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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
FORM 8-K/A
TO CURRENT REPORT ON FORM 8-K
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 13, 2001
DATA SYSTEMS & SOFTWARE INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 0-19771 22-2786081
(State or Other Jurisdiction (Commission file Number) (IRS Employer
of Incorporation) Identification No.)
200 Route 17, Mahwah, New Jersey 07430
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (201) 529-2026
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Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
This Form 8-K/A amends the Form 8-K filed on December 28, 2001 reporting
the acquisition ("Acquisition") by the Registrant of all of the outstanding
ordinary shares of Endan IT Solutions Ltd, a company organized under the laws of
Israel.
The following are the (i) audited consolidated balance sheet of Endan IT
Solutions Ltd. as of December 31, 2000 and the related consolidated statements
of income, changes in shareholders' deficiency and cash flows for the year then
ended and notes thereto and (ii) unaudited consolidated balance sheet of Endan
IT Solutions Ltd. as of September 30, 2001 and the related consolidated
statements of income and cash flows for the nine-month period then ended and
notes thereto.
-----------------------
ENDAN IT SOLUTIONS LTD.
-----------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2000
-----------------------
ENDAN IT SOLUTIONS LTD.
-----------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
C O N T E N T S
Page
----
INDEPENDENT AUDITORS' REPORT 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in Shareholders' Deficiency 5
Consolidated Statement of Cash Flows 6 - 7
Notes to the Consolidated Financial Statements 8 - 20
# # # # # #
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated balance sheet of ENDAN IT SOLUTIONS LTD. (the
"Company") and subsidiary as of December 31, 2000, and the related consolidated
statements of income, changes in shareholders' deficiency and cash flows (as
restated - see Note 2J) for the year then ended. These financial statements are
the responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We did not audit the financial statements of an affiliated company the
investment in which is approximately NIS 229,000 as of December 31, 2000, and
for which the Company's equity in whose losses is approximately NIS 172,000 for
the year then ended. The financial statements of this company were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the amounts included in respect of this company, is based on the
report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards
in the United States and in Israel, including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Board of
Directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiary as of December 31, 2000, and the consolidated results of operations,
changes in shareholders' deficiency and cash flows for the year then ended, in
conformity with accounting principles generally accepted in Israel, which differ
in certain respects from those generally accepted in the United States (see Note
22 to the consolidated financial statements).
As described in Note 2A, the consolidated financial statements referred to above
are presented in values adjusted for the changes in the general purchasing power
of the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
s/LUBOSHITZ KASIERER
---------------------
Member Firm of Arthur Andersen
Tel-Aviv, Israel
August 27, 2001, except for Note 22, as to which the date is December 7, 2001.
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED BALANCE SHEET
In adjusted NIS of December 2000
December 31, 2000
-------------------
Convenience
translation
(Note 2H)
NIS U.S. dollars
Note In thousands
---- -------------------
CURRENT ASSETS
Cash and cash equivalents 99 24
Trade receivables, net (3) 7,003 1,733
Other receivables (4) 531 131
------- ------
7,633 1,888
------- ------
INVESTMENTS AND LONG-TERM RECEIVABLES
Prepayments (6C) 161 40
Investment in affiliate (5) 229 57
------- ------
390 97
------- ------
FIXED ASSETS, NET (6) 2,404 595
------- ------
OTHER ASSETS (2F) 447 111
------- ------
10,874 2,691
======= ======
CURRENT LIABILITIES
Short-term bank debt (7) 5,723 1,417
Trade payables (8) 691 171
Other payables and accrued expenses (9) 3,189 789
------- ------
9,603 2,377
------- ------
LONG-TERM LIABILITIES
Loans from banks (10) 432 107
Loans from parent company and others (11) 4,010 992
Accrued severance pay (12) 929 230
------- ------
5,371 1,329
------- ------
LIENS (13)
SHAREHOLDERS' DEFICIENCY (14) (4,100) (1,015)
------- ------
10,874 2,691
======= ======
...s/Israel Frieder... .....s/ Jacob Neuwirth..... ....s/Avi Kurzweil...
ISRAEL FRIEDER JACOB NEVWIRTH (NOY) AVI KURZWEIL
Chairman of the Board of General Manager and Director In-charge of Financial
Directors Matters
The notes to the financial statements form an integral part thereof.
-3-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENT OF INCOME
In adjusted NIS of December 2000
For the year ended
December 31, 2000 (*)
---------------------
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
Note In thousands
---- -------------------
REVENUES FROM SERVICES 22,652 5,606
COST OF REVENUES (15) 17,306 4,283
------ -----
Gross profit 5,346 1,323
DEVELOPMENT COSTS (MAINLY PAYROLL) 1,435 355
SELLING AND MARKETING EXPENSES (16) 1,628 403
GENERAL AND ADMINISTRATIVE EXPENSES (17) 5,396 1,335
------ -----
Operating loss (3,113) (770)
FINANCING EXPENSES, NET (18) (557) (138)
OTHER INCOME, NET 179 44
------ -----
Loss before equity in loss of affiliate and
minority interest (3,491) (864)
EQUITY IN LOSS OF AFFILIATE (172) (43)
MINORITY INTEREST 530 131
------ -----
Net loss (3,133) (776)
====== =====
(*) Restated - see Note 2J.
The notes to the financial statements form an integral part thereof.
-4-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
In adjusted NIS of December 2000
Share Accumulated Total
capital deficit
------- ---------------- --------
NIS in thousands
-------------------------------------
Balance as of January 1, 2000 2 (969)(*) (967)
------- -------- ------
Net loss -- (3,133)(*) (3,133)
------- -------- ------
Balance as of December 31, 2000 2 (4,102) (4,100)
======= ======== ======
Convenience translation (Note 2H)
U.S. dollars in thousands
-------------------------------------
Share Accumulated Total
capital deficit
------- ---------------- --------
Balance as of January 1, 2000 -- (239)(*) (239)
------- -------- ------
Net loss -- (776)(*) (776)
------- -------- ------
Balance as of December 31, 2000 -- (1,015) (1,015)
======= ======== ======
(*) Restated - see Note 2J.
The notes to the financial statements form an integral part thereof.
-5-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
In adjusted NIS of December 2000
For the year ended
December 31, 2000 (*)
---------------------
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
In thousands
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (3,133) (776)
Adjustments to reconcile net loss to net cash used
in operating activities (see A below) (818) (202)
------ ------
Net cash used in operating activities (3,951) (978)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,141) (282)
Proceeds from disposal of fixed assets 110 27
Additions to other assets (447) (111)
------ ------
Net cash used in investing activities (1,478) (366)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of long-term loans from banks and others 514 127
Repayment of long-term loans to banks (231) (57)
Short-term credit from banks, net 4,859 1,202
Increase in the balance with parent company, net (150) (37)
Proceeds from issuance of shares to minority
shareholders of subsidiary 307 76
------ ------
Net cash provided by financing activities 5,299 1,311
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (130) (33)
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE YEAR 229 57
------ ------
CASH AND CASH EQUIVALENTS AT
THE END OF THE YEAR 99 24
====== ======
CASH PAID DURING THE YEAR FOR:
Interest 429 95
====== ======
Taxes 133 33
====== ======
(*) Restated - see Note 2J.
