SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 0-20181 ----------------------- SAPIENS INTERNATIONAL CORPORATION N.V. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------------------- NETHERLANDS ANTILLES (JURISDICTION OF INCORPORATION OR ORGANIZATION) ---------------------- Kaya Richard J. Beaujon z/n P.O. Box 837 Willemstad Curacao, Netherlands Antilles (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: None (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) <TABLE> <CAPTION> <S> <C> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- Common Shares, par value Hf. 1.00 per share National Market - ---------------------------------------------------------------------------------------------------- </TABLE> Indicate the number of outstanding shares of each of the issuer's classes of capital of common stock as of the close of the period covered by the annual report: 24,505,694 Common Shares, par value Hf. 1.00 per share Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by checkmark which financial statement item the registrant has elected to follow: [ ] Item 17 [X] Item 18
TABLE OF CONTENTS PART I <TABLE> <CAPTION> <S> <C> <C> PAGE Item 1. Identity of Directors, Senior Management and Advisers 3 Item 2. Offer Statistics and Expected Timetable 3 Item 3. Key Information 3 Item 4. Information on the Company 11 Item 5. Operating and Financial Review and Prospects 28 Item 6. Directors, Senior Management and Employees 34 Item 7. Major Shareholders and Related Party Transactions 40 Item 8. Financial Information 43 Item 9. The Offer and Listing 43 Item 10. Additional Information 44 Item 11. Quantitative and Qualitative Disclosure about Market Risk 51 Item 12. Description of Securities Other Than Equity Securities 51 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies 51 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 51 Item 15. Reserved 52 Item 16. Reserved 52 PART III Item 17. Financial Statements 52 Item 18. Financial Statements 52 Item 19. Exhibits 52 </TABLE> 2
THE "COMPANY" INCLUDES, WHERE APPROPRIATE, SAPIENS INTERNATIONAL CORPORATION N.V., ITS DIRECTLY WHOLLY OWNED SUBSIDIARY, SAPIENS INTERNATIONAL CORPORATION B.V., AND EACH OF THEIR OPERATING SUBSIDIARIES. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. ITEM 3. KEY INFORMATION A. SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain selected consolidated financial data and should be read in conjunction with the Company's consolidated financial statements for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, and notes thereto, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," (see Item 5 on page 23). The selected financial data set forth below as of and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 has been derived from the consolidated financial statements of the Company which have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") and which have been audited by Kost, Forer and Gabbay, a member of Ernst & Young International. <TABLE> <CAPTION> SELECTED FINANCIAL DATA (1): Year Ended December 31, ------------------------------------------------------- 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- (In thousands; except per share data) <S> <C> <C> <C> <C> <C> Revenues: Products $20,507 $37,181 $47,390 38,403 $27,876 Consulting and other services 24,057 33,799 44,440 34,341 35,559 ------------------------------------------------------- Total revenues 44,564 70,980 91,830 72,744 63,435 ------------------------------------------------------- Cost of revenues: Cost of products 4,473 12,690 16,354 25,737 20,358 Cost of consulting and other services 15,507 21,611 29,333 26,414 23,212 ------------------------------------------------------- Gross profit 24,584 36,679 46,143 20,593 19,865 Operating Expenses: Research and development, net 3,258 4,112 5,021 9,101 4,501 Selling and marketing, general and Administrative, net 16,316 22,921 27,880 46,682 28,725 Aborted Merger Costs 0 0 0 1,252 0 Restructuring Costs 0 0 2,019 2,558 0 ------------------------------------------------------- Total operating expenses 19,574 27,033 34,920 59,593 33,226 ------------------------------------------------------- Operating income (loss) 5,010 9,646 11,223 (39,000) (13,361) ------------------------------------------------------- </TABLE> 3
