||||||||||
Loss before taxes on income | 17,213 | 3,706 | 2,198 | 4,614 | 7,299 | ||||||||||||
Taxes on income (benefit) | 726 | 1,408 | (19 | ) | 217 | 1,798 | |||||||||||
Minority interests in earnings of a subsidiary | 31 | 39 | 8 | 11 | 2 | ||||||||||||
Net loss | 17,970 | 5,153 | 2,187 | 4,842 | 9,099 | ||||||||||||
Settlement of redeemable shares in a subsidiary | - | - | - | 299 | - | ||||||||||||
Net loss to shareholders of Common Shares | $ | 17,970 | $ | 5,153 | $ | 2,187 | $ | 5,141 | $ | 9,099 | |||||||
Basic and diluted net loss per share | $ | 3.91 | $ | 1.03 | $ | 0.20 | $ | 0.46 | $ | 0.76 | |||||||
Weighted average number of shares | |||||||||||||||||
used in computing basic and diluted loss per share | 4,600 | 4,999 | 10,693 | 11,273 | 11,982 | ||||||||||||
At December 31, (in thousands) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance Sheet Data: | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||
Cash and cash equivalents | $ | 10,942 | $ | 6,699 | $ | 3,108 | $ | 13,125 | $ | 7,938 | |||||||
Working capital (deficit) | 2,767 | (10,636 | ) | (12,616 | ) | (567 | ) | (4,506 | ) | ||||||||
Total assets | 68,734 | 51,866 | 45,619 | 52,532 | 45,177 | ||||||||||||
Long-term debt and other long-term liabilities | 23,281 | 15,603 | 13,235 | 7,560 | 1,565 | ||||||||||||
Capital stock | 108,635 | 110,645 | 113,683 | 132,310 | 132,562 | ||||||||||||
Total shareholders' equity | 12,080 | 3,632 | 3,929 | 21,850 | 21,743 | ||||||||||||
At December 31, (in thousands) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance Sheet Data: | 2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||
Cash and cash equivalents | $ | 16,087 | $ | 22,001 | $ | 31,775 | $ | 10,942 | $ | 6,699 | |||||||
Working capital (deficit) | 1,637 | 9,615 | 20,373 | 2,767 | (10,636 | ) | |||||||||||
Total assets | 68,380 | 65,152 | 76,723 | 68,734 | 51,866 | ||||||||||||
Long-term debt and other liabilities | 7,365 | 7,787 | 24,783 | 23,281 | 15,603 | ||||||||||||
Capital stock | 96,895 | 106,421 | 105,908 | 108,635 | 110,645 | ||||||||||||
Total shareholders' equity | 10,207 | 15,895 | 13,929 | 12,080 | 3,632 |
3
B. | Capitalization and |
Not applicable.
C. | Reasons for the Offer and Use of |
Not applicable.
D. | Risk |
We operate globally in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties that may have a material adverse effect on our business, financial position, results of operations or cash flows.
The current worldwide economic and financial situation may have a material adverse effect on our results.
Many of the world’s largest economies and financial institutions are currently experiencing a reduction in economic activity, a decline in asset prices, liquidity problems and limited availability of credit. This has impacted the insurance and financial sectors in which in excess of 50% of our customers operate. Such factors may result in a reduction in demand in some or all of our major markets and downward pressure on pricing in many markets, which could adversely affect our business, results of operations and financial condition. The economic and financial situation may negatively impact our customers, which in turn would negatively impact our ability to maintain or increase revenues. Also, significant changes and volatility in the equity, credit and foreign exchange markets, and in the competitive landscape, make it increasingly difficult for us to predict our revenues and earnings into the future.
Another manner in which the worldwide economic and financial situation is adversely affecting us relates to the pension plans that cover our employees. As of December 31, 2008, our pension plans were under-funded by approximately $0.2 million as a result of the performance of the financial markets, which has required us to record an accrual of such amount in our financial statements. If the financial markets do not provide the long-term returns that are expected, the likelihood of our being required to make further accruals and ultimately further contributions to make up the shortfall in the pension funds will increase. Because of the volatility in the equity markets, our estimate of future contribution requirements can change dramatically in relatively short periods of time. See Item 18. “Financial Statements – Note 2U.”
Implementing our strategy of focusing on the market for software solutions in the insurance industry has taken longer than anticipated, and we may not succeed in gaining acceptance in that market.
Our goal is to rise to a position of global leadership in delivering strategic business software solutions to the insurance industry. Achieving this goal requires us, among other things, to design appropriate software solutions, maintain sufficient sales and marketing resources, recruit, train and hire sufficient professional services personnel and face intense competition. We have experienced delays in penetration of the insurance industry, and such delays have contributed to a decline in our results. We expect that additional time will be required to achieve our goal. Our future efforts to gain acceptance for our solutions may still not succeed, which could have a material adverse affect on our results.
3
We have a history of losses, and we anticipate that our revenues for the short to medium term will not significantly increase and may decrease while our expenses may increase as a result of maintaining of our research and development, sales and marketing efforts and increased interest costs.
We incurred net losses of approximately $5.1$2.5 million and $9.1$0.3 million for the years ended December 31, 20042007 and December 31, 2005, respectively, and the net loss has grown over each of the past 3 years.2008, respectively. We cannot predict the extent ofthat our future losses and when,will continue to decrease, or if,whether we may become profitable on a sustained basis. Due to the delay in the implementation of our strategy of offering solutions to the insurance industry and possible decline in orders from existing customers, especially because of the current worldwide economic and financial situation, we have no assurance that our revenues in the short to medium term will significantly increase, if at all.all, and they may decrease. At the same time, expenses may increase in the foreseeable future as we maintain our research and development, sales and marketing activities. In addition, following our offering of approximately $17.1 million principal amount of convertible debentures in December 2003, and an additional $1.5 million of convertible debentures in March 2004, upon the exercise by non-affiliates of the Company of options that were offered together with the original convertible debentures in December 2003, we have the obligation to pay the debenture holders interest and to pay the principal amount when the debentures are due.due, which, following various repurchases of debentures by us, currently amounts to approximately NIS 20.3 million or $5.3 million (using the December 31, 2008 exchange rate of NIS 3.802 per $1). Our research and development, marketing and sales efforts may prove more costly than we currently anticipate, and we may not succeed in the long term in increasing our revenues sufficiently to offset the expenses of those efforts and of paying back the principal and paying the interest on the debentures. If our revenues fail to increase at a greater rate than our expenses, we will not be able to achieve profitability.
4
We have a history of declining working capital. Our working capital has declined significantlymay once again decrease and despite our recent financing activities, we may need to raise capital.capital again.
OurHistorically, our liquidity has been reduced due to the drop in our available cash reserves available. Atreserves. In 2007, we raised gross capital of $20 million (excluding finders’ fees and out of pocket expenses), and at December 31, 2005,2008, we had negative working capital of $10.6$4.5 million. We will needIn the past, we have needed to raise capital in order to continue financing our business activities, to pay back the principal and the interest on the debentures that were issued by us and to continue meeting our other obligations. In June 2006, we entered into a term sheet with Formula Systems (1985) Ltd. regarding a $2.0 million investmentDespite our last capital raise in the Company. We also entered into a term sheet with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., regarding the conversion2007, there is no assurance that our past trend of the $1.0 million payment that was due to them on April 1, 2006 into our Common Shares and the delaying until August 1, 2007 of the $1.0 million payment that is currently due on August 1, 2006. On June 27, 2006, we entered into agreements for a new revolving credit line facility for borrowings of up to $9.2 million, until June 30, 2007.diminishing working capital will not continue. There is no assurance that we will be able to obtain additional financing, or if we do, that it will be on favorable terms. In addition, if we issue capital stock to investors in order to raise cash, our existing shareholders will experience dilution.
As a result of an offering of convertible debentures, we have significant debt, and the amount of the debt could hinder our activities and affect the flexibility needed for such activities.
In December 2003, we completed an offering of convertible debentures on the Tel Aviv Stock Exchange.Exchange (“TASE”). The offering resulted in gross proceeds to us of approximately $17.1 million. The debentures were offered in units which included options to purchase additional debentures and with warrants to purchase our Common Shares. Options which were exercised by non-affiliates of the Company before their expiry date resulted in additional gross proceeds of approximately $1.5 million to the Company in the first quarter of 2004. None of the warrants were exercised and they expired on November 21, 2007.
4
In August 2006, a majority of the debenture holders approved changes to the amount and the timing of the first installment payment of the principal of the debentures, such that the payment of 50% of the first payment amount was deferred to December 5, 2009, and we were given the opportunity to either pay back the other 50% of the first payment amount, or to convert such amount into our Common Shares. On November 30, 2006, we announced our decision to pay the approximately $2.4 million in cash, and on December 5, 2006, we made the payment. There can be no guarantee that the debenture holders will agree to any changes to the terms of the debentures in the future. In June 2007, we entered into a private placement transaction for an aggregate gross amount of $20 million (excluding finders’ fees and out of pocket expenses). Following the private placement transaction, in June 2007, we repurchased an aggregate amount of NIS 15,000,000 nominal value of debentures, representing approximately, $3.5 million of the outstanding debentures. In December 2006,2007, we must re-pay $5.2repaid approximately NIS 18.6 million $4.6or $4.9 million (using the December 5, 2007 exchange rate of NIS 3.845 per $1) which representsreflects approximately NIS 16.9 million or $4.4 million for the firstsecond of 4 installment paymentsthe four annual re-payments of the principal of the debentures, and $0.6approximately NIS 1.7 million as partor $0.5 million for the semi-annual interest payment. In January and February 2008, we repurchased an additional aggregate amount of NIS 7,600,000 nominal value of debentures, representing approximately, $2.1 million of the outstanding debentures. In December 2008, we repaid approximately NIS 14.9 million or $3.7 million (using the December 5, 2008 exchange rate of NIS 3.981 per $1), which reflects approximately NIS 13.9 million or $3.5 million for the third of the four annual re-payments of the principal of the debentures, and approximately NIS 1.0 million or $0.2 million for the semi-annual payments. We haveinterest payment. Similarly, in January 2009, we repurchased an aggregate amount of NIS 1,605,799 nominal value of debentures, representing approximately $0.4 million, of the outstanding debentures. Pursuant to the terms of the prospectus governing the debentures, the amounts repurchased by us were retired and removed from circulation on the TASE. As a result, the total amount that we must pay in June and December 2009 (interest and principal) was reduced to approximately NIS 20.3 million or $5.3 million (using the December 31, 2008 exchange rate of NIS 3.802 per $1).
In the past, we did not createdcreate sufficient positive cash flow from operations to make such payment.payments. We currently have enough funds to make the December 2009 payments. However, if we use those funds for other purposes in the future, we may not have enough funds to make the future principal and interest payments. We cannot be certain that our credit lines will be renewed in the future, and if they are, that they will be on favorable terms, especially in light of the current worldwide economic and financial situation. If we are unable to obtain through other means the funds needed to make such payments, we could breach the terms of the debentures and of the Trust Deed which we entered into in connection with the offering. Even if we are able to make the payments required by the debentures, the amount of the debt could have a material adverse effect on our results of operations and financial position. For example, the debt could restrict our ability to obtain additional financing, restrict our flexibility in planning or in reacting to changes in the business, place us in a position inferior to that of competitors with lower debts or make us more vulnerable if there is a downturn in our revenues or in the economy in general. The amount of the debt could require us to dedicate a material part of our cash flow to payment of interest and repayment of principal, and in additionthereby reducing our ability to use the cash for other purposes such as working capital.
The failure of our new solutions to achieve market acceptance or continued delays in our current or future efforts to develop software solutions could erode our competitive position.
The failure to successfully develop, enhance or modify our software solutions, or the failure to do so on a timely basis, could limit our revenue growth and competitive position. We may need to rapidly develop and introduce additional software and enhancements to our existing solutions to satisfy our current customers and maintain our competitive position in the marketplace. We may also need to modify our software so that it can operate with new or enhanced software that may be introduced by other software vendors. The failure to introduce new, enhanced or modified software on a timely basis could prevent our solutions from achieving market acceptance. We have experienced in the past, and anticipate experiencing in the future, delays in the timing of the introduction of new solutions and market acceptance of those solutions. To support our software development, enhancement or modification, we may find it necessary to license or acquire new technologies, which may not be available to us on acceptable terms, if at all.
If we fail to remain technologically competitive, we could lose customers or market share.
The market for our solutions is characterized by rapidly changing business conditions and customer requirements. The introduction of solutions embodying new technology and the emergence of new customer requirements can render existing technology obsolete and unmarketable. Our ability to anticipate changes in technology and customer requirements and to successfully develop and introduce new and enhanced solutions on a timely basis are and will be significant factors in our ability to grow and to remain competitive. Substantial expenditures are required for research and development and the introduction of new products. There can be no assurance that we will have sufficient resources to make such investments, especially in light of the current worldwide financial and economic situation, or that these investments will bring the full advantages or any advantage as planned. We have in the past experienced delays in introducing our technology and enhancements, and there can be no assurance that we will not encounter technical or other difficulties that could delay introduction of new technologies or enhancements in the future. There can be no assurance that we will be successful in developing and marketing enhancements that incorporate new technology on a timely basis, or that itsour new solutions will adequately address the changing needs of the marketplace. Our failure, for technological or other reasons, to timely develop and market products incorporating new technologies could have a material adverse effect on our results of operations, financial condition and cash flows.
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The software solutions market that we address is expected to evolve rapidly, and if we are not able to accurately predict and respond to market developments or customer needs, our competitive position will be impaired.
The market for the solutions that we provide is expected to evolve rapidly. However, estimates of our market’s expected growth are inherently uncertain and are subject to many risks and assumptions. Moreover, many of our customers operate in markets characterized by rapidly changing technologies and business plans. Rapid changes in the needs of these customers and changing technologies make it difficult for us to predict their demands. We are particularly susceptible to those changes since our software is used in a wide array of operating environments, which are constantly evolving. As a result, we may not be able to develop, on a timely basis or at all, solutions that meet our customers’ needs or desires. In addition, various sectors of our market are served by competitors who may respond more effectively to market developments and customer needs. We cannot assure youThere can be no assurance that the market for our solutions will grow or that we will be able to respond to changes in the market, evolving customer needs or our competition. If the market for our solutions does not develop as we expect or if we fail to respond to market and competitive developments, our business prospects and competitive position might be impaired.
If existing customers do not make subsequent purchases from us or if our relationships with our largest customers are impaired, our revenue could be negatively affected.affected
Our existing customers are a key asset of Sapiens,ours, and we depend on repeat product and service revenues from our base of customers. Specifically, revenues from sales to each of EDS CreditMenora Mivtachim Insurance Ltd. (“Menora”) and Liverpool Victoria Friendly Services (“Liverpool Victoria”) constituted 25.6% and Menorah Insurance Company constituted 11%7.4%, respectively, of our consolidated revenues in 2005 (22% in total).2008. There can be no assurance that our existing customers will enter into new project contracts with Sapiensus or that they will continue using our enabling technologies. If our revenue stream from existing customers were to decline significantly, it would have a material adverse impact on our operating results. Indeed, in 2005, the scope of oneIn light of the projects thatworldwide financial and economic situation, we were performing for EDS Credit Services was reduced, ashave seen a result of the end customer being sold to a bankdelay and reduction in Spain, which resulted in a reduction of 66% ofinvestments by our team (from 25 to 8 people) working on the project and a reduction ofcustomers. If this trend continues, it could negatively impact our expected revenues in 2005 from this customer by approximately $3.0 million.financial results.
The relationships with two large customers of our U.S. subsidiary – Texas Farm Bureau Insurance Companies, and Occidental Fire & Casualty –twoCasualty; two large customers of our subsidiary in the United Kingdom – Liverpool Victoria and EDS–EDS Credit Services –and Liverpool Victoria; and a large customer of our subsidiary in Israel - Menorah Insurance Company,– Menora Mivtachim, are the sources of a large portion of the revenues of each of those three subsidiaries. During 2005,2008, revenues from sales to the American customers specified above constituted 42%48.1% of the total revenues of the U.S. subsidiary (10%(8.4% of our consolidated revenues); and revenues from sales to the British customers specified above constituted 54%42.8% of the total revenues of the U.K. subsidiary (17%(11.4% of our consolidated revenues); and revenues from sales to the Israeli customer specified above constituted 46%69.1% of the total revenues of the Israeli subsidiary (11%(25.6% of our consolidated revenues). Our sales to Liverpool Victoria, EDS Credit Services and Occidental Fire & Casualty have declined in recent years, which negatively impacted our revenue stream. If we experience further reductions in sales to these customers, our revenue stream will be further negatively affected.
We compete against companies with significantly greater resources than our own.
The market for software solutions and related services, and for business solutions for the insurance industry, in particular, is highly competitive. Our principal competitors generally have significantly greater resources than our own.we do. Our customers or potential customers could prefer suppliers that are larger than Sapiensus and that have not experienced losses such as ours. There is no guarantee that our customers, present and future, will be confident in our financial stability going forward. Price reductions or declines in demand for our solutions and services, whether as a result of competition, technological change, economic downturn, changes in the level of application development, reengineering or maintenance performed internally by our customers or potential customers would have a material adverse effect on our results of operations, financial position and cash flows.
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Our business involves long-term, large projects, some of themwhich are fixed-price projects that involve uncertainties, such as estimated project costs and profit margins.
Our business is characterized by relatively large projects or engagements that can have a significant impact on our total revenue and cost of revenue from quarter to quarter. A high percentage of our expenses, particularly employee compensation, is relatively fixed. Therefore, a variation in the timing of the initiation, progress or completion of projects or engagements, especially at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter.
Some of our solutions are sold as fixed-price projects with delivery requirements spanning more than one year. If our actual cost-to-completion of these projects differs significantly from the estimated costs, therewe could beexperience a loss on the related contracts, which would have a material adverse effect on our results of operations, financial position and financial position.cash flow. Similarly, delays in executing client contracts may affect our revenue and cause our operating results to vary widely. Some of our solutions may be priced in excess of $1.0 million and are delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse impact on our results of operations, financial position or cash flows. The sales cycle for our solutions is long and variable, typically ranging between nine months to eighteen months from initial contact with the potential client to the signing of a contract. Occasionally, sales require substantially more time. This variability may adversely affect our operating results in any particular quarter.
Our business involves business-critical solutions which expose us to potential liability claims.
Our products focus on organizations’ business-critical applications, including those related to core business solutions for the insurance industry, and we provide re-engineering and re-development services for customers’ specialized needs. Since our customers rely on our software to operate, monitor and improve the performance of their critical software applications, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key employees’ time and attention from theour business, incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims, and we carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse effect on our results of operations and financial position.
Defects in our technology would harm our business and divert resources.
The quality of our products, enhancements and new versions is critical to our success. Since our software solutions are complex, they may contain errors that can be detected at any point in itstheir life cycle. Any errors or defects in our technology could result in:
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| delayed or lost revenue; |
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| failure to attract new customers or achieve market acceptance; |
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| claims against us; |
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| diversion of development resources; |
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| increased service, warranty and insurance costs; and |
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| negative publicity resulting in damage to our reputation. |
While we continually test our products for errors and work with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors is complicated because it is difficult to simulate the breadth of operating systems, user applications and computing environments that our customers use and because our software is becoming increasingly complex itself. The costs we may incur in addressing technology errors could be substantial and could impair our results of operations.
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Although we protect our intellectual property rights, vigorously, there can be no assurance that thesethe measures that we employ to do so will be successful.
In accordance with industry practice, since we have no registered patents, we rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that because ofdue to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret information and as an unpublished copyright work. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, we attempt to protect trade secrets and other proprietary information through non-disclosure agreements with employees, consultants and distributors. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. If we failOur failure to protect our rights, and others are able to improperlyor the improper use of our products by others without licensing them from us, this failure maycould have a material adverse effect on our results of operations and financial condition.
Our Sapiens eMerge™ solution is proprietary to us and if we need to hire programmers, maintenance and professional services providers, we would incur training costs and delays due to training.
Our Sapiens eMerge™ solution was designed by us and its use requires special knowledge and training. If our current employees leave the Company or if a new project is undertaken by the Company and we need to hire new programmers or people to provide maintenance and professional services to our customers, we would have to train the new employees and consultants in Sapiens eMerge™. As a result, we would incur training costs and would have to delay implementation of projects and services until such individuals were adequately trained. In addition, once these individuals are initially trained, they would still be inexperienced with Sapiens eMerge™ and would take additional time to develop efficiency and proficiency with Sapiens eMerge™. As a result of these costs and delays, there could be a negative impact on our results of operations, our financial condition, our cash flows and our relationships with our customers.
Some of our potential customers are reluctant to purchase proprietary solutions.
Some customers of information technology solutions are reluctant to purchase solutions that are not off-the-shelf or widely used by a broad customer base. Since our Sapiens eMerge™ solution and our Sapiens INSIGHT™ suite of solutions are proprietary to us andrequire special knowledge and training, we have faced reluctance by potential customers to purchase our proprietary solutions. Such reluctance could have a negative impact on our results of operations and our financial condition.
As part of our business strategy, we may make acquisitions that could disrupt our business and harm our results of operations and financial condition.
As part of our growth strategy, we may consider acquiring complementary technologies, products and businesses. If we use capital stock in connection with such acquisitions, our existing shareholders may experience dilution. If we use cash or debt financing, our financial liquidity will be reduced, the holders of our debt would have claims on our assets ahead of holders of our Common Shares and our business operations may be restricted by the terms of any debt. An acquisition may involve nonrecurring charges or amortization of significant amounts of intangible assets, which would adversely affect our ability to achieve and maintain profitability. Attempted acquisitions may divert management, operational and financial resources from the conduct of our core business, and we may not complete any attempted acquisition.
If we decide to close or curtail the operations of our subsidiaries in Europe, we would incur substantial severance costs which would materially affect our results of operations in the short term and our revenues would be negatively impacted.
We have several subsidiaries in Europe. If we decide to close one or more of those subsidiaries or to reduce the workforce in one or more of those subsidiaries, we will be subject to severance pay laws and other laws regarding social benefits in Europe which would require us to pay substantial amounts. As a result, even cost-cutting measures would generate substantial additional costs in the short term which would have a material adverse affect on our results of operations. In addition, our revenues would be affected since existing customers in such countries may decide to stop working with us or not to renew agreements for additional terms.
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The terms of our bank debt include a number of restrictive covenants which, if breached, could result in acceleration of our obligation to repay our debt.
Our loan and credit line agreements contain a number of conditions and limitations on the ways in which we can operate our business, including limitations on our ability to raise debt, sell or acquire assets and pay dividends. Our loan and credit line agreements also contain various covenants which require us to maintain certain financial ratiosperformance milestones related to shareholders’ equity and operating results. These limitations and covenants may force us to pursue less than optimal business strategies or forego business arrangements which could have been financially advantageous to us or our shareholders. In the fourth quarter of 2005, we did not fulfill the covenants. There can be no assurance that we will fulfill these covenants or, if we do not fulfill one or more of these covenants, that we will receive from our lender banks waivers of the necessityrequired fulfillment of fulfilling such covenants.
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Our failure to comply with the covenants and restrictions contained in our loan and credit line agreements could lead to a default under the terms of these agreements. If a default occurs and we are unable to renegotiate the terms of the debt, the lenders could declare all amounts borrowed and all amounts due to them under the agreements due and payable. If we are unable to repay the debt, the lenders could foreclose on our assets that are subject to liens and sell our assets to satisfy the debt. As part of our loan agreements, the assets of our subsidiary in the United States are subject to a security interest and the assets of our subsidiaries in Israel and the United Kingdom are subject to a floating lien. Foreclosure on these assets could have a material adverse effect on our results of operations and financial condition.
Our liquidity may be negatively affected due to outstanding obligations to investors in the discontinued operations of a subsidiary.
In April 2000, F.I.D. Holdings Ltd. and Israel Discount Bank Ltd. (the “Investors”) invested $15 million in eZoneXchange.com, Inc. (“eZone”), a subsidiary of the Company. The private placement to the Investors was accompanied by a Put/Call Agreement, according to which the Investors were granted the right to require us to repurchase their shares in the subsidiary beginning May 2004, in exchange for both cash and our Common Shares. In March 2004, we entered into a new agreement with the Investors which replaced the Put/Call Agreement and which restructured the remaining portion of the put option. Among other issues, we agreed to pay the Investors in two annual installments a total of $8.6 million plus interest at 7.5% a year by May 1, 2005. In May 2005, we entered into an agreement regarding the payment of the $4.0 million due May 1, 2005. We paid $2.0 million at the beginning of May 2005 and agreed to pay $1.0 million on April 1, 2006 and $1.0 million on August 1, 2006. The Investors may, at their sole discretion, convert all or any portion of the $1.0 million payable on August 1, 2006 into our Common Shares, at a conversion price per each share of $3.20. Payment of the balance of $2.0 million may affect our liquidity by reducing the cash reserves needed for financing our business activities or for meeting other obligations. In June 2006, we entered into a term sheet with the Investors whereby the Investors will convert the $1.0 million payment that was due on April 1, 2006 into our Common Shares and the payment of the $1.0 million payment due by August 1, 2006, will be delayed to August 1, 2007. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.
Our future results could be adversely affected by an impairment of the value of certain intangible assets.
The assets listed in our consolidated balance sheet include, among other things, goodwill valued atamounted to approximately $8.6 million, capitalized software development costs, valued atnet, amounted to approximately $12.2$14.4 million, long-term deferred income taxes valued atamounted to approximately $3.6$2.2 million, and purchased technologies valued at $950,000.short-term deferred income taxes amounted to approximately $1.0 million. The applicable accounting standards require that (a) goodwill be tested for impairment at least annually, and written down when impaired; (b) capitalized software costs be assessed for recoverability on a regular basis, to determine whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold, in accordance with Statement of Financial Accounting Standard No. 86 (“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”); and (c) certain identifiable intangible assets such as deferred taxes be reviewed for impairment in certain circumstances; and (d) purchased technologies be assessed for recoverability on a regular basis, to determine whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from such asset.circumstances. If our goodwill, capitalized software development costs, or deferred tax assets, or purchased technologies were deemed to be impaired in whole or in part due to the Company not achieving its goals, we could be required to reduce or write off such assets, thus having to recognize additional expense in our statements of operations and to reduce our shareholders’ equity. In 2005, we increased our deferred income tax assets resulting from loss carry-forward and other tax credits by $658,000 and increased the related valuation by $1.5 million. We also recorded a write-off of tax advances in the amount of $783,000. As a result, our net deferred tax asset and tax advances were reduced by a total of $1.6 million.
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Our quarterly results may be impacted by multiple short-term factors.
Our revenue and operating results could vary widely from quarter to quarter as a result of several different factors, such as the budgeting and purchasing practices of our customers, the length of the customerour customers’ product evaluation process, the timing of our customers’ system conversions, the timing and cost of new product introductions and product enhancements, and the timing of any acquisitions and associated costs. Employee hiring and the rate of utilization of such employees may also affect our revenues and results of operations.
Our international operations involve inherent risks, such as foreign currency fluctuations and compliance with various regulatory and tax regimes.
Most of our revenues are derived from international operations that are conducted in local currencies as well as dollars. Changes in the value of such local currencies or the dollar relative to such local currencies may affect our financial position and results of operations. Gains and losses on translations to dollars of assets and liabilities may contribute to fluctuations in our financial position and results of operations. In certain locations, we engage in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our financial position and results of operations. However, there can be no assurance that any such hedging transaction, if entered into, will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our financial position and results of operations could be adversely affected.
Other potential risks that may impact our international business activities include longer accounts receivable payment cycles, the burdens of complying with a wide variety of foreign laws and changes in regulatory requirements, although such factors have not had a material adverse effect on our financial position or results of operations to date.
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Formula Systems (1985) Ltd. and its parent company Emblaze Ltd., may exercise control and influence corporate actions that are potentially in conflict with our other public shareholders.
Formula Systems (1985) Ltd. (“Formula”), whose ADR’sADRs trade on NasdaqNASDAQ (under the trading symbol: FORTY) and whose shares trade on the Tel Aviv Stock Exchange,TASE (under the trading symbol: FORT), directly ownsowned (as of June 25, 2006) 7,661,187,April 1, 2009) 15,114,837, or approximately 60%70%, of our currently outstanding Common Shares.
In June 2005,November 2006, Emblaze Ltd. (“Emblaze”), whose ordinary shares are traded on the London Stock Exchange (under the trading symbol: BLZ.L), purchased the controlling interest of Formula, invested $2.0 million and received 1,041,667as a result, control of our Common Shares. In June 2006, we entered into a term sheet withus. As of April 1, 2009, Emblaze owned 51.7% of the outstanding share capital of Formula Systems (1985) Ltd. regarding a $2.0 million investment in the Company.and, therefore, has an indirect controlling influence over us.
Emblaze, through Formula, is and may continue to be in a position to exercise control over most matters requiring shareholder approval. Formula may use its share ownership or representation on our boardBoard of directorsDirectors to substantially influence corporate actions that conflict with the interests of our other public shareholders including, without limitation, changing the size and composition of the boardour Board of directorsDirectors and committees of our boardBoard of directors,Directors, causing the issuance of further securities, amending our governing documents or otherwise controlling the outcome of shareholder votes. Further, actions by Formula with respect to the disposition of the sharesCommon Shares it beneficially owns, or the perception that such actions may occur, may adversely affect the trading price of our shares.Common Shares.
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The implementationEli Reifman and Guy Bernstein from Emblaze, Hadas Gazit Kaiser (formally from Emblaze) of SFAS No. 123(R), which requires us to record compensation expenses in connection with equity share based compensation may negatively affect our resultsMagic Enterprises Ltd, an affiliate of operations.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revisionours, and Naamit Salomon of SFAS No. 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized on the basis of their fair values while SFAS No. 123(R) requires, as of the first quarter of 2006,Formula, are all share-based payments to employees to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The adoption of SFAS No. 123(R) may have a significant effect on our results of operations. In addition, such adoption could also limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. Accordingly, we adopted SFAS No. 123(R) on January 1, 2006. We will implement SFAS No. 123(R) using the modified prospective method. Under this method, we will begin recognizing compensation cost for equity-based compensation for all new awards and to awards modified, repurchased or cancelled after January 1, 2006. The impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend also on levels of share-based compensation granted in the future. Had we adopted SFAS No. 123(R) in 2005, the impact of that standard would have approximated $2.6 million, as described in the disclosure of pro forma net loss and earnings per share in our consolidated financial statements. See Notes 2t and 2vmembers of our consolidated financial statements for a descriptionBoard of SFAS No. 123(R) and its expected effect onDirectors. Eli Reifman serves as Chairman of our losses and losses per share.Board of Directors.
We may beIf we are classified as a passive foreign investment company, and, as a result, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the value of our assets are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders who are U.S. taxpayers, including having gain realized on the sale of our Common Shares being treated as ordinary income rather than capital gain income and could result in punitive interest charges being applied to such sales proceeds. Rules similar to those applicable to dispositions apply to amounts treated as “excess distributions.”
We believe we were not a PFIC in 2008, just as we believe we were not a PFIC for at least the past 5 years. We currently expect that we will not be a PFIC in 2009. However, PFIC status is determined as of the end of the taxable year and is dependent on a number of factors. Therefore, there can be no assurance that we will not become a PFIC for the year ending December 31, 2009 or in a future taxable year. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our Common Shares.
We believe we were not a PFIC in 2005. We currently expect that we will not be a PFIC in 2006. However, PFIC status is determined as of the end of the taxable year and is dependent on a number of factors, including the relative value of our passive assets and our non-passive assets, our market capitalization and the amount and type of our gross income. Therefore, there can be no assurance that we will not become a PFIC for the year ending December 31, 2006 or in a future year. For a discussion of how we might be characterized as a PFIC and related tax consequences, please seeItem 10,10.E, “Additional Information – Taxation -– U.S. Federal Income Tax Considerations-TaxConsiderations – Tax Consequences if We areAre a Passive Foreign Investment Company.”
We face currency exchange risks, as changes in exchange rates between the US dollar and other currencies, especially the NIS, may negatively impact our costs.
Exchange rate fluctuations between the US dollar and other currencies which we and our subsidiaries use, especially the NIS, may negatively affect our earnings. Moreover, a significant portion of our expenses, including research and development, personnel and facilities-related expenses, are incurred in Israel, in NIS. In addition, our obligations under the debentures that we issued are linked to the US dollar only if the exchange rate between the NIS and the US dollar is greater than NIS 4.394 per 1 US dollar. (On March 31, 2009, the exchange rate between the NIS and the US dollar was NIS 4.188 per 1 US dollar.) Consequently, we are exposed to the risk of appreciation of the NIS vis-à-vis the US dollar. This appreciation would cause, and in 2008 did cause, an increase in our expenses as recorded in our US dollar denominated financial statements even though the expenses denominated in local currencies remains unchanged. Accordingly, our level of revenues and profits may be adversely affected by exchange rate fluctuations.
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Due to the appreciation of the NIS vis-à-vis the US dollar in 2008 and the exchange rate fluctuations between the U.S. dollar and other currencies which we and our subsidiaries use, our foreign currency transaction differences, net, decreased to approximately $0.3 million in 2008, from $0.7 million in 2007. See Note 15.b to our consolidated financial statements. Since December 31, 2008, the US dollar has strengthened vis-à-vis the NIS by approximately 10% and the NIS/US dollar exchange rate as of March 31, 2009 was NIS 4.188 per 1 U.S. dollar.
We cannot predict any future trends in the US dollar/ NIS exchange rate. We cannot assure you that we will not be materially affected in the future from currency exchange rate fluctuations. See Item 11- “Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk.”
Conducting business in Israel entails certain inherent risks that could harm our business.
We have officesOur corporate headquarters and research and development facilities are located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. In addition, several countries still restrict business with Israel and with companies doing business in Israel. We do not believe that theThese political, economic and security situation has had anymilitary conditions in Israel could have a material impactadverse effect on our business, to date; however, we can give no assurance that securityfinancial condition, results of operations and political conditions will have no such effect in the future.future growth.
Since September 2000, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians, and acts of terror have been committed inside Israel and against Israeli targets in the West Bank and Gaza. These developments have adversely affected the regional peace process, placed the Israeli economy under significant stress, and have negatively influenced Israel’s relationship with several Arab countries. In August 2005, Israel evacuated all Israeli settlementsThe establishment in the Gaza Strip and four settlements in the West Bank. In January 2006 Hamas won the electionsof a government in the Palestinian Authority by representatives of the Hamas militant group resulted in an escalation in violence among Israel, the Palestinian Authority and on March 28,other groups and has created additional unrest and uncertainty in the region. Further, during the summer of 2006, electionsIsrael was engaged in a war with Hezbollah, a Lebanese Islamist Shiite militia group, which involved rockets being fired from Lebanon up to 50 miles into Israel and disrupted most day-to-day civilian activity in northern Israel. In January 2009, Israel engaged in a military action against Hamas in Gaza to prevent continued rocket attacks against Israel. These developments have further strained relations between Israel and the Israeli parliament were held in Israel. The implications of these developments cannot at this time be foreseen.Palestinians. Any future armed conflict, political instability or violence in the region, including acts of terrorism, may have a negative effect on our business condition, harm our results of operations and adversely affect our share price.
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Some of our executive officers and employees in Israel are obligated to perform military reserve duty, currently consisting of approximately 30 days of service annually.annually (or more for reserves officers or citizens with certain occupations). Additionally, they are subject to being called to active duty at any time upon the outbreak of hostilities. While we have operated effectively under these requirements since the establishment of Sapiens, no assessment can be made as to the full impact of such requirements on our business or work force and no prediction can be made as to the effect on us of any expansion of such obligations.
We intend to rely upon tax benefits from the State of Israel, benefits that in certain circumstances may not be available to us as anticipated.11
Our subsidiary, Sapiens Technologies (1982) Ltd., which is incorporated in Israel, was granted “Approved Enterprise” status by the Investment Center of the Israeli government for six investment programs in 1984, 1991, 1993, 1995, 1998 and 2000 under the Law for Encouragement of Capital Investments, 1959. We are eligible for certain tax benefits based on this status. In order to receive these tax benefits, Sapiens Technologies must comply with two material conditions: (a) it must invest a certain amount in property and equipment, and (b) it must finance a certain portion of these investments out of equity capital. We believe that Sapiens Technologies has complied with these conditions. If the Investment Center determines that we failed to comply with the conditions summarized above, these past benefits may be canceled, reduced or rendered unavailable to us, which could have a material adverse effect on our results of operations and financial condition. On April 1, 2005, an amendment to the Law for Encouragement of Capital Investments, 1959, came into force. See Note 13 of our consolidated financial statements for a description of the amendment to the Law for Encouragement of Capital Investments, 1959 and its possible effects on our results of operations and financial condition.