The notes to the financial statements form an integral part thereof.
-6-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont.)
In adjusted NIS of December 2000
For the year ended
December 31, 2000 (*)
---------------------
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
In thousands
---------------------
A. ADJUSTMENTS TO RECONCILE NET
LOSS TO NET CASH USED IN
OPERATING ACTIVITIES
Equity in loss of affiliate 172 43
Minority interest (530) (131)
Gain on issuance of shares to minority
shareholders of subsidiary (182) (46)
Depreciation and amortization 722 179
Increase in severance pay
obligations, net 393 97
Gain on disposal of fixed assets (2) --
Purchasing power gain on long-term loans (28) (7)
Increase in trade receivables (1,996) (494)
Increase in other receivables (including
long-term receivables) (64) (16)
Decrease in trade payables (103) (25)
Increase in other payables and accrued
expenses 800 198
------ ------
(818) (202)
====== ======
(*) Restated - see Note 2J
The notes to the financial statements form an integral part thereof.
-7-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 1 - GENERAL
A. The Company is a member of the Kardan Ltd Group and is engaged in
software development and in providing software and outsourcing
services. The Company's principal software products are in the
field of customer care and billing systems for management of
medical files in oncology departments.
B. In June 2001, the Company changed its name from Endan Systems
Management and Computing Ltd. to Endan IT Solutions Ltd.
C. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2 - ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
financial statements, on a consistent basis (except for the matter
discussed in J below), are:
A. ADJUSTED FINANCIAL STATEMENTS
GENERAL
The financial statements are presented on the basis of the
historical cost convention adjusted for the changes in the
general purchasing power of the Israeli currency (New Israeli
Shekel - "NIS"). The Group companies in Israel maintain their
accounts in nominal shekels. The nominal figures are adjusted to
shekels of equivalent purchasing power (shekels of December 2000)
in conformity with principles prescribed by Statements of the
Institute of Certified Public Accountants in Israel, on the basis
of changes in the Consumer Price Index.
BALANCE SHEET
Nonmonetary items are adjusted in accordance with the changes in
the Consumer Price Index from the date of acquisition
(transaction) to balance sheet date (published on the 15th of the
following month).
Monetary items are presented in the adjusted balance sheet at
their nominal value.
The investment at equity is based on the adjusted financial
statements of the affiliate.
The adjusted values of nonmonetary items should not be construed
as a presentation of realizable values or real economic values,
but merely as the original values adjusted for the changes in the
general purchasing power of the currency.
-8-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 2 - ACCOUNTING POLICIES (Cont.)
A. ADJUSTED FINANCIAL STATEMENTS (Cont.)
STATEMENT OF INCOME
Revenues are adjusted in accordance with the change in the index
from transaction date to balance sheet date.
Expenses, other than financing expenses and those deriving from
nonmonetary items, are adjusted for the changes in the index from
transaction date to balance sheet date. Expenses deriving from
nonmonetary items are adjusted in correspondence with the
adjusted balance sheet item.
Equity in the results of the affiliate is based on the adjusted
financial statements of the affiliate.
The balance of the inflationary adjustment, not attributed to
revenues or expenses as referred to above, is included in net
financing income or expenses.
B. CONSOLIDATION OF FINANCIAL STATEMENTS
The financial statements of the Company are consolidated with
those of its investee companies that are under its control.
Material intercompany balances and transactions have been
eliminated in the consolidated financial statements.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is specifically computed for
accounts the collectibility of which, in the view of management,
is doubtful.
D. INVESTMENT IN AFFILIATE
The investments in the affiliate is accounted for by the equity
method.
E. FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful life of the
assets.
F. OTHER ASSETS - SOFTWARE DEVELOPMENT COSTS
Costs in respect of development of software intended for sale are
capitalized only after technological feasibility of the software
product has been established, in accordance with criteria set
forth in U.S. Statement of financial Accounting Standards No. 86,
and when there is a reasonable basis to assume that a market
exists for the software which will generate revenues that will
cover all capitalized costs. Capitalization of costs ceases when
the software product is available for general release to
customers. Capitalized development costs are presented in other
assets and will be amortized over a period of three years as from
the date on which the products are available for sale.
Development costs which do not meet the above criteria are
charged to the operations as incurred.
-9-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 2 - ACCOUNTING POLICIES (Cont.)
G. REVENUE RECOGNITION
Revenues from services are recognized as the services are
provided.
H. CONVENIENCE TRANSLATION INTO U.S. DOLLARS
The adjusted financial statements as of December 31, 2000 have
been translated into United States dollars using the
representative exchange rate of the United States dollar as of
December 31, 2000 (US $1 = NIS 4.041). The translation was made
solely for the convenience of the readers. The translated United
States dollar amounts should not be construed to represent
amounts that are receivable, payable or convertible into dollars,
unless otherwise stated.
I. LINKED BALANCES AND BALANCES IN FOREIGN CURRENCY
Balances linked to the Consumer Price Index are included on the
basis of the last published index before balance sheet date.
Balances in or linked to foreign currency are presented according
to the representative exchange rates as of balance sheet date.
In the year ended December 31, 2000 the Consumer Price Index was
unchanged and the exchange rate of the U.S. dollar in relation to
the NIS decreased by 2.7%.
J. RESTATEMENT
The Company and a subsidiary have restated their financial
statements in order to reflect the effects of charging to
operations in prior years of costs in connection with the
establishment of a subsidiary and certain software development
costs that were previously capitalized (included in other assets
and subsequently amortized).
Following are the effects of the restatement on the financial
statements:
(1) Statement of Income
For the year ended
December 31, 2000
--------------------
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
In thousands
--------------------
Net loss as presented previously (4,117) (1,020)
------ ------
Adjustments resulting from restatement
of prior years' financial statements:
Minority interest (292) (72)
Software development costs 364 90
General and administrative
expenses 912 226
------ ------
984 244
------ ------
Net loss after restatement (3,133) (776)
====== ======
-10-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 2 - ACCOUNTING POLICIES (Cont.)
J. RESTATEMENT (Cont.)
(2) Statement of Changes in Shareholders' Deficiency
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
In thousands
--------------------
Accumulated deficit, January 1,
2000, as presented previously 15 5
Net adjustments of prior years (984) (244)
------ ------
Accumulated deficit,
January 1, 2000, after
restatement (969) (239)
====== ======
Note 3 - TRADE RECEIVABLES
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
--- ------------
Open accounts 6,787 1,680
Income receivable 722 178
Less - allowance for doubtful accounts (506) (125)
------ ------
7,003 1,733
====== =======
Note 4 - OTHER RECEIVABLES
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
--- ------------
Government agencies 375 93
Prepaid expenses 82 20
Other 74 18
------ ------
531 131
====== ======
-11-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 5 - INVESTMENTS
A. INVESTMENT IN AFFILIATE (SEE B.2)
Convenience
translation
(Note 2H)
NIS U.S. Dollars
--- ------------
Balance as of January 1, 2000 401 99
Equity in losses of affiliate (172) (42)
----- -----
Balance as of December 31, 2000 229 57
===== =====
B. SUPPLEMENTARY INFORMATION
(1) As of December 31, 2000 the Company owns approximately 64%
of the shares of JBE Software Services Ltd ("JBE") which
began operations in October 1999 and is engaged in providing
software and outsourcing services.