<TABLE> <CAPTION> Year Ended December 31, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (In thousands; except per share data) <S> <C> <C> <C> <C> <C> Financial income (expenses), net 107 457 412 (632) (3,187) Other expenses, net (417) (328) (220) (403) (665) Income (loss) before taxes on income 4,700 9,775 11,415 (40,035) (17,213) --------------------------------------------------------------- Taxes on income (benefit) 57 55 (1,678) (1,949) 726 Share in losses of equity investment (203) 0 0 0 -- Minority interests in (income) losses of a subsidiary (104) (15) 25 0 31 --------------------------------------------------------------- Net income (loss) 4,544 9,735 13,068 (38,086) (17,970) --------------------------------------------------------------- Dividends on preferred shares (2,406) (645) (418) (107) -- -------- -------- -------- ------- --------------------------------------------------------------- Net income (loss) to shareholders of common shares $ 2,138 $ 9,090 $ 12,650 ($38,193) (17,970) -------- -------- -------- -------- ------- --------------------------------------------------------------- Basic net earnings (loss) per share $ 0.14 $ 0.48 $ 0.61 ($ 1.69) ($ 0.78) Weighted average number of shares used in computing basic earnings (loss) per share 15,210 18,966 20,813 22,559 23,004 -------- -------- -------- -------- ------- (in thousands) Diluted net earnings (loss) per share Before extraordinary item $ 0.12 $ 0.43 $ 0.53 ($ 1.69) ($ 0.78) --------------------------------------------------------------- Diluted net earnings (loss) per share $ 0.12 $ 0.43 $ 0.53 ($ 1.69) ($ 0.78) --------------------------------------------------------------- Weighted average number of shares used in computing diluted net earnings (loss) per share (in thousands) 17,951 21,387 24,558 22,559 23,004 </TABLE> <TABLE> <CAPTION> At December 31, --------------------------------------------------------------- BALANCE SHEET DATA: 1997 1998 1999 2000 2001 --------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 10,338 $ 20,222 $ 8,735 $ 17,038 $16,087 Working capital 20,705 21,028 30,319 7,890 1,637 Total assets 57,648 73,324 85,105 92,400 70,463 Long term debt 16,088 7,273 7,930 7,430 7,365 Total stockholders' equity 20,069 33,115 51,414 18,896 10,740 </TABLE> II. CAPITALIZATION AND INDEBTEDNESS Not applicable. 4
III. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS We operate globally in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. CONTINUING ADVERSE CONDITIONS IN THE MARKET FOR INFORMATION TECHNOLOGY SOLUTIONS MAY LEAD TO DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES AND COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS, AS WELL AS THE PRICE OF OUR SHARES. Sapiens products and services are generally used by organizations with large information technology budgets and needs. The economic slowdown that has affected the markets in which we operate has had a particularly significant impact on the information technology sector. In response to this difficult economic environment, a number of our customers and potential customers have reduced their information technology budgets, leading to a decline in demand for our products. We believe that these adverse market conditions, and the response of certain of our customers and potential customers to these recent developments, have had a negative impact on our revenues and on the price of our shares. Should these market conditions persist, our business and results of operations could suffer further and the price of our shares could be harmed. THE TERMS OF OUR BANK DEBT CONTAIN A NUMBER OF RESTRUCTIVE COVENANTS WHICH, IF BREACHED, COULD RESULT IN ACCELERATION OF OUR OBLIGATION TO REPAY OUR DEBT. Our loan agreements contain a number of conditions and limitations on the way in which we can operate our business, including limitations on our ability to raise debt, sell or acquire assets and pay dividends. Our loan agreements also contain various covenants which require the Company to maintain certain financial ratios related to shareholders equity and operating results that are customary for companies of comparable size. These limitations and covenants may force us to pursue less than optimal business strategies or forego business arrangements which could have been financially advantageous to us or our shareholders. Our failure to comply with the covenants and restrictions contained in our loan agreements could lead to a default under the terms of these agreements. If a default occurs and we are unable to renegotiate the terms of the debt, the lenders could declare all amounts borrowed and all amounts due to them under the agreements due and payable. If we are unable to repay the debt, the lenders could foreclose on our assets that are subject to liens and sell our assets to satisfy the debt. 5