If we fail to meet the standards for continued listing of our shares on Nasdaq,NASDAQ, the shares could be de-listed from the NasdaqNASDAQ Capital Market.
A company must continue to comply with several requirements in order to remain listed on Nasdaq.NASDAQ. One of the requirements is that a company maintain a $1.00 minimum shareholders’ equity of $2.5 million (“Minimum Shareholders’ Equitybid price (the “Minimum Bid Price Requirement”). At
Under the endNASDAQ Marketplace Rules, a failure to meet the continued listing requirement for minimum bid price on the NASDAQ Capital Market shall be determined to exist only if the deficiency continues for a period of the second quarter of 2005, our shareholders’ equity was below $10,000,000 which is30 consecutive business days. On March 20, 2009, NASDAQ suspended the Minimum Shareholders’ EquityBid Price Requirement for continued listinguntil July 19, 2009.
Since February 17, 2009, the closing price of our Common Shares on the Nasdaq National Market. As a result of a notice we received from Nasdaq, we applied to transfer the listingNASDAQ Capital Market has been below $1.00. The closing price of our shares from the Nasdaq National Market, and on September 28, 2005, our shares began to tradeCommon Shares on the NasdaqNASDAQ Capital Market, (formerly known as the Nasdaq SmallCap Market). At the end of the first quarter of 2006, our shareholders’ equityon April 17, 2009, was $2.2 million. On June 5, 2006, we received a letter from Nasdaq indicating that$0.81 per share.
If we fail to comply with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. On June 27, 2006, we submitted to Nasdaq a plan to achieve and sustain compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. If our plan is not approved and if we fail to re-gain and maintain such compliance,Minimum Bid Price Requirement, our Common Shares could be de-listed from the NasdaqNASDAQ Capital Market, which could have a material adverse effect on our share prices and our standing with current and future investors. In addition, if we are de-listed from the NasdaqNASDAQ Capital Market, we may no longer be eligible for certain benefits granted by the Israel Securities Law to companies that are “dual listed” on the Tel Aviv Stock Exchange and a foreign (non-Israeli) securities exchange. The removal of such benefits would require us to incur additional costs relating to periodic reporting in Israel and would have a material impact on our results of operations.
In addition to maintaining compliance with the Minimum Shareholders’ Equity Requirement, a company must continue to comply with other requirements in order to remain listed on Nasdaq. One of those requirements is that a company maintain a $1.00 minimum bid price (the “Minimum Bid Price Requirement”). In June 2003, we implemented a 1-for-5 reverse stock split of our Common Shares, to meet the Minimum Bid Price Requirement. It is our intent to comply with and meet the requirements for continued listing on Nasdaq. The closing price of our common shares on the Nasdaq capital Market, on June 26, 2006, was $1.30 per share.
There can be no assurance that we will continue to meet all of the requirements for continues Nasdaqcontinued NASDAQ listing. Failure to meet one of Nasdaq’sNASDAQ’s continued listing standards could result in the delisting of our Common Shares from Nasdaq.NASDAQ.
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Our Common Shares are traded on more than one market and this may result in price variations.
Our Common Shares are traded on Nasdaqthe NASDAQ Capital Market and the Tel Aviv Stock Exchange.TASE. Trading in our Common Shares on these markets will be made in different currencies (dollars(US dollars on the NasdaqNASDAQ Capital Market and NIS on the Tel Aviv Stock Exchange)TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the U.S. and Israel). The trading prices of our Common Shares on these two markets may differ due to these and other factors. Any decrease in the trading price of our Common Shares on one of these markets could cause a decrease in the trading price of our Common Shares on the other market.
There is very little trading volume offor our shares,Common Shares, which causes the stock price to be volatile and which may lead to losses by investors.
There is very little trading volume offor our shares,Common Shares, both on Nasdaqthe NASDAQ Capital Market and the Tel Aviv Stock Exchange.TASE. As a result, our sharesCommon Shares have experienced significant market price volatility in the past and may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the industry in which we compete.
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INFORMATION ON THE COMPANY |
A. | History and Development of the |
Corporate Details
Our legal and commercial name is Sapiens International Corporation N.V., and we were incorporated and registered in the Netherlands Antilles on April 6, 1990. We are a public limited liability company and operate under the provisions of the Netherlands Antilles Commercial Code. Our registered office is located at Landhuis Joonchi, Kaya Richard J. Beaujon z/n, Curaçao, Netherlands Antilles and our telephone number in Curaçao is + 599-97366-277. Fortis Intertrust (Curaçao)5999-736-6277. United International Trust N.V. is the Company’s agent in Curaçao and serves as a member of our Board of Directors. Our World Wide Web address is www.sapiens.com. The information contained on the web site is not a part of this annual report.
Important Business Developments We did not have any important events in the development of our business since January 1, 2005
In September 2004, we purchased the technologies underlying the INSIGHT™ for Closed Books solution from Liverpool Victoria, for a minimum amount of approximately $1.7 million to be paid in 4 annual installments, beginning December 31, 2005. Under certain conditions set forth in the agreement, the consideration may increase in the future, based on the number of policies administered by such solution.
As of the date of this annual report, we have not yet made the payment in the amount of $340,000 that was due on December 31, 2005. We are currently negotiating with Liverpool Victoria regarding the timing of such payment.
In May 2005, we entered into an agreement with the F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., the investors in eZoneXchange.com, Inc. (the “Investors”), regarding the payment of the remaining $4.0 million due to the Investors, pursuant to the March 2004 agreement between us and the Investors. We agreed to pay $2.0 million on May 2, 2005, $1.0 million by April 1, 2006 and $1.0 million by August 1, 2006. The Investors may, at their sole discretion, convert all or any portion of the $1.0 million payable on August 1, 2006 into our Common Shares, at a conversion price per each share of $3.20. In addition, the interest to be paid on the outstanding principal amount was changed to LIBOR plus 2.5%. The first installment of $2.0 million was paid as required at the beginning of May 2005. In June 2006, we entered into a term sheet with the Investors whereby the Investors will convert the $1.0 million payment that was due on April 1, 2006 into our Common Shares and the payment of the $1.0 million payment due by August 1, 2006, will be delayed to August 1, 2007. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.
(For further details about the transaction with FID, see Item 10, “Additional Information – Material Contracts.”)
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In June 2005, we entered into a share purchase agreement with our major shareholder, Formula, whereby Formula invested $2.0 million in Sapiens, and we issued 1,041,667 shares to Formula, at a purchase price per share of $1.92, which was the average closing price for the 10 day period prior to the execution of the agreement. The shares issued pursuant to the June 2005 were granted “piggyback” registration rights, similar to those granted to Formula and Yarnfield International Limited (now Magnum Technology Limited) in their 2001 investment.
In the fourth quarter of 2005, we did not meet the covenant contained in our loan agreements pertaining to maintenance of certain quarterly earnings.
In June 2006, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
In June 2006, we entered into a term sheet with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., regarding the conversion of the $1.0 million payment that was due to them on April 1, 2006 into our Common Shares, at a conversion price per share equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into, and the delaying until August 1, 2007 of the $1.0 million payment that is currently due on August 1, 2006. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.
(For further details about our agreements transaction with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd, see Item 10, “Additional Information – Material Contracts.”)
On June 27, 2006, we entered into agreements for a new revolving credit line facility for borrowings of up to $9.2 million, until June 30, 2007.
(For further details about the credit lines, see Item 5 “Operating and Financial Review and Prospects - B. Liquidity and Capital Resources – Credit Lines.”)2008.
Capital Expenditures and Divestitures since January 1, 20032006
Our principal capital expenditures during the last three years related mainly to the purchase of computer equipment and software for use by our subsidiaries. These capital expenditures totaled $750,000$276,000 in 2003, $442,0002006, $ 190,000 in 20042007 and $366,000 in 2005.$768,000in 2008.
B. | Business |
We are a global provider of information technology (“IT”) solutions that modernize business processes to enable insurance and other leading companies to quickly adapt to change. Our solutions, sold as customizable software modules, align IT with business demands for speed, flexibility and efficiency. Our solutions are supplemented by our technology, methodology and consulting services, which address the complex issues related to the life-cycle of enterprise business applications. Our solutions include scalable insurance applications that we have developed for leading organizations such as AXA, Norwich Union, Liverpool Victoria, IAT Group, ING, OneBeacon, Principal Financial Group, the Surplus Line Association of California, Allianz Group, Texas Farm Bureau Insurance Companies, MenorahMenora Mivtachim Insurance and Mivtachim Pension Funds.Santam. Our service offerings include a standard consulting offering that helps customers make better use of IT in order to achieve its business objectives.
Our core technology, Sapiens eMerge™, is a rules-based application development suitemodel-driven middleware that utilizes standard modeling such Unified Modeling Language, or UML, and Domain Specific Language ,or DSL, which enables rapid solution development for complex mission-critical enterprisesthe creation of mission critical core enterprise applications with little or no coding using agile methodologies. We have many production proven adaptors which allow customers to deliver new functionality, achieve legacy modernization and enterprise application integration. We believe that our understanding of the insurance marketplace and broad experience in mainframe-based legacy systems, backed by the high return on investment made possible by Sapiens eMerge™, help our customers gain a competitive edge in the rapidly changing business world while maximizing the value of their investments in existing IT systems.
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Our primary goal is to rise to a position of global leadership in delivering strategic business software solutions to the insurance industry, selling Sapiens INSIGHT™, our suite of modular business software solutions. Our mission is to drive customer profitability in the global insurance industry through thought leadership and the proven delivery methodology of our innovative solutions. We plan to achieve this objective by combining our subject matterinsurance expertise and extensive experience in implementing feature-rich, robust, high volume solutions in order to deliver to our clients customizable software products for life insurance, pensions and annuities, general insurance, reinsurance underwriting and loans and mortgages.specialized underwriting. The primary building block of our Sapiens INSIGHT™ solution remains Sapiens eMerge™, our business rules engine that has evolved and matured over the course of thousands of man-years of research and development efforts. Sapiens eMerge™, which serves over 100 of our clients worldwide, reduces the cost of business software development and maintenance.
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We market our solutions globally through our direct sales force and through marketing alliances with global IT providers, such as IBM Corporation, Microsoft, RedHat and Electronic Data Systems Corporation. Sapiens hasWe have cooperated with IBM Corporation for over 10 years at what IBM refers to as a “Premier Business Partner” level. Currently, the Company workswe work with IBM on solutions, joint development, testing, validation and marketing. Through this and other business alliances, Sapiens haswe have developed extensive knowledge in mainframe and mid-range systems, including CICS, DB2, MQSeriesMQ and the WebSphere e-business platform. We are also a member of IBM’s Insurance Application Architecture (IAA) group and the ISV Advantage Program for the Small and Medium Business insurance market segment. We have recently qualified as a Microsoft certified partner for the eMerge platform and cooperate with Microsoft based on the eMerge 4 .NET released in 2008. These alliances enable us to reach a broader base of customers while complementing our partners’ offerings.
Industry Background
The global insurance industry is at a crossroads; facing increased underwriting risks, a highly competitive, landscape,constantly facing new regulations, complicatedmultiple sales channels and demanding customers.
The insurance industry is strugglingInsurance organizations are required to meet heightened needs of intermediaries and customers that have grown to expect information and answers immediately on request. Increased competition, demographic trends, legislative and regulatory requirements, recent disasters and escalating operational costs add to the complex challenges insurance organizations face today.
While insurance companies’ current systems may not be appropriate for current challenges and may be outdated, they are still an important part of an organization because of the vast investment of business know-how and rules, as well as the amounts of information they contain. Replacing them could cause a significant loss of business productivity.
Businesses try to address these challenges in a variety of ways. Certain companies choose to dedicate significant in-house IT resources to address these issues. In many cases, however, organizations lack the requisite internal resources and know-how. As a result, many of these organizations rely on the expertise of external IT service providers.
Our Business Solutions for the Insurance Industry
Our management has focused the Company’s resources on delivering solutions to help the insurance industry become more agile in the face of the new and rapidly changing business environment described above, while simultaneously reducing IT costs.
By creating interdisciplinarycross-functional teams and working with leading insurance companies, we have formulated Sapiens has formulated INSIGHT™, a suite of modular business software solutions that make use of existing assets to quickly and cost-effectively modernize business processes that are the key to survival in the current, challenging insurance landscape. Our Sapiens INSIGHT™ insurance solutions suite is already helping enterprises adapt to the marketplace’s time and cost pressures.
15We collaborate with our customers to tailor the Sapiens INSIGHT™ solutions to achieve the unique operational performance goals of each organization. In addition, we have executed independent projects for the insurance market, 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. Our insurance solutions, which include the Sapiens INSIGHT™ family, are based on Sapiens eMerge™, our rules-based rapid application development (RAD) suite, which enables rapid solution development and maintenance. The Sapiens INSIGHT™ modules therefore allow the codifying of carriers’ implicit business rules into explicit, executable technical rules. The transition to a rules-based system allows for rapid interactive development by technical and business personnel, allowing business users to make changes using everyday language rules rather than application code. Our insurance solutions are compatible with a variety of platforms including IBM System z, IBM System i and HP UNIX at the host-side and Intel-based Web servers. They are also compatible with open architecture standards such as ..NET, Java EE, XML, Web Services and application server platforms such as IBM’s WebSphere™.
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Sapiens INSIGHT™ is designed for the general (property and casualty) and life insurance markets. These solutions can be customized to match specific legacy systems and business requirements, while providing pre-configured functionality. These solutions can be used independently or together as follows:
INSIGHT™ for Property & Casualty (formerly known as Policy INSIGHT™) is a fully functional, general insurance policy administration solution that makes it easier for brokers and agents to do business with carriers. By automating the process, this web-enabled solution reduces the cost of doing business and optimizes risk selection through the use of rules based underwriting. INSIGHT™SapiensINSIGHT™ for Property & Casualty is designed to improve internal efficiencies and simplify and accelerate the cycle of new business, and property and casualty policy processing and administration, 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. INSIGHT™SapiensINSIGHT™ for Property & Casualty is available as a complete package, or in individual modules. Some of the individual modules are: Policy Administration, Billing, Claims, Commissions and Reinsurance.
INSIGHT™SapiensINSIGHT™ for Life & Pensions, known in the United States as INSIGHT™SapiensINSIGHT™ for Life & Annuities,Health, is a powerful and comprehensive framework-based life and pensions solution that serves companies administering life insurance, pension funds, health insurance and saving plans.
INSIGHT™SapiensINSIGHT™ for Life & Pensions is dynamic, highly customizable and can be easily accommodated to administer changes in processes. It is fully web-enabled, prepared to utilize the advantages of the Internet and intranets.
INSIGHT™SapiensINSIGHT™ for Life & Pensions consists of the following independent modules that can be implemented together or only individually:
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| Processes Management - An efficient processes management module, which is very easy to build and maintain |
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| Products Management - Set of tools that enables minimum time-to-market |
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| Dossier Administration |
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| Surrender Value and Paid-Up policies processes |
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| Billing and Collection |
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| Funds Revaluation |
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| Investment Gateway |
INSIGHT™SapiensINSIGHT™ for Underwriting (formerly MediRisk INSIGHT™) is an underwriting solution for life, health and disability insurance. It reduces a customer’s 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 earlier in the business cycle and achieve greater consistency in its decision-making. We market Sapiens INSIGHT™ for Underwriting on the basis of licensing and distribution agreements with MediRisk Solutions Ltd., which developed the solution and holds the intellectual property rights to it.the solution. Sapiens holds a minority interest (approximately 10%) in MediRisk Solutions Ltd.
INSIGHT™SapiensINSIGHT™ for Reinsurance is a sophisticatedfunctional-rich solution for the insurance market, designed to support insurance carriers and reinsurers in the management of all types of reinsurance for the general (property and casualty) insurance market, 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, is based on ACORD standards and B2B XML technology, and is designed for a multi- language, multi- currency, multi- company environment.
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INSIGHT™SapiensINSIGHT™ for Claims is a solution that effectively manages and streamlines the information flow of claim handling across an insurance provider’s entire organization. The claims handled include disability and maturity claims (annuities, pensions), death claims and health claims. This solution uses highly accessible business rules and messaging standards and allows the use of a company’s existing information assets. Thus, the solution improves operational efficiency and enables better and more versatile customer service capabilities, with the goal of providing faster return on investment by reducing the total claims payout.
INSIGHT™SapiensINSIGHT™ for Closed Books also known as LifeLite, is a solution for life insurance companies and pension fundsinsurance companies seeking ways to reduce the cost of maintaining long-term closed books of business, that is, lines of business thatwhere products are no longer current.open to new business. We provide customizable solutions that enable companies to efficiently and more effectively administer policies and claims relating to closed books. Lower ongoing cost of ownershipbooks, leading to significantly lower business administration and IT costs. The solution is achieved by replacing “old” systems (which reflect out-dated business models and working practices with long processing cycles and limited on-line functionality) withbased on modern technology and a Web browser user interface. In September 2004, we purchased the technologies underlying theSapiens INSIGHT™ for Closed Books solution fromis currently deployed at Liverpool Victoria Friendly Society, Limited.
By creating cross-functional teams and partnering with leading insurance companies, we have developed the Sapiens INSIGHT™ insurance solutions suite that is already helping enterprises adapt tolargest Friendly Society in the marketplace’s time and cost pressures.United Kingdom.
We collaborate with our customers to tailor the INSIGHT™ solutions to achieve the unique operational performance goals of each organization. In addition, we have executed independent projects for the insurance market, 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. Our insurance solutions, which include the INSIGHT™ family, are based on Sapiens eMerge™, our rules-based rapid application development (RAD) suite, which enables rapid solution development and maintenance. The INSIGHT™ modules therefore allow the codifying of carriers’ implicit business rules into explicit, executable technical rules. The transition to a rules-based system allows for rapid interactive development by technical and business personnel, allowing business users to make changes using everyday language rules rather than application code. Sapiens’ insurance solutions are compatible with a variety of platforms including IBM zSeries, IBM iSeries and HP UNIX at the host-side and Intel-based Web servers. They are also compatible with open architecture standards such as .NET, J2EE, XML, Web Services and application server platforms such as IBM’s WebSphere™.
Services
Outsourcing of Application Maintenance. Our outsourcing services developed from our strong, long-term relationships with our customers. We are currently servicing multi-year outsourcing contracts with blue-chip customers involving mission-critical systems. The outsourcing projects are performed either on or off the customers’ premises.
IT Services. We provide customers with specialized IT services in many areas, including project management and technical assistance. Our personnel work with the customer for the duration of the entire project, collectively undertaking design, development and deployment tasks, coupled with hands-on-training, to achieve a rapid software solution that matches the customer’s business and IT goals. We have also evolved our service offerings to include a strategy-based discovery and analysis blueprint that helps improve the IT impact on a company’s business objectives.
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Sapiens’Our 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 imposes easily-coded business rules, lending unconventional speed, visibility, agility and cost-effectiveness to the business software lifecycle. 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 frame than through conventional programming.
Another key advantage of Sapiens eMerge™ is the ability to extend the productive life of older computer systems, while at the same time providing the basis for using new generation Internet and service-oriented technologies. The use of rapid application development allows enterprise-specific enhancements to be made in a shorter time and with a greatly reduced maintenance burden when compared to other technologies.
Sapiens eMerge™is based on a multi-level architecture and operates in multi-platform environments, encompassing many hardware vendors, operating system environments and databases. Host-side platforms supported include IBM’s S/390System z (zSeries), AS/400System i (iSeries), HP-UNIX, Linux and HP-UNIX.windows server. Sapiens eMerge™supports databases such as DB2, VSAM, IMS, DB2/400 Oracle and Informix.SQL server. Since Sapiens eMerge™exemplifies open systems and cross-platform capabilities, solutions developed with it can be seamlessly migrated from platform to platform and from database to database.
Development, deployment, integration and administration of applications are all accomplished through the technology components of Sapiens eMerge™, providing customers with flexible, scalable and feature-rich systems.
Our Services
Outsourcing of Application Maintenance. Our outsourcing services performed on our customers’ applications, developed from our strong, long-term relationships with our customers. We are currently servicing multi-year outsourcing contracts involving mission-critical systems. The outsourcing engagements are typically performed with a combination of onsite and offsite mix as required by our customers.
IT Services. We provide customers with specialized IT services in many areas, including project management, application development/enhancements, application platform porting services and general technical assistance. Our personnel work with the customer for the duration of the entire project through proven methodologies on a fixed price and time basis. These IT services can be classified as: (1) consulting services that are not deemed essential to the functionality of the license (such as migration of applications to various platforms and technical assistance with project management), and (2) consulting services that involve significant implementation and customization of our software to customer specific requirements.
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Key Benefits of our Technology to our Customers
—Fast Time to Market and High Return on Investment.Investment. Our combination of a Rapid Application Development (RAD) methodology, rules-based development tools and experienced consultants has resulted in significant productivity increases at customer sites. Declarative development with business rules replaces traditional programming methods, addressing the full application life cycle, meaning that no programming code development is required. Sapiens eMerge™also employs a “positive inference” engine that streamlines application development by requiring only the definition of standard situations, while automatically generating the logic required to handle the non-standard ones. This represents a reduction in logic specification and application maintenance and greatly enhances the quality of the delivered application compared to conventional development environments where most “bugs” arise in the non-standard logic.
—Strong Technical Competence.Competence. Our solutions enable organizations to capitalize on their existing large-scale applications and data by non-intrusively integrating them with modern applications and technologies. Our solutions not only extend the productive life of older computer systems but simultaneously provide a migration path to next-generation technologies. Our solutions are designed for an extensive list of computing platforms and technologies including IBM zSeries and iSeries, HP-Unix at the host server-side and Windows 2000 / XP Web Servers; dueServers. Due to the separation between business logic, data access logic and presentation logic, applications developed for a particular computing platform and database are seamlessly portable to other supported computing platforms and databases. The platform-independent nature of our solutions allows them to be scaled according to the needs of the organization. Sapiens eMerge™ has proven to be extremely scalable, allowing the daily execution of hundreds of millions of business rules for tens of thousands of concurrent users.
Customers for Our Products
Sapiens INISGHT™
We market our Sapiens INISGHT™ suite of solutions to insurance organizations in four main categories: Property & Casualty (known as General Insurance in United Kingdom); Life and Pensions (known as Life and Health in the United States), Reinsurance and Medical Underwriting. Our customers and target markets have direct written premiums in the range of $80 million to in excess of $5 billion per year. However, given the flexibility and modularity of the Sapiens INISGHT™ suite of solutions, our offerings can accommodate most situations and budgets.
Sapiens eMerge™
We market Sapiens eMerge™ primarily to corporate clients and government entities with large information technology budgets and ongoing maintenance and development needs. Our corporate customers include, among others, insurance companies, banks and other companies offering financial services, andas well as companies in the manufacturing and transportation sectors.
The principal markets in which we compete are located in North America, Europe, Israel and Japan. As of December 31, 2005,2008, we had approximately 140110 customers in all the geographical areas in which we operate. Of these, theour primary customers were Menora Mivtachim Insurance, the Israeli Ministry of Labor, Elbit Systems Ltd., EDS Credit Services Limited, MenorahTexas Farm Bureau Insurance Companies, Liverpool Victoria Friendly Society Limited, Occidental Fire and Casualty Company of North Carolina, Computer SciencesAXA Corporation, Haworth Inc., Mazda Motors and Texas Farm Bureau Insurance Companies, accountingVSN, which collectively accounted for 38%approximately 62% of our gross revenues during 2005.2008.
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Competition
The market for enterprise software solutions is highly competitive and characterized by rapidly changing technology, evolving industry standards and customer requirements, and frequent innovations. On the operational level, insurance companies are focusing their business in an attempt to reduce costs and maximize efficiency, and to respond to frequent changes in regulations. Insurance companies need a solution that provides flexible management of business processes, support for rapid changes in regulations and fast time to market. The INSIGHT™ suite of solutions was designed to answer those challenges.
The following is a breakdown of the competition that we face in each of our primary markets:
Our competitors in the market for solutions offered to the insurance industry fall into several categories. Examples are: CSC, SOLCORP, Fineos, SAP, SunGard, Navisys, ePolicy Solutions, InsureWorx, OneShield, Ascendant One, Insurity, The Innovation Group, Duck Creekcategories: vendors of complete systems, vendors of insurance software products, large multinational integrators and AQSlocal integrators in the United States; Unisys, SunGard and RebusIsvarious territories in the United Kingdom; Falmeyer (FJA) and COR AG Insurance Technologies in Germany. which we operate. Examples of these competitors are:
In the United States: | CSC, AGO, Oracle, Camilion, ISI, SOLCORP, Fineos, SAP, SunGard, Navisys, Fiserv, Accenture, OneShield, Insurity, Prima Solutions, IDP, The Innovation Group, DRC, and AQS; | |
In the United Kingdom: | Unisys, SunGard, FIS Software and RebusIs; SOLCORP and SAP; | |
In Europe: | Falmeyer (FJA) and COR AG Insurance Technologies, mainly in German speaking countries, and IDIT I.D.I. Technologies. | |
Examples of large integrators in the insurance field are Electronic Data Systems (EDS) and CSC (companies that also have customer or alliance relationships with Sapiens in other fields). An example of a competitor that is a local integrator is Ness Technologies in Israel.
In addition, we face competition from our customers’ and our potential customers’ internal IT departments, who often prefer to develop solutions in-house.
We differentiate ourselves from our competition withvia a few key factors:
(i) | ||
| Sapiens INSIGHT™ is innovative and modern, rich in functionality and Internet compatible. |
(ii) | ||
| As a result of the Sapiens INSIGHT™ architecture, customers may implement the full solution or parts of it, and readily integrate it into existing “legacy” systems. |
(iii) | ||
| Sapiens INSIGHT™ is agile and flexible to use, based on its product configurator and its |
There has been an infusion of new vendors and new features into the business rules engine and management marketplace. Our competitors in the business rules engines and management marketplace include, Fair-Isaacamong others, Fair Isaac (Blaze), Pegasystems, ILOG, Computer Associates, Haley, Corticon, Versata, SoftLaw, ESIRuleBurst and others.ESI.
We differentiate ourselves from our competition withvia a few key factors:
(i) | ||
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(ii) | ||
| Sapiens eMerge™ is highly optimized for performance of data-intensive tasks that characterize many enterprises’ transactional environments. |
By leveraging our differentiating characteristics mentioned above, we compete in the much larger IT solution delivery market, carving out for ourselves a niche attractive to mid-size enterprises seeking rapid and cost-effective custom software solutions. Our competitors in this domain are:include, among others: IBM, EDS, CSC, Accenture, Unisys, and India-based system integrators such as Tata, Infosys, and WiPro.
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Sales and Marketing
To reach the broadest potential customer base, we use multiple distribution channels, including a direct sales force and relationships with system integrators and, in certain geographic areas, with distributors.
We have marketing and sales personnel located at our offices in the United States, the United Kingdom, Japan and Israel. The direct sales force focuses on large organizations within select industries. It also coordinates sales activities with system integrators such as EDS, IBM and IBM.Microsoft. These partnerships allow us to further expand our own solutions and to gain access to specific types of businesses.
We employ a variety of business development and marketing techniques to communicate directly with current and prospective clients. These techniques include exhibiting at trade shows and industry conferences, disseminating product brochures and other literature, direct-mail marketing, authoring articles, and hosting business forums for customers and prospective customers on technology and industry issues.
As part of our efficiency measures, in 2008 we reduced our sales and marketing activities, from approximately $8.8 million in 2007 to $7.6 million in 2008.
Customer Maintenance and Support
We believe that a high level of post-contract customer support is important to the successful marketing and sale of our solutions. We employ a team of technical specialists who provide thea full range of maintenance and support services.services to our customers. The typical direct sale to a client includes initial maintenance, training and consulting services. In addition, substantially all of theour clients for which we have developed applications elect to enter into an ongoing maintenance and support contract with us. The term of such a contract is usually twelve months. A maintenance contract entitles the customer to technology upgrades, when made generally available, and technical support. In addition, we offer introductory and advanced classes and training programs available at our offices and at customer sites.
Our authorizedWe also work with a limited few distributors value-added resellers and system integrators alsowho provide customers with training, product support and consulting services. Each of our software distributors is capable of providing training in its respective country. In addition, many international partners and distributors, particularly independent software vendors, operate their own technology training programs.
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Geographical Distribution of Revenues
The following is a breakdown of our revenues by geographical areas based on our customers’ locations,geographic markets, both in thousands of dollars and as a percentage of total revenues for the years indicated:
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United Kingdom |
| $ | 19,446 |
| 37.2 | % | $ | 18,217 |
| 38.1 | % | $ | 12,604 |
| 32.0 | % | $ | 13,805 | 31.2 | % | $ | 13,417 | 31.6 | % | 11,612 | 26.7 | % | ||||||||||||
North America |
| 17,636 |
| 33.7 |
| 12,381 |
| 25.9 |
| 10,046 |
| 25.5 |
| 9,895 | 22.3 | 10,061 | 23.7 | 7,846 | 18.0 | ||||||||||||||||||||
France |
| 2,594 |
| 5.0 |
| 1,352 |
| 2.8 |
| 1,131 |
| 2.9 |
| 902 | 2.0 | 389 | 0.9 | 721 | 1.7 | ||||||||||||||||||||
Germany |
| 2,211 |
| 4.2 |
| 1,814 |
| 3.8 |
| 1,414 |
| 3.6 |
| 837 | 1.9 | 475 | 1.1 | 839 | 1.9 | ||||||||||||||||||||
Israel |
| 6,453 |
| 12.3 |
| 8,910 |
| 18.6 |
| 9,147 |
| 23.2 |
| 12,072 | 27.2 | 13,824 | 32.6 | 16,141 | 37.1 | ||||||||||||||||||||
Japan |
| 2,644 |
| 5.1 |
| 3,147 |
| 6.6 |
| 3,902 |
| 9.9 |
| 4,491 | 10.1 | 4,071 | 9.6 | 6,375 | 14.6 | ||||||||||||||||||||
Other |
| 1,334 |
| 2.5 |
| 1,983 |
| 4.2 |
| 1,160 |
| 2.9 |
| 2,309 | 5.3 | 158 | 0.5 | - | - | ||||||||||||||||||||
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Total |
| $ | 52,318 |
| 100.0 | % | $ | 47,804 |
| 100.0 | % | $ | 39,404 |
| 100.0 | % | $ | 44,311 | 100.0 | % | $ | 42,395 | 100.0 | % | 43,534 | 100.0 | % | ||||||||||||
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For details of revenues by category of activity, see the table entitled “Selected Financial Data” under Item 3, “Key Information.”
20
Seasonality
Even if not reflected in the 2005our 2007 or 2008 results, traditionally, the first and third quarters of the fiscal year tendhave tended to be slower quarters for us and the industries that we target. The first quarter usually reflects a lull following an active fourth quarter as companies rush to complete deals and utilize budgets before the end of the fiscal year. The slowdown in the third quarter reflects the summer months, which usually have reduced activities in many of the regions where areour customers are located.
Intellectual Property
In accordance with industry practice, we rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that because ofdue to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret information and as an unpublished copyright work. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements which grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, we attempt to protect trade secrets and other proprietary information through agreements with employees, consultants and distributors.Wedistributors. We do not believe that patent laws are a significant source of protection for our products and we do not hold any patents.
Our trademark rights include rights associated with our use of our trademarks, and rights obtained by registration of our trademarks. Our use and registration of our trademarks do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods or services. We have registrations for the mark “Sapiens” in the United States, Israel, Brazil and a number of countries in Europe. The initial terms of the registration ofprotection for our registered trademarks range from 10 to 20 years and are renewable thereafter.
Our Sapiens INSIGHT™ group of solutions include our proprietary technology as well as technology licensed by customers (such as Liverpool Victoria, OneBeacon Insurance Company, Allianz Suisse and Menorah)Menora) or strategic partners (MediRisk Solutions).
C. | Organizational |
Sapiens International Corporation N.V. is the parent company of the Sapiens group of companies. It hasWe have a number of subsidiaries in Israel and throughout the world. TheOur significant subsidiaries are as follows:
Sapiens International Corporation B.V. (“("Sapiens B.V.”"): incorporated in The Netherlands and 100% owned by Sapiens.
20
Unless otherwise indicated, the other significant subsidiaries of Sapiens listed below are all 100% owned by Sapiens B.V.:
Sapiens Israel Software Systems Ltd.: incorporated in Israel
Sapiens Technologies (1982) Ltd.: incorporated in Israel
Sapiens Americas Corporation: incorporated in New York
Sapiens (UK) Limited: incorporated in England
Sapiens France S.A.S.: incorporated in France
Sapiens Deutschland GmbH: incorporated in Germany
Sapiens (Schweiz) AG: incorporated in SwitzerlandSapiens Japan Co.: incorporated in Japan and 90% held by Sapiens B.V.
We are a member of the Formula Systems (1985) Ltd. Group (Nasdaq:(NASDAQ: FORTY and TASE: FORT) (“Formula”).
Formula is a holding and managing company of publicly traded companies and their subsidiaries. Formula companies provide IT solutions worldwide, developing and implementing innovative, proprietary software, services and solutions, turnkey projects and outsourcing services as well as software distribution and support. As of June 25, 2006,April 1, 2009, Formula beneficially ownsowned approximately 60%70% of our outstanding Common Shares.
21In November 2006, Emblaze purchased a controlling interest in Formula, and as a result, controls us. As of April 1, 2009, Emblaze beneficially owned 51.7% of the outstanding share capital of Formula.
Based on Formula’s beneficial holding of over 50% of the outstanding Common Shares of the Company, and based on Emblaze’s beneficial holding of over 50% of the outstanding share capital of Formula, both Formula and Emblaze may be considered to control us.
D. |
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We lease office space in Israel, the United States, Japan and the United Kingdom, France and Germany.Kingdom. The lease terms are generally five to ten years. In Israel, we lease approximately 50,00045,000 square feet of office space; in the United States, approximately 8,4004,700 square feet; in the United Kingdom, approximately 13,40013,800 square feet;feet, and smaller areasin Japan, approximately 3,750 square feet. In the United Kingdom, we sub-lease to others approximately 7,364 square feet. In 2008, our rent costs totaled $1.76 million in the other locations.aggregate for all of our leased offices. Our corporate headquarters are located in Israel and our core research and development activities are performed at our offices in Israel. Our sales, marketing and general and administrative activities are performed in each of our offices. We believe that our existing facilities are adequate for our current needs.
UNRESOLVED STAFF COMMENTS |
Not Applicable.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following management’s discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto.
Our discussion and analysis of our financial condition and result of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of theseour financial statements required us to make estimations and judgments, in accordance with U.S. GAAP, that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, bad debts, goodwill and other intangible assets, foreign currency fluctuation, capitalized software development costs, deferred taxes, income taxes, restructurings and legal contingencies. We basedbase our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. More detailed descriptions of these policies are provided in Note 2 to theour consolidated financial statements.
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We believe the following critical accounting policies affect the estimates and judgments that we made in preparing our consolidated financial statements.
Revenue recognitionRecognition
Our revenue recognition approach for software licensing requires that, in accordance with Statement of Position No. 97-2 “Software Revenue Recognition” (as amended), four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered, and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Revenues under multiple-element arrangements, which may include software licenses, support and maintenance, and training and consulting services, are allocated to each element based on their respective fair values based on vendor-specific objective evidence. This objective evidence representsunder the price of products and services“residual method” when sold separately.
When vendor-specific objective evidenceVendors Specific Objective Evidence (“VSOE”) of fair value exists for all undelivered elements butand VSOE does not exist for all of the delivered elements. VSOE is determined for support and maintenance, training and consulting services based on the price charged when the respective elements are sold separately or renewed. The Company charges support and maintenance renewals at a fixed percentage of athe total price of the licensed software arrangement, we useproducts purchased by the residual method for recognition of revenues, when all other revenue recognition criteria are met.customer. Under the residual method, we defer revenues related to the undelivered elements based on their vendor-specific objective evidence of fair value and recognize the remaining arrangement fee for the delivered elements. When vendor-specific objective evidence of fair value for undelivered elements does not exist, revenues from the entire arrangement are recognized over the term of the agreement.
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We recognize revenue from support and maintenance agreements ratably over the term of the agreement, which is typically one year. We recognize revenues from training arrangements as the services are performed.
We generally do not grant a right of return to our customers. When we do grant a right of return, we defer the recognition of revenue until the right of return expires, provided that all other revenue recognition criteria are met.
Amounts collected or billed prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue represents deferred maintenance revenue, and to a lesser extent, deferred software license revenues.