In December 2000 JBE issued shares to minority shareholders
such that the Company's holdings decreased from 68% to
approximately 64%. As a result of the issuance, the Company
recorded a gain of NIS 182,000 which is included in other
income. Subsequent to balance sheet date, in March 2001, JBE
issued additional shares to a minority shareholder and the
Company's holdings decreased to approximately 54%. As a
result of this issuance, the Company will record a gain of
NIS 797,000.
(2) The Company owns 33.3% of the shares of Mileon Ltd. which is
engaged in providing services to the municipal sector.
Subsequent to balance sheet date, it was decided to sell the
Company's holdings in Mileon Ltd to a related party at a
price approximating carrying value. The sale is subject to
the approval of the shareholders.
(3) The Company owns approximately 60% of Binsoft Ltd
("Binsoft") which was engaged in the sale of software tools
and in providing software services, including Year 2000
modifications. At the beginning of the year 2000, Binsoft
ceased its operations.
(4) The Company owns shares of inactive companies, the
investment in which have been fully written off.
-12-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 6 - FIXED ASSETS, NET
A. COMPOSITION AND MOVEMENT
Office Motor Computers and Leasehold
furniture vehicles software improvements Total
--------- -------- -------- ------------ -----
COST -
As of January 1, 2000 370 1,252 1,078 158 2,858
Additions 100 328 669 45 1,142
Disposals (9) (73) (68) -- (150)
----- ----- ----- ----- -----
As of December 31, 2000 461 1,507 1,679 203 3,850
----- ----- ----- ----- -----
ACCUMULATED DEPRECIATION -
As of January 1, 2000 78 305 367 15 765
Provision 41 200 434 48 723
Eliminated on disposal -- (36) (6) -- (42)
----- ----- ----- ----- -----
As of December 31, 2000 119 469 795 63 1,446
----- ----- ----- ----- -----
NET BOOK VALUE -
As of December 31, 2000 342 1,038 884 140 2,404
===== ===== ===== ===== =====
Convenience translation
(Note 2H) U.S. dollars 85 257 219 34 595
----- ----- ----- ----- -----
Annual depreciation rates 6% - 15% 15% 20% - 33% 10%
(mainly 7%) (mainly 33%)
===== ===== ===== =====
B. The Company entered into an agreement for rental of offices for a
period of three years ending in September 2001. The Company has a
renewal option for an additional six years. Annual rent is
approximately NIS 480,000.
C. The Company and its subsidiary entered into operating lease
agreements for vehicles for periods of three years. Annual lease
fees are approximately NIS 630,000. As security for these leases,
the companies prepaid the final monthly payments, which are
presented as long-term prepaid expenses.
D. Liens - see Note 13.
-13-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 7 - SHORT-TERM BANK DEBT
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Bank overdraft 32 8
Short-term loans (1) 5,453 1,349
Current maturities of long-term loans 238 60
----- -----
5,723 1,417
===== =====
(1) The loans are not linked and bear interest at a weighted
average annual rate of 9.1% as of December 31, 2000.
(2) Collateral - see Note 13
Note 8 - TRADE PAYABLES
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Open accounts 547 135
Checks payable 144 36
----- -----
691 171
===== =====
Note 9 - OTHER PAYABLES AND ACCRUED EXPENSES
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Salaries and related expenses (*) 2,407 596
Government authorities 324 80
Related party 293 73
Other 165 40
----- -----
3,189 789
===== =====
(*) Include accrued vacation pay in the amount of NIS 626,000.
-14-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 10 - LONG-TERM LOANS
A. COMPOSITION
Convenience
Annual December 31, translation
interest 2000 (Note 2H)
rate (*) NIS U.S. Dollars
-------- ------------ ------------
Linked to the U.S. dollar 6.8% 528 131
Linked to the Consumer
Price Index 5.4% 142 36
----- -----
670 167
Less - current maturities 238 60
----- -----
432 107
===== =====
(*) Average weighted rate as of December 31, 2000.
B. MATURITIES
Convenience
translation
(Note 2H)
NIS U.S. Dollars
------------ ------------
First year - current maturities 238 60
Second year 196 49
Third year 145 36
Fourth year 58 14
Fifth year 33 8
---- ----
670 167
==== ====
(*) Collateral - see Note 13
Note 11 - LONG-TERM LOANS FROM PARENT COMPANY AND OTHERS
Convenience
Annual December 31, translation
interest 2000 (Note 2H)
rate NIS U.S. Dollars
-------- ------------ ------------
From parent company (*)
Linked to the Consumer
Price Index 4% 4,010 992
From minority shareholder
of subsidiary
Linked to the U.S. dollar -- 868 215
----- -----
4,878 1,207
Less - minority interest in
shareholders' deficiency
of subsidiary 868 215
----- -----
4,010 992
===== =====
(*) Repayment date of loans has not yet been determined. The parent company has
undertaken not to request repayment before January 1, 2002.
-15-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 12 - ACCRUED SEVERANCE PAY, NET
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Accrued severance pay 1,775 439
Less - deposits with provident funds 846 209
----- -----
929 230
===== =====
Under Israeli law, the Company and its subsidiary in Israel are
required to make severance payments to terminated employees. The
calculation is based on the employee's latest salary and the period
employed. For most of their employees, the obligation for severance
pay is discharged by payment of premiums to insurance companies under
approved plans and by regular payments to pension funds. The amounts
maintained with insurance companies and the pension funds are not
under the control of the Company and its subsidiary and therefore such
amounts and the corresponding obligation are not reflected in the
financial statements. The obligation under Israeli law for severance
pay not covered by the aforementioned payments is presented in the
balance sheet, net of deposits in provident funds.
Note 13 - LIENS
The liabilities of the Company and of a subsidiary to banks, amounting
to approximately NIS 6.2 million as of December 31, 2000, are
collateralized by fixed and floating charges of various priorities on
the companies' assets, including contractual rights in respect
thereof, and by charges on their share capital and goodwill.
Note 14 - SHARE CAPITAL
A. COMPOSITION
December 31, 2000
-----------------
Issued and
Authorized paid-up
---------- ----------
Number of shares
----------------------------
Ordinary shares of NIS 1 par value 21,400 1,031
====== =====
B. In 1998 the Company signed an agreement with a senior employee in
the framework of which it was agreed that 3% of the Company's
share capital would be issued and transferred to a trustee and
that after two years from the date of the transfer of the shares
to the trustee, the shares would be transferred to the employee.
In May 2000 the shares were issued (in consideration for their
par value) and transferred to the trustee.
C. Subsequent to balance sheet date, the Board of Directors approved
the grant of options to an employee to purchase 2% of the shares
of the Company at an exercise price based on a Company valuation
of US$ 5 million which amount approximates the fair value of the
Company on the date of the grant. The options may be exercised
prorata over a period of three years.
The Board of Directors also approved that, in the event of a
split-up of the Company and an investment of at least US$ 1.5
million by an outside investor in the split-up company, the
employee will be entitled to 5% of the shares of the split-up
company at no consideration, and that, in the event that US$ 10
million is invested in the split-up company, the employee will be
entitled to 7% of the shares of the split-up company at no
consideration.