OUR BUSINESS INVOLVES LONG-TERM, FIXED-PRICE PROJECTS, WHICH 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 cost-to-completion, there could be a material adverse effect on our results of operations and financial position. Similarly, delays in executing client contracts may affect our revenue and cause our operating results to vary widely. Some of our solutions may be priced in excess of $1 million and are delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse impact on our financial position. The sales cycle for our solutions is variable, typically ranging between three months to several 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. IF EXISTING CUSTOMERS DO NOT MAKE SUBSEQUENT PURCHASES FROM US OR IF OUR RELATIONSHIPS WITH OUR LARGEST CUSTOMERS ARE IMPAIRED, OUR REVENUE GROWTH COULD DECLINE. Our existing customers are a key asset of the Company, and we depend on repeat product and service revenues from our base of customers. There can be no assurance that our existing customers will enter into new project contracts with the Company or that they will continue using our enabling technologies. If our revenue stream from existing customers were to decline significantly, it would have a material adverse impact on our operating results. OUR QUARTERLY RESULTS MAY BE IMPACTED BY SEASONAL TRENDS AND OTHER SHORT-TERM FACTORS. The operating results of many software and services companies reflect seasonal trends, and we expect to be affected by such trends in the future. Although we have not experienced consistent seasonal fluctuations in operational results to date, we believe that it is likely that we will experience relatively higher revenues in the fourth quarter and relatively lower revenues in the first quarter due mainly to customers' annual purchasing and budgetary practices. To the extent that our operations in Europe continue to generate a high percentage of our total revenues, we anticipate that we may also experience relatively weak demand in the third quarter as a result of reduced activities in Europe during the summer months. Variations in our revenue and operating results could occur as a result of a number of other factors, such as the budgeting and purchasing practices of our customers, the length of the customer product evaluation process, the timing of our customers' system conversions, the 6
timing and cost of new product introductions and product enhancements, and the timing of any acquisitions and associated costs. Employee hiring and utilization rates may also affect our revenues and results of operations. WE ARE DEPENDENT ON THE SUCCESS OF OUR TWO MAIN SUBSIDIARIES IN THE U.S. AND U.K. Our two main subsidiaries, which are located in Cary, North Carolina and London, England, account for more than 60% of annual revenues. While we are committed to the continued growth of these operations, as well as our operations in France, Germany, Japan Switzerland and Israel, there can be no assurance that our main operations will continue to perform at their current level. Furthermore, a significant downturn in the business of either of our two main subsidiaries would have a material adverse impact on our financial results. WE COMPETE AGAINST COMPANIES WITH SIGNIFICANTLY GREATER RESOURCES THAN OUR OWN. The market for software solutions and related services, and for business solutions for the Insurance industry, in particular, is highly competitive. Our principal competitors generally have significantly greater resources than our own. Price reductions or declines in demand for our solutions and services, whether as a result of competition, technological change, changes in the level of application development, reengineering or maintenance performed internally by our customers or potential customers would have a material adverse effect on our results of operations and financial position. Additional factors that may cause actual results to differ materially from our expectations include industry specific factors; our ability to continuously develop, introduce and deliver commercially viable solutions and technologies, and the market's rate of acceptance of the solutions we offer; our ability to keep pace with market and technology changes and to compete successfully; and our ability to manage the competitive risks associated with the strategic alliances that we have entered into. OUR INTERNATIONAL OPERATIONS INVOLVE INHERENT RISKS, SUCH AS FOREIGN CURRENCY FLUCTUATIONS AND COMPLIANCE WITH VARIOUS REGULATORY AND TAX REGIMES. Most of the Company's revenues are derived from international operations that are conducted in local currencies as well as dollars. Changes in the value of such local currencies or the dollar relative to such local currencies will affect the Company's financial position. Gains and losses on translations to dollars of assets and liabilities will contribute to fluctuations in the Company's financial position. The Company may engage in the future in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on the Company's financial position. However, there can be no assurance that any such hedging transaction, if entered into, will materially reduce the effect of fluctuation in foreign currency exchange rates on such results or on the dollar price at which the Common Shares are publicly traded. In addition, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, the Company's financial position could be adversely affected. Other potential risks that may impact the Company's international business activities include longer accounts receivable payment cycles and the burdens of complying with a wide variety of foreign laws, although such factors have not had a material adverse effect on the Company's financial position to date. 7