Our project business derives a significant portionRevenues from license fees that involve implementation and customization of its revenueour software to customer specific requirements are generated from fixed pricefixed-price or time-and-materials contracts. Revenues from fixed-price contracts are recognized based on Statement of OpinionPosition No. 81-1 “Accounting for Performance of Construction Type and Certain Production Type Contracts,” which requires the accurate estimation of the cost, scope and duration for each project. Revenue and related cost for these projects are recognized on percentage of completion, using the input measure or output measure to assess the percent completed when enforceable right to services performed between milestones during the project exists, with revisions to estimates reflected in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage the project properly within the projected periods of time or satisfy our obligations under the contract, project margins may be significantly and negatively affected, which may result in losses on existing contracts. Any such resulting reductions in margins or contract losses in a large, fixed-price contract may have a material adverse impact on our results of operations.
Consulting and other service revenue includes also training and post-contract maintenance service. Revenues from consulting maintenanceservices that are not deemed essential to the functionality of the license provided on a “time and trainingmaterials” basis are recognized as services are performed.
22
Revenues from IT outsourcing services that mainly include maintenance of customers’ applications integrated on our license performed on a fixed fee basis are recognized ratablyon a straight line basis over the contractual period orthat the services are rendered, since no other pattern of outputs is discernible. Revenues from IT outsourcing services that are performed on a “time and materials” basis are recognized as services are performed.
Bad Debt
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
Goodwill, long lived assets and other identifiable intangible assets
On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142Assets” requires that goodwill be tested for impairment on adoption and at least annually thereafter.or between annual tests in certain circumstances. Goodwill is required to be written down when impaired, rather than amortized as previous accounting standards required. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is generally determined using market capitalization. Significant estimates are used in the fair value methodologies. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill.
We selected December 31st as the date on which we will perform our annual indefinite life impairment tests for our goodwill and intangible assets with an indefinite life impairment tests.assets. Through December 31, 2005,2008, no impairment was required.
In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” our long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of 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. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our forecast and cash flows and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies used to assess the recoverability of our long-lived assets include estimates of future cash-flows, future short-term and long-tem growth rates, market acceptance of products and services, and other judgmental assumptions, which are also affected by factors detailed in our Risk Factors section in this Annual Report.annual report (see Item 3, “Key Information – Risk Factors”). If these estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.
Share-Based Payments
Effective January 1, 2006, we adopted Statement of Financial Accounting Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123 (R)”), which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFFS 123”) which requires the measurement and recognition of compensation expense based on estimated fair values for all shared based payments awards made to employees and directors. In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), as amended by SAB 110, relating to SAFS 123 (R). We have applied the provisions of SAB 110 in our adoption of SFAS 123 (R) with respect to the determination of the expected term of the option, as allowed SAB 110, which is the midpoint between the vesting date and the end of the contractual term of the options.
SFAS 123 (R) requires us to estimate the fair value equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the awards that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statement of operations. Prior to the adoption of SFAS 123 (R), we accounted for equity based awards using the intrinsic-value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).
23
We adopted SFAS 123 (R) using the Modified Prospective Method. Under that transition method, compensation cost recognized in the year ended December 31, 2006 included compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123 (R). In December 2005, primarily as a result of the issuance of SFAS No. 123 (R), we accelerated the vesting of all unvested stock options held by employees and directors.
Beginning on the date of adoption of SFAS 123 (R), we estimate forfeitures based on historical experience and other factors; previously, we recorded forfeitures as they occurred.
Foreign Currency Fluctuation
We expect that, in addition to the US dollar, a significant portion of our revenues will continue to be denominated in the British pound (the “GBP”) and in the NIS and a smaller portion will be denominated in the Euro and Japanese yen. As a result, movementschanges in the exchange rates between the US dollar and the GBP, the US dollar and the NIS, and to a lesser extent the US dollar and the Euro and the US dollar and the Japanese yen, could have a material adverse impact on our revenues and results of operations within the U.K., the rest of Europe, Israel and Japan. We regularly assess our currency exchange exposures and determine whether to adjust or hedge our position. We may use derivative instruments to hedge or adjust our exposures. As a matter of policy we do not enter into transactions of a speculative or trading nature. Foreign exchange exposures are monitored by tracking actual and projected commitments and through the use of sensitivity analysis.
Capitalized software development costsSoftware Development Costs
Our policy on capitalized software costs determines the timing of our recognition of certain development costs. Software development costs incurred from the point of reaching technological feasibility until the time of general product release should be capitalized. We generally define technological feasibility as the completion of a detailed program design. The determination of technological feasibility requires the exercise of judgment by our management. Since we sell our products in a market that is subject to rapid technological changes, new product development and changing customer needs, changes in circumstances and estimations may significantly affect the timing and the amounts of software development costs capitalized and thus our financial condition and results of operations. At
Capitalized software costs are amortized by the endgreater of 2004, the unamortized capitalizedamount computed using: (i) the ratio that current gross revenues from sales of the software bear to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method between three to five years, which is the estimated useful life of the software product. We assess the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold.
In recent years, we developed a new generation of Sapiens eMerge™ products, which includes Service Oriented Architecture based products (“SOA”), eMerge™ for Linux and eMerge™ for Windows. In 2007, we determined the useful life of Sapiens eMerge™ products to be five years. The life expectancy was established based on the contents, characteristics and capabilities of the products suite, on the technology trends in the IT market in the next decade and on the rate of adoption of new technologies by our customers. To assure a long life expectancy in a dynamic market, software components that support SOA, MS Windows and Linux environments were developed and released in the recent years. These products (that are SOA compliant) support adaptation of existing applications to the new standards without necessitating long and expensive re-implementation and agile incorporation of new business models, effectively extending the lifetime of existing applications. eMerge™ product suite, as well as the eMerge™ based applications, are based on mainstream technologies that are industry standards and were adopted by most of the software vendors. Based on life cycles for these mainstream key technologies, it is expected that the Microsoft and Linux platforms will exist for five years. Additionally, we believe that if there are major technology changes or advancements in the future, the technologies used by Sapiens eMerge™ products would be at the root of those advancements. The new eMerge™ product suite enables extending the productive life of existing legacy systems, while simultaneously providing a rapid migration path to new technologies. The advanced rapid application development technology allows making enterprise-specific enhancements in a significantly shortened timeframe resulting in a vastly reduced maintenance burden as compared to other technologies, application lifecycle costs exceededreduced by approximately 80% and a significant prolongation of applications’ lifecycle. We estimate the net realizable valuetechnological life of the underlying platforms and architecture (SOA) to be five years.
24
In addition, during recent years, we developed a new insurance product, Sapiens INSIGHT™ for Life and Pensions. The useful life of Sapiens INSIGHT™ was also determined to be five years. We based our determination of useful life on internal product road map analysis, our experience with insurance companies that have already implemented Life & Pensions products, technological obsolescence and industry and market research. In the life insurance market, there are very high costs of migrating the old life insurance programs to a new system. The INSIGHT™ for Life & Pension is a SOA compliant product that is multi-company, multi-currency, multi-language, and web-enabled, leveraging the advantages of the Internet and company intranet. Sapiens INSIGHT™ for Life & Pension’s domain is significantly more complex and robust than other insurance domains (such as medirisk, closed books, re-insurance or property and casualty) as it handles more product modules, engines and algorithms which are also implemented during a longer average period than other insurance domains.
We do not anticipate any major variance or trend impacting our cost of revenues and profit margins as a result of determination of useful life of a certain project, innew generation of Sapiens eMerge™ products as well as Sapiens INSIGHT™ for Life and Pensions to be five years.
Except as otherwise mentioned, the amountuseful life of $901,000, and therefore we recorded an impairment of capitalized software costs in the amount of $901,000, which was presented in cost of revenues. Based on its most recent analysis, the Company’s management believes that no additional impairment of capitalized software development costs existed as of December 31, 2005.our other products is three years.
Management judgment is required in determining our future taxable income for purposes of assessing our ability to realize any future benefits from our deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. If actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected. If we determine that we will be able to realize the deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset would increase income in the period in which such determination is made. On the other hand, should we determine that we will not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets will be charged to expenses in the period in which such determination is made. In 2005,2008, we increased our deferred income tax assets resulting from loss carry-forwardcarry-forwards and other tax creditstemporary differences by $658,000$0.7 million and increased the related valuation allowance by $1.5$1.0 million. We also recorded a write-off of tax advances in the amount of $783,000. As a result, in 2005, ourthe net deferred tax asset and tax advances wererecorded in our 2008 financial statements was reduced by a total of $1.6$0.3 million.
Income Taxes
Through our operating subsidiaries, we operate within multiple tax jurisdictions and may be subject to tax audits in these jurisdictions. These tax audits can involve complex issues, which may require an extended period of time to resolve. In management’s opinion, adequate provisions for income taxes have been made for all years. However, though our income tax reserves are based on our best knowledge, we may be subject to unexpected audits by tax authorities in the various countries where we have subsidiaries, which may result in material adjustments to the reserves established in our consolidated financial statements and have a material adverse effect on our results of operations.
2425
Accounting for Income Taxes
On January 1, 2007, we adopted FIN 48, “Accounting for Uncertainty in Income Taxes,” which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax obligations in accordance with SFAS No. 109, “Accounting for Income Taxes” and SFAS No. 5 “Accounting for Contingencies”. A provision of $300,000 was recorded as a result of the adoption of FIN 48 at January 1, 2007, that was reduced by $150,000 during the year ended December 31, 2007. As of December 31, 2008, the provision for FIN 48 was $160,000.
Legal Contingencies
We are currently involved in certain legal proceedings and claims that arose in the ordinary course of business, as discussed in Note 11 of10 to our consolidated financial statements. As of December 31, 2005,2008, we have accrued our estimate of the probable costs for the resolution of those claims where we believe it is probable that we will incur a loss. This estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. We do not expect these claims and/or proceedings to have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these claims and proceedings.
Restructurings
In 2008 and 2007, we did not undergo any restructurings. In February 2006, we began to implementimplemented a restructuring plan for the purpose of reducing costs and restoring profitability. The restructuring plan includesincluded the termination of the employment of approximately 4025 employees.
In addition, in the previous year, in February 2005, we implemented a restructuring plan which resulted in, the employment of approximately 40 employees being terminated.
The Company’s restructuring plansplan in 2006 and 2005 resulted in costs of $635,000 and $1.1 million, respectively.$758,000.
Fair Value Measurements
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities.
Effective January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements” and, effective October 10, 2008, adopted FSP No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 | – | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
Level 2 | – | Includes other inputs that are directly or indirectly observable in the marketplace. |
Level 3 | – | Unobservable inputs which are supported by little or no market activity. |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
FSP 157-2SFAS 123R – Share-Based Payments“Effective Date of FASB Statement No. 157”
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized on the basis of their fair values while SFAS No. 123(R) requires, as of the first quarter of 2006, all share-based payments to employees to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. We adopted SFAS No. 123(R) on January 1, 2006. We will implement SFAS No. 123(R) using the modified prospective method. Under this method, we will begin recognizing compensation cost for equity-based compensation for all new awards and to awards modified, repurchased or cancelled after January 1, 2006. The impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend also on levels of share-based compensation granted in the future. Had we adopted SFAS No. 123(R) in 2005, the impact of that standard would have approximated $2.6 million, as described in the disclosure of pro forma net loss and earnings per share in our consolidated financial statements. Primarily as a result of the issuance of SFAS No. 123(R), we accelerated the vesting of all unvested stock options held by employees and directors, in December 2005.26
In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS No. 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company expects that the adoption of SAB 107 will have an impact on its results of operations and net earnings per share as the Company will be required to expense the fair value of all share-based payments.FSP 115-1 - The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
In November 2005,February 2008, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 115-1 and FAS 124-1, “The MeaningNo. 157-2, “Effective Date of Other-Than-Temporary Impairment and Its Application to Certain Investments”FASB Statement No. 157” (“FSP 115-1”157-2”), which provides guidanceto delay the effective date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial liabilities, excluding those that are recognized or disclosed in financial statements at fair value on determining when investmentsa recurring basis (that is, at least annually). For purposes of applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or a financial liability in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss.FASB Statement 159. FSP 115-1 also includes accounting considerations subsequent157-2 defers the effective date of Statement 157 to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periodsfiscal years beginning after DecemberNovember 15, 20052008, and is required to be adopted byinterim periods within those fiscal years for items within the Company in the second quarterscope of fiscal 2006.this FSP 157-2. The Company does not expect the adoption of FSP 115-1157-2 to have a significant effectmaterial impact on its consolidated financial statements.position, results of operations or cash flows.
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SFAS 155161 – Accounting for Certain Hybrid Financial“Disclosures about Derivative Instruments and Hedging Activities”
In February 2006,March 2008, the FASB issued FASB Statement No. 155(“161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 155”161”), which is an amendment ofto FASB Statements No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and 140. SFAS 155 (a) permits fair value re-measurement for any hybridits related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only stripposition, financial performance, and principal-only strip are not subject to the requirements of Statement 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, (e) amends FASB Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.cash flows. This Statementstatement is effective for financial statements issued for fiscal years and interim periods beginning after SeptemberNovember 15, 2006.2008. Early application is encouraged. The Company does not expect the adoption of SFAS 155161 to have a significant effectmaterial impact on its consolidated financial statements.position, results of operations or cash flows.
SFAS 156160 – Accounting for Servicing of“Noncontrolling Interests in Consolidated Financial AssetsStatements”
In March 2006,December 2007, the FASB issued FASB Statement No. 156SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 156”160”). SFAS 160 amends ARB 51, “Consolidated Financial Statements”, which amends FASB Statement No. 140.to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 156 establishes, among other things,160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material effect on accounting for all separately recognized servicingcurrent subsidiaries.
SFAS 141(R) – “Business Combinations”
In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). This Statement replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and servicing liabilities.liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 156 amends FASB Statement 140141(R)). In addition, SFAS 141(R)‘s requirement to require that all separately recognized servicing assets and servicing liabilities be initially measuredmeasure the noncontrolling interest in the acquiree at fair value if practicable. will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer.
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SFAS 156 permits, but does not require,141(R) applies prospectively to business combinations for which the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigateacquisition date is on or after the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because SFAS 156 permits income statement recognitionbeginning of the potential offsetting changesfirst annual reporting period beginning on or after December 15, 2008. As such, the adoption of SFAS 141(R) is not expected to have a material effect on accounting for our current subsidiaries.
FSP 142-3 – “Determination of the Useful Life of Intangible Assets”
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors that should be considered in fair valuedeveloping renewal or extension assumptions used to determine the useful life of those servicing assetsa recognized intangible asset under SFAS No. 142, “Goodwill and servicing liabilities and derivative instruments in the same accounting period. SFAS 156Other Intangible Assets”. FSP 142-3 is effective for financial statements for fiscal years beginning after SeptemberDecember 15, 2006.2008. The Company does not expect the adoption of FSP 142-3 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
EITF 08-6 – “Equity-Method Investment Accounting”
EITF Issue No. 08-6, “Equity-Method Investment Accounting”(“EITF 08-6”) concludes that the cost basis of a new equity-method investment would be determined using a cost-accumulation model, which would continue the practice of including transaction costs in the cost of investment and would exclude the value of contingent consideration. Equity-method investment should be subject to other-than-temporary impairment analysis. It also requires that a gain or loss to be recognized on the portion of the investor’s ownership sold. EITF 08-6 will be effective for the reporting period beginning after December 15, 2008. The Company does not expect a material impact on its consolidated financial statements from adoption of EITF 08-6.
SFAS 156162 – “The Hierarchy of Generally Accepted Accounting Principles”
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company is currently evaluating the impact of SFAS No. 162 on its financial statements, and the adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe the adoption of FSP APB 14-1 will have significant effect on its consolidated results of operations and financial condition
EITF 08-4 – “Transition Guidance for Conforming Changes to Issue No. 98-5”
In June 2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5". The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The company is currently evaluating the impact of adoption of EITF 08-4.
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EITF 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”
In June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will have no material impact on the consolidated financial statements.
A. | Operating Results |
Revenues from the sale of products are comprised of revenues from sales of Sapiens eMerge™ licenses, license upgrades, specially designed productsfixed price projects, and licenses for “Sapiens INSIGHT™” suite of solutions for the insurance industry such as “INSIGHT™ for Property & Casualty,” “INSIGHT™ for Closed Books,” “INSIGHT™ for Life & Pensions,” “INSIGHT™ for Reinsurance,” “INSIGHT™ for Underwriting, “ and “INSIGHT™ for Claims” application development, re-engineering computer systems and converting operating systems. These specially designed products are provided to customers either on a fixed-price or time and materials basis.industry. Revenues from services include mainly consulting on a time and materials basis, maintenance and support.
Total revenues in 2005 decreased 17.6%2008 increased 2.6% to $39.4$43.5 million from $47.8$42.4 million in 2004.2007. Product revenues in 20052008 decreased 50.4%26.8% to $13.3$4.1 million in 20052008 from $26.8$5.6 million in 2004.2007. Consulting and other service revenues in 20052008 increased 24.3%7.1% to $26.1$39.4 million from $21.0$36.8 million in 2004.2007.
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Our product revenues for the year 20052008 decreased mainly due to the completion of multi-year projects for two ofand our customers – EDSCS and Liverpool Victoria in the UK, which amounted to a decline of $4.3 million, or 32% of the decline in our product revenue, and two of our customers CSC and OneBeacon in the United States, which amounted to a decline of $3.1 million, or 23% of the decline in our product revenue, and the decision of such customers not to place follow-on orders. We continue to work with these customers on other projects, though overall revenue from them decreased as we completed certain projects. Product revenues also declined as a result of the prolonged periods of time required to negotiate with our customers, particularly in the insurance industry. The increase in consulting and other service revenues came as a result of higher revenues from consulting, wereincreased mainly due to a planned shift from fixed price projects to time and material based projects, and the fact thatcompletion of certain fixed price projects during the nature of our relationship with certain customers changed from project delivery to consulting services. As a result of a decrease in sales of new licenses, maintenance revenues decreased in the UK, the United States, Germany, Japan and Switzerland where the decrease from 2004 amounted to $359,000, $481,000, $154,000, $135,000 and $151,000, respectively.year.
Cost of Revenues and Gross Profit.
Cost of revenues increased 3.5% to $26.5 million in 2008 from $25.6 million in 2007. Cost of revenues relating to products is comprised of salaries and other personnel-related expenses of software consultants and engineers ($5.71.2 million, or 50.4%48% of our total costs of products, in 2005,2008, and $11.7$1.0 million, or 70.6%30.3% of our total costs of products, in 2004)2007), depreciation costs ($0.3 million, or 12.0% of our total costs of products, in 2008 and $0.4 million, or 16.0% of our total costs of products, in 2007), amortization of capitalized software development costs ($3.80.4 million, or 33.4%16.0% of our total costs of products, in 20052008 and $3.0$1.0 million, or 17.9%30.3% of our total costs of products, in 2004)2007), royalties to the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel (“OCS”) ($1.10.1 million, or 9.8%4.0% of our total costs of products, in 2005,2008, and $1.6$0.6 million, or 9.6%18.2% of our total costs of products in 2004)2007) and other costs ($726,0000.5 million, or 6.4%20.0% of our total costs of products, in 2005,2008, and $323,000$0.3 million, or 1.9%9.1% of our total costs of products, in 2004)2007). Cost of revenues relating to consulting and other services is comprised of salaries and other personnel-related expenses.expenses, and amortization of capitalized software development costs. Salaries and other personnel-related expenses amounted to $13.5$19.6 million, or 81.7% of our total costs of consulting and other services, in 2005, an2008, and $20.3 million, or 91% of our total costs of consulting and other services, in 2007. Amortization of capitalized software development costs amounted to $3.8 million, or 15.8% of our cost of revenues related to consulting, in 2008, and $2.0 million, or 9.0% of our cost of revenues related to consulting, in 2007. The increase of 32.3% from $10.2 million in 2004, mainly because of the increase in consulting revenues,amortization is mainly due to the fact thatdevaluation of the natureNIS against the US dollar and the commencement of our relationship with certain customers changed from project delivery to consulting services.the amortization of new capitalized software development costs.
Our gross profit in 2005 decreased 27.4%2008 increased 1.8% to $14.6$17.1 million from $20.1$16.8 million in 2004.2007. The gross profit margin decreased by 12.4%0.8% in 2008 to 36.9%39.3 % from 42.1%39.6% in 2004. Gross margin decreased, even though we reduced our expenses, since2007 mainly due to the influence of our 2005 restructuring plan was only felt lateincrease in the year while revenues declined throughout the year, and since our revenues decreased at a greater rate than our reduction in expenses.amortization costs.
Gross profit from product revenues decreased 80.4%30.4% in 20052008 to $2.0$1.6 million from $10.2$2.3 million in 2004.2007. Gross margin from product revenues was 15.0%39.0% in 2005,2008, a decrease of 60.6%5.1% from 38.1%41.1% in 2004. The decrease in product gross margin is due to three main reasons. The first is that the nature of our relationship with certain customers changed in the UK in 2005, which resulted in the transition of revenues from products to consulting, which represents 8% of the decline in our gross margin from products. The second is due to the decrease in revenue from license sales which amounted to $900,000 which had a 5% effect on our product gross margin. The third is the decrease in the profitability of our projects in Israel, UK and the United States.
Amortization of capitalized software development costs increased 26.7% to $3.8 million in 2005 from $3.0 million in 2004. Since we released for sale a new Sapiens eMerge™ solution at the end of 2004, the amortization of this solution only began to have an impact in 2005.
2007. Gross profit from consulting, maintenance and other services increased 16.7%6.2% to $12.6$15.4 million in 20052008 from $10.8$14.5 million in 2004. At the same time, gross2007. Gross margin from consulting, maintenance and other services decreased 6.8%0.8% in 20052008 to 48.1%39.1% from 51.6%39.4% in 2004.2007.
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Amortization of capitalized software development costs increased 40.0% to $4.2 million in 2008 from $3.0 million in 2007. The decrease in the gross margin from consulting, maintenance and other servicesincrease is due to beginning of the decrease in higher margin maintenance revenue, to $7.9 million in 2005 from $9.2 million in 2004.amortization of new capitalized software development costs.
Research and Development, net.
Research and development (“R&D”) costs are mainly comprised of labor costs and depreciation of property and equipment, reduced by grants from the OCS and capitalization of software development costs. Net research and developmentR&D expenses increased 8.0%11.4% in 20052008 to $2.7$3.9 million from $2.5$3.5 million in 2004.2007. The increase in spending on R&D recorded in 2005,2008, as compared with the previous year, resulted mainly from the higher participationdevaluation of the OCS in 2004, which decreased our R&D expenses in that year.
A portionNIS against the US dollar during the first three quarters of 2008, as most of our R&D expendituresresearch and development group is funded by the OCSlocated in accordance with programs entitling the Government to receive royalties on sales of productsIsrael and services developed as a result of R&D projects so funded. Our net R&D expenditure benefited from OCS fundingaccordingly its expenses are recorded in the amounts of $520,000 in 2005 and $833,000 in 2004.NIS.
Capitalized software development costs decreased 8.5%increased 12.9% to $4.3$3.5 million in 20052008 compared with $4.7$3.1 million in 2004.This decrease reflected a restructuring executed2007. Direct labor costs increased 36.6% in February 2005 which resulted2008 to $5.6 million from $4.1 million in a reduction2007, mainly due to the devaluation of R&D employees.the NIS against the US dollar during the first three quarters of 2008.
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Selling, Marketing, General and Administrative expenses, net.
Selling, marketing, general and administrative, net expenses (“SG&A expenses”) decreased 16.1%14.4% in 20052008 to $16.2$10.7 million from $19.3$12.5 million in 2004.2007. SG&A expenses consist primarily of salaries and other personnel-related expenses, which in 20052008 amounted to $10.3$6.4 million, or 63.6%59.8% of total SG&A expenses, and in 20042007 to $12.7$6.8 million or 65.8%54.4% of total SG&A expenses, as well as other costs associated with our sales and marketing efforts and our general and administrative activities such as rent which amounted to $2.4$1.3 million in 2005,2008, accounting, legal and other public company expenses in the amount of $0.7$1.0 million, depreciation costs of $0.4$0.2 million, marketing costs, including tradeshows and design, in the amount of $0.3$0.2 million and other miscellaneous costs amountingbad debt income in the amount of $0.4 million (bad debt expenses in the amount of $0.4 million offset by the proceeds of a creditors’ claim in the amount of $0.8 million granted to $2.1 million.our German subsidiary). General and administrative expenses include management salaries, offices and office maintenance, communications, external consultants and other expenses. The decrease in SG&A expenses in 20052008 was the result of planneda reduction in headcount and consistent efficiency measures implemented by our management, which resulted in reduced expenses, particularly reduced salary as a result of the February 2005 restructuring, which resulted in a reduction of direct labor costs of $2.1 million.
Restructuring Costs.Restructuring costs in 2005 were $1.1 million, as a result of the restructuring executed by the Company in February 2005, which resulted in the lay-off of approximately 40 employees. The Company did not incur any restructuring costs in 2004.expenses.
Financial expenses, net.
Our financial expenses, net, decreased 25.0%21.4% to $1.8$2.2 million in 20052008 from $2.4$2.8 million in 2004.2007. Total financial income decreased $0.2 million to $0.6 million in 2008 from $0.8 million in 2007, which was offset by the decrease in financial expenses of $0.8 million to $2.8 million in 2008 from $3.6 million in 2007. The decrease resultedis mainly due to the decrease in the aggregate amount of our outstanding debentures and short term loans from financial institutions during 2008. In January and February 2008, we repurchased an aggregate amount of NIS 7,600,000 nominal value of debentures, representing approximately, $2.1 million of the outstanding debentures. As a reduction inresult, the amount of (short and long term) loans outstanding, from $16.8the annual interest payment that we paid in 2008 was reduced to approximately NIS 2.1 million at the end of 2004 to $11.8 million at the end of 2004, which led to a reduction in the amount of interest incurred or paid during 2005.$0.6 million. In addition, in 2005, we capitalized $100,000 of financial expenses related to software development, in accordance with SFAS No. 86 which further reduced our financial expenses, and there was a reduction in the amount of bank feesDecember 2008, we paid from $249,000 in 2004 to $84,000 in 2005.our debenture holders, $3.5 million for the third installment repayment of the principal amount due under the debentures.
Taxes on Income.
Our net tax expenses in 20052008 were $1.8$0.58 million compared with $217,000$0.34 million in 2004. In 2005, we increased our deferred income tax assets resulting from loss carry-forward and other tax credits by $658,000 and increased the related valuation allowance by $1.5 million. We also recorded a write-off of tax advances, which were included in current assets, in the amount of $783,000. As a result, our deferred tax asset and tax advances were reduced by a total of $1.6 million. In addition, we wrote off $80,000 of current tax expenses in Japan and $118,000 of tax advances in other territories. 2007.
Our entire provision for taxes on income relates to operations in jurisdictions other than the Netherlands Antilles. The effective income tax rate varies from period to period as thea result of the various jurisdictions in which we operate and where each one has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carryforwardscarry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We did not recognize a majority of the deferred tax assets relating to the net operating losses of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.
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Net Loss.
Net loss to shareholdersholders of common sharesour Common Shares was $0.3 million for 2005 was $9.1 million, an increase2008, a decrease of 78.4%88.0% compared with a net loss to shareholders of $5.1$2.5 million in 2004.2007. The increasedecrease in net loss to shareholders in 20052008 was primarily due to the declineincrease in our total revenues, which was not matched by a similar declineoperational profit of $1.7 million to $2.5 million in expenses and due to the restructuring expense2008, compared with an operational profit of $0.8 million in 2005 of $1.1 million and the reduction of our deferred tax asset and tax advances by a total of $1.6 million.2007.
Accelerated Options.In December 2005, we accelerated the vesting of all unvested stock options held by employees and directors. All of the options were considered out-of-the-money since the stated option exercise price was greater than the closing price of our Common Shares on the day we approved the acceleration ($1.50). Unvested options to purchase approximately 1.7 million shares became exercisable as a result of the vesting acceleration. Our decision to accelerate the vesting of those options was based primarily upon the issuance of SFAS No. 123(R) (revised 2004), which requires the Company to treat all unvested stock options as compensation expense effective January 1, 2006. The vesting acceleration did not result in the recognition of compensation expense in the year ended December 31, 2005.We prepared pro-forma results for 2005 as if we had recorded a compensation expense for the accelerations performed in December 2005. Such pro-forma results appear in the footnotes to our consolidated financial statements and reflect approximately $1.9 million of compensation expense for the year ended December 31, 2005resulting from the vesting acceleration. See Notes 2t and 2v of our consolidated financial statements for a description of SFAS No. 123(R) and its expected effect on our losses and losses per share.
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Total revenues in 20042007 decreased 8.6%4.3% to $47.8$42.4 million from $52.3$44.3 million in 2003.2006. Product revenues in 20042007 decreased 17.8%46.2% to $26.8$5.6 million in 20042007 from $32.6$10.4 million in 2003.2006. Consulting and other service revenues in 20042007 increased 6.5%8.6% to $21.0$36.8 million from $19.7$33.9 million in 2003.2006.
Our product revenues for the year 20042007 decreased mainly due to the completion of multi-year projects for two ofand our customers - CSC and OneBeacon in the United States, which amounted to a decline of $3.3 million, or 57% of the decline in our product revenue. Product revenues also declined as a result of the prolonged periods of time required to negotiate with our customers, particularly in the insurance industry. The increase in consulting and other service revenues came asincreased mainly due to a resultplanned shift from fixed price projects to time and material based projects, and the completion of higher revenues from maintenance, while revenues from consulting remained stable. Maintenance revenues increased because of several long-term customers (who had previously not had maintenance agreements) entering into maintenance agreements, primarily in England,certain fixed price projects during the United States, Germany and Switzerland where the increases from 2003 amounted to $223,000, $356,000, $137,000 and $122,000, respectively.year.
Cost of Revenues and Gross Profit.
Cost of revenues products:,decreased 11.1% to $25.6 million in 2007 from $28.8 million in 2006. Cost of revenues relating to products was comprised of salaries and other personnel-related expenses of software consultants and engineers was $11.7($1.0 million, or 70.6%30.3% of our total costs of products in 2004,2007, and $13.8$4.0 million, or 78.9%63.5% of our total costs of products in 2003,2006), amortization of capitalized software development costs was $3.0($1.0 million or 17.9%30.3% of our total costs of products in 20042007 and $2.3$1.1 million or 13.0%17.5% of our total costs of products in 2003,2006), royalties to the OCS was $1.6Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel (“OCS”) ($0.6 million or 9.6%18.2% of our total costs of products in 2004,2007, and $1.2$0.5 million or 7.1%7.9% of our total costs of products in 20032006) and other costs were $323,000($0.7 million or 1.9%21.2% of our total costs of products in 2004,2007, and $166,000$0.7 million or 1.0%11.1% of our total costs of products in 2003)2006). Cost of revenues Consultingrelating to consulting and other services: includedservices was comprised of salaries and other personnel-related expenses, and amortization of capitalized software development costs. Salaries and other personnel-related expenses amounted to $20.3 million or 91% of our total costs of consulting and other services in 2004 an additional line item for impairment2007, and $19.0 million or 84.4% of our total costs of consulting and other services in 2006. Amortization of capitalized software development costs amounted to $2.0 million or 9.0% of $901,000 which contributedour cost of revenues related to consulting in 2007, and $3.5 million or 15.6% of our cost of revenues related to consulting in 2006. The decrease of the declineamortized software development costs related to consulting in gross profit.2007 was mainly due to completion of the amortization period of certain of our capitalized software development costs related to older products during 2007, offset by the commencement of the amortization of new capitalized software development costs amortized over a higher average useful life than in the prior years.
Our gross profit in 2004 decreased 15.0%2007 increased 8.4% to $20.1$16.8 million from $23.7$15.5 million in 2003. Without the $901,000 impairment, gross profit in 2004 would have been $21.0 million, representing a decrease of 11.4% from 2003.2006. The gross profit margin decreasedincreased by 7.0%13.1% to 42.1%39.6% from 45.3%35.0% in 2003,2006. Gross margin increased mainly as a result of this impairmentthe completion of the amortization period of certain of our capitalized software development costs. Without such impairment, gross profit margin for 2004 would have been 44.0%. Gross profit margin was further negatively affectedcosts related to older products during 2007, partially offset by the increase incommencement of the amortization of new capitalized software development costs amortized over a higher average useful life than in 2004, as described below.the prior years.
Gross profit from product revenues decreased 32.4%43.9% in 20042007 to $10.2$2.3 million (without taking into account the $901,000 impairment which cannot be allocated to products or to consulting and other services, and is therefore a separate line item) from $15.1$4.1 million in 2003, because revenues decreased greater than the decreases in salaries and other personnel-related expenses, and such cost reductions were partially neutralized due to (i) increases in the amortization of software development costs, and (ii) increases in the royalties paid to the OCS, each as described below.2006. Gross margin from product revenues was 38.1%41.1% in 2004, a decrease2007, an increase of 17.7%4.3% from 46.3%39.4% in 2003.
Royalty expense pursuant to the OCS funding programs, included in cost of products, increased in 2004 by 33.3% to $1.6 million from $1.2 million in 2003. The increase in royalties to the OCS occurred due to the one-time drop in our liability to the OCS in 2003, resulting from an arrangement entered into with the OCS in that year.
Amortization of capitalized software development costs increased 30.4% to $3.0 million in 2004 (without taking into account the impairment charge of $901,000) from $2.3 million in 2003 due to the increase in capitalized development costs in 2003 relating to our Sapiens eMerge™ solution.
2006. Gross profit from consulting, maintenance and other services increased 25.6%27.2% to $10.8$14.5 million in 20042007 from $8.6$11.4 million in 2003. At the same time, gross2006. Gross margin from consulting, maintenance and other services improved 18.1%increased 17.3% in 20042007 to 51.6%39.4% from 43.6%33.6% in 2003.2006.
Amortization of capitalized software development costs decreased 34.8% to $3.0 million in 2007 from $4.6 million in 2006. The improvementdecrease was due to the completion of the amortization period of certain of our capitalized software development costs related to older products during 2007, partially offset by the commencement of the amortization of new capitalized software development costs amortized over a higher average useful life than in gross profit and gross margin derived primarily from our continuing efficiency measures, at the center of which was better utilization of manpower resources.prior years.
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Research and Development, net.
R&D costs were mainly comprised of labor costs and depreciation of property and equipment, reduced by grants from the OCS and capitalization of software development costs. Net R&D expenses decreased 32.4%increased 40.0% in 20042007 to $3.5 million from $2.5 million from $3.7 million in 2003.2006. The decreasedincrease in spending on R&D recorded in 2004,2007, as compared with the previous year, reflects our efforts to make our development activity more efficient through reducing work force, salaries and other personnel-related expenses decreased to $6.7 million in 2004 from $6.9 million in 2003 as well as increased grantsresulted from the OCS Our net R&D expenditure benefited from OCS funding in the amountsreduction of $833,000 in 2004 and $134,000 in 2003.capitalized software development costs.
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Capitalized software development costs increased 4.4%decreased 31.9% to $3.2 million in 2007 compared with $4.7 million in 2004 compared with $4.52006 while direct labor costs remained constant: $4.1 million in 2003. This increase reflects our efforts to accelerate development of our INSIGHT™ group of products for the insurance industry.2007 and $4.1 million in 2006.
Selling, Marketing, General and Administrative expenses, net.
SG&A expenses decreased 10.2%8.1% in 20042007 to $19.3$12.5 million from $21.5$13.6 million in 2003. Salaries2006. SG&A expenses consisted primarily of salaries and other personnel-related expenses, which in 2007 amounted to $12.7$6.8 million, in 2004, or 65.8%54.4% of total SG&A expenses, and $14.7in 2006 to $8.1 million in 2003 or 68.3%59.6% of total SG&A expenses, as well as other costs associated with our sales and marketing efforts.efforts and our general and administrative activities such as rent which amounted to $1.8 million in 2007, accounting, legal and other public company expenses in the amount of $0.8 million, depreciation costs of $0.3 million, and marketing costs, including tradeshows and design, in the amount of $0.2 million. General and administrative expenses included management salaries, offices and office maintenance, communications, external consultants and other expenses. The decrease in SG&A expenses in 20042007 was the result of planneda reduction in headcount and consistent efficiency measures implemented by our management. Furthermore, expressedmanagement, which resulted in reduced expenses.
Restructuring Costs.