-16-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 15 - COST OF REVENUES
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Payroll and related expenses 11,883 2,941
Subcontractors 3,371 834
Depreciation 234 58
Vehicle maintenance 1,197 296
Other 621 154
------ -----
17,306 4,283
====== =====
Note 16 - SELLING AND MARKETING EXPENSES
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Payroll and related expenses 1,036 256
Advertising 152 38
Depreciation 117 29
Rental 118 29
Other 205 51
----- -----
1,628 403
===== =====
Note 17 - GENERAL AND ADMINISTRATIVE EXPENSES
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Payroll and related expenses 1,898 470
Management fees 921 228
Office maintenance 915 226
Professional fees 329 81
Bad and doubtful debts 499 123
Depreciation 353 88
Other 481 119
----- -----
5,396 1,335
===== =====
-17-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 18 - FINANCING EXPENSES, NET
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
In respect of loans from parent company 160 40
In respect of long-term loans from banks 28 7
In respect of short-term loans from banks 308 76
Other expenses, net 61 15
----- -----
557 138
===== =====
Note 19 - TAXES ON INCOME
A. TAX LAWS APPLICABLE
The Company and its subsidiary are subject to the Income Tax Law
(Inflationary Adjustments), 1985.
B. EFFECTIVE TAX
The difference between income taxes computed on loss before
equity in loss of affiliate and minority interest at the regular
tax rate and the income tax expense as reflected in the financial
statements, is explained as follows:
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Tax benefit computed at
regular tax rate (36%) (1,257) (311)
Increase (decrease) in tax
liability due to:
Losses in respect of which no
tax benefit was recorded 1,221 302
Non-taxable gain on issuance
of shares to minority
shareholders of subsidiary (64) (16)
Non-deductible expenses and
other differences 100 25
----- -----
-- --
===== =====
C. DEFERRED TAX BENEFITS
The Company and its subsidiary have temporary net deductible
differences and loss carryforwards at December 31, 2000 of
approximately NIS 1.1 million and NIS 3.1 million, respectively.
Due to the uncertainty of realization, the tax benefit in respect
of these losses have not been included in the financial
statements.
D. FINAL TAX ASSESSMENTS
The Company has received final tax assessments, through 1996. The
subsidiary has not received final tax assessments since
incorporation.
-18-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 20 - RELATED PARTIES
A. BALANCES
Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Trade payables 37 9
Other payables 293 73
Long-term loans (see Note 11) 4,010 992
B. TRANSACTIONS
For the year
ended Convenience
December 31, translation
2000 (Note 2H)
NIS U.S. Dollars
------------ ------------
Financing expenses to parent
Company 160 40
Management fees 921 228
Note 21 - FINANCIAL INSTRUMENTS
A. CREDIT RISKS
Group companies perform ongoing evaluations of customer credit
and make appropriate provisions for losses with regard to
specific debts, the collectibility of which is doubtful.
B. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments (cash and cash
equivalents, trade receivables, and other current monetary assets
and monetary liabilities) approximates their fair value.
Note 22 - RECONCILIATION TO U.S. GAAP
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles applicable in
Israel (Israeli GAAP), which differ in certain respects from those
applicable in the United States (U.S. GAAP). The main differences are
described below:
1. FINANCIAL STATEMENTS IN ADJUSTED NIS
In accordance with Israeli GAAP, the financial statements are
presented in accordance with a comprehensive basis of accounting
for inflation. U.S. GAAP does not generally provide for the
adjustment of financial statements for the impact of inflation of
entities which do not operate in a hyperinflationary economy.
Pursuant to the United States Securities and Exchange Commission
requirements applicable to foreign private issuers, however, the
Company has not included the impact of inflationary accounting
pursuant to Israeli GAAP in the reconciliation to U.S. GAAP.
-19-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted shekels of December 2000
Note 22 - RECONCILIATION TO U.S. GAAP (Cont.)
2. ACCRUED SEVERANCE PAY
According to U.S. GAAP, accrued severance and the related funded
amounts are presented separately in the balance sheet.
According to Israeli GAAP, the accrual and funded amounts are
presented net in the balance sheet - see Note 12 for details of
amounts.
The difference between the two methods described above is
immaterial with respect to the financial statements of the
Company.
3. TREATMENT OF COMPENSATION EXPENSE FOR OPTIONS ISSUED TO EMPLOYEES
Under Israeli accounting principles, the grant of the stock
option mentioned in Note 14C will not require the recognition of
compensation expense. For the purpose of the reconciliation
between Israeli GAAP and U.S. GAAP, the Company has adopted the
provisions of APB 25 - "Accounting for Stock Issued to
Employees". As the exercise price of the options approximates the
fair market value of the Company's shares on the date of grant,
under APB Opinion No. 25 there is no requirement to recognize
compensation expense and as such no adjustment is required.
# # # # #
-20-
-----------------------
ENDAN IT SOLUTIONS LTD.
-----------------------
CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
as of September 30, 2001
(Unaudited)
-----------------------
ENDAN IT SOLUTIONS LTD.
-----------------------
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001
C O N T E N T S
Page
----
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Shareholders' Deficiency 4
Consolidated Statements of Cash Flows 5 - 6
Notes to the Consolidated Financial Statements 7 - 9
# # # # # # #
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED BALANCE SHEETS
In Adjusted NIS of September 2001
Convenience
translation
(Note 3)
September 30, September 30,
2001 2001
NIS U.S.$
------------- -------------
(Unaudited)
------------------------------
In thousands
------------------------------
CURRENT ASSETS
Cash and cash equivalents 202 46
Trade receivables, net of allowance
for doubtful accounts of NIS 257
(U.S.$59) 7,845 1,801
Other receivables 993 228
------ -----
9,040 2,075
------ -----
LONG-TERM RECEIVABLES 212 49
------ -----
FIXED ASSETS, NET 2,658 610
------ -----
OTHER ASSETS 342 79
------ -----
12,252 2,813
====== =====
CURRENT LIABILITIES
Short-term bank debt 4,871 1,118
Trade payables 549 126
Other payables and accrued expenses 3,087 709
------ -----
8,507 1,953
------ -----
LONG-TERM LIABILITIES
Loans from banks 878 202
Loans from parent company and others 4,304 988
Accrued severance pay 1,129 259
------ -----
6,311 1,449
------ -----
SHAREHOLDERS' DEFICIENCY
Share capital 2 --
Accumulated deficit (2,568) (589)
------ -----
(2,566) (589)
------ -----
12,252 2,813
====== =====
The accompanying notes form an integral part of the financial statements.
-2-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENTS OF INCOME
In Adjusted NIS of September 2001
Convenience
For the nine For the nine translation (Note 3)
months ended months ended For the nine months
September 30, September 30, ended September 30,
2000 2001 2001
NIS NIS U.S.$
------------- ------------- --------------------
(Unaudited)
--------------------------------------------------------
In thousands
--------------------------------------------------------
REVENUES FROM SERVICES 16,689 20,270 4,654
COST OF REVENUES 12,929 14,589 3,350
------ ------ -----
Gross profit 3,760 5,681 1,304
DEVELOPMENT COSTS 1,277(*) -- --
SELLING AND MARKETING
EXPENSES 1,037 1,239 285
GENERAL AND ADMINISTRATIVE
EXPENSES 4,136(*) 3,154 724
------ ------ -----
Operating income (loss) (2,690) 1,288 295
FINANCING EXPENSES, NET (389) (645) (148)
OTHER INCOME, NET 5 790 181
------ ------ -----
Income (loss) before equity in loss of
affiliate and minority interest (3,074) 1,433 328
EQUITY IN LOSS OF AFFILLIATE (67) -- --
MINORITY INTEREST 330(*) 183 42
------ ------ -----
Net income (loss) (2,811) 1,616 370
====== ====== =====
(*) Restated - see Note 2B.