OUR BUSINESS INVOLVES BUSINESS-CRITICAL SOLUTIONS, WHICH EXPOSE US TO POTENTIAL LIABILITY CLAIMS. Our products focus specifically on organizations' business-critical applications including those related to core business solutions for the insurance and financial services industries and specialized redevelopment issues such as the adoption of the single European currency. Because our customers rely on our software to monitor and improve the performance of their critical software applications, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key employees' time and attention from the business, incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims, and we carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse effect on our results of operations and financial position. ALTHOUGH WE PROTECT OUR INTELLECTUAL PROPERTY RIGHTS VIGOROUSLY, THERE CAN BE NO ASSURANCE THAT THESE MEASURES WILL BE SUCCESSFUL. In accordance with industry practice, the Company relies upon a combination of contractual provisions and intellectual property law to protect its proprietary technology. The Company believes that because of the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of the Company's management and personnel. The Company seeks to protect the source code of its products as trade secret information and as an unpublished copyright work. The Company also relies on security and copy protection features in its proprietary software. The Company distributes its products under software license agreements which grant customers a personal, non-transferable license to use the Company's products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of the Company's products. In addition, the Company attempts to protect trade secrets and other proprietary information through agreements with employees, consultants, and distributors. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. IF WE FAIL TO REMAIN TECHNOLOGICALLY COMPETITIVE, WE COULD LOSE CUSTOMERS OR MARKET SHARE. The market for the Company's solutions is characterized by rapidly changing business conditions and customer requirements. The introduction of solutions embodying new technology and the emergence of new customer requirements can render existing technology obsolete and unmarketable. The Company's ability to anticipate changes in technology and customer requirements and to successfully develop and introduce new and enhanced solutions on a timely basis will be significant factors in the Company's ability to grow and to remain competitive. Substantial expenditures are required for research and development and new product introduction. There can be no assurance that the Company will have sufficient resources to make such investments, or that these 8
investments will bring the full advantages or any advantage, as planned. If the Company is unable, for technological or other reasons, to develop solutions on a timely basis in response to the changing demands of its industry, the Company's business and financial results could be materially adversely affected. The Company has in the past experienced limited delays introducing its technology and enhancements, and there can be no assurance that it will not encounter technical or other difficulties that could delay introduction of new technologies or enhancements in the future. There can be no assurance that the Company will be successful in developing and marketing enhancements that incorporate new technology on a timely basis, or that its new solutions will adequately address the changing needs of the marketplace. IMPLEMENTING OUR NEW STRATEGY OF FOCUSING ON THE MARKET FOR SOFTWARE SOLUTIONS IN THE INSURANCE AND FINANCIAL SERVICES INDUSTRIES COULD TAKE LONGER THAN ANTICIPATED OR COULD FAIL, WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR LONG-TERM GROWTH. In February 2001, we announced a new strategic initiative focusing on the insurance and financial services industries. Our goal is to rise to a position of global leadership in delivering strategic business software solutions to this market. Implementing this new strategy requires us to, among other things, design appropriate software solutions, maintain sufficient sales and marketing resources, recruit, train and hire sufficient professional services personnel and face intense competition. Our failure to meet any one or more of these challenges may lead to delays in, or to the failure of, our new strategy, which could have a material adverse affect on our capability to grow and achieve our long-term goals. WE HAVE A HISTORY OF LOSSES, AND WE ANTICIPATE OUR EXPENSES TO INCREASE IN THE FORESEEABLE FUTURE AS A RESULT OF PLANNED EXPANSION OF OUR MARKETING EFFORTS AND RESEARCH AND DEVELOPMENT ACTIVITIES We incurred net losses of approximately $38.2 million for the year ended