In 2007, we incurred no restructuring costs. Restructuring costs in 2006 were $0.76 million as a percentresult of total revenues, SG&A expenses decreased to 40.4%the restructuring we implemented in 2004 from 41.1%February 2006, which resulted in 2003, since expenses were reduced at a greater rate than the decline in total revenues from 2003 to 2004.termination of approximately 25 employees.
Financial expenses, net.
Our financial expenses, net, increased 152%27.3% to $2.4$2.8 million in 20042007 from $958,000$2.2 million in 2003.2006. The increase resulted from the accrual of interest amounts to be paid by the Company relatingwas mainly due to the devaluation of the US dollar against the NIS. Since we are obligated to pay the principal and the interest of our debentures in NIS, but we record the amountexpenses in our financial statements in US dollars, the devaluation of $1.2the US dollar results in an increase in our financial expenses. During 2007, we paid $0.98 million as interest to our debenture holders, and $4.4 million for the amortizationsecond installment repayment of issuance expenses and the discount relating toprincipal of the debentures, in the amount of $595,000.debentures.
Taxes on Income.The
Our net tax expenses in 20042007 were $217,000$0.34 million compared with a net$0.33 million in 2006.
Our provision for taxes on income relates to operations in jurisdictions other than the Netherlands Antilles. The effective income tax benefit of $19,000 in 2003. The extraordinary tax benefit in 2003 was therate varies from period to period as a result of losses recordedthe various jurisdictions in which we operate and where each one has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the United Kingdom in 2003 which enabled us to set-off amounts due in previous yearsforeseeable future. We did not recognize a majority of the deferred tax assets relating to the UKnet operating losses of our subsidiaries worldwide due to the uncertainty of the realization of such tax authorities, thereby enabling us to record a tax benefit.benefits in the foreseeable future.
Net Loss.
Net loss to shareholdersholders of common sharesour Common Shares was $2.5 million for 2004 was $5.1 million, an increase2007, a decrease of 132%34.2% compared with a net loss to shareholders of $3.8 million in 2006. The decrease in net loss to shareholders in 2007 was due to the shift to operational profit of $0.8 million, compared with an operating loss of $1.3 million in 2006. The decrease in net loss was partially offset by an increase in financial expenses, net and other expenses, which were $2.9 million in 2007, compared to $2.2 million in 2003. The increase in loss in 2004 was primarily due to the decline in our total revenues, which was not matched by a similar decline in expenses.2006.
Settlement of Redeemable Shares in a Subsidiary.In March 2004, in the context of the restructuring of the Put/Call Agreement, we issued to the Investors (i) 750,000 Common Shares, (ii) warrants to purchase 350,000 Common Shares at an exercise price of $4.00 per share, exercisable until December 31, 2007, and (iii) a commitment to pay $8.6 million by May 2005. The warrants were valued at $560,000 using the Black-Scholes pricing model. The difference between the fair value of the three components, and the carrying amount of the liability before the modification, in the amount of $299,000, was recorded as a settlement of redeemable shares in a subsidiary deemed dividend in our consolidated statements of operations. See Item 10, “Additional Information – Material Contracts and Note 1 of our consolidated financial statements.32
B. | Liquidity and Capital |
Cash,Our cash equivalents, marketable securities and short-term depositscash equivalents at the end of 20052008 were $12.0$7.9 million, compared with $22.1$13.1 million at the end of 2004.2007. The decrease in such liquid assets was due mainly to the repayment of loansdecrease in short term bank credit in the net amount of $6.9$5.0 million, investmentour repurchase of the outstanding debentures in researchJanuary and development activityFebruary 2008 and the December 2008 payment of $4.3 million, and cash usedthe third installment of the principal amount of outstanding debentures in operating activities.the amount of approximately $5.5 million. The decrease was partially offset by the $2.0 million investment by Formula in June 2005.improved collection and positive cash flow from operating activities.
Net cash provided by operating activities was $0.3$9.8 million in 20052008, compared with net cash used inprovided by operating activities of $7.1 million in 2004 of $3.0 million.2007. This change reflects the net loss for 2005improved operational profit in 2008 of $9.1$2.5 million and a decrease in other liabilities, trade payables and accrued expenses of $2.2 million offset by depreciation and amortization charges of $5.2 million, a decrease in certain receivables, prepaid expenses and trade receivables of $3.3 million, a decrease ofcompared to $0.8 million in deferred taxes and an increase in deferred revenue of $2.0 million.during 2007.
Net cash provided byused in investing activities was $0.9$3.9 million in 2005,2008, compared with net cash used in investing activities in 20042007 of $15.5$3.3 million. In 2005,2008, we generated $5.6 million cash from the sale of marketable securities, which was offset byconsummated investments in software development of $4.3$3.5 million and the purchase of property and equipment of $0.4$0.8 million. The highThis was partially offset by the proceeds from our sale of a building in France in the amount of cash used in investing activities in 2004, was a result of our using the proceeds of the December 2003 debenture offering during the course of 2004. Of the 2004 net proceeds, $10.3 million was used for the purchase of marketable securities, $4.7 million for investment in software development and $0.4 million for the purchase of property and equipment.$0.42 million.
30
Net cash used in financing activities totaled $4.9$10.9 million in 2005,2008, compared with $2.9$6 million provided by financing activities in 2004. The main outlay2007. In 2008, we decreased our short term bank credit in the amount of cash$5.0 million, repurchased as well as repaid the third payment of the principal amounts outstanding under our convertible debentures in the amount of $5.5 million, and repaid the principal of a long term loan in the amount of $0.5 million. This was partially offset by the proceeds from an employee stock option exercise that we received in the amount of $0.1 million. During 2007, we completed a fundraising in the amount of $19.4 million, which offset amounts used in financing activities in 2005 was $6.9 million, net, in repayment of short and long term loans. In 2005, we received gross proceeds of $2.0 million from the investment by Formula in June 2005.2007.
Credit Lines
Until June 27, 2006, we hadWe have a revolving credit line facility for borrowings of up to $18.5 million, which was available until June 30, 2006. On June 27, 2006, we entered into new agreements with the banks regarding a new revolving credit line facility for borrowings of up to $9.2 million, which is available until June 30, 2007. Although2009. We are currently negotiating the total amountextension of the credit facility was reduced, as a result of the changesfor another year. Due to the restrictions relatingcurrent worldwide economic situation, especially in the banking sector, we cannot be certain that an agreement will be signed to credit facility, the actual amount that we can draw underextend the credit facility has increased by approximately $3.0in the same amount of $9.2 million over the credit facility that expires on June 30, 2006.substantially similar terms.
As a condition for receiving the newcurrent credit lines from our lender banks, we undertook, among other things, (a) not to charge or sell our assets to any entity whateverwhatsoever without the advance written consent of the banks, (b) that the total of our debts and obligations to the banks will not at any time exceed $9.5$9.2 million, and (c) that the total of our accounts receivable from customers will not be less than $6.0 million. In addition, we undertook that our quarterly earnings before income tax, depreciation and amortization will be positive through June 30, 20072009 and that our aggregate earnings before income tax, depreciation and amortization for each of the year ended December 31, 2006,2008, and the six-month period ended June 30, 2007,2009, will not be less than $1.0 million. We also undertook that our shareholders’ equity will not be less than $3.0 million. In addition, we undertook, on behalf of each of our subsidiaries, to provide the banks with cross guarantees from each subsidiary to secure our performance and fulfillment of any of our or our subsidiaries’ obligations under the facilities. Among themselves, the banks are entitled to repayment of our debts in proportion to our debts to each bank.Assuch bank. As a result of negotiations regarding the extension of our loan agreements, the assets of our subsidiary in the United States will beare subject to a UCC-1 security interest and the assets of our subsidiaries in Israel and the United Kingdom will beare subject to floating liens.
Under the credit lines, expiring on June 30, 2006, borrowings in US dollars bear interest at rates ranging between the London Interbank Offered Rate (“LIBOR”)of LIBOR plus 2% to plus 2.25%1.75% and borrowings in New Israeli Shekels (“NIS”)NIS bear interest at the prime rate of interest in Israel plus 0.7%. The interest rates under the new credit lines have not yet been finalized.
In 2008, we met all of the fourth quarter of 2005, we did not fulfillconditions for receiving the covenant contained in our loan agreements pertaining to maintenance of cumulative, quarterly earnings at certain levels.
current credit lines. There can be no assurance that we will continue to fulfill the covenants we undertook or, if we do not fulfill one or more of the covenants that we will receive from our lender banks waivers of the necessityrequired fulfillment of fulfilling such covenants.
As of December 31, 2008, we had not utilized any of our credit lines.
33
Fund raising
In December 2006,June 2007, we must re-pay $5.2entered into a private placement investment transaction with several institutional investors, private investors and Formula for an aggregate gross investment amount of $20 million $4.6(excluding finders’ fees and out of pocket expenses), $6.5 million of which representswas invested by Formula. We issued to the firstinvestors an aggregate of four installment payments6,666,667 Common Shares (of which 2,166,666 Common Shares were issued to Formula), at a price per share of $3.00 which reflected a premium of approximately 25% above the trading price of our Common Shares (as of the date on which our Board of Directors approved the investment).
Debenture Issuance, Repayments and Buybacks
A prior source of liquidity for our Company was our offering of convertible debentures on the TASE in December 2003, which provided gross proceeds to us in an approximate amount of $18.6 million (after including approximately $1.5 million of additional debentures that were purchased in March 2004 pursuant to options that were issued as part of the December 2003 closing). The debentures bear interest at an annual rate of 6.0%, payable on the 5th of June and $0.6the 5th of December each year commencing on June 5, 2004 and ending on December 5, 2009. Principal is payable in four installments, on the 5th of December of the years 2006-2009. Our obligations under the debentures are denominated in NIS but would become linked to the US dollar if the exchange rate between the NIS and the US dollar is greater than NIS 4.394 per 1 US dollar (on March 31, 2009, the exchange rate between the NIS and the US dollar was NIS 4.188 per 1 US dollar).
In June 2007, we repurchased an aggregate amount of NIS 15,000,000 nominal value, representing approximately $3.5 million, represents partof the then outstanding debentures. Pursuant to the terms of the prospectus governing the debentures, the debentures repurchased by us were retired and removed from circulation.
In January and February 2008, we repurchased an additional aggregate amount of NIS 7,600,000 nominal value, representing approximately $2.1 million, of the outstanding debentures. Similarly, in January 2009, we repurchased an aggregate amount of NIS1,605,799 nominal value, representing approximately $0.4 million, of the outstanding debentures. Pursuant to the terms of the prospectus governing the debentures, the amount repurchased by us was retired and removed from circulation. As a result of such repurchases, the amount of the semi-annual interest payments. We have not created sufficient positive cash flow from operationspayments that we paid in June 2008 was reduced to make such payment. In May 2006, atapproximately NIS 1.0 million or $0.3 million. Similarly, the requesttotal amount that we paid in December 2008 under the outstanding debentures was reduced to approximately NIS 14.9 million or $3.7 million (using the December 5, 2008 exchange rate of NIS 3.981 per $1), consisting of the trustee on behalfthird of the debenture holders, we held a meetingfour annual re-payments of the debenture holders to update them about the statusprincipal of the Company.debentures in an amount of approximately NIS 13.9 million or $3.5 million, and a reduced semi-annual interest payment of approximately NIS 1.0 million or $0.2 million.
(For further details about the debentures,on certain of these transactions, see Item 10, “Additional Information – Material Contracts.”)
In June 2006,2008, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
In June 2006, we entered into a term sheet with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., regarding the conversion of the $1.0 million payment that was due to themgenerated positive cash flow on April 1, 2006 into our Common Shares, at a conversion price per share equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into, and the delaying until August 1, 2007 of the $1.0 million payment that is currently due on August 1, 2006. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.an annual basis.
31
Management believes that the new credit lines,proceeds of the June 2007 $20 million private placement investment together with the potential investment by Formulapositive cash flow generated during 2007 and the potential renegotiation of the payment terms with the Investors,2008 will be sufficient for itsour present requirements, and at least until December 31, 2006, to support our operating and financing requirements. In addition, we have been considering financing alternatives2009, to support our operating and financing requirements.
C. | Research and Development |
See section A. “Results“Operating Results” of Operations” above.this Item 5 above for a description of our R&D policies and amounts expended thereon during the last two fiscal years.
D. | Trend Information |
The global insurance industry has changed over the past few years,is constantly changing as a result of four events: regulatory changes, large pay-outs, poor returns on investments and globalization.
Regulatory changes are being felt throughout the industry. Manychanges. Insurance companies must comply with regulations such as the Sarbanes-Oxley Act of 2002 in the United States, Solvency II in Europe and the International Convergence of Capital Measurement and Capital Standards, known as Basel II.other directives regarding transparency. In addition, many individual countries have increased supervision over local insurance companies.
Particularly in the reinsurance and the property and casualty markets, insurance companies have had to make large pay outs because of events such as September 11, 2001 and other terrorist incidents as well as great natural disasters such as Hurricane Katrina in the United States.34
Globally, the insurance industry has witnessed cross-border mergers and acquisitions, and the entry of international insurance companies into new emerging markets.
In 2000 and 2001 insurance companies generated poor returns, if not losses, on their investments. As a result, and particularly in Europe, many companies are now more cautious, are concerned about equity losses and are emphasizing cost efficiency. In North America, companies are more aggressive and many insurance companies are increasing their IT budgets. However, most insurance companies are still not willing to change their platforms and core software, despite the acknowledged need.
In Europe, regulators and insurers have been very active and creative, motivated by past financial crises and the need for pension restructuring. Distribution of policies is being optimized with the increasing use of BancassuranceBank Assurance (selling of insurance through a bank’s established distribution channels), supermarkets and kiosks (insurance stands). Nevertheless, European insurers, and to some extent North American insurers, are cautiously approaching spending increases and most companies have not decided to change their software.
Finally, from 2001 to 2004,in recent years there has been constant significant growth in income from annual premiums. The recent financial developments worldwide may reduce insurers’ revenues from such premiums, grew by approximately 34%.however, thereby reducing the likelihood that insurers will make additional expenditures to purchase our products and services.
We believe that the insurance market is changing and the reasons that contributed to the delays we experienced in penetration of the insurance industry are gradually fading away. However, delays in our growth and expansion could be caused by the recent financial developments worldwide.
However,Under current circumstances, we expect that additional time will be required to fully implement our strategy of focusing on the insurance industry, and that our results of operations and financial condition could continue to be adversely affected.affected, especially in light of the recent worldwide economic downturn. We are addressing the challenges posed by the market environment by focusing our marketing and selling efforts and by further reducing the expenses of our operation.operations.
E. | Off-Balance Sheet Arrangements |
WeIn 2008, we entered into hedging transactions, by purchasing (i) put options in total amount of up to $9.8 million, to protect against the devaluation of the US Dollar, exercisable by us in the range of NIS 3.30 – 3.70 per Dollar, and (ii) put options in total amount of $1.0 million, to protect against the devaluation of the US dollar, exercisable by us at the rate of GBP 0.54 per US dollar. During 2008, we recorded a total gain of $106,000 from the performance of put options contracts. As of December 31, 2008, we had put option contracts outstanding in the amount of $3.3 million. Except for the abovementioned put options contracts, we have no other off-balance sheet concentration of credit risk such as foreign exchange contracts options contracts or other foreign hedging arrangement asarrangements. In 2009, we purchased put options in the total amount of December 31, 2005, other than forward exchange contracts to hedge certain transactions denominated in foreign currencies$1.8 million to protect ourselves from risk thatagainst the eventual dollar cash flows from international activities will be adversely affecteddevaluation of the US Dollar exercisable by changes inus at the exchange rates. Such hedging contracts are further described in Note 2r of our consolidated financial statements.rate NIS4.00 per US Dollar.
32
F. | Contractual Obligations |
The following table sets forth information on our short-term and long-term contractual obligations as at December 31, 20052008 (in thousands of dollars):.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Total |
| Up to 1 year |
| 1 to 3 years |
| 3 to 5 years |
| Over 5 years |
| |||||
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures |
| $ | 18,366 |
| $ | 4,464 |
| $ | 9,174 |
| $ | 4,728 |
| $ | – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank credit |
|
| 1,830 |
|
| 1,830 |
|
| – |
|
| – |
|
| – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank loans |
|
| 10,120 |
|
| 10,120 |
|
| – |
|
| – |
|
| – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term loan-investors |
|
| 2,000 |
|
| 2,000 |
|
| – |
|
| – |
|
| – |
|
Long-term liability-third party |
|
| 1,366 |
|
| 690 |
|
| 676 |
|
| – |
|
| – |
|
Long-term bank loans |
|
| 8 |
|
| 8 |
|
| – |
|
| – |
|
| – |
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Accrued severance pay |
|
| 768 |
|
| – |
|
| – |
|
| – |
|
| 768 |
|
Operating leasing |
|
| 9,039 |
|
| 2,457 |
|
| 4,171 |
|
| 2,411 |
|
| – |
|
|
|
|
|
|
|
| ||||||||||
Total |
| $ | 43,497 |
| $ | 20,594 |
| $ | 14,000 |
| $ | 6,135 |
| $ | 768 |
|
|
|
|
|
|
|
|
Payments due by period | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | Less than 1 year | 1 to 3 years | 3 to 5 years | Over 5 years | |||||||||||||
Convertible debentures | $ | 5,380 | $ | 5,380 | $ | - | $ | - | $ | - | |||||||
Long-term loan | 174 | - | 174 | - | - | ||||||||||||
Long-term liability-third party | 365 | 365 | - | - | |||||||||||||
Accrued severance pay | 1,136 | - | - | - | 1,136 | ||||||||||||
Provision for tax exposures | 150 | 150 | |||||||||||||||
Operating leasing | 5,325 | 2,603 | 2,541 | 181 | - | ||||||||||||
Total | $ | 12,530 | $ | 8,498 | $ | 2,715 | $ | 181 | $ | 1,136 | |||||||
3335
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. | Directors and |
The following table sets forth certain information regarding the current executive officers and directors of the Company.
Name | Age | Position | |||||
---|---|---|---|---|---|---|---|
| 39 |
|
| ||||
|
| Chairman of the Board of Directors | |||||
Ron Al Dor | 48 |
| President, Chief Executive Officer and Director | ||||
| 38 |
|
| ||||
| 51 |
|
| ||||
Naamit Salomon (1) | 45 | Director | |||||
Yacov Elinav (2) | 64 |
| Director | ||||
Uzi Netanel (2) | 73 |
| Director | ||||
| 47 |
| Director | ||||
| 41 |
| Director | ||||
| 33 |
| Director | ||||
|
| Director | |||||
|
|
(1) | Member of Compensation Committee |
(2) | |
| Member of Audit Committee |
(3) | |
|
|
Ron ZuckermanEli Reifman has served as a director of the Company since May 1991 and assumed the position of Chairman of the Board of Directors onsince January 1, 1998. He2007. Mr. Reifman is a Co-founder and President of Emblaze. Prior to his appointment as President of Emblaze in December 2006, Mr. Reifman served as Chief Executive Officer of Emblaze from 2000 to 2006. Emblaze was established as GEO Interactive Ltd. (“GEO”), which was co-founded by Mr. Reifman in 1994. Prior to founding GEO, Mr. Reifman was the Company from January 1995 until March 31, 2000. Mr. Zuckerman served as Chief Operating Officerhead of the Company from its incorporation until April 1994. Mr. ZuckermanTechnical Development Department and acting head of all production in the Training Development Center of the Israeli Defense Forces, where he was a founder and served as Chairman of Precise Software Solutions Ltd. until it was acquired by Veritas in June 2003 and serves as a director of Attunity Ltd. and Tamir Fishman Ventures Ltd. Mr. Zuckerman serves as an advisor to Magnum Communications Fund and the First Israeli Turnaround Fund.responsible for producing high-end military simulators.
Ron Al Dorjoined the Company as President and Chief Executive Officer in November 2005 and has served as a director of the Company since November 2005. Prior to joining the Company, Mr. Al Dor was one of the two founders of TTI Team Telecom International Ltd. (“TTI”), a global supplier of operations support systems to communications service providers and from August 1996 tilluntil 2004, Mr. Al Dor served as President of TTI Team Telecom International Ltd., a global supplier of Operations Support Systems to communications service providers.TTI. Prior to that, Mr. Al Dor served as TTI’s Co-President from November 1995 until August 1996 and its Vice President from September 1992 to November 1995. During his service in the Israeli Air Force, Mr. Al Dor worked on projects relating to computerization in aircrafts. Mr. Al Dor is a graduate of the military computer college of the Israeli Air Force, studied computer science and management at Bar Ilan University and attended the Israel Management Center for Business Administration.
Elior (Ori) BrinRoni Giladi joined the Company as Executive Vice President and Chief Financial Officer in March 2005. In addition to his position at the Company, Mr. Brin also serves as a director of Modelim Kranot Neemanut Ltd., a mutual funds management company, a position he also filled from 1996 through 2003.July 2007. Prior to joining the Company, heMr. Giladi served as the Director of Finance at Emblaze since January 2007. Prior to joining Emblaze, Mr. Giladi served as Chief Financial Officer of publicly traded companies suchRichFX, from August 2003 until November 2006, after serving as VCON Telecommunications Ltd. 1998-2001), NICE Systems Ltd. (1997-1998), and B.V.R. Technologies Ltd. (1989-1996).Corporate Controller since June 2002. Prior to RichFX, Mr. BrinGiladi worked at Ernst & Young Israel, from 1997-2002, as a manager in the high-tech practice group. Since July 2007, Mr. Giladi has an MBA from the Recanati School of Business Administration, Tel Aviv University.
Yitzhak Sharirserved the Company as President and Chief Executive Officer from November 2000 till November 2005. Since November 2005, Mr. Sharir has continued to serve as a director of MediRisk Solutions Ltd., as the nominee of the Company. Mr. Giladi is Certified Licensed Public Accountant and holds a BA in Business Management and Accounting from the College of Management in Israel.
36
Rami Doron joined the Company as Chief Operating Officer in February 2007. Prior to joining the Company, Mr. Sharir served as General Manager of Nilit IndustriesDoron led a business unit at Comverse Ltd. from 1994 through 2000.January 2006 until February 2007. Prior to joining Nilit,that, Mr. Sharir served as President & CEODoron was one of Orlite Industriesthe founders of TTI where he led the professional services, R&D and existing customers’ sales units from 1990 through 1994.December 1993 until May 2005. At TTI, Mr. SharirDoron was involved in defining and building support systems, and was responsible for delivering, maintaining and enlarging the business with worldwide customers. Prior to founding TTI, Mr. Doron led the software division at TEAM Computers Ltd. (“TEAM”) from October 1985 until December 1993, where he was responsible for supporting a large customer base in Israel with TEAM’s R&D and system support. Mr. Doron also served as Executive V.P. and General Manager of Oshap Technologies (1985-1989), V.P. Technology of Urdan Industries (1983-1985), and manager of engineering teams at Israel Aircraft Industries and Israel’s Nuclear Research Center.
34
Dan Goldsteinhas a software development background, having served as a director ofdatabase expert for several years. During his service in the Company since 2001. He has served as chairman of the board and CEO of Formula Systems (1985) Ltd. since 1985.Israeli Air Force, Mr. Goldstein is also the chairman of the board of Matrix-IT and Formula Vision Technologies Ltd. andDoron was an electronics officer for six years. Mr. Doron is a directorgraduate of BluePhoenix Solutions Ltd., MagicHadassah College with a degree in Software Enterprises Ltd.,Engineering and other companies in the Formula Group. Mr. Goldstein holds a B.A. in mathematics and computer sciences and an M.A. in business administration, both from Tel Aviv University.
Gad Goldsteinhas served as a director of the Company since 2002. He has served as President of Formula Systems (1985) Ltd. since 1995 and a director since 1985. Between 1985 and 1995, Mr. Goldstein was Vice President of Formula. Mr. Goldstein is Chairman of the Board of BluePhoenix Solutions Ltd. and serves as a director of Matrix, Magic Software Enterprises Ltd., Formula Vision Technologies Ltd. and other companies in the Formula Group. Mr. Goldstein holds a B.A. in economics and an M.A. in business administration, both from Tel Avivhe studied management at Bar-Ilan University.
Naamit Salomonhas served as a director of the Company since September 2003. She has been Vice President, Financeheld the position of Chief Financial Officer of Formula since August 1997. Ms. Salomon also serves as a director of Magic Software Enterprises Ltd. and BluePhoenix Solutions Ltd., Formula Group Companies.(“Magic”) (NASDAQ: MGIC). From 1990 through August 1997, Ms. Salomon was a controller of two large, privately held companies in the Formula Group. Ms. Salomon holds a B.A.BA in economics and business administration from Ben Gurion University and an LL.M. from the Bar-Ilan University.
Yacov Elinavhas served as a director of the Company since March 2005. He hasFor over 30 years, Mr. Elinav served as Chairman of the Board of Directors of Diur B.P. Ltd. since 2003. Diur B.P. Ltd. is the real estate subsidiary ofin various positions at Bank Hapoalim B.M., which is listed on the London and Tel Aviv Stock Exchanges. For over 30 years, Mr. Elinav served in various positions at Bank Hapoalim,Exchanges, including over 10 years as a member of the Board of Management, responsible for subsidiary and related companies. From 1992 through 2006, Mr. Elinav served as Chairman of the Board of Directors of Diur B.P. Ltd., the real estate subsidiary of Bank Hapoalim. Since August 1994,2004, Mr. Elinav has served as a directorChairman of the Boards of Directors of DS Securities and Investments, Ltd. and DS MutualProvident Funds Ltd., and since 2004, has served as Chairman of their Boards of Directors. Mr. Elinav also serves on the Board of Directors of several other public and private companies.
Uzi Netanelhas served as a director of the Company since March 2005. He has served as Chairman of the Board of Directors of Maccabi Group Holdings Ltd. since 2005,2005. From 2004 through 2007, Mr. Netanel served as Chairman of the Board of Directors of MLL Software & Computers Industries Ltd. since 2004 and as Chairman of the Executive Committee of Carmel Olephines since 2004.Olephines. From 2001 through 2003, Mr. Netanel served as a partner in the FIMI Opportunity Fund. From 1993 through 2001, he served as Active Chairman of Israel Discount Capital Markets and Investments Ltd. From 1997 to 1999, Mr. Netanel served as Chairman of Poliziv Plastics Company (1998) Ltd. Mr. Netanel also serves on the Board of Directors of Israel Oil Refineries, Frutarom IndustriesCarmel Olephines, Gaon Real Estate, The Maman Group, Acme Trading and Caeserea-Vardinon Textiles.Harel-PIA funds.
Ido SchechterEyal Ben-Chlouchehas served as a director of the Company since JuneAugust 15, 2008, Mr. Ben-Chlouche served as the Commissioner of Capital Market Insurance and Savings at the Israeli Ministry of Finance from 2002 through 2005, where he was responsible for implementation of fundamental reforms in pension savings. Prior to that, he served as a Deputy Commissioner of Capital Market Insurance and Savings and as a Senior Foreign Exchange and Investment Manager in the Foreign Exchange Department of the Bank of Israel. He also served as an Investment Officer in the Foreign Exchange Department of the Bank of England, in London. Mr. Ben-Chlouche served as Chairman of the Board of Directors of the Shahar Group, Chairman of the Advisory Board of Directors of the Shekel Group until the end of 2007 and serves as a director of Matrix IT Ltd, Migdal Insurance and Financial Holdings Ltd, Migdal Insurance corp. and Migdal Capital Markets Ltd. Mr. Ben-Chlouche serves as Vice Chairman of DavidShield Ltd. and also serves as Chairman of the Advisory Board of the Caesarea Center for Capital Markets and Risk Management. In 2005, Mr. Ben-Chlouche served as a member of the Bachar Committee on Capital Market Reform in Israel. Mr. Ben-Chlouche is an independent director.
Guy Bernstein has served as a director of the Company since January 1, 2007. Mr. Bernstein joined the Emblaze Group as Chief Financial Officer and member of the Board of Directors in April 2004 and was appointed Group Chief Executive Officer in December 2006. Prior to joining Emblaze, Mr. Bernstein served as Chief Financial and Operations Officer of Magic Software Enterprises (“Magic”) (NASDAQ: MGIC), a position he held since 1999. He also acted as the Interim CEO for Magic’s subsidiaries: MSE Israel Ltd. and Coretech Consulting Group. Mr. Bernstein joined Magic from Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, where he acted as senior manager from 1994 to 1997. Mr. Bernstein also serves as Chief Executive Officer of Formula, Chairman of the Board of Magic and Chairman of the Board of Matrix IT Ltd. Mr. Bernstein is a Certified Licensed Public Accountant and holds a BA in Accounting and Economics from Tel Aviv University.
37
Hadas Gazit Kaiser has served as a director of the Company since July 2007. She has served as the Chief ExecutiveFinancial Officer of Top Image SystemsMagic Software Enterprises Ltd. since January 2002 and has been a director of Top Image Systems Ltd. sinceFebruary 2009. From December 2004. From January 20012006 until he became CEO, Dr. Schechter was Vice President of TIS’ ASP, an initiative of TIS to offer data collection services via the Internet. Prior to that Dr. Schechter had been TIS’s Vice President of Sales since August 1996. From January 1995 until August 1996, Dr. SchechterFebruary 2009, she served as Generalthe Chief Financial Officer and Finance Director of Emblaze. From August 2005 until she became CFO of Emblaze, Ms. Gazit Kaiser served as the Vice President-Finance of Emblaze and the Chief Financial Officer of Emblaze Mobile. From August 2003 to August 2005, Ms. Gazit Kaiser served as the Budget Control Manager of Super Image, a former affiliate of Top Image Systems Ltd., which operated a form processing service bureau.TTI. From August 19932000 to December 1994, Dr. Schechter oversaw the start-up of automatic form processing servicesAugust 2003, Ms. Gazit Kaiser acted as a manager at Israel Credit Cards, Ltd. From 1991 to 1993, Dr. Schechter wasKost, Forer Gabbay & Kasierer. Ms. Gazit Kaiser holds a research scientist at the Horticultural Research Institute of Ontario, Canada. Dr. Schechter received his Ph.D.BA in Economics and M.Sc.Accounting and an MBA degree in Plant PhysiologyFinance, both from theTel Aviv University, of Guelph in Ontario, Canada and his B.Sc. from the Hebrew Universityis a Certified Public Accountant in Israel.
Fortis Intertrust (Curaçao)United International Trust N.V. (“UIT”) is a corporate body organized and existing under the laws of the Netherlands Antilles. It, or one of its predecessor entities, has provided the Company with corporate-related services since April 1990, including but not limited to serving as the Company’s transfer agent and register, maintaining the corporate-related records of the Company, and filing various corporate documents and the annual corporate tax return with the governmental authorities in the Netherlands Antilles. Until May 2006,UIT was established by former shareholders of Intertrust (Curaçao) N.V., which subsequently operated under the names of MeesPierson Intertrust (Curaçao) N.V. and Fortis Intertrust (Curaçao) N.V. operated under the name MeesPierson Intertrust (Curaçao) N.V.
35
All directorsThe Board of Directors must have a minimum of three, and may have a maximum of 24, directors. Directors of the Company are appointed by theour General Meeting of Shareholders and hold office until the expiration of the term of their appointment by our General Meeting of Shareholders, or until they resign or are suspended or dismissed by the General Meeting of Shareholders. ExecutiveThe Board of Directors may appoint up to four directors in addition to the directors elected by the General Meeting of Shareholders, subject to the maximum number of directors permitted, and any such appointment shall be effective until the next General Meeting of Shareholders. The Board of Directors may fill any vacancies on the Board of Directors, whether as a result of the resignation or dismissal of a director, or as a result of a decision of the Board of Directors to expand the Board of Directors.
Our executive officers are appointed by, the Board of Directors of the Company and serve at the discretion of, theour Board of Directors.
By virtueTwo of their deemed beneficial ownershipour Board members, Messrs. Reifman (the Chairman of Common Shares, directors Dan Goldsteinour Board of Directors) and Gad Goldstein may be deemedBernstein, serve as executive officers of Emblaze, while Ms. Kaiser, a third Board member, was an executive officer at Emblaze when she was appointed to beneficially own over 50%our Board and now serves as an executive officer of Magic Enterprises Ltd, an affiliate of ours. In addition, Ms. Salomon, another Board member of ours, serves as an executive officer at Formula and is a member of the Board of Directors of Magic Enterprises Ltd. Formula directly owns (as of April 1, 2009) approximately 70% of our currently outstanding Common Shares, and, will besince November 2006, Emblaze holds a controlling interest in a position to control the electionFormula (51.7% of the Company’soutstanding share capital of Formula as of April 1, 2009). Other than as described immediately above, there are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our directors and thus the direction and future operationsor members of the Company.
Directors Dan Goldstein and Gad Goldstein are brothers. Apart from that relationship,senior management were selected as such. In addition, there are no family relationships among theour executive officers or directors of the Company. The Company has no current intent or plan to change its compensation arrangements with respect to directors for serving as directors.
B. | Compensation of Directors and Officers |
The aggregate amount of compensation paid by the Company, or accrued by the Company, during the fiscal year ended December 31, 2005,2008 with respect to such year, to all directors and executive officers as a group for services in all capacities was $930,000.$1,134,000. This amount does not include amounts expended by the Company for automobiles made available to its officers or expenses (including business travel and professional and business association dues) reimbursed to such officers. The aggregate amount set aside or accrued by the Company during its fiscal year ended December 31, 2005,2008 to provide pension, retirement severance, vacation accrual and similar benefits for directors and executive officers of the Company was $127,000.$100,000. The foregoing amounts also exclude stock option grants to the Company’s directors and officers pursuant to the Company’s 1992 Stock Option and Incentive Plan, the Company’s 2003 Share Option Plan and 2003the Company’s 2005 Special Incentive Share Option Plan, which are described below.
The Company has employment agreements with its officers. The Company, in the ordinary course of its business, enters into confidentiality agreements with its personnel and has entered into non-competition and confidentiality agreements with its officers and high-level technical personnel. The Company does not maintain key person life insurance on any of its executive officers.
38
Board Fees and Expenses
The Company reimbursesWe reimburse all members of our Board membersof Directors for reasonable out-of-pocket expenses incurred in connection with their attendance at Board of Directors or committee meetings.
The Company grantsWe grant to each of itsour independent directors a fee for attending or participating in Board of Directors meetings and committee meetings.meetings, and participating in unanimous written consents.
In the past, the Company haswe granted to each of itsour independent directors options to purchase 4,000 shares of the Company’s Common Shares annually. The options were granted at an exercise price equal to the fair market value of the Company’s Common Shares on the date of grant. The term of the options iswas set at 10 years and the options become exercisable in four equal, annual installments, beginning with the first anniversary of the grant date. Since 2005, we have not granted any options to our independent directors.
In 2008, we increased the fees paid to our independent directors to reflect the increase in payments paid to outside directors under the Israeli Companies Law 5759-1999, even though we are not an Israeli company and are not subject to the Israeli Companies Law.
Stock Option and Incentive Plans
1992 Stock Option and Incentive Plan and 2003 Share Option Plan
In 1992, our Board of Directors and shareholders approved the 1992 Stock Option and Incentive Plan (the “1992 Stock Plan”) pursuant to which our officers, directors and employees are eligible to receive awards of stock options and restricted stock. In February 2003, the Board of Directors authorized the extension of the 1992 Stock Plan until April 2012 and our shareholders approved that extension. In 2003, our Board of Directors and shareholders approved the 2003 Share Option Plan (the “2003 Option Plan”), pursuant to which our officers, directors, employees, consultants and contractors are eligible to receive awards of stock options. In the following description, the 1992 Stock Plan and 2003 Option Plan will be referred to together as the “Incentive Plans” and may each be referred to individually as an “Incentive Plan.”
Options granted under the 1992 Stock Plan may be “incentive stock options” (“ISOs”), within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options (“non-Qualified Stock Options”). Restricted stock may be granted in addition to or in lieu of any other award granted under the 1992 Stock Plan. Option grants under the 2003 Option Plan are intended to comply with, and benefit from, applicable tax laws and regulations in Israel.
36
Each of the Incentive Plans is administered by the compensation committeeCompensation Committee of our Board of Directors (the “Committee”) established by the Company’s Board of Directors.. Subject to the provisions of each Incentive Plan, the Committee determines the type of award, when and to whom awards will be granted and the number of shares covered by each award. The Committee also determines the terms, provisions, and kind of consideration payable (if any), with respect to awards. The Committee has discretionary authority to interpret the Incentive Plans and to adopt rules and regulations related thereto. In determining the persons to whom awards shall be granted and the number of shares covered by each award, the Committee takes into account the contribution to the management, growth and/or profitability of the business of the Company by the respective persons and such factors as the Committee shall deem relevant, including the length of employment of the respective persons, the nature of their responsibilities to the Company, and their flexibility with regard to location of their employment and other employment-related factors.