The accompanying notes form an integral part of the financial statements.
-3-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
In Adjusted NIS of September 2001
Share Accumulated
capital deficit Total
------- ------- -----
NIS in thousands
-------------------------------------
Balance as of January 1, 2001 2 (4,184) (4,182)
Net income -- 1,616 1,616
---- ----- -----
Balance as of September 30, 2001 2 (2,568) (2,566)
==== ===== =====
Convenience translation (Note 3)
U.S. dollars in thousands
-------------------------------------
Share Accumulated Total
capital deficit
------- ----------- -----
Balance as of January 1, 2001 -- (959) (959)
Net income -- 370 370
---- ---- ----
Balance as of September 30, 2001 -- (589) (589)
==== ==== ====
The accompanying notes form an integral part of the financial statements.
-4-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Adjusted NIS of September 2001
Convenience
translation
(Note 3)
For the nine For the nine For the nine
months ended months ended months ended
September 30, September 30, September 30,
2000 (*) 2001 2001
NIS NIS U.S.$
------------- ------------- --------------
(Unaudited)
-----------------------------------------------------
In thousands
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (2,811) 1,616 370
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities (see A below) (28) (1,208) (277)
----- ----- -----
Net cash provided by (used in) operating
activities (2,839) 408 93
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,058) (911) (209)
Proceeds from disposal of fixed assets 116 141 32
----- ----- -----
Net cash used in investing activities (942) (770) (177)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of long-term loans from banks and others 280 714 164
Repayment of long-term loans to banks (172) (218) (50)
Short-term credit from banks, net 3,574 (1,050) (241)
Increase (decrease) in the balance with parent
company, net (90) 214 49
Proceeds from issuance of shares to minority
shareholders of subsidiary -- 802 184
----- ----- -----
Net cash provided by financing activities 3,592 462 106
----- ----- -----
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (189) 100 22
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE PERIOD 235 102 24
----- ----- -----
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD 46 202 46
===== ===== =====
CASH PAID DURING THE YEAR FOR:
INTEREST 237 556 128
===== ===== =====
TAXES 97 84 19
===== ===== =====
(*) Restated - see Note 2B.
The accompanying notes form an integral part of the financial statements.
-5-
ENDAN IT SOLUTIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
In Adjusted NIS of September 2001
Convenience
translation
(Note 3)
For the nine For the nine For the nine
months ended months ended months ended
September 30, September 30, September 30,
2000 (*) 2001 2001
NIS NIS U.S.$
------------- ------------- -------------
(Unaudited)
----------------------------------------------------
In thousands
----------------------------------------------------
A. ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Equity in net loss of affiliate 67 -- --
Minority interest (330) (183) (42)
Gain on issuance of shares to minority
shareholders of subsidiary -- (802) (184)
Depreciation and amortization 513 668 153
Increase in severance pay
Obligations, net 161 181 42
Purchasing power loss (gain)
on long-term loans (10) 59 14
Loss (gain) on disposal of fixed assets (5) 11 3
Increase in trade receivables (1,203) (701) (161)
Increase in other receivables
(including long-term receivables) (204) (112) (26)
Decrease in trade payables (222) (156) (36)
Increase (decrease) in other payables 1,205 (173) (40)
----- ------ -----
(28) (1,208) (277)
===== ====== =====
B. NONCASH TRANSACTION
Sale of an affiliate in consideration
for short-term credit -- 240 55
===== ====== =====
(*) Restated - see Note 2B.
The accompanying notes form an integral part of the financial statements.
-6-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - GENERAL
A. These financial statements have been prepared in condensed form
as of September 30, 2001 and for the nine months then ended in
accordance with generally accepted accounting principles in
Israel relating to interim financial statements. These financial
statements should be read in conjunction with the annual
financial statements and the accompanying notes of the Company as
of December 31, 2000 and for the year then ended ("the annual
financial statements").
B. In June 2001 the Company changed its name from Endan Systems
Management and Computing Ltd to Endan IT Solutions Ltd.
Note 2 - ACCOUNTING POLICIES
A. The significant accounting policies followed in the preparation
of these financial statements are identical to those applied in
preparation of the annual financial statements.
B. RESTATEMENT
As described in the annual financial statements, the Company and
a subsidiary restated their prior years' financial statements in
order to reflect the effects of charging to operations costs in
connection with the establishment of a subsidiary and certain
software development costs that were previously capitalized, and
included in other assets.
Following are the effects of the restatement on the statement of
income for the nine months ended September 30, 2000:
NIS
In thousands
Net loss as presented previously (3,070)
------------
Adjustments resulting from
restatement of prior years'
financial statements :
Minority interest (173)
Software development costs (111)
General and administrative
expenses 543
------
259
------
Net loss after restatement (2,811)
======
Note 3 - FINANCIAL STATEMENTS IN ADJUSTED VALUES AND U.S. DOLLARS
The Company prepares its primary financial statements on the basis of
historical cost adjusted for the changes in the general purchasing
power of the New Israeli Shekel ("NIS") based on the changes in the
Israeli Consumer Price Index.
The primary financial statements as of September 30, 2001 and for the
nine months then ended have been translated into U.S. dollars using
the representative exchange rate at that date ($1 = NIS 4.35). The
translation was made solely for the convenience of the reader.
-7-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - FINANCIAL STATEMENTS IN ADJUSTED VALUES AND U.S. DOLLARS (Cont.)
The U.S. dollar amounts presented in these financial statements should
not be construed to represent amounts receivable or payable in dollars
or convertible into dollars, unless otherwise indicated.
Following are the changes in the Consumer Price Index and in the
representative exchange rate of the U.S. dollar:
Consumer U.S. dollar
Price Index exchange rate
% %
----------- -------------
For the nine months ended:
September 30, 2001 2.0 7.8
September 30, 2000 (0.5) (3.1)
Note 4 - SUPPLEMENTARY INFORMATION
A. In March 2001 JBE Software Services Ltd, a 64% - owned
subsidiary, issued shares to a minority shareholder, resulting in
the Company's holdings decreaseing to approximately 54%. As a
result of this issuance, the Company recorded a gain of
approximately NIS 800,000.
B. In August 2001 an agreement was signed according to which the
Company sold its holdings of 33% in Mileon Ltd. to a related
party in consideration for its carrying value (approximately NIS
240,000).
C. In August 2001, the Board of Directors approved the grant of
options to an employee to purchase 2% of the shares of the
Company at an exercise price based on a Company valuation of US$
5 million which amount approximates the fair value of the Company
on the date of the grant. The options may be exercised prorata
over a period of three years.
The Board of Directors also approved that, in the event of a
split-up of the Company and an investment of at least US$ 1.5
million by an outside investor in the split-up company, the
employee will be entitled to 5% of the shares of the split-up
company at no consideration, and that, in the event that US$ 10
million is invested in the split-up company, the employee will be
entitled to 7% of the shares of the split-up company at no
consideration.