December 31, 2000 and $18.0 million for the year ended December 31, 2001, which diminished the Company's total shareholders equity to $10.7 million. We cannot predict the extent of our future losses and when, or if, we may become profitable on a sustained basis. We anticipate that our expenses may increase substantially in the foreseeable future as we seek to increase our sales and marketing activities, and to continue to develop our technology and introduce new solutions. These efforts may prove more costly than we currently anticipate and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. If we fail to increase our revenues at a greater rate than our expenses, we will not be able to maintain profitability. WE DEPEND UPON KEY PERSONNEL, THE LOSS OF WHOM WOULD HARM OUR OPERATIONS. Our success depends, to a significant extent, upon the continued performance and services of our executive officers and other key sales, marketing, software engineers and support personnel. The loss of the services of any of our executive officers or key personnel, including Yitzhak Sharir, our President and Chief Executive Officer, Yair Spitzer, Managing Director of Sapiens U.K. and Gil Arbel, President of Sapiens Americas, would be disruptive to our operations. It would be difficult and time consuming to replace them. We do not maintain key person life insurance policies on any of our officers. Any of these individuals may voluntarily terminate his employment with Sapiens. Our inability to retain 9
these employees could have a material adverse impact on the growth and success of our business. WE INTEND TO RELY UPON TAX BENEFITS FROM THE STATE OF ISRAEL AND FROM THE U.S., BUT THOSE TAX BENEFITS MAY NOT BE AVAILABLE TO US AS ANTICIPATED. Our subsidiary Sapiens Technologies Ltd., which incorporated in Israel, has been granted an "Approved Enterprise" status for six investment programs in 1984, 1991, 1993, 1995, 1998 and 2000 by the Israeli government under the Law for Encouragement of Capital Investments, 1959. We are eligible for certain tax benefits resulting from the above programs pursuant to the above law. In order to receive tax benefits, the Company must comply with two material conditions: (a) to invest a certain amount in fixed assets and (b) to finance a portion of these investments with proceeds of equity capital. We believe that the Company has complied with these conditions; however confirmation from the Israeli government's Investment Center with respect to the 1995, 1998 and 2000 program compliance has not yet been received. In the event of failure to comply with these conditions, the benefits may be canceled, and our financial condition may suffer if these tax benefits were subsequently reduced or rendered unavailable to us. In addition, our Company has a contingent tax liability to pay $2.6 million, based on the provisions of an agreement reached on December 9, 2001 between Sapiens Technologies Ltd. and some of the Company's group entities with the Israeli Tax Authorities following a tax audit. The Company must obtain certain approvals from the Investment Center regarding the status of the Approved Enterprise, under the Law for Encouragement of Capital Investment, 1959 to some of its plans, within six months from the agreement date, in order to avoid paying the additional tax liability. The Company's management believes that it is probable that such approvals will be granted by the Investment Center. However, there can be no assurance that such approvals will be received. CONDUCTING BUSINESS IN ISRAEL ENTAILS CERTAIN RISKS THAT COULD HARM OUR BUSINESS. We have offices and research and development facilities in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. The future of the "peace process" is uncertain and has deteriorated due to recent violence between Israelis and Palestinians. In addition, several countries still restrict business with Israel and with companies doing business in Israel. We could be adversely affected by adverse developments in the "peace process" or by restrictive laws or policies directed towards Israel or Israeli businesses. All male permanent residents of Israel between the ages of 18 and 45 are, unless exempt, obligated to perform reserve duty in the Israeli Defence Forces, presently consisting of approximately 30 days of service annually. Additionally, all such residents are subject to being called to active duty at any time upon the outbreak of hostilities. Many of the Company's officers and employees are currently obligated to perform annual reserve duty. While the Company has operated effectively under these requirements since its organization, no assessment can be made as to the full impact of such requirements on the 10