39
An option may be granted on such terms and conditions as the Committee may approve, and generally may be exercised for a period of up to 10 years from the date of grant. In 2008, certain grants were limited to an exercise period of 6 years. Options granted under the Incentive Plans become exercisable in four equal, annual installments, beginning with the first anniversary of the date of the grant, or pursuant to such other schedule as the Committee may provide in the option agreement. The exercise price of such options generally will be not less than 100% of the fair market value per share of the Common Shares at the date of the grant. In the case of ISOs, certain limitations will apply with respect to the aggregate value of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations will apply to “Ten Percent Stockholders” (as defined in the 1992 Stock Plan). The Committee may provide for the payment of the option price in cash, by delivery of other Common Shares having a fair market value equal to such option exercise price, by a combination thereof or by any method in accordance with the terms of the option agreements. The Incentive Plans contain special rules governing the time of exercise of options in the case of death, disability, or other termination of employment. Options are not transferable except by will or pursuant to applicable laws of descent and distribution upon death of the employee.
The 1992 Stock Plan also provides for the granting of restricted stock awards, which are awards of Common Shares that may not be disposed of, except by will or the laws of descent and distribution, for such period as the Committee determines (the “restricted period”). The Committee may also impose such other conditions and restrictions on the shares as it deems appropriate, including the satisfaction of performance criteria. The Committee may provide that such restrictions will lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of the award. During the restricted period, the grantee is entitled to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee’s continuous employment with the Company terminates for any reason, any shares remaining subject to restrictions will be forfeited. The Committee has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period, including cancellation of restrictions in connection with certain types of termination of employment.
As of December 31, 2005,2008, we had 939,524973,817 Common Shares available for future issuance of awards under the Incentive Plans. As of December 31, 2005,2008, options to purchase 2,812,2122,698,350 Common Shares, 692,2501,913,000 of which were held by officers and directors, were outstanding. As of that date, there were 22,280 shares of restricted stock that the Company had granted to employees and other eligible grantees (none of which were held by current andor former officers and directors). As of December 31, 1997,, and all of the restricted shareswhich had vested (prior to 1998) under the restricted stock awards.
In November 2005,During the 2007 year, under the Incentive Plans, we granted to our directors and executive officers a total of 350,000 options to purchase Common Shares (including 200,000 options to the Company’s President and Chief Executive Officer) at exercise prices per Common Share ranging between $1.50 and $2.31, which options will expire at the conclusion of ten years.
During the 2008 year, under the Incentive Plans, we granted to our directors and executive officers a total of 65,000 options to purchase Common Shares at an exercise price of $1.50 per Common Share, which options will expire at the conclusion of six years.
New Incentive Stock Option Plan
In 2005, our Board of Directors approvedauthorized a new Incentive Stock Option Plan (the “Special Plan”). and our shareholders approved the Special Plan in 2006. The number of Common sharesShares available for grants pursuant to the Special Plan was set at 2,000,000 shares. The Special Plan is intended to be used solely to attract or retain senior management and/or members of the Board members. Optionsof Directors. Unless otherwise determined by the Committee, options granted pursuant to the Special Plan will have an exercise price of $3.00 per share, shares issued upon exercise will beare locked up for up to 5five years following the grant date, and the right to obtain shares will beis contingent upon the optionee providing services to the Company throughout the entire 5five year period. In the event of a change of control of the Company, any unvested options will be accelerated.
The Special Plan is administered by the Committee. Subject to the provisions of the Special Plan, the Committee determines the type of award, when and to whom awards will be presentedgranted and the number of shares covered by each award. The Committee also determines the terms and provisions with respect to awards. The Committee has discretionary authority to interpret the Special Plan and to adopt rules and regulations related thereto.
40
Pursuant to the Company’s shareholders, for their approval, at the upcoming Annual General Meeting of Shareholders, which is expected to be heldSpecial Plan, in September 2006.
37
In November 2005 the Company’s current President and Chief Executive Officer was granted options to purchase 1,000,000 shares, pursuant to the Special Plan and subject to shareholders approvalCommon Shares at an exercise price of the Special Plan.$3.00 per share. In December 2005, as a result of the issuance of SFAS No. 123(R), we accelerated the vesting of all 1,000,000 options. In 2007, the Company’s Chief Operating Officer was granted options to purchase 250,000 Common Shares, pursuant to the Special Plan at an exercise price of $3.00 per share. No options were granted to our executive officers or directors under the Special Plan during 2008.
C. | Board Practices |
Members of the Company’s Board of Directors are elected by a vote at the annual general meeting of shareholders and serve for a term of one year. Directors may serve multiple terms and are elected by a majority of the votes cast at the meeting. The Chief Executive Officer serves until his removal by the Board of Directors or resignation from office. Non-employeeOur non-employee directors do not have agreements with the Company for benefits upon termination of their service as directors.
Audit Committee
The Audit Committee of theour Board of Directors is comprised of three independent directors, nominated by the Board of Directors. Until May 2006, former director Rammy Ringel along withDirectors: Yacov Elinav, and Uzi Netanel served as members of the Audit Committee. In June 2006, the Board of Directors nominated Dr. Ido Schechter to be a member of the Audit Committee, in addition to Yacov Elinav and Uzi Netanel.Eyal Ben Chlouche. The Board of Directors has determined that Mr. Elinav meets the definition of an audit committee financial expert. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial information, internal controls and the audit process. In addition, the Committee is responsible for oversight of the work of our independent auditors. The Committee is governed by a Chartercharter and meets at regularly scheduled quarterly meetings.
Compensation Committee
The Compensation Committee of theour Board of Directors is comprised of threetwo directors, nominated by the Board of Directors. Until May 2006,Directors: Naamit Salomon and Guy Bernstein. On March 11, 2008, Ms. Naamit Salomon replaced Mr. Gad Goldstein (our former director Rammy Ringel served director)as a member of the Committee along with Ron Zuckerman and Gad Goldstein. In June 2006, the Board of Directors nominated Dr. Ido Schechter to be a member of theCompensation Committee. Mr. Zuckerman and Dr. Schechter are independent directors. The primary function of the Compensation Committee is to manage the Company’s Stock Option Plan and review and approve all matters relating to the compensation of the Company’s officers and directors. The Committee is governed by a Chartercharter and meets at regularly scheduled quarterly meetings.
NASDAQ Exemptions for a Controlled Company
We are a controlled company within the meaning of NASDAQ Marketplace Rule 4350(c)(5), or Rule 4350(c)(5),5615(c)(1) since Formula Systems (1985) Ltd. holds more than 50% of our voting power.
Under Rule 4350(c)(5)5615(c)(2), a controlled company is exempt from the following requirements of NASDAQ Marketplace Rule 4350(c) asRules 5605(b), (d) and (e) (we rely upon such exemption with respect to each of July 31, 2005:the requirements described below):
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— | ||
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— | Director nominees must either be selected or recommended for the board of |
— | The company must certify that it has adopted a formal written charter or board resolution, as applicable, addressing the nominations process and such related matters as may be required under US federal securities laws. |
41
NASDAQ Exemption for a Foreign Private Issuer
We are a foreign private issuer within the meaning of NASDAQ Marketplace Rule 5000(a)(18), since we are incorporated in the Netherlands Antilles and we meet the other criteria set forth for a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act.
Pursuant to NASDAQ Marketplace Rule 5615(a)(3), a foreign private issuer may follow home country practice in lieu of certain provisions of the NASDAQ Marketplace Rule 5600 series and certain other NASDAQ Marketplace Rules. Please see Item 16G below (“Corporate Governance”) for a description of the manner in which we rely upon home country practice in lieu of NASDAQ listing requirements.
D. | Employees |
As of December 31, 2005,2008, we had a total of 364283 employees, a 10.1%6.3% decrease from the end of 2004.
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In February 2006, we began to implement a restructuring plan for the purpose of reducing costs and restoring profitability. The restructuring plan includes the termination of the employment of approximately 40 employees.
In February 2005, we implemented a restructuring plan for the purpose of reducing costs and restoring profitability. As a result of such restructuring, the employment of approximately 40 employees was terminated.
As of December 31, 2004, we had a total of 405 employees, a 12.7% decrease from the end of 2003.
As of December 31, 2003, we had a total of 464 employees, a 14.2% decrease from the end of 2002.2007.
The following table sets forth the number of employees in (1) research and development, (2) consulting, delivery and technical support and (3) SG&A forat the end of each of the past three years.years, as well as their geographic area of employment:
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|
|
|
|
|
|
|
|
|
|
|
| Total Employees |
| Research & |
| Consulting, Delivery |
| SG&A |
| ||||
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|
|
|
|
| ||||||||
December 31, 2005 |
|
| 364 |
|
| 52 |
|
| 235 |
|
| 77 |
|
December 31, 2004 |
|
| 405 |
|
| 57 |
|
| 252 |
|
| 96 |
|
December 31, 2003 |
|
| 432 |
|
| 61 |
|
| 276 |
|
| 95 |
|
Total Employees | Research & Development | Consulting, Delivery & Technical Support | SG&A | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 283 | 56 | 186 | 41 | ||||||||||
2007 | 302 | 48 | 207 | 47 | ||||||||||
2006 | 319 | 53 | 217 | 49 |
2008 | 2007 | 2006 | |||||||||||||||||||||||||
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| ||||||||||||||
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| December 31, 2005 |
| December 31, 2004 |
| December 31, 2003 |
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Israel |
| 218 |
| 214 |
| 214 |
|
| 202 | 199 | 198 | ||||||||||||||||
United States |
| 50 |
| 54 |
| 61 |
|
| 21 | 36 | 43 | ||||||||||||||||
United Kingdom |
| 52 |
| 82 |
| 102 |
|
| 34 | 37 | 49 | ||||||||||||||||
Japan |
| 24 |
| 24 |
| 24 |
|
| 23 | 23 | 23 | ||||||||||||||||
France |
| 15 |
| 25 |
| 24 |
|
| 3 | 5 | 4 | ||||||||||||||||
Germany |
| 5 |
| 5 |
| 6 |
|
| 0 | 1 | 1 | ||||||||||||||||
Switzerland |
| - |
| 1 |
| 1 |
|
| 0 | 1 | 1 | ||||||||||||||||
Total Employees |
| 364 |
| 405 |
| 432 |
|
| 283 | 302 | 319 |
E. | Share Ownership |
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| Shares Beneficially Owned |
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| Number |
| Percent(1) |
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| ||
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|
|
|
| ||||
| Dan Goldstein (2) |
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| 7,746,372 |
|
| 60.1 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
| Gad Goldstein (2) |
|
| 7,746,372 |
|
| 60.1 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ron Zuckerman (3) |
|
| 370,700 |
|
| 2.9 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Yitzhak Sharir (4) |
|
| 425,000 |
|
| 3.3 |
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|
|
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| Roni Al Dor (5) |
|
| 240,000 |
|
| 1.8 |
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| All directors and executive officers as a group (9 persons) (6) |
|
| 8,840,072 |
|
| 65.9 |
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The number of our Common Shares beneficially owned by each of our directors and executive officers, and by our directors and executive officers as a group, as of April 1, 2009, is as follows:
Shares Beneficially Owned | ||||||||
---|---|---|---|---|---|---|---|---|
Number | Percent (1) | |||||||
Ron Al Dor | 306,667 | (2) | 1.4 | % | ||||
All directors and executive officers | ||||||||
as a group (5 persons, | ||||||||
including Ron Al Dor)(3) | 393,417 | (4) | 1.8 | % | ||||
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(1) | |
| Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The percentages shown are based on |
39
(2) | |
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| |
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| Includes options to purchase 240,000 Common Shares under the Incentive Plans at an exercise price of $1.74 per |
(3) | |
| Each of |
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(4) | The options held by the directors and executive officers not separately identified in the above table have exercise prices ranging from $1.50 to $3.00 per share, and none of such options expires before 2015. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. | Major |
The following table sets forth, as of June 25, 2006,April 1, 2009, certain information with respect to the beneficial ownership of the Company’s Common Shares by each person known by the Company to own beneficially more than 5% of the outstanding Common Shares, based on information provided to us by the holders or disclosed in public filings with the Securities and Exchange Commission.
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| |
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| Shares Beneficially Owned |
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| |||
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Name and Address |
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| Number |
| Percent (1) |
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| |||
Formula Systems (1985) Ltd. (“Formula”) (2) |
| 7,746,372 |
| 60.1 |
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Magnum Technology Limited (3) |
| 1,204,819 |
| 9.4 |
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| |
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| |
F.I.D. Holdings Ltd. (“FID”) (4) |
| 1,412,500 |
| 10.5 |
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Shares Beneficially Owned | ||||||||
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Name and Address | Number | Percent (1) | ||||||
Formula Systems (1985) Ltd. (2) | ||||||||
3 Abba Eban Boulevard | ||||||||
Herzlia 46725, Israel | 15,146,781 | 70 |
(1) | |
| The percentages shown are based on |
(2) | |
| Includes |
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Significant changes in holdings of major shareholders
1. | |
| Formula |
In June 2005,August 2006, we entered into a share purchaseissuance agreement with Formula (then a holder of approximately 58% of our outstanding Common Shares) whereby Formula invested $2.0 million in the Company, and we issued 1,041,667 shares1,562,500 Common Shares to Formula, at a purchase price per share of $1.92,$1.28, which was the average closing price of our Common Shares for the 10 day period prior to the execution of the agreement.July 17, 2006. As a result of the $2.0 million investment in August 2006, Formula became the holder of approximately 58%60% of our outstanding Common Shares at that time. (For further details about the
43
In June 2007, we entered into a private placement investment transaction with several institutional investors, private investors and Formula see Item 10, “Additional Information – Material Contracts.”)for an aggregate gross investment amount of $20 million (excluding finders’ fees and out of pocket expenses), $6.5 million of which was invested by Formula. As a result, we issued to Formula 2,166,666 Common Shares, at a price per share of $3.00 which reflected a premium of approximately 25% above the trading price of our Common Shares (as of the date our Board of Directors approved the investment).
41
From time to time, Formula has increased its beneficial shareholding in the Company through market purchases of additional Common Shares. From June 28, 2005October 2007 through June 25, 2006,2008, Formula increased its holding of our Common Shares by approximately 207,000914,858 Common Shares. Shares through purchases on the public market. See the Schedule 13DA filed by Formula with the SEC on June 12, 2008 with respect to such purchases. From June 2008 through August 2008, Formula increased its holding of our Common Shares by approximately 2,201,010 additional Common Shares through purchases on the public market. See the Schedule 13DA filed by Formula with the SEC on September 2, 2008 with respect to such purchases.
As of June 25, 2006,April 1, 2009, Formula was the holder of approximately 60%70% of our outstanding Common Shares.
In June 2006, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
2. | |
| FID and Israel Discount Bank |
As a result of the Agreementan agreement (the “Investment Agreement”) entered into as of March 16, 2004 by and among the Company, F.I.D. Holdings Ltd. (“FID”) and Israel Discount Bank Ltd., (together with FID, the investors“Investors” (each of which invested in eZoneXchange.com, Inc. (the “Investors”eZone))., FID became the beneficial holder of approximately 9.1% of the Company’sour share capital.(For further details about the March 2004 transaction with FID, see Item 10, “Additional Information – Material Contracts.”)
In May 2005,August 2006, we entered into an agreement with the Investors regarding the payment of the remaining $4.0 million due towhereby the Investors pursuant to the March 2004 agreement between us and the Investors. We agreed to pay $2.0 million on May 2, 2005, $1.0 million by April 1, 2006 and $1.0 million by August 1, 2006. The Investors may, at their sole discretion, convert all or any portion of the $1.0 million payable on August 1, 2006 into our Common Shares, at a conversion price per each share of $3.20. The first installment of $2.0 million was paid as required at the beginning of May 2005. (For further details about the May 2005 transaction with FID, see Item 10, “Additional Information – Material Contracts.”)
In June 2006, we entered into a term sheet with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., regarding the conversion ofconverted the $1.0 million payment that was due to them on April 1, 2006 under the Agreement into 781,250 Common Shares.
As of December 31, 2008, FID no longer beneficially owns any of our outstanding Common Shares.
3. | Highbridge International LLC |
In June 2007, we entered into a private placement investment transaction with several institutional investors, private investors and Formula for an aggregate gross investment amount of $20 million (excluding finders’ fees and out of pocket expenses). Pursuant to such private placement investment, Highbridge International LLC invested $6.5 million in the Company in return for the issuance of 2,166,667 Common Shares, which equaled 10.5% of our outstanding Common Shares at a conversion price per share equal to the average closing price for the 10 day period prior to the executiontime.
As of the agreement being entered into, and the delaying until August 1, 2007December 31, 2008, Highbridge International LLC no longer beneficially owns any of the $1.0 million payment that is currently due on August 1, 2006. The term sheet is subject to the executionour outstanding Common Shares
Voting rights of a binding agreement and subject to the fulfillment of certain conditions.major shareholders
The major shareholders disclosed above do not have different voting rights.rights than other shareholders with respect to the Common Shares that they hold.
Holders of Record
As of June 1, 2006,April 22, 2009, there were 17975 holders of record of the Company’s Common Shares (which excludes brokers holding Common Shares), including 12750 holders of record with addresses in the United States. The number of record holders in the United States is not representative of the number of beneficial holders, nor is it representative of where such beneficial holders are resident because many of these ordinary sharesCommon Shares were held of record by brokers or other nominees.
44
Control of the Company
Based on Formula’s beneficial holding of over 50% of the outstanding Common Shares of the Company, and based on Emblaze’s beneficial holding of over 50% of the outstanding share capital of Formula, both Formula and Emblaze may be considered to control the Company.We are unaware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.
B. | Related Party |
On April 4, 2001, we entered into a share purchase and loan agreement with Red Coral Holdings, Inc. (“Red Coral”), a company owned by Itzick Sharir, then our President and Chief Executive Officer and now a director. According to the terms of the agreement, Red Coral purchased 300,000 shares of the Company for a purchase price of $975,000. As part of the agreement, the Company granted to Red Coral a loan in the amount of $975,000 for the purpose of acquiring the Common shares. The term of the loan is six years, with accrued interest at a rate of 4%, which is payable on January 15th of each calendar year. The interest amount is fully-recourse and fixed. To secure payment of the loan, Red Coral granted to the Company a lien and security interest on all of the Common shares of the Company that it owns. To secure fulfillment of the terms of the agreement, the Common shares are being held in escrow by the General Counsel of the Company. In November 2005, upon the termination of his employment with the Company, Mr. Sharir was granted options to purchase 50,000 Common Shares at a price $1.74 per share.
42
As a result of the Agreement entered into as of March 16, 2004 by the Company, F.I.D. Holdings Ltd. (“FID”)and Israel Discount Bank Ltd., FID became the beneficial holder of approximately 9.1% of the Company’s share capital.
In May 2005, we entered into an agreement with FID and Israel Discount Bank Ltd., the investors in eZoneXchange.com, Inc. (the “Investors”), regarding the payment of the remaining $4.0 million due to the Investors, pursuant to the March 2004 agreement between us and the Investors. We agreed to pay $2.0 million on May 2, 2005, $1.0 million by April 1, 2006 and $1.0 million by August 1, 2006. The Investors may, at their sole discretion, convert all or any portion of the $1.0 million payable on August 1, 2006 into our Common Shares, at a conversion price per each share of $3.20. The first installment of $2.0 million was paid as required at the beginning of May 2005.
In June 2006, we entered into a term sheet with the Investors, regarding the conversion of the $1.0 million payment that was due on April 1, 2006 into our Common Shares, at a conversion price per share equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into, and the delaying until August 1, 2007 of the $1.0 million payment that is currently due on August 1, 2006. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.
(For further details about the transactions with the Investors, see Item 10, “Additional Information – Material Contracts.”)
In June 2005, we entered into a share purchase agreement with our major shareholder, Formula, whereby Formula invested $2.0 million in Sapiens, and we issued 1,041,667 shares to Formula, at a purchase price per share of $1.92, which was the average closing price for the 10 day period prior to the execution of the agreement. The shares issued pursuant to the June 2005 were granted “piggyback” registration rights, similar to those granted to Formula and Yarnfield International Limited (now Magnum Technology Limited) in their 2001 investment.
In June 2006, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
(For further details about the transaction with Formula, see Item 10, “Additional Information – Material Contracts.”)None.
C. | Interests of Experts and |
Not applicable.
43
FINANCIAL INFORMATION |
A. | Consolidated Statements and Other Financial Information. |
ConsolidatedFinancial Statements and Other Financial Information
See the Consolidated Financial Statements and related notes in Item 18.
Export Sales
In 2005, 76.8%2008, 62.9% of our revenues were from customers located outside of Israel. For information on our revenues breakdown by geographic market for the past three years, see Item 4:4, “Information on the Company.Company – Business Overview – Geographical Distribution of Revenues.”
Legal Proceedings
In February 2008, a former employee of the Company filed a claim against the Company for the amount that such former employee was required to pay to the Israel Tax Authorities – approximately NIS 4.5 million (approximately $1.2 million as of December 31, 2008)-as a result of his exercise of stock options. The Company believes that such claim lacks merit, and the Company, based on the advice of its legal counsel, believes that it has a reasonable defense.
In addition the Company is a party to various other legal proceedings and claims that arise in the ordinary course of business. The total aggregate amount of exposure of such proceedings and claims, except for the above mentioned claim, is approximately $0.4 million of which an accrual in the amount of approximately $0.2 million was recorded in the Company’s financial statements.
Dividend Policy
We have never declared or paid any cash dividends on our Common Shares and we do not anticipate paying cash dividends in the foreseeable future. It is the present intention of our Board of Directors to retain all earnings in the Company in order to support the future growth of its business. Any determination in the future to pay dividends will be dependent upon our consolidated results of operations, financial condition, cash requirements, future prospects and other factors. For more information about distribution of dividends and various tax implications,see Item 10, “Additional Information -– Memorandum and Articles of Association,Association;” Item 10, “Additional Information – Exchange Controls,” and Item 10, “Additional Information – Taxation.”
45
B. | Significant Changes |
Legal Proceedings
The Company is subjectIn January 2009, we repurchased an aggregate amount of NIS 1,605,799 nominal value of debentures, representing approximately, $0.41 million of our outstanding debentures. Pursuant to certain legal and governmental proceedings and claims that arise in the conductterms of its business. In the opinion of management,prospectus governing the debentures, the amount of liability, if any, asrepurchased by us was retired and removed from circulation on the TASE. As a result, of these claims and proceedings is not likely to have a material effect on the financial condition or results of operations of the Company.
Significant Changes
The following significant changes have occurred since the date of our annual consolidated financial statements:
In February 2006, we began to implement a restructuring plan for the purpose of reducing costs and restoring profitability. The restructuring plan includes the termination of the employment of approximately 40 employees.
In June 2006, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
In June 2006, we entered into a term sheet with F.I.D. Holdings Ltd. and Israel Discount Bank Ltd., regarding the conversion of the $1.0 million payment that was due to them on April 1, 2006 into our Common Shares, at a conversion price per share equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into, and the delaying until August 1, 2007 of the $1.0 million payment that is currently due on August 1, 2006. The term sheet is subject to the execution of a binding agreement and subject to the fulfillment of certain conditions.
Until June 27, 2006, we had a revolving credit line facility for borrowings of up to $18.5 million, which was available until June 30, 2006. On June 27, 2006, we entered into new agreements with the banks regarding a new revolving credit line facility for borrowings of up to $9.2 million, which is available until June 30, 2007. Although the total amount that we must pay in December 2009 was reduced to approximately NIS 20.3 million or $5.3million (using the December 31, 2008 exchange rate of NIS 3.802 per $1), consisting of approximately NIS 19.2 million or $5.0 million for the fourth and final annual re-payment of the credit facility was reduced, as a resultprincipal of the changes todebentures, and approximately NIS 1.1 million or $0.3 million for the restrictions relating to credit facility, the actual amount that we can draw under the credit facility has increased by $3.0 million over the credit facility that expires on June 30, 2006.semi-annual interest payment.
See Item 5 - Operating and Financial Review and Prospects - B. Liquidity and Capital Resources – Credit Lines.
44
ITEM 9. | |
|
A. | Offer and Listing |
The Company’s Common Shares are quoted on Nasdaqthe NASDAQ Capital Market and on the Tel Aviv Stock Exchange (the “TASE”)TASE under the symbol “SPNS”.
NASDAQ:
The table below sets forth the high and low market prices for our Common Shares on Nasdaqthe NASDAQ National Market (now known as the NASDAQ Global Market) until September 27, 2005 and the NasdaqNASDAQ Capital Market thereafter on an annual basis for the years 20012004 through 20052008 and on a quarterly basis for the years 20042007 and 2005,2008, and the first quarter of 2006. On June 16, 2003, the Company carried out the Reverse Stock Split (see Note under Item 3.A “Selected Consolidated Financial Data”). All share prices have been adjusted to reflect the Reverse Stock Split by multiplying historical prices by five.2009.
|
|
|
|
|
|
|
| HIGH | LOW | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| HIGH |
| LOW |
| ||||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
2001 (Annual) |
| $ | 8.30 |
| $ | 2.80 |
| ||||||||
2002 (Annual) |
| 6.85 |
| 3.00 |
| ||||||||||
2003 (Annual) |
| 6.01 |
| 3.30 |
| ||||||||||
2004 (Annual) |
| 5.25 |
| 1.48 |
| $ | 5.30 | $ | 1.48 | ||||||
2005 (Annual) |
| 2.89 |
| 1.00 |
| 2.89 | 1.00 | ||||||||
2006 (Annual)(through June 25, 2006) |
| 1.60 |
| 1.06 |
| ||||||||||
2006 (Annual) | 2.10 | 1.02 | |||||||||||||
2007 (Annual) | 3.66 | 1.20 | |||||||||||||
2008 (Annual) | 2.40 | 0.82 | |||||||||||||
2009 (Annual) (through April 17, 2009) | 2.00 | 0.76 | |||||||||||||
|
|
|
|
|
| ||||||||||
2004 |
|
|
|
|
| ||||||||||
2007 | 2007 | ||||||||||||||
First Quarter |
| $ | 5.25 |
| $ | 3.44 |
| $ | 2.00 | $ | 1.35 | ||||
Second Quarter |
| 3.77 |
| 2.17 |
| 3.66 | 1.51 | ||||||||
Third Quarter |
| 2.71 |
| 1.49 |
| 3.19 | 1.74 | ||||||||
Fourth Quarter |
| 2.95 |
| 1.48 |
| 1.99 | 1.20 | ||||||||
|
|
|
|
|
| ||||||||||
2005 |
|
|
|
|
| ||||||||||
2008 | |||||||||||||||
First Quarter |
| $ | 2.89 |
| $ | 1.85 |
| $ | 1.50 | $ | 1.01 | ||||
Second Quarter |
| 2.41 |
| 1.52 |
| 1.88 | 0.82 | ||||||||
Third Quarter |
| 2.09 |
| 1.30 |
| 2.40 | 1.32 | ||||||||
Fourth Quarter |
| 1.86 |
| 1.00 |
| 2.35 | 1.21 | ||||||||
|
|
|
|
|
| ||||||||||
2006 |
|
|
|
|
| ||||||||||
First Quarter |
| $ | 1.60 |
| $ | 1.14 |
| ||||||||
Second Quarter (through June 25, 2006) |
| 1.54 |
| 1.06 |
| ||||||||||
2009 | 2009 | ||||||||||||||
First Quarter 2009 | $ | 2.00 | $ | 0.76 | |||||||||||
Second Quarter 2009 (through April 17, 2009) | 1.37 | 0.76 |
46
The table below sets forth the high and low market prices for our Common Shares on Nasdaqthe NASDAQ Capital Market during the most recent six-month period:period.
|
|
|
|
|
|
|
|
|
| HIGH |
| LOW |
| ||
|
|
|
| ||||
|
|
|
|
|
| ||
December 2005 |
| $ | 1.70 |
| $ | 1.31 |
|
January 2006 |
|
| 1.54 |
|
| 1.14 |
|
February 2006 |
|
| 1.60 |
|
| 1.22 |
|
March 2006 |
|
| 1.40 |
|
| 1.16 |
|
April 2006 |
|
| 1.54 |
|
| 1.12 |
|
May 2006 |
|
| 1.39 |
|
| 1.13 |
|
June 2006 (through June 25, 2006) |
|
| 1.34 |
|
| 1.06 |
|
HIGH | LOW | |||||||
---|---|---|---|---|---|---|---|---|
October 2008 | $ | 2.35 | $ | 1.24 | ||||
November 2008 | 2.10 | 1.21 | ||||||
December 2008 | 2.16 | 1.24 | ||||||
January 2009 | 2.00 | 0.99 | ||||||
February 2009 | 1.16 | 0.76 | ||||||
March 2009 | 1.15 | 0.76 |
45The closing price of our Common Shares on the NASDAQ Capital Market on April 17, 2009, being the last practicable date prior to publication of this annual report, was $0.81.
TASE:
Our Common Shares began trading on the TASE effective March 6, 2003. Under current Israeli law, the Company will satisfy its reporting obligations in Israel by furnishing to the applicable Israeli regulators only those reports the Company is required to file in the United States. The table below sets forth the high and low market prices for our Common Shares on TASE on an annual basis for the years 20032004 through 20052008 and on a quarterly basis for the years 2004, 20052007 and 2008, and the first quarter of 2006.2009. The translationconversion from NIS into US dollars for the following two tables is based on the average monthly representative rate of exchange published by the Bank of Israel then in effect.effect for the month in which such high or low was recorded, except for the month of April 2009 where the conversion is based on the representative rate of exchange as published by the Bank of Israel for the specific date recorded.
|
|
|
|
|
|
|
|
|
| HIGH |
| LOW |
| ||
|
|
|
| ||||
|
|
|
|
|
| ||
2003 (Annual from March 6) |
| $ | 6.01 |
| $ | 3.56 |
|
2004 (Annual) |
|
| 5.29 |
|
| 1.75 |
|
2005 (Annual) |
|
| 2.74 |
|
| 1.19 |
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
Second Quarter |
| $ | 4.99 |
| $ | 4.33 |
|
Third Quarter |
|
| 5.06 |
|
| 3.58 |
|
Fourth Quarter |
|
| 6.01 |
|
| 3.56 |
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
First Quarter |
| $ | 5.29 |
| $ | 3.62 |
|
Second Quarter |
|
| 3.64 |
|
| 2.28 |
|
Third Quarter |
|
| 2.54 |
|
| 1.75 |
|
Fourth Quarter |
|
| 2.42 |
|
| 1.85 |
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
First Quarter |
| $ | 2.74 |
| $ | 2.06 |
|
Second Quarter |
|
| 2.28 |
|
| 1.76 |
|
Third Quarter |
|
| 2.03 |
|
| 1.55 |
|
Fourth Quarter |
|
| 1.73 |
|
| 1.19 |
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
First Quarter |
| $ | 1.57 |
| $ | 1.24 |
|
Second Quarter (through June 26, 2006) |
|
| 1.42 |
|
| 1.23 |
|
HIGH | LOW | |||||||
---|---|---|---|---|---|---|---|---|
2007 (Annual) | $ | 3.89 | $ | 0.97 | ||||
2008 (Annual) | 2.31 | 0.88 | ||||||
2009 (Annual) (through April 16, 2009) | 1.98 | 0.93 | ||||||
2007 | ||||||||
First Quarter | $ | 1.83 | $ | 1.66 | ||||
Second Quarter | 3.92 | 1.75 | ||||||
Third Quarter | 3.07 | 2.31 | ||||||
Fourth Quarter | 2.23 | 1.05 | ||||||
2008 | ||||||||
First Quarter | $ | 1.46 | $ | 1.08 | ||||
Second Quarter | 2.04 | 0.92 | ||||||
Third Quarter | 2.38 | 1.56 | ||||||
Fourth Quarter | 2.04 | 1.53 | ||||||
2009 | ||||||||
First Quarter | $ | 2.00 | $ | 0.94 | ||||
Second Quarter (through April 16 2009) | 1.01 | 0.95 |
The table below sets forth the high and low market prices for our Common Shares on TASE during the most recent six-month period:
|
|
|
|
|
|
|
|
|
| HIGH |
| LOW |
| ||
|
|
|
| ||||
|
|
|
|
|
| ||
December 2005 |
| $ | 1.73 |
| $ | 1.52 |
|
January 2006 |
|
| 1.57 |
|
| 1.36 |
|
February 2006 |
|
| 1.56 |
|
| 1.33 |
|
March 2006 |
|
| 1.33 |
|
| 1.24 |
|
April 2006 |
|
| 1.42 |
|
| 1.23 |
|
May 2006 |
|
| 1.39 |
|
| 1.23 |
|
June 2006 (through June 26, 2006) |
|
| 1.34 |
|
| 1.23 |
|
HIGH | LOW | |||||||
---|---|---|---|---|---|---|---|---|
October 2008 | $ | 2.06 | $ | 1.96 | ||||
November 2008 | 1.95 | 1.88 | ||||||
December 2008 | 2.02 | 1.51 | ||||||
January 2009 | 2.07 | 1.28 | ||||||
February 2009 | 1.13 | 0.97 | ||||||
March 2009 | 1.06 | 0.92 |
47
The closing price of our Common Shares on the TASE on April 16, 2009, being the last practicable date prior to publication of this annual report, was $0.94.
B. | Plan of |
Not applicable.
46
C. |
|
The Company’s Common Shares are quoted on Nasdaqthe NASDAQ Capital Market and on the Tel Aviv Stock Exchange (the “TASE”)TASE under the symbol “SPNS”.
D. | Selling |
Not applicable.
E. |
|
Not applicable.
F. | Expenses of the |
Not Applicable.applicable.
ADDITIONAL INFORMATION |
A. | Share |
Not applicable.
B. | Memorandum and Articles of Association (the “Articles”). |
1. | Registration and Purposes.The Company is organized and existing under the laws of the Netherlands Antilles. Its registered number is 53368. |
The objects and purposes of the Company, which are itemized in Article II of the Articles, may be summarized as follows: |
— |
| to establish, participate in or have any other interest in business enterprises concerned with the development and commercial operation of software; |
— | ||
| to finance directly or indirectly the activities of the Company, its subsidiaries and affiliates; |
— | ||
| to borrow and to lend moneys; |
— | ||
| to engage in the purchase and sale of securities, futures, real estate, business debts, commodities and intellectual property; |
48
— | ||
| to undertake, conduct and promote research and development; |
— | ||
| to guarantee, pledge, mortgage or otherwise encumber assets as security for the obligations of the Company or third parties; and |
— | ||
| to do all that may be useful or necessary for the attainment of the above purposes. |
2. | Board of Directors.A member of the Board of Directors may vote on a proposal or transaction in which he/she has a material interest if |
The Articles do not grant borrowing powers to directors; nor do they require directors to resign at a certain age or to purchase a certain number of |
47
3. | Rights and Preferences.The Company has only one class of shares of common stock, the Common Shares, currently outstanding. All previous issuances of preferred shares have been converted into Common Shares. The rights and preferences of the holders of Common Shares are summarized below. The Articles authorize a class of undefined preferred shares (the “Blank Preferred Shares”). There are no rights associated with the Blank Preferred Shares and none have been issued. |
(a) | Common Shares |
Holders of the Common Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Common Shares do not have cumulative voting rights in the election of directors. All Common Shares are equal to each other with respect to liquidation and dividend rights. Holders of the Common Shares are entitled to receive dividends, subject to shareholder approval, out of funds legally available under Netherlands Antilles law. See “Dividend Policy”below. In the event of the liquidation of the Company, all assets available for distribution to the holders of the Common Shares are distributable among them according to their respective holdings, subject to the preferences of any shares having a preference upon liquidation that may be then outstanding. Holders of the Common Shares have no preemptive rights to purchase any additional, unissued Common Shares. The foregoing summary of the Common Shares does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Articles. |
(b) | Dividend Policy |
The Company has never declared or paid any cash dividends on its Common Shares and does not anticipate paying cash dividends in the foreseeable future. It is the present intention of the Company’s Board of Directors to retain all earnings in the Company in order to support the future growth of its business. Any determination in the future to pay dividends will be dependent upon the Company’s consolidated results of operations, financial condition, cash requirements, future prospects and other factors. In addition, the ability of the Company to pay dividends is subject to the limitations of the Corporate Law of the Netherlands Antilles, which provides, among other things, that dividends, while permitted to be paid periodically during a fiscal year, are subject to being proposed by the Board of Directors of the Company and approved thereafter at the General Meeting of Shareholders. The Corporate Law of the Netherlands Antilles also provides that a distribution of dividends can only occur if, at the moment of distribution, the equity of the Company equals at least the nominal capital of the Company and, as a result of the distribution, will not fall below the nominal capital. Nominal capital is the sum of the par values of all of the issued shares |
49
(c) | The Blank Preferred Shares |
There are no preferences or any rights whatsoever associated with the Blank Preferred Shares. These shares are unissued and are not owned by any of the current shareholders of the Company. Any issuance of these preferred shares is solely within the discretion of the Company’s Board of Directors. The Company has undertaken toward the TASE that so long as shares of its Common Stock are listed for trading on the TASE, the Company shall not issue or grant any shares of a different class of shares than those that are listed for trading on the TASE. This undertaking does not apply to Preferred Shares as defined in Section 46B(b) of the Israel Securities Law, on the condition that such Preferred Shares are issued in accordance with the conditions set forth in Section 46A(1) therein. |
4. | Changing the Rights of the Shareholders. The general meeting of shareholders decides upon any change in the Articles. A resolution to amend the Articles requires the approval of the absolute majority of all shares outstanding and entitled to vote. |
48
5. | General Meetings. At least one general meeting of shareholders must be held each year. General meetings must be held in Curaçao. Special general meetings of shareholders may be called at any time by the Chairman of the Board or by the Board of Directors upon no less than 10 nor more than 60 |
6. | Limitations to Own Securities. The Articles contain no limits on the right to own securities. |
7. | Change of Control. The Articles contain no provisions that would prevent or delay a change of control of |
8. | Disclosure of Ownership.By-laws do not exist under Netherlands Antilles law. The |
C. | Material Contracts |
| Convertible Debentures and Trust Deed |
On December 11, 2003, we completed an offering of securities in Israel, resulting in gross proceeds of approximately $17.1 million. We sold 100,000 units of securities, each unit consisting of 800 Debenturesdebentures (Series A), two Optionsoptions (Series A) exercisable into Debenturesfor debentures (Series A) and six Warrantswarrants (Series 1) exercisable into common sharesto purchase Common Shares of Sapiens.the Company.