D. In September 2001 the Company submitted a claim against another
party in the amount of approximately US$ 710,000 in respect of
damages caused to the Company as a result of breach of contract
by the other party, including in respect of a receivable not paid
to the Company and loss of future income.
In November 2001 the other party submitted a counter claim in the
amount of approximately NIS 3.7 million alleging that the
software system provided by the Company was not appropriate.
Management of the Company believes, based on the opinion of its
legal counsel, it is likely that most of the Company's arguments
will be ultimately accepted and that the Company will not be
required to pay a material amount to the other party in respect
of the counter claim. Accordingly, no provision was included in
the financial statements in respect of the counter claim.
E. In October 2001 a Memorandum of Understanding was signed between
the shareholders of the Company and the shareholders of Decision
Systems Israel Ltd ("DSI"), in the framework of which it was
agreed, inter alia, that the shareholders of the Company will
transfer all their holdings in the Company to DSI for
consideration that includes, shares of DSI. Consummation of the
transaction is subject to signing of a final agreement and
receipt of certain authorizations.
-8-
ENDAN IT SOLUTIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
A. In 2001, the Israel Accounting Standards Board issued Accounting
Standard No. 12, "Cessation of Adjustment of Financial
Statements". Under the provisions of this Standard, as of January
1, 2003, financial statements will cease to be adjusted for the
effect of changes in the general purchasing power of the Israeli
currency. Until December 31, 2002, the Company will continue to
prepare adjusted financial statements in accordance with the
provisions of Opinion No. 36 of the Institute of Certified Public
Accountants in Israel. The adjusted amounts in the financial
statements as of December 31, 2002, will serve as the basis for
nominal financial reporting as of January 1, 2003.
B. Concurrently with the issuance of Accounting Standard No. 12, the
Israel Accounting Standards Board issued Accounting Standard No.
13, "Effects of Changes in Foreign Exchange Rates". The Standard
establishes the accounting treatment for foreign currency
transactions, and for the translation of financial statements of
investee companies with foreign operations. In addition, the
Standard provides guidance as to how to determine whether a
foreign investee is integral to the operations of the reporting
entity or an autonomous unit, and as to the manner in which the
financial statements of the aforementioned investee companies
should be translated.
The new Standard is effective for financial statements for
periods commencing after December 31, 2002. Management believes
that the effect of the adoption of the new Standard on the
Company's financial position and operating results is not
expected to be material.
Note 6 - RECONCILIATION TO U.S. GAAP
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles applicable in
Israel (Israeli GAAP), which differ in certain respects from those
applicable in the United States (U.S. GAAP). The main differences are
described below:
1. FINANCIAL STATEMENTS IN ADJUSTED NIS
In accordance with Israeli GAAP, the financial statements are
presented in accordance with a comprehensive basis of accounting
for inflation. U.S. GAAP does not generally provide for the
adjustment of financial statements for the impact of inflation of
entities which do not operate in a hyperinflationary economy.
Pursuant to the United States Securities and Exchange Commission
requirements applicable to foreign private issuers, however, the
Company has not included the impact of inflationary accounting
pursuant to Israeli GAAP in the reconciliation to U.S. GAAP.
2. ACCRUED SEVERANCE PAY
According to U.S. GAAP, accrued severance and the related funded
amounts are presented separately in the balance sheet.
According to Israeli GAAP, the accrual and funded amounts are
presented net in the balance sheet.
The difference between the two methods described above is
immaterial with respect to the financial statements of the
Company.
3. TREATMENT OF COMPENSATION EXPENSE FOR OPTIONS ISSUED TO EMPLOYEES
Under Israeli accounting principles, the grant of the stock
options described in Note 4C does not require the recognition of
compensation expense. For the purpose of the reconciliation
between Israeli GAAP and U.S. GAAP the Company has adopted the
provisions of APB 25 - "Accounting for Stock Issued to
Employees". As the exercise price of the options approximates the
fair market value of the Company's shares on the date of grant,
under APB Opinion No. 25 there is no requirement to recognize
compensation expense and as such no adjustment is required.
# # # # # # #
-9-
Item 7. Financial Statements and Exhibits.
(b) Pro Forma Financial Information.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial statements
give effect to the acquisition by Data Systems & Software Inc. ("DSSI") of all
the issued and outstanding shares of Endan IT Solutions Ltd. ("Endan") on
December 13, 2001 in a transaction accounted for as a purchase business
combination.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet (the "Pro Forma
Balance Sheet") as of September 30, 2001 has been prepared as if the acquisition
occurred on September 30, 2001. The Pro Forma Balance Sheet combines the
historical consolidated balance sheet of DSSI, which is incorporated herein by
reference, and Endan, which is included herein, at September 30, 2001, and give
effect to the unaudited pro forma adjustments necessary to account for the
acquisition as a purchase.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations (the
"Pro Forma Statements of Operations") have been prepared as if the acquisition
had occurred on January 1, 2000. These Pro Forma Statements of Operations
combine the historical consolidated statements of operations of DSSI for the
year ended December 31, 2000 and the nine months ended September 30, 2001, which
are incorporated herein by reference, with the historical consolidated
statements of income of Endan for the year ended December 31, 2000 and the nine
months ended September 30, 2001, respectively, which are included herein, and
give effect to the unaudited pro forma adjustments necessary to account for the
acquisition as a purchase.
The unaudited pro forma adjustments are based on an estimated purchase price and
preliminary purchase price allocation made based on available information and
assumptions that DSSI believes are reasonable. Therefore, the amounts in the Pro
Forma Statements of Operations and Pro Forma Balance Sheet and accompanying
notes (collectively, the "Pro Forma Financial Information") are subject to
change which could be material. In the opinion of management, all adjustments
have been made that are necessary to present fairly the Pro Forma Financial
Information. The Pro Forma Financial Information is provided for illustrative
purposes only and do not purport to represent what DSSI's results of operations
or financial position would actually have been, had the acquisition occurred on
such dates, nor do they purport to project the results of operations or
financial position of DSSI for any future period or date.
The Pro Forma Financial Information should be read in conjunction with, and
are qualified by reference to, the audited and unaudited consolidated financial
statements and accompanying notes of DSSI and Endan which are incorporated
herein by reference and included herein, respectively.