The Debenturesdebentures are linked to the US dollar only if the exchange rate between the NIS and the US Dollar is greater than NIS 4.394 per 1 US Dollar. (On March 31, 2009, the exchange rate between the NIS and the US Dollar was NIS 4.188 per 1 US Dollar.) The debentures bear annual interest at the rate of 6.0%, payable on the 5th of June and the 5th of December each year commencing on June 5, 2004 and ending on December 5, 2009. Principal is payable in four installments on the 5th of December of the years 2006-2009. During the period beginning 45 days after the registration of the Debenturesdebentures (Series A) for trading on the TASE and ending November 21, 2009, the Debenturesdebentures (Series A) are convertible in common sharesCommon Shares at a conversion rate of one common shareCommon Share per each NIS 27 (currently approximately $5.90) amount(approximately $7.10, using the December 31, 2008 exchange rate of NIS 3.802 per $1) outstanding under the Debentures.debentures. The conversion rate is subject to certain adjustments. The Debenturesdebentures (Series A) are unsecured.
Options (Series A) to purchase additional debentures which were exercised by non-affiliates of the Company before their expiry date resulted in additional gross proceeds of approximately $1.6 million to the Company in the first quarter of 2004.
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Each Warrantwarrant (Series 1) iswas exercisable intofor one Common Share of the Company until November 21, 2007 for an exercise price of approximately $6.14.$7.02. None of the 600,000 warrants (Series 1) were exercised and they expired on November 21, 2007.
In accordance with chapter E1August 2006 we convened a general meeting of the Israel Securities Law, we offereddebenture holders, where a special resolution was adopted concerning the Debentures after nominating a trustee for the Debenture holders. The trustee is Ubank Trust Company Ltd. (formerly Investec Trust Company (Israel) Ltd.)amount and the datetiming of the Trust Deed is December 2, 2003. The Trust Deed includes, among other things, the duties of the trustee, the circumstances in which the trustee can demand immediate repayment of the outstanding Debentures, the circumstances in which the trustee or the Company can call meetings of Debenture holders and the procedures for such meetings.
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In April 2000, FID and Israel Discount Bank Ltd. (the “Investors”) invested $15 million in eZoneXchange.com, Inc. (“eZone”), a subsidiary of the Company. The private placement to the Investors was accompanied by a Put/Call Agreement, according to which the Investors were granted the right to require us to repurchase their shares in the subsidiary beginning May 2004 in exchange for both cash and our Common Shares. In February 2001, management decided to discontinue the operations of eZone. During the same period, we agreed to a partial exercise of Investors’ put option, resulting in a payment to them of $4.5 million.
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On March 16, 2004, we entered into a new Agreement with the Investors which replaced the Put/Call Agreement and which restructured the remaining portion of the put option. We agreed to issue the Investors, in a private placement, 750,000 Common Shares and warrants to purchase 350,000 additional common shares that are exercisable through December 31, 2007. In addition, we agreed to pay the Investors in two annual installments a total of $8.6 million plus interest at 7.5% a year by May 1, 2005. The first installment of $4.6 million was paid as required at the beginning of May 2004.
In May 2005, we entered into an agreement with the Investors regarding the payment of the remaining $4.0principal of the debentures. A majority of the debenture holders approved that (a) 50% of the first payment amount, approximately $2.4 million, duewill be deferred to December 5, 2009 (the last date of payment of the principal on the debentures), and (b) with respect to the Investors, pursuant to the March 2004 agreement between us and the Investors. We agreed to pay $2.0 million on May 2, 2005, $1.0 million by April 1, 2006 and $1.0 million by August 1, 2006. The Investors may, at their sole discretion, convert all or any portionother 50% of the $1.0 million payablefirst payment amount, the Company could choose from the following alternatives, in its sole discretion: (1) to convert such amount on August 1, 2006 into our Common Shares, at a conversion price per each share of $3.20. In addition the interest to be paid on the outstanding principal amount was changed to LIBOR plus 2.5%. The first installment of $2.0 million was paid as required at the beginning of May 2005.
In June 2006, we entered into a term sheet with the Investors whereby the Investors will convert the $1.0 million payment that was due on April 1,December 5, 2006 into our Common Shares, at a conversion price per share equal toof $1.28, which reflects the average closing price for the 10 day period prior to July 17, 2006, or (2) to pay the executionapproximately $2.4 million amount to the debenture holders, in cash. In December 2006, we made the payment in cash.
Following a $20 million private placement investment in June 2007, we purchased an aggregate amount of NIS 15,000,000 nominal value, representing approximately $3.5 million of the agreement being entered into, andoutstanding debentures. Pursuant to the paymentterms of the $1.0prospectus governing the debentures, the amount repurchased by us was retired and removed from circulation.
In January and February 2008, we repurchased an aggregate amount of NIS 7,600,000 nominal value of debentures, representing approximately, $2.1 million payment due by August 1, 2006, will be delayed to August 1, 2007. The term sheet is subjectof the outstanding debentures. In January 2009, we repurchased an additional aggregate amount of NIS 1,605,799 nominal value of debentures, representing approximately, $0.41 million of the outstanding debentures. Pursuant to the executionterms of the prospectus governing the debentures, the amounts repurchased by us were retired and removed from circulation on the TASE. As a binding agreementresult, the total amount that we paid in December 2008 was reduced to approximately NIS14.9 million or $3.7 million (using the December 5, 2008 exchange rate of NIS 3.981 per $1), consisting of approximately NIS 13.9 million or $3.5 million for the third of the four annual re-payments of the principal of the debentures, and subject toapproximately NIS1.0 million or $0.2 million for the fulfillment of certain conditions.semi-annual interest payment.
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In June 2005, we entered into a share purchase agreement with our major shareholder, Formula, whereby Formula invested $2.0 million in Sapiens, and we issued 1,041,667 shares to Formula, at a purchase price per share of $1.92, which was the average closing price for the 10 day period prior to the execution of the agreement. The shares issued pursuant to the June 2005 were granted “piggyback” registration rights, similar to those granted to Formula and Yarnfield International Limited (now Magnum Technology Limited) in their 2001 investment.
In June 2006, we entered into a term sheet with Formula pursuant to which Formula will invest $2.0 million in the Company. The potential investment is subject to the execution of a binding agreement and subject to the completion of certain closing conditions. The purchase price per share will be equal to the average closing price for the 10 day period prior to the execution of the agreement being entered into.
D. | Exchange Controls |
Although there are Netherlands Antilles laws which may impose foreign exchange controls on the Company and may affect the payment of dividends, interest or other payments to non-resident holders of the Company’s securities, including the Common Shares, the Company has been granted an exemption from such foreign exchange control regulations by the Central Bank of the Netherlands Antilles. Other jurisdictions in which the Company conducts operations may have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed on the operations of the Company. As to the Company’s securities, Netherlands Antilles law and the Articles impose no limitations on the right of non-resident or foreign owners to hold or vote such securities.
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E. | Taxation |
See “ResultsIsraeli Tax Considerations and Government Programs
General
The following is a general discussion only and is not exhaustive of Operations – Taxes on Income” under Item 5all possible tax considerations. It is not intended, and should not be construed, as legal or professional tax advice and should not be relied upon for disclosure regardingtax planning purposes. In addition, this discussion does not address all of the reductiontax consequences that may be relevant to purchasers of our deferredCommon Shares in light of their particular circumstances, or certain types of purchasers of our Common Shares subject to special tax assetstreatment. Examples of this kind of investor include residents of Israel and traders in securities who are subject to special tax advances balances,regimes not covered in 2005.this discussion. Each individual/entity should consult its own tax or legal advisor as to the Israeli tax consequences of the purchase, ownership and disposition of our Common Shares.
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To the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or the courts will accept the views expressed in this section.
The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of the material Israeli tax consequences to holders of our Common Shares.
“Approved Enterprise” status underTaxation of Companies
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax at the rate of 27% on taxable income for the year 2008 and are subject to capital gains tax at a rate of 25% on capital gains (other than gains derived from the sale of listed securities that are taxed at the prevailing corporate tax rates) derived after January 1, 2003. Under recently adopted legislation, taxes paid by Israeli companies will be gradually reduced to a rate of 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. However, the effective tax rate payable by a company that derives income from an approved enterprise (as discussed below) may be considerably lower.
Law for the Encouragement of Industry (Taxes), 1969.
According to the Law for the Encouragement of Industry (Taxes), 1969 (“Industry Encouragement Law”), industrial companies are entitled to the following tax benefits, among others:
— | deduction of purchases of know-how and patents over an eight-year period for tax purposes; |
— | expenses involved with the issuance and listing of shares on the TASE or on a recognized stock market outside of Israel, are deductible over a three-year period; |
— | the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli industrial companies; and |
— | accelerated depreciation rates on equipment and buildings. |
According to the law, an “industrial company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency (exclusive of income from government loans, capital gains, interest and dividends) is derived from an “industrial enterprise” owned by it. An “industrial enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity. Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that our subsidiary, Sapiens Technologies (1982) Ltd, currently qualifies as an industrial company within the definition under the Industry Encouragement Law. However, we cannot give any assurance that we will continue to qualify as an “industrial company” or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments.Investments, 1959.
The Law for the Encouragement of Capital Investments, 1959, in effect prior to April 1, 2005 (the “Investments Law”), provides that a capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, be designated as an “approved enterprise.” Each certificate of approval for an approved enterprise relates to a specific investment program, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. An approved enterprise is entitled to benefits including Israeli government cash grants and tax benefits in specified development areas. The extent of the tax benefits available under the Investments Law and the period for which tax benefits are available are determined by the geographic location of the enterprise. The benefits are dependent upon the fulfillment of conditions stipulated in the Investments Law and its regulations, including the criteria set forth in the specific certificate of approval. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its enterprise is approved, its effective tax rate is the result of a weighted average of the applicable rates (such weighted average is calculated in accordance with the guidelines of the Investment Law).
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Tax benefits given under the Investment Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated in the course of the approved enterprise’s ordinary course of business.
Each application to the Investment Center is reviewed separately and a decision as to whether or not to approve such application is based, among other things, on the then-prevailing criteria set forth in the law, the specific objectives of the applicant company set forth in such application and certain financial criteria of the applicant company. Accordingly, there can be no assurance that any future application will be approved. In addition, as described above, the benefits available to an approved enterprise are dependent upon the fulfillment of certain conditions stipulated in the Investments Law and its regulations and the criteria set forth in the specific certificate of approval. In the event that these conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits, with the addition of the Israeli consumer price index linkage adjustment and interest.
Our subsidiary, Sapiens Technologies (1982) Ltd., which is incorporated in Israel, was granted “Approved Enterprise”approved enterprise status by the Investment Center of the Israeli government for six investment programs in 1984, 1991, 1993, 1995, 1998 and 2000 under the Law for Encouragement of Capital Investments 1959 (the “Investments Law”).Law.
We believe our approved enterprise operates in substantial compliance with all such conditions and criteria.
On April 1, 2005, ana comprehensive amendment to the InvestmentInvestments Law came into effect that has significantly changedeffect. As the provisions of the Investment Law. The amendment limits the scope of enterprises which may beamended Investments Law does not retroactively apply to investment programs having an approved enterprise approval certificate issued by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income will be derived from export. Additionally, the amendment enacted major changes in the manner in whichprior to December 31, 2004, our current tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. However, the amended Investment Law provides that terms and benefits included in any certificate of approval granted prior to the April 2004 amendment will remain subject to the provisions of the law as they were onInvestments Law prior to its revision. Our approved plans subsequent to 2005 and others that may be received in the date of such approval. Therefore, our existing Approved Enterprisesfuture will generally not be subject to the provisions of the Investments Law, as amended. Accordingly, the following description includes a summary of the Investments Law prior to its amendment as well as the relevant changes contained in the Investments Law.
Under the terms of our approved enterprise, once we begin generating taxable net income, we will be entitled to a tax exemption with respect to the income derived from our approved enterprise program for two years and will be subject to a reduced company tax rate of between 10% and 25% for the following five to eight years, depending on the extent of foreign (non-Israeli) investment in our company during the relevant year. The tax rate will be 20% if the foreign investment level is more than 49% but less than 74%, 15% if the foreign investment level is more than 74% but less than 90%, and 10% if the foreign investment level is 90% or more. The lowest level of foreign investment during a particular year will be used to determine the relevant tax rate for that year. The period in which we receive these tax benefits is limited to 12 years from the year in which operations or production by the enterprise commenced or 14 years from the year in which approval was granted, whichever is the earlier (the “year of limitation”). The year of limitation does not apply to the exemption period. Dividends distributed from tax-exempt income would be taxed in respect of the gross amount distributed according to the company tax rate that would have been applicable had the company not been exempt from taxation that year. This rate is generally 10% to 25% depending on the extent of foreign investment in the company.
Dividends paid out of income generated by an approved enterprise (or out of dividends received from a company whose income is generated by an approved enterprise) are generally subject to withholding tax at the rate applicable to dividends from approved enterprises (15%), unless a different rate is provided according to a treaty between Israel and the shareholder’s country of residence (if the dividend is distributed out of income derived during the tax exemption period or within 12 years thereafter). The company must withhold this tax at source.
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The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. We have not utilized this benefit.
Pursuant to the amendment to the Investment Law. As a resultInvestments Law, effective as of April 1, 2005, the basic condition for receiving the benefits (both under the grant and the tax benefits programs) is the enterprise’s contribution to the economic independence of the amendment, tax-exempt income will subject usState of Israel and its contribution to taxes upon distribution or liquidation and we may bethe gross domestic product. In order to fulfill these conditions, the enterprise is required to record deferredbe categorized as an industrial enterprise which complies with any of the following:
— | its major activity is in the field of biotechnology or nano-technology; |
— | its revenues during the applicable tax year from any single market (i.e. country or a separate customs territory) do not exceed 75% of the privileged enterprise's aggregate revenues during such year; or |
— | 25% or more of its revenues during the applicable tax year are generated from sales into a single market (i.e. country or a separate customs territory) with a population of at least 12 million residents. |
According to the amendment to the Investments Law, only approved enterprises receiving cash grants require the approval of the Investment Center. Approved enterprises, which do not receive benefits in the form of governmental cash grants, such as benefits in the form of tax liabilitybenefits, are no longer required to obtain this approval (such enterprises are referred to as “privileged enterprises”). In order to be eligible for the tax benefits, privileged enterprises are required to comply with certain requirements and make certain investments as specified in the amended Investments Law. The privileged enterprises are subject to the responsibility of the Israeli Tax Authority and may, at their discretion, in order to provide greater certainty, elect to apply for a pre-ruling from the Israeli tax authorities confirming that they are in compliance with the provisions of the amended Investments Law and therefore are entitled to receive the benefits provided under the amended Investments Law. The amended Investments Law also specifies which income of the privileged enterprise is entitled to tax benefits (for example income generated from the sale of products that were manufactured by the privileged enterprise, income generated from usage right with respect to such tax-exempt income. As of December 31, 2005,know-how developed by the privileged enterprise, etc.).
We cannot assure you that we did not generate incomewill comply with the above conditions in the future or that we will be entitled to any additional benefits under the amended InvestmentInvestments Law.
In addition, the amended Investments Law changed the definition of “foreign investment” according to the Investments Law so that the definition, instead of a foreign currency investment, now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder (secondary market purchase), provided that the company’s outstanding and paid-up share capital exceed NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 2003.
To date, we have not utilized the benefits of the Investments Law, as amended subsequent to April 1, 2005, since we are in a loss position for tax purposes.
Special Provisions Relating to Taxation Under Inflationary Conditions
Under the Income Tax (Inflationary Adjustments) Law, of 1985, or the Adjustments Law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2004, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in taxable year 2005, our subsidiaries in Israel elected to measure their taxable income and file their tax returns under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an election obligates our Israeli subsidiaries for three years. Accordingly, commencing taxable year 2005, results for tax purposes are measured in terms of earnings in dollar. We have submitted a request to the Israeli tax authorities to extend the effect of the above regulations on our company for 2008.
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Tax Benefits for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research.
Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the sum of funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period.
Transfer Pricing
As part of the Israeli 2003 tax reform, the Israeli Tax Ordinance was amended to include section 85A, dealing with international transactions transfer pricing. Section 85A provides that regardless of the actual conditions of an international transaction between related parties, the transaction shall be reported and taxed, based on the arm’s length standard,i.e., based on market conditions in similar transactions between unrelated parties. On October 30, 2006, the Income Tax Regulations (Determination of Market Conditions), hereinafter referred to as the Regulations, which provide instructions for the implementation of section 85A, came into effect.
In accordance with the Regulations, a transaction shall be considered an international transaction if one of the parties is a “foreign resident” as defined thereunder or if the income generated from such transaction, in all or in part, is taxed both in and outside of Israel. The Regulations establish acceptable methods for comparison between transactions, and methods for calculating the price range against which the transaction is measured.
Taxpayers are required to include in their yearly income tax returns a report regarding their international transactions at arm’s length prices.
Taxation of Investments
The following discussion is a summary of certain anticipated tax consequences of an investment in the Common Shares under U.S. FederalUS federal income tax laws, and Netherlands Antilles tax laws and Israeli laws. The discussion does not deal with all possible tax consequences relating to an investment in the Common Shares. In particular, the discussion does not address the tax consequences under state, local and other (e.g., non-U.S.,non-US, non-Netherlands Antilles)Antilles, non-Israel) tax laws. Accordingly, each prospective investor should consult its tax advisor regarding the tax consequences of an investment in the Common Shares. The discussion is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are subject to change.
Netherlands Antilles Taxation
Under the laws of the Netherlands Antilles as currently in effect, a holder of Common Shares who is not resident of, and during the taxable year has not engaged in trade or business through a permanent establishment in, the Netherlands Antilles will not be subject to Netherlands Antilles income tax on dividends paid with respect to the Common Shares or on gains realized during that year on sale or disposal of such shares; the Netherlands Antilles does not impose a withholding tax on dividends paid by the Company. Under Netherlands Antilles law, no gift or inheritance taxes are levied if, at the time of such gift or at the time of death, the relevant holder of Common Shares was not domiciled in the Netherlands Antilles.
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U.S. Federal Income Tax Considerations
Subject to the limitations described herein, this discussion summarizes certain material U.S. federal income tax consequences of the purchase, ownership and disposition of our Common Shares to a U.S. holder. A U.S. holder is a holder of our Common Shares who is:
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| an individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes; |
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| a corporation |
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| an estate, the income of which may be included in gross income for U.S. federal income tax purposes regardless of its source; or |
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| a trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) that has in effect a valid election under applicable U.S. Treasury |
Unless otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder (a “non-U.S. holder”) and considers only U.S. holders that will own theour Common Shares as capital assets.assets (generally, for investment).
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury regulationsRegulations 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 U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular, this discussion does not address the U.S. federal income tax consequences to U.S. holders who are broker-dealers, or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, U.S. holders holding the Common Shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, individual retirement and tax-deferred accounts, certain former citizens or long-term residents of the U.S., tax-exempt organizations, financial institutions , “financial service entities”or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, U.S. holders holding our Common Shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders that acquired our Common Shares upon the exercise of employee stock options or otherwise as compensation, and U.S holders who are 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 theour Common Shares through a partnership or other pass-through entity is not considered, nor is the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
You are advised to consult your tax advisor with respect to the specific U.S. federal, state, local and foreign income tax consequences to you of purchasing, holding or disposing of our Common Shares.
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Taxation of Distributions on Common Shares
Subject to the discussion below under “Tax Consequences if We areAre a Passive Foreign Investment Company,” a distribution paid by us with respect to theour Common Shares to a U.S. 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 U.S. federal income tax purposes. The amount of a distribution with respect to the Common Shares will equal the amount of cash and the fair market value of any property distributed. Dividends that are received by U.S. holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (a(currently a maximum rate of 15% through taxable years beginning on or before December 31, 2010), provided that such dividends meet the requirements of “qualified dividend income.” For this purpose, qualified dividend income generally includes dividends paid by a foreign corporation if certain holding period and other requirements are met and either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable” on an established securities market in the U.S. (e.g., the NASDAQ Capital Market) or (b) the foreign corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The United States Internal Revenue Service (“IRS”) has determined that the U.S.-Netherlands Antilles income tax treaty is not a comprehensive income tax treaty for this purpose. Dividends that fail to meet such requirements and dividends received by corporate U.S. holders are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (1)(i) if the U.S. holder held the Common Share 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 sectionSection 246(c), any period during which the U.S. 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 Common Share (or substantially identical securities); or (2)(ii) to the extent that the U.S. 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 Common Share with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code), or “PFIC”, for any taxable year, dividends paid on our Common Shares in such year or in the following taxable year would not be qualified dividends. See the discussion below regarding our PFIC status under “Tax Consequences if We Are a Passive Foreign Investment Company.” In addition, a non-corporate U.S. holder will be able to take a qualified dividend income into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend income 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 U.S. holder’s tax basis in itsour Common Shares to the extent thereof, and then as capital gain from the deemed disposition of the Common Shares. Corporate holders will not be allowed a deduction for dividends received in respect of the Common Shares.
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Taxation of the Disposition of Common Shares
Subject to the discussion below under “Tax Consequences if We areAre a Passive Foreign Investment Company,” upon the sale, exchange or other disposition of our Common Shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the U.S. holder’s tax basis in theour Common Shares. The gain or loss recognized on the disposition of the Common Shares will be long-term capital gain or loss if the U.S. holder held the Common Shares for more than one year at the time of the disposition and iswould be eligible for a maximum 15%reduced rate of taxation for individuals throughcertain non-corporate U.S. holders (currently a maximum rate of 15% for taxable years beginning on or before December 31, 2010.2010). Capital gain from the sale, exchange or other disposition of Common Shares held for one year or less is short-term capital gain and taxed as ordinary income at a maximum rate of 35%.income. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of our Common Shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.loss. The deductibility of capital losses is subject to limitation.certain limitations.
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A U.S. 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 U.S. 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 U.S. holder that uses the accrual method 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 U.S. holder that receives foreign currency upon disposition of its Common Shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) willmay 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 U.S. source ordinary income or loss.
Tax Consequences if We areAre a Passive Foreign Investment Company
We willwould be a passive foreign investment company, or PFIC, if (taking into account certain “look-through” rules with respect to the income and assets of our corporate subsidiaries) either (1)(i) 75% or more of our gross income in afor the taxable year iswas passive income, or (2) 50% or more of(ii) the average percentage (by value determined on the basis of a quarterly average,basis) of our assets in athat are passive assets during the taxable year produce,was at least 50%. As discussed below, we believe that we were not a PFIC for 2008.
If we were a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of our Common Shares (including gain deemed recognized if our Common Shares are used as security for a loan) and upon receipt of certain excess distributions (generally, distributions that exceed 125% of the average amount of distributions in respect to such shares received during the preceding three taxable years or, are heldif shorter, during the U.S. holder’s holding period prior to the distribution year) with respect to our Common Shares as if such income had been recognized ratably over the U.S. holder’s holding period for the productionshares. The U.S. holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current taxable year and to any taxable year prior to the first day of passive income; passivethe first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income generally includes interests, discounts, royaltiestax rate in effect for each other taxable year to which income is allocated, and rents. Ifan interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally, if we own (directlywere a PFIC, U.S. holders who acquire our Common Shares from decedents (other than nonresident aliens) dying before 2010 would be denied the normally-available step-up in basis for such shares to fair market value at the date of death and, instead, would have a tax basis in such shares equal to the lessor of the decedent’s basis or indirectly) at least 25% bythe fair market value of such shares on the stockdecedent’s date of another corporation, we will be treated for purposes ofdeath. .
As an alternative to the foregoing tests as owning our proportionate share of the other corporation’s assets and as directly earning our proportionate share of the other corporation’s income. If we are a PFIC,tax treatment described above, a U.S. holder must determine under which of three alternative taxing regimes it wishes to be taxed.
The “QEF” regime applies if the U.S. holder electscould elect to treat us as a “qualified electing fund” (“QEF”(a “QEF”) for the first taxable year, in which case the U.S. holder owns our Common Shares or in which we are a PFIC, whichever is later, and if we comply with certain reporting requirements. If the QEF regime applies, thenwould be taxed, for each taxable year that we are a PFIC, such U.S. holder will include inon its gross income a proportionatepro rata share of our ordinary earnings (which is taxed as ordinary income) and net capital gain (which is taxed as long-term capital gain), subject(subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. Thesecharge). Special rules apply if a U.S. holder makes a QEF election after the first taxable year in its holding period in which we are a PFIC. We have agreed to supply U.S. holders with the information needed to report income and gain under a QEF election if we were a PFIC. Amounts includable in income as a result of a QEF election will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us. A U.S. holder’s basis in its Common Shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the entire holding period for its Common Shares, any gain or loss realized by such holder on the disposition of its Common Shares held as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily would be included inlong-term if such U.S. holder had held such Common Shares for more than one year at the time of the disposition. For non-corporate U.S. holders, long-term capital gain is generally subject to a maximum federal income tax rate of 15% for taxable years beginning on or before December 31, 2010. The QEF election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired by an electing U.S. holder for its taxable year in which our taxable year ends, whether or not such amounts are actually distributed to the U.S. holder. A U.S. holder’s basis in our Common Shares 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 U.S. holder to treat any gain realized on the disposition of his Common Shares as capital gain.
Once made, the QEF election applies to all subsequent taxable years of the U.S. holder in which it holds our Common Shares and for which we are a PFIC and can be revoked only with the consent of the Internal Revenue Service. A shareholder makesIRS.
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As an alternative to making a QEF election, 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 whoholder of PFIC stock that is a shareholder“marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to holders of stock in a PFIC must file a completed Internal Revenue Service Form 8621 every year.
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If a QEF election is made afterby electing to mark the first taxable year in which a U.S. holder holds our Common Shares and we are a PFIC, then special rules would apply.
A second regime, the “mark-to-market” regime, may be elected so long as our Common Shares are “marketable: (i.e., regularly traded on certain securities exchanges). Pursuantstock to this regime, an electing U.S. holder’s Common Shares are marked-to-market each year and the U.S. holder recognizes as ordinary income or loss an amount equal to the differencemarket as of the closebeginning of the taxable year between the fair market value of our Common Shares and the U.S. holder’s adjusted tax basis in our Common Shares. Losses are allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election for prior taxable years. An electing U.S. holder’s adjusted basis in our Common Shares is increased by income recognized under the mark-to-market election and decreased by the deductions allowed under the election.
Under the mark-to-market election, gain on the sale of our Common Shares is treated as ordinary income, and loss on the sale of our Common Shares, 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 Common Shares cease to be marketable or the Internal Revenue Service consents to the revocation of the election.
If the mark-to-market election is made after the first taxable year in which a U.S. holder holds our Common Shares and we are a PFIC, then special rules would apply.
A U.S. 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 shares that is greater than 125% of the average distributions received by the U.S. holder from us over the shorter of either the preceding three taxable years or such U.S. holder’s holding period for our shares, or (2) 100% of the gain from the disposition of our shares (including gain deemed recognizedCommon Shares. Special rules apply if the Common Shares are used as security for a loan).
Excess distributions must be allocated ratably to each day that a U.S. holder has held our Common Shares. A U.S. holder must include amounts allocated to the current taxable year, as well as amounts allocated to taxable years prior tomakes a mark-to-market election after the first year in its holding period in which we wereare a PFIC. As a result of such an election, in any taxable year that we are a PFIC, in its gross income as ordinary income for that year. All amounts allocateda U.S. holder would generally be required to prior yearsreport gain or loss to the extent of the difference between the fair market value of the Common Shares at the end of the taxable year and such U.S. holder duringholder’s tax basis in such shares at that time. Any gain under this computation, and any gain on an actual disposition of our Common Shares in a taxable year in which we were aare PFIC, would be taxed at the highest tax rate for each such prior year applicable totreated as ordinary income. The U.S. holder alsoAny loss under this computation, and any loss on an actual disposition of our Common Shares in a taxable year in which we are PFIC, would be liabletreated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking our Common Shares to market will not be allowed, and any remaining loss from an actual disposition of our Common Shares generally would be capital loss. A U.S. holder’s tax basis in its Common Shares is adjusted annually for interest onany gain or loss recognized under the deferred tax liability for each such prior year calculated as if such liability had been duemark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to each such prior year. The portions of gainsour Common Shares for the Common Shares to be considered “regularly traded” or that our Common Shares will continue to trade on the NASDAQ Capital Market. Accordingly, there are no assurances that our Common Shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired by an electing U.S. holder and distributions that are not characterized as “excess distributions” are subject to tax in the current year under the normal tax rulescan only be revoked with consent of the Code.
A U.S. person who inherits shares in a foreign corporation that was a PFIC inIRS (except to the hands of the decedent (who did not make a QEF election), is denied the otherwise available step-up in the tax basis of such shares to fair market value at the date of death.extent our Common Shares no longer constitute “marketable stock”).
Based on an analysis of our assets and income, we believe that in we were not a PFIC in 2005 or 2004. However, since the determination of whetherfor 2008. We currently expect that we arewill not be a PFIC in 2009. The tests for determining PFIC status are applied annually and it is dependant on a numberdifficult to make accurate predictions of factors, including the relative value of our passivefuture income and assets, and non-passive assets, our market capitalization and the amount and the type of our gross income, there can be no assurance with respectwhich are relevant to the position of the Internal Revenue Service on our status as a PFIC. In addition,this determination. Accordingly, there can be no assurance that we will not become a PFIC in any future taxable years. U.S. holders who hold our Common Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for the current fiscal year ending December 31, 2006U.S. holders who made QEF, mark-to-market or in a future year.
certain other special elections. U.S. holders are urged to consult their tax advisors regarding the application ofabout the PFIC rules, including eligibility for and the manner and advisabilityconsequences to them of making thea mark-to-market or QEF election with respect to our Common Shares in the event that we qualify as a PFIC.
Non-U.S. holders of Common Shares
Except as provided below, a non-U.S. holder of our Common Shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, or the mark-to-market election.proceeds from the disposition of, our Common Shares, unless, in the case of U.S. federal income taxes, that item is effectively connected with the conduct by the non-U.S. 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, such 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 on the disposition of our Common Shares by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
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Information Reporting and Backup Withholding
A U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of up to 28% (through 2010) with respect to dividend payments andon, or receipt of the proceeds from the disposition of, theour Common Shares. Backup withholding will not apply with respect to payments made to exempt recipients, including corporations and tax-exempt organizations, or if a U.S. 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. Non-U.S. holders are not subject to information reporting or backup withholding with respect to dividend payments on, or receipt of the proceeds from the disposition of, our Common Shares in the U.S., or by a U.S. payor or U.S. middleman, provided that such non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, or alternatively, the U.S. 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.IRS.
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Non-U.S. holdersCapital Gains From the Sale of Common Shares
ExceptUnder Section 91 of the Israeli Income Tax Ordinance (New Version), 5721-1961, or Israeli Tax Ordinance, real capital gains from the sale of securities by an individual Israeli resident are subject to tax at the applicable marginal tax rates for such an individual. However, under Section 91 of the Israeli Tax Ordinance, such rates will not exceed 20% and the capital gain will be treated as the highest level on the scale of taxable income. The aforesaid will not apply to the sale of securities by an individual who is classified as a “significant shareholder” in the company – i.e. one who holds, directly or indirectly, alone or “together with another”, at least 10% in one or more of the means of control in the company – either at the time of sale of the securities or at any time during the 12 months that preceded the above stated sale, in which case the rate of tax in respect of the real capital gains will not exceed 25%. “Together with another” is defined in the Israeli Tax Ordinance as together with a relative and together with an entity that is not a relative, with which cooperation exists in the regular course of business according to a material agreement in respect of a corporate entity, directly or indirectly.
Furthermore, until the determination of the directives and conditions for the deduction of real interest expenses under Section 101A(A)(9) of the Israeli Tax Ordinance, an individual who claims real interest and linkage differential expenses with respect to securities will owe tax at a rate of 25% on real capital gains from the sale of such securities. The aforesaid reduced tax rates will not apply to an individual for whom the income from the sale of the securities is classified as “business” income under Section 2(1) of the Israeli Tax Ordinance and therefore will be subject to tax according to the applicable marginal tax rate set forth in Section 121 of the Israeli Tax Ordinance.
An association of individuals (including a company) will be taxed on real capital gains from the sale of securities at the corporate tax rate that is scheduled to decrease gradually to a rate of 25% by 2010. However, an association of individuals that prior to August 10, 2005 was not subject to Section 6 of the Income Tax Law (Inflationary Adjustments), 1985, or Section 130A of the Israeli Tax Ordinance, is taxed at a rate of 25% on real capital gains as of January 1, 2006.
An exempt mutual fund and entities subject to the exemption stated in Section 9(2) of the Israeli Tax Ordinance will be exempt from capital gains tax from sale of securities. A taxable mutual fund will be subject to tax at the rate of 20% on the real capital gain from sale of securities.
In accordance with the Income Tax Regulations (Deduction from Proceeds, from Payment or from Capital Gain from Sale of Securities or from a Future Transaction), 2002, or Deduction Regulations, the payer to an individual seller of consideration for sale of securities will withhold tax at source at the rate of 20% from the real capital gain subject to tax. The payer to a corporate entity of consideration for sale of securities will withhold tax at source at the rate of 25% from the real capital gain. Such payment to a foreign resident will be exempt from withholding tax at source, as stated, subject to fulfillment of certain conditions stated in the Deduction Regulations.
Rate of Tax Applicable to Income from Dividends on Shares
In general, those individuals who are residents of Israel will owe tax at a rate of 20% on dividends received in connection with our shares of common stock. Yet, individuals who are “significant shareholders” (see above) at the time of receiving the dividend, or at any time during the 12-month period preceding the receipt of dividend, will be subject to a tax rate of 25%. The tax rate in respect of dividends received by Israeli companies is, in general, 0%, but dividends that are derived from sources outside of Israel or that are generated or produced outside of Israel will be taxed at a rate of 25%. Dividends received by a taxable mutual fund will be subject to the 20% tax rate of an Israeli resident individual (for whom the income is not classified as “business” income). Generally, exempt mutual funds,pension funds and other entities that are exempt from tax under Section 9(2) of the Israeli Tax Ordinance are exempt from tax on such dividends. A “taxable mutual fund” is defined in the Israeli Tax Ordinance as a mutual fund whose agreement or prospectus irrevocably states that the fund is a mutual fund subject to tax. An “exempt mutual fund” is defined as a mutual fund whose agreement or prospectus irrevocably states that the fund is a mutual fund exempt from tax.