-10-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2001
(in thousands)
Pro Forma
DSSI Endan Adjustments Note Pro Forma
(Note 12)
ASSETS
Cash, cash equivalents and short-term investments $9,660 $46 (500) (3) $8,206
(1,000) (6)
Trade accounts receivable, net 9,618 1,801 11,419
Other current assets 9,075 231 9,306
-------- -------- --------
Total current assets 28,353 2,078 28,931
Property and equipment, net 1,753 629 2,382
Goodwill, net 1,973 -- 6,030 (1) 8,003
Other intangible assets, net 375 81 500 (1) 956
Other assets 765 52 817
Prepaid employee termination benefits 2,436 315 2,751
-------- -------- --------
Total assets $35,655 3,155 $43,840
======== ======== =======
LIABILITIES
Short-term debt and current maturities of long-term
debt $7,184 1,118 8,302
Trade accounts payable 4,278 126 4,404
Other payables and accrued expenses 5,526 709 100 (1) 6,335
-------- -------- --------
Total current liabilities 16,988 1,953 19,041
--------
Deferred tax liability -- -- 180 (1) 180
Long term debt 9 1,190 (1,000) (6) 199
Employee termination benefits 3,289 574 3,863
-------- -------- --------
Total long-term liabilities 3,298 1,764 4,242
--------
Minority interests 40 -- 2,772 (4) 2,812
--------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock 81 -- 81
Additional paid in capital 36,290 -- 484 (2) 36,774
Warrants 114 -- 114
Deferred compensation (90) -- (90)
Accumulated deficit (15,389) (562) 562 (2)
166 (5) (15,223)
Treasury stock (5,677) -- 1,766 (2) (3,911)
-------- -------- --------
15,329 (562) 17,745
-------- -------- --------
Total liabilities and equity $35,655 3,155 $43,840
======== ======== ========
-11-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
(in thousands, except per share data)
Pro Forma
DSSI Endan Adjustments Note Pro Forma
(Note 11)
Sales $57,839 $5,569 $63,408
Cost of sales 45,606 4,255 100 (7) 49,961
---------- ----------- --------
Gross profit 12,233 1,314 13,447
Research and development expenses 928 353 1,281
Selling, general and administrative
expenses 16,340 1,727 18,067
Gain on sale of division 1,144 -- 1,144
---------- ----------- --------
Operating loss (3,891) (766) (4,757)
Interest income 1,758 -- 1,758
Interest expense (709) (137) 40 (8) (806)
Other (loss) income, net (50) 44 (6)
---------- ----------- --------
Loss before provision for income taxes (2,892) (859) (3,811)
Provision for income taxes 171 -- (9) 171
---------- ----------- --------
(3,063) (859) (3,982)
Equity loss in investee -- (42) (42)
Minority interest -- 130 130
---------- ----------- --------
Loss from continuing operations
before non-recurring gain on partial
sale of subsidiary ($3,063) (771) (5) ($3,894)
---------- ----------- --------
Loss per share from continuing
operations before non-recurring
gain on partial sale of
subsidiary - basic and diluted ($0.41) (10) ($0.50)
Weighted average number of shares
outstanding - basic and diluted 7,422 365 (10) 7,787
-12-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
(in thousands, except per share data)
Pro Forma
DSSI Endan Adjustments Note Pro Forma
(Note 11)
Sales $36,157 4,789 $40,946
Cost of sales 27,861 3,446 75 (7) 31,382
---------- ---------- ----------
Gross profit 8,296 1,343 9,564
Research and development expenses 2,216 -- 2,216
Selling, general and administrative expenses 13,220 1,038 14,258
---------- ---------- ----------
Operating (loss) income (7,140) 305 (6,910)
Interest income 917 -- 917
Interest expense (361) (153) 30 (8) (484)
Other income, net 26 187 213
---------- ---------- ----------
(Loss) income before provision for income taxes (6,558) 339 (6,264)
Provision for income taxes 18 -- (9) 18
---------- ---------- ----------
(6,576) 339 (6,282)
Minority interest -- 43 43
---------- ---------- ----------
(Loss) income from continuing operations before ($6,576) 382 (5) ($6,239)
non-recurring gain on partial sale of subsidiary
========== ========== ==========
Loss per share from continuing operations before
non-recurring gain on partial sale of subsidiary -
basic and diluted ($0.95) (10) ($0.85)
Weighted average number of shares outstanding -
basic and diluted 6,943 365 10) 7,308
-13-
DATA SYSTEMS & SOFTWARE INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1
To record the preliminary allocation of the purchase price over the historical
net assets of Endan at September 30, 2001. In accordance with FASB Statement No.
141, Business Combinations, the assets and liabilities of Endan are required to
be adjusted to their fair values. The estimated purchase price of $5,788 is the
sum of the following: (i) $2,250 representing the issuance of 365,210 shares of
DSSI common stock valued at $6.16 per share, which represents the average
closing price of DSSI common stock for a 60 day trading period prior to the
closing of the acquisition as agreed upon by the parties (this amount is not
materially different from a valuation of the DSSI common stock based on three
days before and after the date the acquisition was announced), (ii) $2,912
representing the estimated value of 32% of the outstanding ordinary shares of
DSSI's subsidiary, Decision Systems Israel Ltd. (DSI), (iii) $26 representing
the fair value of options to purchase DSI ordinary shares in exchange for the
cancellation of outstanding Endan stock options, (iv) $500 of cash, and (v) $100
of estimated closing costs. The final purchase price will be dependent upon the
actual closing costs and the final valuation of 32% of the outstanding ordinary
shares of DSI.
The following pro forma adjustments give effect to the preliminary allocation of
the purchase price to the estimated fair value of the net assets acquired based
upon available information. These adjustments are subject to the determination
of the final purchase price as described above and completion of the valuations
as of the date of consummation of the acquisition. Valuations of the
specifically identifiable intangible assets are in progress. Consequently, the
actual allocation of the purchase price could differ materially from that
presented below. The following represents the preliminary allocation of the
purchase price:
Estimated purchase price $5,788
Net liabilities assumed 562
--------
$6,350
Fair value adjustments:
Acquired intangibles with
estimable lives - software licenses $ (500)
Deferred taxes 180
--------
Purchase price in excess of fair value
of net assets acquired (goodwill) $6,030
========
In addition to the purchase consideration mentioned above, DSSI also is required
to provide a loan of $1,100 to DSI to enable repayment by Endan of a $1,000 loan
previously made to Endan by Kardan Communications Ltd. ("Kardan"), Endan's
majority shareholder.
For purposes of the Pro Forma Financial Information, the estimated amount
of goodwill generated by the transaction of $6,030 is not amortized in
accordance with FASB Statement No. 142, "Goodwill and Other Intangible Assets".
Intangible assets with estimable useful lives are amortized over that period.
The acquired intangible assets with estimable useful lives include $500 for the
estimated fair market value of Endan's "Easy Bill" and "Clinic" software
licenses. The estimated useful life of these licenses is five years.
NOTE 2
To eliminate the historical Endan shareholders' equity balances and to record
the issuance of DSSI common stock from its treasury stock.
NOTE 3
To record the issuance of cash consideration of $500.
-14-
NOTE 4
To record the minority interest ownership of DSI of $2,746 (32% of the fair
value of Endan and 32% of the historical book value of DSI before the
transaction) and the fair value of DSI options issued in exchange for the
cancellation of outstanding Endan stock options.
NOTE 5
To record the gain on the exchange of 32% of the difference between the fair
value of DSI before the transaction of $4,300 and the book value of DSI as of
September 30, 2001 of $3,780. The gain is excluded from the Pro Forma Statement
of Operations as it is non-recurring.
NOTE 6
To record the repayment of Endan's debt to Kardan.
NOTE 7
To record amortization of acquired intangibles with finite lives on a
straight-line basis over 5 years.
NOTE 8
To record estimated interest expense saved resulting from repayment of Endan's
debt to Kardan.
NOTE 9
No pro forma income tax provision (benefit) is recognized because of a loss
before income taxes in each period and the need to recognize a valuation
allowance on deferred tax assets. Given the history of incurring losses, DSSI
believes that it is more likely than not that no deferred tax assets will be
realized.