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Generally, Israeli income tax will not apply to income, including capital gains dividends, which is realized by a non-Israeli resident who has purchased securities from a non-Israeli resident corporation, provided below,that (i) the non-Israeli resident corporation is not deemed an Israeli resident corporation for tax purposes; (ii) the securities are not deemed as a non-U.S. holderright to assets in Israel (i.e., the consolidated assets of Commonthe corporation are substantially located in Israel); and (iii) the income is not derived from a permanent establishment of the non-Israeli resident purchaser in Israel.
Although we are not registered and/or incorporated in Israel, the Israeli Tax Authority may contend that the “control and management” of our business is exercised in Israel and, therefore, we are considered a resident of Israel for tax purposes. In general, the test of “control and management” seeks to determine where the company’s policy is set and where its strategic resolutions are accepted. Accordingly, what is examined is the place in which the ability to direct and determine the business policy of the company is realized and the place in which the resolutions allowing the business of the company to be carried-out are accepted. The test of “control and management” is determined every tax year. Furthermore, since a substantial portion of our assets are located in Israel, our shares may be deemed by the Israeli Tax Authority as a right to assets in Israel. It should be noted that Israeli tax law does not provide clear guidelines regarding the manner in which the Israeli and non-Israeli assets of a non-Israeli company should be measured for purposes of determining whether the assets of such company are substantially located in Israel and whether its shares are deemed a right to assets in Israel. Therefore, it is uncertain whether our shares would be considered a right to assets in Israel.
In the event that we are classified as an Israeli resident corporation or our shares are deemed a right to assets in Israel, the following tax consequences would be applicable to non-Israeli residents who purchased our securities.
Capital Gains From the Sale of Shares (except
Non-Israeli residents, including U.S. resident purchasers, are generally exempt from Israeli capital gains tax on any gains derived from the sale of securities publicly traded on NASDAQ, whether such sold securities are of an Israeli resident corporation or of a non-Israeli resident corporation, provided such gains are not derived from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations selling such securities, including U.S. resident corporations, will not be entitled to such an exemption if an Israeli resident (i) has a controlling interest of 25% or more in the non-Israeli corporation, or (ii) if the beneficiary is directly or indirectly entitled to 25% or more of the revenues or profits of the non-Israeli corporation.
In addition, pursuant to certain former U.S. citizens and long-term residentstreaties to which the Government of Israel is a party, the sale, exchange or disposition of common shares may not be subject to Israeli capital gains tax, in according with the terms of such treaties.
For example, pursuant to the Convention between the Government of the United States)States of America and the Government of Israel with respect to Taxes on Income, or U.S.-Israel Tax Treaty, the sale, exchange or disposition of common shares by a person who qualifies as a “resident of the United States” within its meaning under the U.S.-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, which person is referred to for purposes of this tax discussion as “Treaty U.S. Resident,” generally will not be subject to Israeli capital gains tax unless such Treaty U.S. federal incomeResident holds, directly or withholding tax onindirectly, shares representing 10% or more of the receiptvoting power during any part of dividends on, and the proceeds12-month period preceding such sale, exchange or disposition. Moreover, subject to particular conditions, the capital gains from thesuch sale, exchange or disposition of, a Common Share, unless, in the case of U.S. federal income taxes, that item is effectively connected with the conduct by the non-U.S. 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 attributablecan be allocated to a permanent establishment of such Treaty U.S. Resident in Israel. In such cases, subject to the United States or, inlimitations of U.S. laws applicable to foreign tax credits, the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S. holder willTreaty U.S. Resident would be subject to Israeli tax, in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and other conditions are met.
Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the payment of dividends on Common Shares unlessextent applicable; however, under the payment is made throughU.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a paying agent, or an office of a paying agent, in the United States. Non-U.S. holders will be subject to information reporting and backup withholding at a rate of up to 28% (through 2010) with respect to the payment within the United States of dividends on the Common Shares unless the holder provides its taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Non-U.S. holders will be subject to information reporting and backup withholding at a rate of up to 28% (through 2010) on the receipt of the proceeds from the disposition of the Common Shares 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-U.S. holders will not be subject to information reporting or backup withholding with respect to the receipt of proceeds from the disposition of the Common Shares 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-U.S. holder’s foreign status or the non-U.S. 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 for such taxes against the U.S. federal income tax liabilityimposed with respect to such sale, exchange or disposition.
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Therefore, the exemption under the Israeli Tax Ordinance may be the only exemption from Israeli tax available to non-Israeli shareholders. Accordingly, non-Israeli resident purchasers who, in light of the existence or lack of existence of certain conditions, are unable to benefit from a treaty, may wish to utilize a recently introduced special exemption on capital gains arising from the sale of shares in an Israeli company (including companies which are deemed an Israeli resident corporation for tax purposes) between July 1, 2005 and December 31, 2008. In order for this exemption to apply, the following conditions must be met:
(a) | an application is to be submitted to the Israeli Tax Authority at the same time as the reporting of the sale and capital gain; |
(b) | the capital gain does not derive from a permanent establishment of the seller in Israel; |
(c) | the seller is an individual and has been a resident of a country with which Israel has a tax treaty (e.g., the U.S.) during the ten continuous years prior to the acquisition or is an entity where at least 75% of the means of control of the entity are ultimately held, directly or indirectly, by individual shareholders who are residents of a country with which Israel has a tax treaty (e.g., the U.S.) during the ten continuous years prior to the acquisition. Unless it can be proved otherwise, where the entity is listed on a non-Israel stock exchange, this condition is deemed to be met automatically in respect of “non-material” shareholders. “Material” is defined as a 10% or more holding, directly or indirectly, of any means of control, together with related parties; |
(d) | the shares were not purchased from a “related party” (as defined in the Israeli Tax Ordinance) and Chapter E-2 of the Israeli Tax Ordinance did not apply to such purchase of shares; |
(e) | the sale was reported to the tax authority in the country of the seller’s residence; and |
(f) | within 30 days of the acquisition, the transaction was disclosed in full to the Israeli Tax Authority. |
Shareholders who wish to benefit from this additional exemption would therefore be advised to approach the Israeli Tax Authority within 30 days of the purchase of shares in the Company.
In the event that the exceptions to the capital gains tax do not apply to a non-Israeli resident purchaser, upon the realization of gain from the sale of our shares, such non-Israeli resident purchaser will be subject to the tax rates described above under “Israeli Holders – Capital Gains From the Sale of Shares.”
Rate of Tax Applicable to Income from Dividends on Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income, such as dividends on shares of an Israeli resident corporation.
Under Israeli tax law, distributions of dividends are generally subject to withholding tax at the rates indicated above under “Israeli Holders – Rate of Tax Applicable to Income from Dividends on Shares.” However, the tax rates in the event of a non-U.S. holder, or alternatively,distribution of dividends to a foreign resident are subject to relevant provisions of the non-U.S. holder may be eligibleapplicable treaty for a refundthe avoidance of any excess amounts withhelddouble taxation between Israel and the country of residency of the foreign resident. For U.S. resident purchasers, who qualify as Treaty U.S. Residents under the backup withholding rules, in either case, providedU.S.-Israel Tax Treaty, the maximum rate of tax on dividends paid to a holder of common shares is 25%; however, the tax rate is generally reduced to 12.5% if the shareholder is a U.S. corporation and holds at least 10% of the issued voting power during the whole of its prior tax year, as well as during the part of the tax year that precedes the required information is furnished todate of payment of the Internal Revenue Service.dividend, and not more than 25% of the gross income consists of interest or dividends.
F. | Dividends and Paying |
Not applicable.
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G. | Statement by Experts. |
Not applicable.
G.
Statement by Experts
Not applicable.
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H. | Documents on |
We are currently subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended that are applicable to foreign private issuers. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies, we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the SECUnited States Securities and Exchange Commission under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange Act. Our SEC filings are filed electronically on the EDGAR reporting system and may be obtained through that medium. You may review ainspect without charge and copy of ourat prescribed rates such filings, with the SEC, including any exhibits and schedules, at the SEC’s public reference facilities in Room 1024, Judiciary Plaza, 450 Fifthmaintained by the SEC, 100 F Street, N.W.N.E., Washington, D.C. 20549.20549 and at the SEC’s regional offices at 233 Broadway, New York, NY 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. You may also obtain copies of such materials from the Public Reference Section of the SEC at prescribed rates. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The Exchange Act file number for our Securities and Exchange Commission filings is 000-20181.
The Company’s Common Shares are quoted on the NASDAQ Capital Market. You may inspect reports and other information concerning Sapiensthe Company at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, MD 20850.
Information about Sapiens is also available on its website at http://www.sapiens.com. Such information on our website is not part of this annual report.
I. | Subsidiary |
Not applicable.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET |
Market risks relating to our operations result primarily from changes in exchange rates, interest rates or weak economic conditions in the markets in which we sell our products and services. We have been and we are actively monitoring these potential exposures. To manage the volatility relating to these exposures, we may enter into various forward contracts or other hedging instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates and interest rates.
Foreign Currency Risk.We conduct our business in various foreign currencies, primarily those of Israel and the UK, and to a lesser extent of Japan, Europe and Canada. A devaluation of the NIS, GBP, Euro and the Japanese Yen in relation to the US dollar has the effect of reducing the US dollar amount of any of our expenses or liabilities which are payable in those currencies (unless such expenses or payables are linked to the US dollar) and increasing the US Dollar amount of any of our revenues which are payable in those currencies.
In 2007 and the first three quarters of 2008 the US dollar devalued significantly with respect to the NIS. We are obligated to pay the principal and the interest of our debentures in NIS, but we record the expenses in our financial statements in US dollars. Therefore, as a result of the devaluation of the US dollar, we had an increase in our finance expenses.
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Because exchange rates between the NIS, GBP, Euro and the Japanese Yen and the US dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reflected as financial expenses in our consolidated financial statements.
We monitor our foreign currency exposure and, from time to time, may enter into currency forward contracts or put/call currency options to hedge balance sheet exposure. In 2005, we entered into forward exchange contracts to hedge transactions denominated in foreign currencies, in the amount of approximately $1.5 million.
We may use such contracts to hedge exposure to changes in foreign currency exchange rates associated with balance sheet balances denominated in a foreign currency and anticipated costs to be incurred in a foreign currency.
Interest Rate Risk. Our interest expenses are most sensitive to changes In 2008, we entered into hedging transactions, by purchasing (i) put options in the London Interbank Offered Rate (LIBOR) as our short-term borrowingstotal amount of $9.8 million, to protect against the devaluation of the US Dollar, in the range of NIS 3.30 – 3.70 per Dollar, and cash balances, including(ii) put options in total amount of $1.0 million, to protect against the proceedsdevaluation of the US dollar, at the rate of GBP 0.54 per US dollar. During 2008, we recorded a total gain of $106,000 from the offeringperformance of the Debentures, bear a LIBOR-based interest rate.
put options contracts. As of December 31, 2005,2008, we had approximately $12.0put option contracts outstanding in the amount of $3.3 million. In 2009, we purchased put options in the total amount of $1.8 million outstandingto protect against the devaluation of the US Dollar exercisable by us at the rate 4NIS per US Dollar.
Except for the abovementioned put option contracts, as of December 31, 2008, we had no foreign exchange contracts, options contracts or other foreign hedging arrangements.
Market Risk.We currently do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk.
Interest Rate Risk. We pay interest on our credit facilities, convertible notes and short-term credit agreements. The potential loss to Sapiens over one year that wouldloans based on LIBOR, for dollar-denominated loans, and the prime interest rate in Israel, for some of our NIS-denominated loans. As a result, from a hypothetical, instantaneous and unfavorable change of 100 basis pointschanges in the general level of interest rates directly affect the amount of all applicable financial assetsinterest payable by us under these facilities. However, we expect our exposure to risk from changes in interest rates to be minimal and liabilities on December 31, 2005 would not exceed approximately $120,000.material. Therefore, no quantitative tabular disclosures are required.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY |
Not applicable.
56
DEFAULTS, DIVIDEND ARREARAGES AND |
None.
| ||
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF |
None.
ITEM 15T. | |
| |
CONTROLS AND PROCEDURES |
A.Evaluation of Disclosure Controls and Procedures.The President and Chief Executive Officer of the Company and Executive Vice President andthe Chief Financial Officer of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c)13a-15(e) and 15d-14(c) under15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) as of the end of the period covered by this annual report (the “Evaluation Date”). Based on such evaluation, such officersthe President and Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to materialensure that information relating to the Company (including its consolidated subsidiaries) required to be includeddisclosed by the Company in reports that the Company’s reports filedCompany files or submittedsubmits under the Exchange Act.Act is accumulated and communicated to the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the periods specified by the SEC’s rules and forms.
64
B.ChangesManagement’s Annual Report on Internal Control Over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based principally on the framework and criteria established in Internal Controls.SinceControl Integrated Framework issued by the Evaluation Date,Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the period covered by this report. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008. Notwithstanding the foregoing, there have not been any significant changes incan be no assurance that the Company’s internal controlscontrol over financial reporting will detect or in other factors that could significantly affect such controls.
Alluncover all failures of persons within the Company to comply with our internal procedures, as all internal control systems, and disclosure controls and procedures, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to the ability to detect or uncover all failures of persons within Sapiensthe Company to disclose material information required to be set forth in the Company’sour reports. Also, projections
This annual report does not include an attestation report of any evaluation of effectiveness to future periods areour registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the riskSecurities and Exchange Commission that controls may become inadequate because ofpermit us to provide only management’s report in this annual report.
C.Changes in Internal Control Over Financial Reporting.Based on the evaluation conducted by our President and Chief Executive Officer and our Chief Financial Officer pursuant to Rules 13a-15 and 15d-15 under the Exchange Act, we have concluded that there were no changes in conditions,our internal control over financial reporting that occurred during the year ended December 31, 2008 that have materially affected, or that the degree of compliance with the policies or procedures may deteriorate.are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. | RESERVED |
AUDIT COMMITTEE FINANCIAL |
Our Board of Directors has determined that Mr. Yacov Elinav meets the definition of an audit“audit committee financial expert,” as defined in Item 401 of Regulation S-K.under the applicable rules promulgated by the SEC. All members of theour Audit Committee are independent directors.“independent”, as defined under the NASDAQ Marketplace Rules.
CODE OF |
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer and corporate controller, as well as to our directors and other employees. The Code of Ethics is publicly available on our website at www.sapiens.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waivers, including any implicit waiver, from a provision of this codesuch Code to our chiefprincipal executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.
57
PRINCIPAL ACCOUNTANT FEES AND |
The following table sets forth, for each of the years indicated, the aggregate fees billed by our independent auditors for types of services indicated:
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
| ||||
|
|
| |||||
|
| 2004 |
| 2005 |
| ||
|
|
|
| ||||
|
| (in thousands) |
| ||||
Audit Fees (1) |
| $ | 158 |
| $ | 149 |
|
Audit Related Fees (2) |
|
| 12 |
|
| 13 |
|
Tax Fees (3) |
|
| 106 |
|
| 56 |
|
Other Fees (4) |
|
| 20 |
|
| 34 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Total |
| $ | 296 |
| $ | 253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies and Procedures
Our Audit Committee has adopted a policypolicies and procedures for the approvalpre-approval of audit and non-audit services rendered by our independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. The policypolicies generally requiresrequire the Audit Committee’s approvalpre-approval of the scope of the engagement of our independent auditorauditors or additional work performed on an individual basis. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors. During 20042007 and 2005,2008, 100% of the fees for services rendered by the Company’s independent auditors were approvedpre-approved by the Audit Committee.Committee, in accordance with these procedures.
65
The following table sets forth, for each of the years indicated, the aggregate fees billed by our independent auditors for types of services indicated:
Year ended December 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2007 | 2008 | |||||||
(in thousands) | ||||||||
Audit Fees (1) | $ | 132 | $ | 144 | ||||
Audit Related Fees (2) | - | $ | 40 | |||||
Tax Fees (3) | $ | 57 | $ | 28 | ||||
All Other Fees (4) | $ | 21 | $ | 26 | ||||
Total | $ | 210 | $ | 238 | ||||
(1) | Audit Fees consist of fees billed for the annual audit and the quarterly reviews of the Company’s consolidated financial statements and consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent auditors can reasonably provide. |
(2) | Audit Related Fees consist of fees billed for assurance and related services that traditionally were only performed by the independent auditor, and include the review of documents filed with the SEC, accounting consultation and consultation concerning financial accounting and reporting standards. |
(3) | Tax Fees relate to tax compliance, planning and advice. |
(4) | All Other Fees consist of services related to stock options and value added tax (VAT) related matters. |
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
During 2005, we did not engage in the purchasingSee Item 7, “Major Shareholders and Related Party Transactions – Major Shareholders” for purchases of our own Common Shares.Shares by Formula, our controlling shareholder.
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT. |
Not applicable.
ITEM 16G. | CORPORATE GOVERNANCE. |
We have elected to follow our home country practice in lieu of the requirements set forth in NASDAQ Marketplace Rule 5250(d)(1) which require a domestic United States company to make available to its shareholders a copy of its annual report containing its audited financial statements in one of three specific ways. Instead of distributing copies of our annual report by mail, furnishing an annual report in accordance with Rule 14a-16 under the Exchange Act or posting our annual report on our website and undertaking to provide a hard copy thereof free of charge upon request, we simply make our annual report available to shareholders via our website (http://www.sapiens.com/AnnualReports/).
5866
We have submitted to NASDAQ a written statement from our independent Netherlands Antilles counsel which certified that our practice of not making the annual report available in accordance with NASDAQ rules, but rather making it available on our website, was not prohibited by Netherlands Antilles law.
FINANCIAL |
See Item 18.
FINANCIAL |
The Consolidated Financial Statements and related notes required by this itemItem are contained on pages F-1 through F-46F-40 hereof.
INDEX TO 2008 CONSOLIDATED FINANCIAL STATEMENTS
Page | |||
---|---|---|---|
| |||
Report of Independent Registered Public Accounting Firm | F-2 | ||
Consolidated Balance Sheets | F-3 | ||
Consolidated Statements of Operations | F-5 | ||
Statements of Changes in | F-6 | ||
Consolidated Statements of Cash Flow | F-9 | ||
Notes to the Consolidated Financial Statements | F-11 |
67
ITEM 19. | EXHIBITS |
1.1 | |
|
| Articles of Association of Sapiens International Corporation N.V., as amended on March 17, 2005 |
2.(b) | |
| Trust Deed between Sapiens International Corporation N.V. and Investec Trust Company (Israel) Ltd., dated December 2, 2003 –incorporated by reference to |
4(a)1 | |
|
|
4(a)2 | |
|
|
4(a)3 | |
|
|
|
|
8.1 | List of Subsidiaries |
|
|
| Consent of Kost Forer Gabbay & Kasierer, Independent Registered Public Accounting Firm |
12.1 | |
| Certification by Chief Executive Officer pursuant to |
12.2 | |
| Certification by Chief Financial Officer pursuant to |
13.1 | |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to |
13.2 | |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to |
5968
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SAPIENS INTERNATIONAL CORPORATION N.V. By: /s/ Ron Al Dor —————————————— Ron Al Dor President & Chief Executive Officer |
Date: April 27, 2009
69
Page | |||
---|---|---|---|
| |||
F - 2 | |||
F - 3 - F - 4 | |||
F - 5 | |||
Consolidated Statements of Changes in | F - 6 - F - 8 | ||
F - 9 - F - 10 | |||
F - 11 - F - |
![]() |
| Kost Forer Gabbay & Kasierer |
|
|
|
We have audited the accompanying consolidated balance sheets of Sapiens International Corporation N.V. and its subsidiaries (the “Company”) as of December 31, 20042008 and 20052007 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005.2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sapiens International Corporation N.V. and its subsidiaries as of December 31, 20042008 and 20052007 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005,2008, in conformity with U.S. generally accepted accounting principles.
| /s/ Kost Forer Gabbay & Kasierer | ||
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER | ||
| A Member of Ernst & Young Global |
F - 2
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
U.S. dollars in thousands |
|
|
|
| December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| December 31, |
| 2007 | 2008 | ||||||||||
|
|
| |||||||||||||
|
| 2004 |
| 2005 |
| ||||||||||
|
|
|
| ||||||||||||
ASSETS |
|
|
|
|
| ||||||||||
|
|
|
|
|
| ||||||||||
CURRENT ASSETS: |
|
|
|
|
| ||||||||||
Cash and cash equivalents |
| $ | 10,942 |
| $ | 6,699 |
| $ | 13,125 | $ | 7,938 | ||||
Marketable securities (Note 3) |
| 11,157 |
| 5,337 |
| ||||||||||
Trade receivables (net of allowance for doubtful accounts of $775 and $662 as of December 31, 2004 and 2005, respectively) (Note 4) |
| 10,028 |
| 8,339 |
| ||||||||||
Other receivables and prepaid expenses (Note 5) |
| 4,013 |
| 1,620 |
| ||||||||||
Trade receivables (net of allowance for doubtful accounts of $ 1,460 and | |||||||||||||||
$ 881 at December 31, 2007 and 2008, respectively) (Note 3) | 7,549 | 6,860 | |||||||||||||
Other receivables and prepaid expenses (Note 4) | 1,881 | 2,565 | |||||||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
Total current assets |
| 36,140 |
| 21,995 |
| 22,555 | 17,363 | ||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
PROPERTY AND EQUIPMENT, NET (Note 6) |
| 2,382 |
| 1,716 |
| ||||||||||
PROPERTY AND EQUIPMENT, NET (Note 5) | 1,219 | 1,055 | |||||||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
OTHER ASSETS: |
|
|
|
|
| ||||||||||
Capitalized software development costs, net of accumulated amortization of $29,274 and $31,075 as of December 31, 2004 and 2005, respectively (Note 7a) |
| 12,394 |
| 12,219 |
| ||||||||||
Capitalized software development costs, net of accumulated amortization of | Capitalized software development costs, net of accumulated amortization of | ||||||||||||||
$ 15,984 and $ 20,193 at December 31, 2007 and 2008, respectively (Note 6a) | 14,957 | 14,391 | |||||||||||||
Goodwill |
| 8,621 |
| 8,621 |
| 8,621 | 8,621 | ||||||||
Deferred income taxes (Note 13d) |
| 3,768 |
| 3,573 |
| ||||||||||
Other, net (Note 7b) |
| 5,429 |
| 3,742 |
| ||||||||||
Deferred income taxes (Note 12f) | 2,598 | 2,159 | |||||||||||||
Other, net (Note 6b) | 2,582 | 1,588 | |||||||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
Total other assets |
| 30,212 |
| 28,155 |
| 28,758 | 26,759 | ||||||||
|
|
|
| ||||||||||||
|
|
|
|
|
| ||||||||||
Total assets |
| $ | 68,734 |
| $ | 51,866 |
| $ | 52,532 | $ | 45,177 | ||||
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
CONSOLIDATED BALANCE SHEETS |
U.S. dollars in thousands (except share and per share data) |
|
| December 31, |
| ||||
|
|
| |||||
|
| 2004 |
| 2005 |
| ||
|
|
|
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Short-term bank credit (Note 9a) |
| $ | 9,195 |
| $ | 11,950 |
|
Current maturities of long-term liabilities and convertible debt (Note 9 and 10) |
|
| 9,678 |
|
| 7,162 |
|
Trade payables |
|
| 2,718 |
|
| 1,910 |
|
Deferred revenues |
|
| 3,224 |
|
| 4,867 |
|
Other liabilities and accrued expenses (Note 8) |
|
| 8,558 |
|
| 6,742 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Total current liabilities |
|
| 33,373 |
|
| 32,631 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
Convertible debt and warrants (Note 9b) |
|
| 18,246 |
|
| 14,019 |
|
Other long-term liabilities (Note 10) |
|
| 5,035 |
|
| 1,584 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| 23,281 |
|
| 15,603 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY (Note 14): |
|
|
|
|
|
|
|
Share capital: |
|
|
|
|
|
|
|
Preferred shares: Authorized - 1,000,000 of €0.01 par value at December 31, 2004 and 2005, respectively; Issued and outstanding - None at December 31, 2004 and 2005 |
|
| - |
|
| - |
|
Common shares: Authorized - 30,000,000 of €0.01 par value at December 31, 2004 and 2005, Issued - 11,790,729 and 12,851,896 at December 31, 2004 and 2005, respectively; Outstanding: 11,748,935 and 12,810,102 at December 31, 2004 and 2005, respectively |
|
| 142 |
|
| 155 |
|
Additional paid-in capital |
|
| 108,493 |
|
| 110,490 |
|
Treasury shares |
|
| (2,423 | ) |
| (2,423 | ) |
Note receivable from a related party shareholder |
|
| (975 | ) |
| (975 | ) |
Accumulated other comprehensive loss |
|
| (2,542 | ) |
| (3,901 | ) |
Accumulated deficit |
|
| (90,615 | ) |
| (99,714 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
| 12,080 |
|
| 3,632 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
| $ | 68,734 |
| $ | 51,866 |
|
|
|
|
|
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2007 | 2008 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Short-term bank credit (Note 8(a)) | $ | 4,958 | $ | - | ||||
Current maturities of long-term liabilities and convertible debt (Notes 8 (b) | ||||||||
and 9) | 4,498 | 5,745 | ||||||
Trade payables | 1,088 | 1,500 | ||||||
Other liabilities and accrued expenses (Note 7) | 8,375 | 9,716 | ||||||
Deferred revenues | 4,203 | 4,908 | ||||||
Total current liabilities | 23,122 | 21,869 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Other long-term liabilities (Note 9) | 1,132 | 1,565 | ||||||
Convertible debt (Note 8(b)) | 6,428 | - | ||||||
7,560 | 1,565 | |||||||
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) | ||||||||
SHAREHOLDERS' EQUITY (Note 13): | ||||||||
Share capital: | ||||||||
Preferred shares: Authorized - 1,000,000 of(euro)0.01 par value at December 31, 2007 | ||||||||
and 2008; Issued and outstanding: None at December 31, 2007 and 2008 | - | - | ||||||
Common shares: Authorized - 30,000,000 of(euro)0.01 par value at December 31, 2007 | ||||||||
and 2008; Issued - 21,891,882 and 21,941,882 shares at December 31, 2007 and | ||||||||
2008, respectively; Outstanding: 21,541,088 and 21,591,088 shares at December | ||||||||
31, 2007 and 2008, respectively | 275 | 276 | ||||||
Additional paid-in capital | 132,035 | 132,286 | ||||||
Treasury shares, at cost (350,794 shares at December 31, 2007 and 2008) | (2,423 | ) | (2,423 | ) | ||||
Accumulated other comprehensive loss | (1,654 | ) | (1,669 | ) | ||||
Accumulated deficit | (106,383 | ) | (106,727 | ) | ||||
Total shareholders' equity | 21,850 | 21,743 | ||||||
Total liabilities and shareholders' equity | $ | 52,532 | $ | 45,177 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
U.S. dollars in thousands (except share and per share data) |
Year ended December 31, | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| Year ended December 31, |
| 2006 | 2007 | 2008 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
| |||||||||||||||||
Products |
| $ | 32,580 |
| $ | 26,781 |
| $ | 13,295 |
| $ | 10,423 | $ | 5,632 | $ | 4,137 | ||||||||
Consulting and other services |
| 19,738 |
| 21,023 |
| 26,109 |
| 33,888 | 36,763 | 39,397 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues |
| 52,318 |
| 47,804 |
| 39,404 |
| 44,311 | 42,395 | 43,534 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cost of revenues: |
|
|
|
|
|
|
| Cost of revenues: | ||||||||||||||||
Products |
| 17,489 |
| 16,578 |
| 11,306 |
| 6,302 | 3,277 | 2,482 | ||||||||||||||
Consulting and other services |
| 11,118 |
| 10,186 |
| 13,540 |
| 22,499 | 22,306 | 23,975 | ||||||||||||||
Impairment of capitalized software development costs (Note 2i) |
| - |
| 901 |
| - |
| |||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total cost of revenues |
| 28,607 |
| 27,665 |
| 24,846 |
| 28,801 | 25,583 | 26,457 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Gross profit |
| 23,711 |
| 20,139 |
| 14,558 |
| 15,510 | 16,812 | 17,077 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Operating expenses: |
|
|
|
|
|
|
| |||||||||||||||||
Research and development, net (Note 16a) |
| 3,656 |
| 2,531 |
| 2,723 |
| |||||||||||||||||
Research and development, net (Note 15a) | 2,451 | 3,502 | 3,884 | |||||||||||||||||||||
Selling, marketing, general and administrative |
| 21,539 |
| 19,260 |
| 16,245 |
| 13,558 | 12,513 | 10,708 | ||||||||||||||
Restructuring costs (Note 1b) |
| - |
| - |
| 1,113 |
| |||||||||||||||||
Restructuring costs | 758 | - | - | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total operating expenses |
| 25,195 |
| 21,791 |
| 20,081 |
| 16,767 | 16,015 | 14,592 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Operating loss |
| 1,484 |
| 1,652 |
| 5,523 |
| |||||||||||||||||
Financial expenses, net (Note 16b) |
| 958 |
| 2,410 |
| 1,788 |
| |||||||||||||||||
Operating profit (loss) | (1,257 | ) | 797 | 2,485 | ||||||||||||||||||||
Financial expenses, net (Note 15b) | 2,230 | 2,798 | 2,236 | |||||||||||||||||||||
Other expenses (income), net |
| (244 | ) |
| 552 |
| (12 | ) | - | 109 | (32 | ) | ||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Loss before taxes on income |
| 2,198 |
| 4,614 |
| 7,299 |
| |||||||||||||||||
Taxes on income (benefit) (Note 13) |
| (19 | ) |
| 217 |
| 1,798 |
| ||||||||||||||||
Income (loss) before taxes on income | (3,487 | ) | (2,110 | ) | 281 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
|
| 2,179 |
| 4,831 |
| 9,097 |
| |||||||||||||||||
Minority interest in earnings of a subsidiary |
| 8 |
| 11 |
| 2 |
| |||||||||||||||||
Taxes on income (Note 12) | 325 | 338 | 584 | |||||||||||||||||||||
Minority interest in earnings of a subsidiary and other | (13 | ) | (96 | ) | (41 | ) | ||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net loss |
| 2,187 |
| 4,842 |
| 9,099 |
| $ | (3,825 | ) | $ | (2,544 | ) | $ | (344 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Settlement of redeemable shares in a subsidiary (Note 1c) |
| - |
| 299 |
| - |
| |||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net loss to shareholders of common shares |
| $ | 2,187 |
| $ | 5,141 |
| $ | 9,099 |
| ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Basic and diluted net loss per share (Note 2s) |
| $ | 0.20 |
| $ | 0.46 |
| $ | 0.76 |
| $ | (0.29 | ) | $ | (0.14 | ) | $ | (0.02 | ) | |||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Weighted-average number of shares used in computing basic and diluted net loss per share |
| 10,693 |
| 11,273 |
| 11,982 |
| |||||||||||||||||
Weighted-average number of shares used in computing basic and diluted | Weighted-average number of shares used in computing basic and diluted | |||||||||||||||||||||||
net loss per share | 13,395 | 18,218 | 21,550 | |||||||||||||||||||||
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
CONSOLIDATED STATEMENTS OF CHANGES IN |
U.S. dollars in thousands (except share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common |
| Additional |
| Deferred |
| Treasury |
| Note |
| Accumulated |
| Accumulated |
| Total |
| |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| shares |
| amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| ||||||||||||||||||||||||||||
Balance as of January 1, 2003 |
|
| 10,987,115 |
| $ | 23,773 |
| $ | 82,648 |
| $ | (21 | ) | $ | (2,423 | ) | $ | (975 | ) | $ | (3,820 | ) | $ | (83,287 | ) | $ | 15,895 |
|
Total comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (2,187 | ) |
| (2,187 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on available-for-sale marketable securities, net |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 6 |
|
| - |
|
| 6 |
|
Foreign currency translation adjustments |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 707 |
|
| - |
|
| 707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,474 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Employee stock options exercised |
|
| 6,820 |
|
| 15 |
|
| 12 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 27 |
|
Amortization expense on re-priced options |
|
| - |
|
| - |
|
| - |
|
| 21 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 21 |
|
Issuance expenses related to the conversion of Series F Preferred shares and exercise of warrants |
|
| - |
|
| - |
|
| (44 | ) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (44 | ) |
Payment in respect of acquisition adjustment of Syspart |
|
| - |
|
| - |
|
| (496 | ) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (496 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Balance as of December 31, 2003 |
|
| 10,993,935 |
|
| 23,788 |
|
| 82,120 |
|
| - |
|
| (2,423 | ) |
| (975 | ) |
| (3,107 | ) |
| (85,474 | ) |
| 13,929 |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares | Additional paid-in capital | Treasury shares | Note receivable from a shareholder | Accumulated other comprehensive loss | Accumulated deficit | Total shareholders' equity | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | |||||||||||||||||||||||||
Balance as of January 1, 2006 | 12,801,102 | $ | 155 | $ | 110,490 | $ | (2,423 | ) | $ | (975 | ) | $ | (3,901 | ) | $ | (99,714 | ) | $ | 3,632 | |||||||
Net loss | - | - | - | - | - | - | (3,825 | ) | (3,825 | ) | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized losses on available-for-sale | ||||||||||||||||||||||||||
marketable securities, net | - | - | - | - | - | (22 | ) | - | (22 | ) | ||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | 1,106 | - | 1,106 | ||||||||||||||||||
Other comprehensive income | 1,084 | |||||||||||||||||||||||||
Stock-based compensation | - | - | 38 | - | - | - | - | 38 | ||||||||||||||||||
Shares issued | 2,343,750 | 30 | 2,970 | - | - | - | - | 3,000 | ||||||||||||||||||
Balance as of December 31, 2006 | 15,144,852 | $ | 185 | $ | 113,498 | $ | (2,423 | ) | $ | (975 | ) | (2,817 | ) | $ | (103,539 | ) | $ | 3,929 | ||||||||
Accumulated unrealized gains from available- | ||||||||||||||||||||||||||
for-sale marketable securities | $ | 20 | ||||||||||||||||||||||||
Accumulated foreign currency translation adjustments | (2,837 | ) | ||||||||||||||||||||||||
Accumulated other comprehensive loss | $ | (2,817 | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
CONSOLIDATED STATEMENTS OF CHANGES IN |
U.S. dollars in thousands (except share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Common |
| Additional |
| Treasury |
| Note |
| Accumulated |
| Accumulated |
| Total |
| |||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| shares |
| amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance as of January 1, 2004 |
|
| 10,993,935 |
|
| 23,788 |
|
| 82,120 |
|
| (2,423 | ) |
| (975 | ) |
| (3,107 | ) |
| (85,474 | ) |
| 13,929 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (4,842 | ) |
| (4,842 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized losses on available-for-sale marketable securities, net |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (99 | ) |
| - |
|
| (99 | ) | |
Foreign currency translation adjustments |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 664 |
|
| - |
|
| 664 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 565 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4,277 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deemed dividend in conjunction with a settlement of redeemable shares in a subsidiary |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (299 | ) |
| (299 | ) | |
Employee stock options exercised |
|
| 5,000 |
|
| 15 |
|
| 5 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 20 |
| |
Shares issued in conjunction with a settlement of redeemable shares in a subsidiary |
|
| 750,000 |
|
| 2,093 |
|
| 614 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2,707 |
| |
Change in Common shares par value |
|
| - |
|
| (25,754 | ) |
| 25,754 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
| |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance as of December 31, 2004 |