NOTE 10
The weighted average number of outstanding common shares outstanding assumes
that the 365,210 shares of DSSI common stock issued in the acquisition are
outstanding throughout each period. Pro forma basic and diluted loss from
continuing operations per share are the same because the inclusion of options
and warrants in the calculation would be antidilutive.
NOTE 11
The reconciliation of the condensed consolidated statements of income of Endan
prepared in accordance with accounting principles generally accepted in Israel
("IGAAP") to accounting principles generally accepted in the United States of
America ("USGAAP") is as follows:
-15-
Nine months ended September 30, 2001
------------------------------------
Endan Endan Endan
IGAAP Adjustments (i) USGAAP USGAAP(iii)
----- --------------- ------ -----------
(NIS) (NIS) (NIS) (US$)
Sales 20,270 (209) 20,061 4,789
Cost of sales 14,589 (150) 14,439 3,446
------ ------ -----
Gross profit 5,681 5,622 1,343
Research and development -- -- -- --
Selling, general and administrative 4,393 (46) 4,347 1,038
------ ------ -----
Operating income 1,288 1,275 305
Interest income -- -- -- --
Interest expense (645) 7 (638) (152)
Other, net 790 (8) 782 187
------ ------ -----
Income before provision
for income taxes 1,433 1,419 340
Provision for income taxes -- -- --
------ ------ -----
Equity income (loss) in investee --- -- --
Minority interest 183 (2) 181 43
------ ------ -----
Net income 1,616 1,600 383
====== ====== =====
Year ended December 31, 2000
----------------------------
Endan Endan Endan
IGAAP Adjustments(ii) USGAAP USGAAP(iii)
----- --------------- ------ -----------
(NIS) (NIS) (NIS) (US$)
Sales 22,652 22,652 5,569
Cost of sales 17,306 17,306 4,255
------ ------ -----
Gross profit 5,346 5,346 1,314
Research and development 1,435 1,435 353
Selling, general and administrative 7,024 7,024 1,727
------ ------ -----
Operating loss (3,113) (3,113) (766)
Interest income -- -- --
Interest expense (557) (557) (137)
Other, net 179 179 44
------ ------ -----
Loss before provision
for income taxes (3,491) (3,491) (859)
Provision for income taxes -- -- --
Equity income (loss) in investee (172) (172) (42)
Minority interest 530 530 130
------ ------ -----
Net loss (3,133) (3,133) (771)
====== ======= =====
(i) The financial statements of Endan were prepared in accordance with
IGAAP which require that the financial statement be prepared on the
basis of historical cost convention adjusted for changes in the
general purchasing power of the Israeli currency (New Israeli Shekel
- "NIS"). Endan's accounts are maintained in nominal shekels. The
nominal figures are adjusted to shekels of equivalent purchasing
power in conformity with the principles prescribed by Statements of
the Institute of Certified Public Accountants in Israel, on the
basis of changes in the Consumer Price Index (the "Index"). Revenues
are adjusted in accordance with the change in the Index from
transaction date to balance sheet date. Expenses, other than
financing expenses and those deriving from nonmonetary items, are
adjusted for the changes in the Index from transaction date to
balance sheet date. Expenses deriving from
-16-
nonmonetary items are adjusted in correspondence with the adjusted
balance sheet item. Equity in the results of the affiliate is based
on the adjusted financial statements of the affiliate. The balance
of the inflationary adjustment, not attributed to revenues or
expenses as referred to above, is included in net financing income
or expenses.
During the nine month period ended September 30, 2001, the Index
increased by 2.0%. All of the adjustments reflected in the nine
month period ended September 30, 2001 are to reverse the effect of
the adjustment to the Index. No adjustment has been made for the
effect of adjusting historical assets due to immateriality.
(ii) During the year ended December 31, 2000, there was no change in the
Index. Accordingly, no adjustments are reflected in the year ended
December 31, 2000 to reverse the effect of the adjustment to the
Index.
(iii) The consolidated statement of income for the nine months ended
September 30, 2001 has been translated from NIS to U.S. dollars
based upon the monthly average foreign currency translation rate for
the nine months ended September 30, 2001.
NOTE 12
The reconciliation of the condensed consolidated balance sheet of Endan prepared
in accordance with IGAAP to USGAAP is as follows:
As of September 30, 2001
------------------------
Endan Endan Endan
IGAAP Adjustments USGAAP USGAAP(vi)
----- ----------- ------ ----------
(NIS) (NIS) (NIS) (US$)
Assets
Cash and cash equivalents 202 202 46
Trade accounts receivables, net 7,845 7,845 1,801
Other receivables 993 993 231
----- ------ -----
Total current assets 9,040 9,040 2,078
Long-term receivables 212 212 52
Property and equipment, net 2,658 (78) (iv) 2,580 629
Other assets 342 (6) (iv) 336 81
Prepaid employee termination benefits -- 1,370 (v) 1,370 315
------ ------ -----
Total assets 12,252 13,538 3,155
====== ====== =====
Liabilities
Short-term bank debt 4,871 4,871 1,118
Trade payables 549 549 126
Other payables and accrued expenses 3,087 3,087 709
----- ----- -----
Total current liabilities 8,507 8,507 1,953
Loans from banks 878 878 202
Loans from parent company and others 4,304 4,304 988
Accrued severance pay 1,129 1,370(v) 2,499 574
Shareholders' Deficiency
Share capital 2 2 --
Accumulated deficit (2,568) (84)(iv) (2,652) (562)
Total shareholders' deficiency (2,566) (2,650) (562)
------- ------- -----
Total liabilities and shareholders' deficiency 12,252 13,538 3,155
======= ======= =====
-17-
iv) The financial statements of Endan were prepared in accordance with
IGAAP which require that the financial statement be prepared on the
basis of historical cost convention adjusted for changes in the NIS.
Endan's accounts are maintained in nominal shekels. The nominal
figures are adjusted to shekels of equivalent purchasing power in
conformity with the principles prescribed by Statements of the
Institute of Certified Public Accountants in Israel, on the basis of
changes in the Consumer Price Index (the "Index"). Non-monetary items
are adjusted in accordance with the changes in the Index from the date
of acquisition (transaction) to balance sheet date (published on the
15th of the following month). Monetary items are presented in the
adjusted balance sheet at their nominal value. Accordingly,
non-monetary items (fixed assets and capitalized software costs) are
adjusted to their nominal value. For the purposes of the Pro Forma
Balance Sheet, the effect of changes in the Index on non-monetary
balance sheet items has been reversed as such adjustments are not
permitted by U.S. GAAP.
(v) According to IGAAP, the accrual and funding of severance pay amounts
are presented net, in the balance sheet. According to USGAAP, accrued
severance and the related funded amounts are presented separately in
the balance sheet.
(vi) The September 30, 2001 consolidated balance sheet has been translated
based upon the foreign currency translation rate as of September 30,
2001, with the exception of non-monetary items which were translated
at their historical rates.
-18-
(c) Exhibits.
Exhibit 1--Consent of Luboshitz Kasierer
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, in the Township of
Mahwah, State of New Jersey, on February 12, 2002.
DATA SYSTEMS & SOFTWARE INC.
BY: s/George Morgenstern
----------------------------------
GEORGE MORGENSTERN
Chairman of the Board, President
and Chief Executive Officer
-20-