|
| 11,748,935 |
|
| 142 |
|
| 108,493 |
|
| (2,423 | ) |
| (975 | ) |
| (2,542 | ) |
| (90,615 | ) |
| 12,080 |
| |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Accumulated unrealized losses from available- for-sale marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (75 | ) |
|
|
|
|
|
| |
Accumulated foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,467 | ) |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (2,542 | ) |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares | Additional paid-in capital | Treasury shares | Note receivable from a shareholder | Accumulated other comprehensive loss | Accumulated deficit | Total shareholders' equity | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | |||||||||||||||||||||||||
Balance as of January 1, 2007 | 15,144,852 | $ | 185 | $ | 113,498 | $ | (2,423 | ) | $ | (975 | ) | $ | (2,817 | ) | $ | (103,539 | ) | $ | 3,929 | |||||||
Net loss | - | - | - | - | - | - | (2,544 | ) | (2,544 | ) | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized losses on available-for-sale | ||||||||||||||||||||||||||
marketable securities, net | - | - | - | - | - | (20 | ) | - | (20 | ) | ||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | 1,183 | - | 1,183 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | 1,163 | ||||||||||||||||||
Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48) | - | - | - | - | - | - | (300 | ) | (300 | ) | ||||||||||||||||
Exercise of options | 29,569 | *) - | 69 | - | - | - | - | 69 | ||||||||||||||||||
Stock-based compensation | - | - | 118 | - | - | - | - | 118 | ||||||||||||||||||
Loan settlement Red Coral | (300,000 | ) | *) - | (975 | ) | - | 975 | - | - | - | ||||||||||||||||
Shares issued, net **) | 6,666,667 | 90 | 19,325 | - | - | - | - | 19,415 | ||||||||||||||||||
Balance as of December 31, 2007 | 21,541,088 | $ | 275 | $ | 132,035 | $ | (2,423 | ) | $ | - | $ | (1,654 | ) | $ | (106,383 | ) | $ | 21,850 | ||||||||
Accumulated foreign currency translation adjustments | $ | (1,654 | ) | |||||||||||||||||||||||
*) | Less than $1. |
**) | Net of issuance expenses of $585 |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
CONSOLIDATED STATEMENTS OF CHANGES IN |
U.S. dollars in thousands (except share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common |
| Additional |
| Treasury |
| Note |
| Accumulated |
| Accumulated |
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| shares |
| amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance as of January 1, 2005 |
|
| 11,748,935 |
|
| 142 |
|
| 108,493 |
|
| (2,423 | ) |
| (975 | ) |
| (2,542 | ) |
| (90,615 | ) |
| 12,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (9,099 | ) |
| (9,099 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on available-for-sale marketable securities, net |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 117 |
|
| - |
|
| 117 |
|
Foreign currency translation adjustments |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (1,476 | ) |
| - |
|
| (1,476 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,359 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10,458 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Stock-based compensation related to warrants issued to consultants |
|
| - |
|
| - |
|
| 10 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 10 |
|
Employee stock options exercised |
|
| 19,500 |
| *) | - |
| *) | - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
Shares issued to Formula Systems (1985) Ltd |
|
| 1,041,667 |
|
| 13 |
|
| 1,987 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2,000 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
| 12,810,102 |
| $ | 155 |
| $ | 110,490 |
| $ | (2,423 | ) | $ | (975 | ) | $ | (3,901 | ) | $ | (99,714 | ) | $ | 3,632 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated unrealized gains from available- for-sale marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 42 |
|
|
|
|
|
|
|
Accumulated foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,943 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (3,901 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) less than $1 thousands
Common shares | Additional paid-in capital | Treasury shares | Accumulated other comprehensive loss | Accumulated deficit | Total shareholders' equity | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | ||||||||||||||||||||||
Balance as of January 1, 2008 | 21,541,088 | $ | 275 | $ | 132,035 | $ | (2,423 | ) | $ | (1,654 | ) | $ | (106,383 | ) | $ | 21,850 | |||||||
Net loss | - | - | - | - | - | (344 | ) | (344 | ) | ||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (15 | ) | - | (15 | ) | ||||||||||||||
Exercise of options | 50,000 | 1 | 86 | - | - | - | 87 | ||||||||||||||||
Stock-based compensation | - | - | 165 | - | - | - | 165 | ||||||||||||||||
Balance as of December 31, 2008 | 21,591,088 | $ | 276 | $ | 132,286 | $ | (2,423 | ) | $ | (1,669 | ) | $ | (106,727 | ) | $ | 21,743 | |||||||
Accumulated foreign currency translation adjustments | $ | (1,669 | ) | ||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
U.S. dollars in thousands |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
| |||||||
|
|
| ||||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
|
| ||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (2,187 | ) | $ | (4,842 | ) | $ | (9,099 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 3,866 |
|
| 4,250 |
|
| 5,226 |
|
Revaluation of Warrants (Series 1) |
|
| - |
|
| (266 | ) |
| (79 | ) |
Amortization of convertible debt issuance expenses |
|
| 15 |
|
| 247 |
|
| 42 |
|
Amortization of convertible debt discount |
|
| - |
|
| 348 |
|
| 338 |
|
Impairment of capitalized software development costs |
|
| - |
|
| 901 |
|
| - |
|
Loss (gain) on disposal of property and equipment |
|
| (15 | ) |
| 64 |
|
| (1 | ) |
Amortization expense on re-priced options |
|
| 21 |
|
| - |
|
| - |
|
Stock-based compensation related to warrants issued to consultants |
|
| - |
|
| - |
|
| 10 |
|
Decrease (increase) in trade receivables |
|
| 2,415 |
|
| (412 | ) |
| 885 |
|
Decrease in other receivables and prepaid expenses |
|
| 552 |
|
| 1,427 |
|
| 2,420 |
|
Decrease in deferred income taxes, net |
|
| 110 |
|
| - |
|
| 814 |
|
Decrease in trade payables |
|
| (185 | ) |
| (20 | ) |
| (583 | ) |
Increase (decrease) in deferred revenues |
|
| (829 | ) |
| (257 | ) |
| 1,965 |
|
Decrease in other liabilities and accrued expenses |
|
| (3,826 | ) |
| (4,568 | ) |
| (1,710 | ) |
Accrued interest on redeemable shares in a subsidiary |
|
| 320 |
|
| 64 |
|
| - |
|
Loss on marketable securities and bonds |
|
| 77 |
|
| 67 |
|
| 71 |
|
Gain on payment of convertible subordinated notes |
|
| (61 | ) |
| - |
|
| - |
|
Minority interests in earnings of a subsidiary |
|
| 8 |
|
| 11 |
|
| 2 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
| $ | 281 |
| $ | (2,986 | ) | $ | 301 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
| $ | (750 | ) | $ | (442 | ) | $ | (366 | ) |
Increase in capitalized software development costs |
|
| (4,539 | ) |
| (4,750 | ) |
| (4,323 | ) |
Purchase of marketable securities and short-term deposits |
|
| (3,000 | ) |
| (13,622 | ) |
| (4,683 | ) |
Proceeds from sales of marketable securities and short-term deposits |
|
| 3,541 |
|
| 3,353 |
|
| 10,318 |
|
Proceeds from sale of property and equipment |
|
| 39 |
|
| 5 |
|
| 14 |
|
Payment for acquisition of Syspart |
|
| (496 | ) |
| - |
|
| - |
|
Other investment |
|
| - |
|
| (75 | ) |
| (17 | ) |
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
| $ | (5,205 | ) | $ | (15,531 | ) | $ | 943 |
|
|
|
|
|
|
Year ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2007 | 2008 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (3,825 | ) | $ | (2,544 | ) | $ | (344 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) | |||||||||||
operating activities: | |||||||||||
Depreciation and amortization | 5,807 | 4,037 | 5,122 | ||||||||
Re-evaluation of warrants (series 1) | (46 | ) | (71 | ) | - | ||||||
Amortization of convertible debt issuance expenses | 230 | 228 | 268 | ||||||||
Amortization of convertible debt discount and changes in embedded | |||||||||||
derivative | 220 | 1,653 | 699 | ||||||||
Loss on repurchase of convertible debt | - | 109 | 314 | ||||||||
Gain on disposal of property and equipment | (75 | ) | - | (32 | ) | ||||||
Stock-based compensation | 38 | 118 | 165 | ||||||||
Loss (gain) on marketable securities and bonds | (20 | ) | (29 | ) | - | ||||||
Minority interests in earnings of a subsidiary and other | 13 | 96 | 41 | ||||||||
Decrease (increase) in trade receivables | (2,154 | ) | 4,090 | (127 | ) | ||||||
Decrease (increase) in other receivables and prepaid expenses | 664 | 259 | (817 | ) | |||||||
Decrease in deferred income taxes and reserves | 160 | 103 | 330 | ||||||||
Increase (decrease) in trade payables | (41 | ) | (1,038 | ) | 382 | ||||||
Increase (decrease) in deferred revenues | (1,900 | ) | 493 | 1,235 | |||||||
Increase (decrease) in other liabilities and accrued expenses | 76 | (385 | ) | 2,533 | |||||||
Net cash provided by (used in) operating activities | (853 | ) | 7,119 | 9,769 | |||||||
Cash flows from investing activities: | |||||||||||
Purchase of property and equipment | (276 | ) | (190 | ) | (768 | ) | |||||
Increase in capitalized software development costs | (4,699 | ) | (3,169 | ) | (3,496 | ) | |||||
Purchase of marketable securities and short-term deposits | (16 | ) | - | (23 | ) | ||||||
Proceeds from sales of marketable securities and short-term deposits | 5,319 | 41 | - | ||||||||
Proceeds from sale of property and equipment | 2 | - | 429 | ||||||||
Investment in equity method investee | (168 | ) | - | - | |||||||
Net cash provided by (used in) investing activities | 162 | (3,318 | ) | (3,858 | ) | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
U.S. dollars in thousands |
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| Year ended December 31, |
| 2006 | 2007 | 2008 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||||||||||||||||
Increase (decrease) in short-term bank credit, net |
| $ | 2,501 |
| $ | (241 | ) | $ | 2,822 |
| ||||||||||||||
Conversion of Series “F” Preferred shares and exercise of warrants (issuance expenses) |
| (44 | ) |
| - |
| - |
| ||||||||||||||||
Decrease in short-term bank credit, net | (2,962 | ) | (4,610 | ) | (5,033 | ) | ||||||||||||||||||
Proceeds from employee stock options exercised |
| 27 |
| 20 |
| - |
| - | 69 | 87 | ||||||||||||||
Proceeds from issuance of convertible debt, net |
| 16,193 |
| - |
| - |
| |||||||||||||||||
Proceeds from issuance of common shares |
| - |
| - |
| 2,000 |
| |||||||||||||||||
Proceeds from issuance of Options (Series A), net |
| 17 |
| - |
| - |
| |||||||||||||||||
Proceeds from issuance of Warrants (Series 1), net |
| 462 |
| - |
| - |
| |||||||||||||||||
Proceed from Options (Series A) exercise |
| - |
| 1,492 |
| - |
| |||||||||||||||||
Payment of convertible subordinated notes |
| (4,144 | ) |
| - |
| - |
| ||||||||||||||||
Proceeds from issuance of Common shares, net | 2,000 | 19,415 | - | |||||||||||||||||||||
Principal payments and repurchase of convertible debt | (2,411 | ) | (7,818 | ) | (5,495 | ) | ||||||||||||||||||
Principal payments of long-term loans |
| (279 | ) |
| (4,742 | ) |
| (9,678 | ) | - | (1,000 | ) | (487 | ) | ||||||||||
Proceeds from long-term bank loans |
| 1,000 |
| 567 |
| - |
| |||||||||||||||||
Convertible debt issuance expenses |
| (1,496 | ) |
| (32 | ) |
| - |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net cash provided by (used in) financing activities |
| 14,237 |
| (2,936 | ) |
| (4,856 | ) | (3,373 | ) | 6,056 | (10,928 | ) | |||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| 461 |
| 620 |
| (631 | ) | 473 | 160 | (170 | ) | |||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Increase (decrease) in cash and cash equivalents |
| 9,774 |
| (20,833 | ) |
| (4,243 | ) | (3,591 | ) | 10,017 | (5,187 | ) | |||||||||||
Cash and cash equivalents at the beginning of year |
| 22,001 |
| 31,775 |
| 10,942 |
| 6,699 | 3,108 | 13,125 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
| ||||||||||||||||||||||||
Cash and cash equivalents at the end of year |
| $ | 31,775 |
| $ | 10,942 |
| $ | 6,699 |
| $ | 3,108 | $ | 13,125 | $ | 7,938 | ||||||||
|
|
|
|
| ||||||||||||||||||||
Supplemental cash flow activities: |
|
|
|
|
|
|
| |||||||||||||||||
Cash paid during the year for: |
|
|
|
|
|
|
| Cash paid during the year for: | ||||||||||||||||
Interest |
| $ | 704 |
| $ | 2,917 |
| $ | 2,281 |
| $ | 2,132 | $ | 1,992 | $ | 741 | ||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Income taxes |
| $ | 214 |
| $ | 176 |
| $ | 144 |
| $ | 221 | $ | 120 | $ | 159 | ||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non-cash investing and financing activities: |
|
|
|
|
|
|
| |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Purchase of technology usage rights (Note 10) |
| $ | - |
| $ | 1,695 |
| $ | - |
| ||||||||||||||
Conversion of loan to shares | $ | 1,000 | $ | - | $ | - | ||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Settlement of redeemable shares in a subsidiary (Note 1c) |
| $ | - |
| $ | 11,569 |
| $ | - |
| ||||||||||||||
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
|
NOTE 1: | GENERAL |
a. | General: |
|
| |
|
The Company’s core technology, Sapiens eMerge™, is a rules-based application development suite which enables rapid solution development for complex mission-critical enterprises to deliver new functionality, achieve legacy modernization and enterprise application integration. |
Revenues from a major customer accounted for | ||
| ||
|
| |
| ||
| ||
|
| |
|
F - 11
|
|
|
|
|
|
| |||
| |||
| |||
| |||
|
| ||
| |||
|
F - 12
|
|
|
|
NOTE |
|
| ||
| |||
|
| ||
| |||
| |||
| |||
| |||
|
F - 13
|
|
|
|
|
|
The consolidated financial statements have been prepared in accordance with |
a. | ||
| Use of estimates: |
U.S. GAAP requires management to make certain estimates, judgments and assumptions. Management believes that the estimates, judgments and assumptions upon which it relies, are reasonable based upon information available at the time that these estimates, judgments and assumptions were |
b. | ||
| Financial statements in U.S. dollars: |
A substantial portion of the financing of the Company’s activities is made in U.S. dollars (“dollar”). In addition, a substantial portion of the Company’s and certain of its subsidiaries’ costs | ||
Thus, the functional and reporting currency of the Company and these subsidiaries is the dollar. |
F - 11
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with Statement of the Financial Accounting Standard Board No. 52, “Foreign Currency Translation” (“SFAS No. 52”). All transaction gains and losses of the re-measurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial |
The financial statements of foreign subsidiaries, whose functional currency is not the dollar, have been translated into dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as accumulated other comprehensive income (loss) |
Foreign currency translation differences included in financial expenses (income), net, amounted to approximately |
c. | ||
| Principles of consolidation: |
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. |
F - 14
|
|
|
|
|
|
|
| |
Cash equivalents are short-term highly liquid investments that are readily convertible to cash, with maturities of three months or less at the date of acquisition. |
e. | Allowance for doubtful accounts: |
|
| |
| ||
|
| |
|
f. | ||
| Property and equipment, net: |
Property and equipment are stated at cost, net of accumulated depreciation using the straight-line method over the estimated useful lives of the assets as follows: |
Equipment and furniture | 4 - 15 years | |||||||
Computer equipment and software | 3 years | |||||||
Motor vehicles |
| |||||||
Leasehold improvements | Over the shorter of the term of the lease | |||||||
or the estimated useful life of the asset | ||||||||
F - 12
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| Impairment of long-lived assets: |
The Company’s long-lived assets and certain identifiable intangibles 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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During |
F - 15
|
|
|
|
|
|
|
| |
Research and development costs incurred in the process of developing new products or product improvements, are charged to expense as |
Statement of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS No. 86”), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is generally established upon completion of a detailed program design. |
Significant costs incurred by the Company and its subsidiaries between the establishment of technological feasibility and the point at which the product is ready for general release, have been capitalized, net of participation by the OCS. |
The changes in capitalized software development costs during the year ended December 31, 2008 were as follows: |
Capitalized Software costs | ||||||
---|---|---|---|---|---|---|
Balance as of December 31, 2007 | $ | 14,957 | ||||
Capitalized software development costs | 3,496 | |||||
Amortization of software development costs | (4,224 | ) | ||||
Effect of exchange rate differences | 162 | |||||
Balance as of December 31, 2008 | $ | 14,391 | ||||
As for finance |
Capitalized software costs are amortized by the greater of the amount computed using: (i) the ratio that current gross revenues from sales of the software bear to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method |
F - 13
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
U.S. dollars in thousands |
NOTE 2: |
|
For the years ended December 31, |
i. | Goodwill: |
| ||
|
| |
Goodwill represents excess of the costs over the net assets of businesses acquired. Under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) goodwill acquired in a business combination should not be amortized. SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is allocated to one reporting unit and fair values are determined using market capitalization. | ||
Through |
F - 16
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| |
Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method as follows: |
Prepaid royalties | 15 years | ||||
|
| ||||
|
| ||||
Technology, usage rights and other intangible assets | 4-8 years | ||||
During |
As of December 31, 2008 all the intangible assets were fully amortized. See note 6b. |
k. |
| Revenue recognition: |
Product revenues include software license sales and may also include implementation and customization services |
The Company recognizes revenue from software license sales in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” Under SOP 97-2, revenues from software product licenses are recognized upon delivery of the software provided there is persuasive evidence of an agreement, the fee is fixed or determinable, |
F - 14
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
When |
Revenues from support and maintenance agreements are recognized ratably over the term of the agreement, which is typically one year. Revenues from training arrangements are recognized as the services are performed. |
The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met. |
Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue represents deferred maintenance revenue, and to a lesser extent, deferred software license revenues. |
F - 17
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|
Under certain circumstances, license revenue consists of license fees received whereby under the terms of these license agreements the Company’s software is modified to that customer’s specific requirements. Each license is designed to meet the specific requirements of the particular customer. Fees are payable upon completion of agreed-upon milestones, such as delivery of specifications and technical documentation. |
Revenues from license fees that involve implementation and customization of the Company’s software to customer specific requirements are generated from fixed-price or time-and-materials contracts. Such revenues generated from fixed-price contracts are recognized in accordance with Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. Fixed-price contracts revenues are recognized using contract accounting on a percentage-of-completion method, over the period from signing of the license through to customer acceptance, in accordance with the “Input Method” or “Output Method”. The amounts of revenues recognized are based on the total license fees under the license agreement and the percentage to completion achieved. According to the “Input Method”, the percentage to completion is measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project requirement, which corresponds to the costs related to earned revenues. According to the “Output Method”, the percentage to completion is determined by using |
The Company believes that the use of the percentage of completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and the terms of settlement, including in cases of termination for convenience. In all cases, the Company expects to perform its contractual obligations and its customers are expected to satisfy their obligations under the contract. |
F - 15
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology, and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the software, license revenue is not recognized until acceptance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, |
Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis. |
Consulting services that are not deemed essential to the functionality of the license provided on a “time and materials” basis are recognized as services are performed. |
|
l. | Equity method investments |
The Company’s investments in a company (generally, that is held to the | ||
|
F - 18
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|
| ||
|
| |
Advertising expenses are charged to the statement of operations as incurred. |
n. | ||
| Government grants: |
Royalty-bearing grants from the Government of Israel for the funding of research and development projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred, and are recorded as a reduction of research and development costs, or as a reduction of capitalized software development costs. |
o. | ||
| Income taxes: |
The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS |
F - 16
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of FIN 48, the Company must review all of its tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the |
p. | ||
| Concentrations of credit risk: |
Financial instruments that potentially subject the Company and certain of its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, |
The Company’s cash and cash equivalents are invested in deposits with major international financial institutions. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. |
The Company’s trade receivables are generally derived from sales to large and solid organizations located mainly in Europe, North America and Israel. The Company performs ongoing credit evaluations of its customers and has established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and other information. In certain circumstances, the Company may require letters of credit, other collateral or additional guarantees. |
No off-balance sheet concentrations of credit risk exist. |
q. | Fair value of financial instruments: |
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities. |
Effective January 1, 2008, the Company |
F - 1917
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Level 1 | – | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
Level 2 |
| Include other inputs that are directly or indirectly observable in |
Level 3 | – | Unobservable inputs which are |
|
| |
| ||
|
r. | ||
| ||
|
|
|
The Company enters into |
Changes in the fair value of |
F - 20
|
|
|
|
|
|
In |
s. | ||
| Basic and diluted net loss per share: |
Basic net loss per share is computed based on the weighted average number of Common shares outstanding during each year. Diluted net |
In | ||
|
| |
| ||
|
F - 2118
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
t. | Stock-based compensation: |
| ||
|
The value of the portion of the awards that is |
The Company | ||
|
Upon the |
|
The Company estimates the fair value | ||
|
|
|
|
|
|
|
|
|
| 2003 |
| 2004 |
| 2005 |
|
|
|
| |||
|
|
|
|
|
|
|
Dividend yield |
| 0% |
| 0% |
| 0% |
Expected volatility |
| 83% |
| 65% |
| 83% |
Risk-free interest |
| 2% |
| 3.74% |
| 4.41% |
Expected life of up to |
| 3.5 years |
| 2.5 years |
| 6.9 years |
Year ended December 31, | ||||
---|---|---|---|---|
2006 | 2007 | 2008 | ||
Expected term | 6.25 years | 6.25 years | 4.25 years | |
Dividend yield | 0% | 0% | 0% | |
Expected volatility | 67% | 89% | 78% | |
Risk-free interest rate | 6% | 4.2% | 2.95% | |
The risk-free interest rate assumption is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term as of the Company’s employee stock options. The dividend yield assumption is based on the Company’s historical and expectation of future dividend payouts. The expected term of the options represents the period of time that the options are expected to be outstanding and is based on the simplified method, as allowed under Staff Accounting Bulletin 110, which is the midpoint between the vesting date and the end of the contractual term of the options. It should be noted, that in 2008 the Company granted options with contractual term of 6 years (10 years in 2006 and 2007). The Company used its historical volatility for calculating volatility in accordance with SFAS 123 (R). |
Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period for each of the awards. |
F - 2219
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
| |||||||
|
|
| ||||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
|
| ||||||
|
| U.S. dollars in thousands |
| |||||||
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
Net loss to shareholders of common shares - as reported |
| $ | 2,187 |
| $ | 5,141 |
| $ | 9,099 |
|
Less - stock-based employee compensation - intrinsic value |
|
| (21 | ) |
| - |
|
| - |
|
Add - stock-based employee compensation -fair value |
|
| 1,207 |
|
| 637 |
|
| 2,587 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
| $ | 3,373 |
| $ | 5,778 |
| $ | 11,686 |
|
|
|
|
|
| ||||||
Basic and diluted net loss per share - as reported |
| $ | 0.20 |
| $ | 0.46 |
| $ | 0.76 |
|
|
|
|
|
| ||||||
Pro forma basic and diluted net loss per share |
| $ | 0.31 |
| $ | 0.51 |
| $ | 0.98 |
|
|
|
|
|
|
| ||
The Company |
u. | ||
| Accrued severance pay: |
The liability of the Company’s subsidiaries in Israel for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The liability for |
In addition, the Company signed collective agreement with few of its employees, according to which the Company’s contributions for severance pay shall be instead of severance compensation and that upon release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee. Generally, the Company pays to all its employees the entire liability, as if the agreement was never signed. Therefore, the net obligation related to the employees (the excess amount that is usually paid by the Company) is stated on the balance sheet as an accrued severance pay. |
The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these |
Severance |
In addition, the Company has various defined contribution plans for employees of its subsidiaries around the world. Most of the plans are those required according to the laws of the country in which the subsidiary operates. Contributions made under the plans are invested with financial institutions. Benefits under the plans are based on contributions from employees and the Company, and earnings on insurance contracts or other investment instruments in which the contributions are invested. |
F - 23
|
|
|
|
|
|
Expense for contributions made to these plans was |
F - 20
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
U.S. dollars in thousands |
NOTE 2: |
| SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
v. | Recently issued Accounting Standards: |
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to delay the effective date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial liabilities, excluding those that are recognized or disclosed in financial statements at fair value on a recurring basis (that is, at least annually). For purposes of applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or a financial liability in FASB Statement 159. FSP 157-2 defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP 157-2. The Company does not expect the adoption of FSP 157-2 to have a material impact on its financial position, results of operations or cash flows. |
In March 2008, the FASB issued Statement 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) an amendment to FASB No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The Company does not expect the adoption of SFAS 161 to have a material impact on its financial position, results of operations or cash flows. |
In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends ARB 51, “Consolidated Financial Statements”, to establish accounting |
F - 21
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
U.S. dollars in thousands |
NOTE 2: |
|
In December |
SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As such, the adoption of SFAS 141(R) is not expected to have a material effect on accounting for our current subsidiaries. |
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FSP 142-3 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows. |
EITF Issue No. 08-6, “Equity-Method Investment Accounting”(“EITF 08-6”) concludes that the cost basis of a new equity-method investment would be determined using a cost-accumulation model, which would continue the practice of including transaction costs in the cost of investment and would exclude the value of contingent consideration. Equity-method investment should be subject to other-than-temporary impairment analysis. It also requires that a gain or loss to be recognized on the portion of the investor’s ownership sold. EITF 08-6 will be effective for the reporting period beginning after December 15, 2008. The Company does not expect a material impact on its consolidated financial statements from adoption of EITF 08-6. |
In May 2008, the FASB issued SFAS No. | ||
| ||
| ||
| ||
| ||
| ||
|
F - 24
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|
| |||
|
F - 22
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands |
NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe the adoption of FSP APB 14-1 will have significant effect on its consolidated results of operations and financial condition | |||
| |||
|
| ||
|
| ||
|
F - 25
|
|
|
|
|
|
In |
In June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after | ||
| ||
|
| |
|
F - 26
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|
NOTE 3: |
|
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|
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|
|
| December 31, |
| ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
|
| 2004 |
| 2005 |
| ||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||
| |||||||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Market |
| Amortized |
| Unrealized |
| Unrealized |
| Market |
| ||||||||
|
|
| |||||||||||||||||||||||
|
| U.S. dollars in thousands |
| ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
| |||||||||||||||||||||||||
Available-for-sale: |
|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Government debentures |
| $ | 1,309 |
| $ | 8 |
| $ | - |
| $ | 1,317 |
| $ | 70 |
| $ | 10 |
| $ | - |
| $ | 80 |
|
Commercial debentures |
|
| 9,923 |
|
| 103 |
|
| (186 | ) |
| 9,840 |
|
| 5,225 |
|
| 72 |
|
| (40 | ) |
| 5,257 |
|
|
|
|
|
|
|
|
|
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| ||||||||||||||||
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totalavailable-for-sale marketable securities |
| $ | 11,232 |
| $ | 111 |
| $ | (186 | ) | $ | 11,157 |
| $ | 5,295 |
| $ | 82 |
| $ | (40 | ) | $ | 5,337 |
|
|
|
|
|
|
|
|
|
|
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|
F - 27
|
|
|
|
|
|
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|
|
|
|
|
|
| December 31, |
| ||||||||||
|
|
|
| |||||||||||
|
|
| 2004 |
| 2005 |
| ||||||||
|
|
|
|
| ||||||||||
|
|
| Amortized |
| Market |
| Amortized |
| Market |
| ||||
|
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|
|
|
|
| ||||||||
|
|
| U.S. dollars in thousands |
| ||||||||||
|
|
|
| |||||||||||
| Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Matures in one to five years |
| $ | 6,975 |
| $ | 6,868 |
| $ | 5,295 |
| $ | 5,337 |
|
| Matures in five to ten years |
|
| 1,003 |
|
| 1,008 |
|
| - |
|
| - |
|
| Matures in more than ten years |
|
| 3,254 |
|
| 3,281 |
|
| - |
|
| - |
|
|
|
|
|
|
|
| ||||||||
|
|
| $ | 11,232 |
| $ | 11,157 |
| $ | 5,295 |
| $ | 5,337 |
|
|
|
|
|
|
|
|
|
|
The Company’s net trade receivables are composed of accounts receivable in the amounts of |
Bad debt |
F - 23
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
U.S. dollars in thousands |
NOTE | OTHER RECEIVABLES AND PREPAID EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
|
|
| |||||
|
|
| 2004 |
| 2005 |
| ||
|
|
|
|
| ||||
|
|
| U.S. dollars in thousands |
| ||||
|
|
|
| |||||
| ||||||||
| Sales and other taxes receivable |
| $ | 1,363 |
| $ | 445 |
|
| Prepaid expenses |
|
| 921 |
|
| 734 |
|
| Deferred income taxes |
|
| 860 |
|
| 241 |
|
| Government grants |
|
| 258 |
|
| 65 |
|
| Employees receivables |
|
| 307 |
|
| 21 |
|
| Other |
|
| 304 |
|
| 114 |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,013 |
| $ | 1,620 |
|
|
|
|
|
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|
2007 | 2008 | ||||||||
Prepaid expenses | $ | 328 | $ | 983 | |||||
Deferred income taxes | 953 | 1,061 | |||||||
Sales and other taxes receivable | 108 | - | |||||||
Employees receivables | 27 | 22 | |||||||
Other | 465 | 499 | |||||||
$ | 1,881 | $ | 2,565 | ||||||
NOTE 5: | PROPERTY AND EQUIPMENT, NET |
Cost | Accumulated depreciation | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | ||||||||||||
U.S. dollars in thousands | |||||||||||||||
Equipment and furniture | $ | 2,306 | $ | 2,057 | $ | 1,983 | $ | 1,688 | |||||||
Computer equipment and software | 12,888 | 13,117 | 12,474 | 12,501 | |||||||||||
Motor vehicles | 89 | 85 | 67 | 63 | |||||||||||
Leasehold improvements | 2,446 | 1,583 | 1,986 | 1,535 | |||||||||||
$ | 17,729 | $ | 16,842 | $ | 16,510 | $ | 15,787 | ||||||||
Depreciation expense totaled $690, $583 and $550 for the years 2006, 2007 and 2008, respectively. |
As for pledges, see Note 10. |
F - 2824
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 6: |
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|
| Cost |
| Accumulated depreciation |
| ||||||||
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|
|
|
| ||||||||||
|
|
| December 31, |
| ||||||||||
|
|
|
| |||||||||||
|
|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| ||||
|
|
|
|
|
|
| ||||||||
|
|
| U.S. dollars in thousands |
| ||||||||||
|
|
|
| |||||||||||
|
|
|
|
| ||||||||||
| Equipment and furniture |
| $ | 2,364 |
| $ | 2,176 |
| $ | 1,791 |
| $ | 1,734 |
|
| Computer equipment and software |
|
| 12,022 |
|
| 10,777 |
|
| 11,072 |
|
| 10,080 |
|
| Motor vehicles |
|
| 205 |
|
| 117 |
|
| 169 |
|
| 110 |
|
| Leasehold improvements |
|
| 2,296 |
|
| 2,072 |
|
| 1,473 |
|
| 1,502 |
|
|
|
|
|
|
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| ||||||||
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|
|
|
|
|
|
|
|
|
|
|
| $ | 16,887 |
| $ | 15,142 |
| $ | 14,505 |
| $ | 13,426 |
|
|
|
|
|
|
|
|
| ||
| ||
| OTHER ASSETS |
a. |
| Amortization |
| ||
|
F - 29
|
|
|
|
In 2007 and 2008, $408 and $62, respectively, of interest expense was capitalized in respect of software development costs. |
|
| |
| Other assets, net, are comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated amortization |
| Other assets, net |
| ||||||||||||
|
|
|
|
|
| |||||||||||||||
|
|
| December 31, |
| ||||||||||||||||
|
|
|
| |||||||||||||||||
|
|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| ||||||
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
| U.S. dollars in thousands |
| ||||||||||||||||
|
|
|
| |||||||||||||||||
|
|
|
|
| ||||||||||||||||
| Prepaid royalties |
| $ | 2,074 |
| $ | 2,074 |
| $ | 1,627 |
| $ | 1,759 |
| $ | 447 |
| $ | 315 |
|
| Technologies and usage rights (1) |
|
| 2,041 |
|
| 1,745 |
|
| 396 |
|
| 796 |
|
| 1,645 |
|
| 949 |
|
| Intangible assets and other |
|
| 158 |
|
| 156 |
|
| 148 |
|
| 156 |
|
| 10 |
|
| - |
|
| Deferred debt issuance costs (2) |
|
| 1,528 |
|
| 1,528 |
|
| 262 |
|
| 304 |
|
| 1,266 |
|
| 1,224 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,801 |
| $ | 5,503 |
| $ | 2,433 |
| $ | 3,015 |
|
| 3,368 |
|
| 2,488 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
| ||||||||||||||||||||
| In addition, other assets include: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| Severance pay fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,011 |
|
| 1,015 |
|
| Long-term tax advances (see Note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 774 |
|
| - |
|
| Long-term deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 162 |
|
| 146 |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 114 |
|
| 93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,061 |
|
| 1,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,429 |
| $ | 3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost | Accumulated amortization | Other assets, net | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | |||||||||||||||||||||
2007 | 2008 | 2007 | 2008 | 2007 | 2008 | ||||||||||||||||
Prepaid royalties | $ | 2,074 | $ | 2,074 | $ | 2,022 | $ | 2,074 | $ | 52 | $ | - | |||||||||
Technologies and usage | |||||||||||||||||||||
rights (1) | 1,682 | 1,701 | 1,411 | 1,701 | 271 | - | |||||||||||||||
Deferred debt issuance | |||||||||||||||||||||
costs (2) | 1,528 | 1,528 | 929 | 1,287 | 599 | 241 | |||||||||||||||
$ | 5,284 | $ | 5,303 | $ | 4,362 | $ | 5,062 | $ | 922 | $ | 241 | ||||||||||
In addition, other | |||||||||||||||||||||
assets include: | |||||||||||||||||||||
Severance pay fund | 1,235 | 900 | |||||||||||||||||||
Long-term deposits | 315 | 250 | |||||||||||||||||||
Other | 110 | 197 | |||||||||||||||||||
1,660 | 1,347 | ||||||||||||||||||||
$ | 2,582 | $ | 1,588 | ||||||||||||||||||
(1) | ||
| In September 2004, the Company purchased the technologies underlying the Sapiens INSIGHT™ for Closed Books solution, for a minimum amount of approximately |
| ||
The technologies are amortized over a 4 year period, which is the estimated useful life of the technologies. |
(2) | ||
|
|
Amortization of other assets charged to expenses was | ||
|
c. | Estimated amortization expense of deferred debt issuance costs is: |
December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|
2009 | $ | 241 | |||||
F - 3025
SAPIENS INTERNATIONAL CORPORATION N.V. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 7: |
| |
|
|
|
|
|
|
|
|
|
|
| |
| December 31, |
|
| U.S. dollars in |
|
|
|
| |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| |
| 2006 |
|
| 813 |
|
|
|
| |
| 2007 |
|
| 808 |
|
|
|
| |
| 2008 |
|
| 677 |
|
|
|
| |
| 2009 |
|
| 190 |
|
|
|
| |
|
|
|
|
|
|
| |||
|
|
| $ | 2,488 |
|
|
|
| |
|
|
|
|
|
|
|
| OTHER LIABILITIES AND ACCRUED EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
|
|
| |||||
|
|
| 2004 |
| 2005 |
| ||
|
|
|
|
| ||||
|
|
| U.S. dollars in thousands |
| ||||
|
|
|
| |||||
|
|
|
|
| ||||
| Employee and related payroll accruals |
| $ | 3,310 |
| $ | 2,680 |
|
| Sales and other taxes payable |
|
| 1,611 |
|
| 753 |
|
| Accrued royalties to the OCS (Note 11a) |
|
| 1,477 |
|
| 1,014 |
|
| Accrued expenses and other liabilities |
|
| 2,160 |
|
| 2,295 |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 8,558 |
| $ | 6,742 |
|
|
|
|
|
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|
2007 | 2008 | ||||||||
Employee and related payroll accruals *) | $ | 3,104 | $ | 3,330 | |||||
Sales and other taxes payable | 760 | 926 | |||||||
Accrued royalties to the OCS (Note 10a) | 2,618 | 3,377 | |||||||
Accrued expenses and other liabilities | 1,893 | 2,083 | |||||||
$ | 8,375 | $ | 9,716 | ||||||
*) Including accrual for vacation | $ | 1,034 | $ | 1,089 | |||||
NOTE | DEBT |
a. | ||
| Short-term bank credit: |
As of December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average |
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
| December 31, |
| December 31, |
| |||||||||
|
|
|
|
|
|
| |||||||||||
|
|
|
|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| |||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
| Linkage |
| % |
| U.S. dollars in thousands |
| |||||||||
|
|
|
|
|
| ||||||||||||
| |||||||||||||||||
| Credit lines |
|
| NIS *) |
|
| 6.5 |
|
| 5.9 |
| $ | 1,045 |
| $ | 1,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term loans |
|
| U.S. dollar |
|
| 4.5 |
|
| 5.6 |
|
| 8,150 |
|
| 10,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 9,195 |
| $ | 11,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) Weighted average interest December 31, December 31, Linkage 2007 2008 2007 2008 % Credit lines NIS *) 6.2 - $ 1,058 $ - Short-term loans U.S. dollar 7.2 - 3,900 - $ 4,958 $ -
*) | New Israeli Shekel, including immaterial amounts linked to other currencies.
F - 26
F - 27
F - 28
F -
F -
F - 31
F -
F - 33
F - 34
F - 35
F - 36
F -
F - 38
F -
F -
|