Company's business or work force and no prediction can be made as to the effect on the Company of any expansion of such obligations. The Company believes that its relations with its employees are good. ITEM 4. INFORMATION ON THE COMPANY I. HISTORY OF THE COMPANY The Company, which was incorporated in the Netherlands Antilles in 1990, has a registered office located at Lanhuis Joonchi, Kaya Richard J. Beaujon z/n, Curacao, Netherlands Antilles. Our telephone number is: (011) 599-97366-277. Holland Intertrust (Curacao) N.V. is the Company's agent in Curacao and serves as a member of our Board of Directors. At the time of its formation through 1997, the Company marketed and supported a comprehensive software development tool originally known as "SAPIENS" later renamed "ObjectPool" and now known as Sapiens eMerge. The original software tool, whose software technology remains one of our key assets, involved an innovative, object and rules-based approach to software application development that substantially improved software development productivity while significantly reducing the cost and time required to build applications that previously had to be developed and maintained using procedural programming languages. In 1998, the Company made a strategic shift from "tool provider" to "solution provider". These solutions, which integrate our software technology, project methodology and consulting expertise, offer our customers comprehensive solutions to their pressing IT needs, such as adaptation to the Internet, reengineering of existing software applications or the changeover to the euro, the single European currency. In February 2001, the Company announced a new strategic initiative in the Insurance and Financial Services industries. Our goal is to rise to a position of global leadership in delivering strategic business software solutions to the insurance industry. For a description of our principal capital expenditures, please see Note 1(b) to our Financial Statements. II. BUSINESS OVERVIEW Sapiens is a global provider of cost-effective, rapidly deployed business software solutions that support our clients' core business processes, such as insurance claims processing, loan/mortgage management and other key business solutions. These solutions consist primarily of our technology, methodology and consulting services, which address the complex issues related to the life-cycle of enterprise business applications. These include rapid application development ("RAD"), the integration and evolution of legacy systems and the configuration and management of enterprise IT assets. Our accumulated expertise in serving more than 50 clients in the insurance and financial services industries, and our thorough understanding of their business processes and IT needs, has naturally evolved into an area of strategic vertical focus. 11
We enable our customers to gain competitive edge while maximizing the value of their investments in existing Information Technology ("IT") systems. Our flagship solution, Sapiens eMerge(TM), covers rapid application development and re-engineering, legacy to Web integration and application integration with other back-end and front-end systems and processes. We believe that our understanding of and broad experience in evolving legacy systems, our domain expertise in industries such as insurance and finance and our business logic and rules-based approach help our customers gain a competitive edge in the rapidly changing business world. Our goal is to rise to a position of global leadership in delivering strategic business solutions to the insurance industry. We plan to achieve this objective by combining our domain expertise and extensive experience in deploying robust, high volume solutions in order to deliver customizable life & pensions, general insurance and loans & mortgages business frameworks to our clients. The cornerstone of our strategic vertical focus and solution offerings remains Sapiens eMerge(TM), our technology-rich platform that has evolved and matured over the course of thousands of man-years of research and development efforts. Sapiens eMerge, which serves hundreds of our clients worldwide, accelerates business solution development, legacy lifecycle management and maintenance. We market our solutions globally through our direct sales force and through marketing alliances with global IT providers, such as IBM and EDS. These alliances enable us to reach a broader base of customers while complementing our partners' offerings. One of our key assets is our global, blue-chip customer-base, which is built on years of trust and on-time delivery. Our customers include: 3M, Argos, AXA Insurance, Berlinische Leben, Canadian Imperial Bank of Commerce, Six Continents Hotels (Holiday Inn), Honda Motors, IBM, International Paper, Liverpool Victoria, Mutuelles du Mans Assurances, Norwich Union Health Care, OneBeacon Insurance Company, Panasonic UK, New Jersey Manufacturers Insurance, Principal Financial, Siemens Energy and Automation and other major organizations worldwide. INDUSTRY BACKGROUND Organizations worldwide are struggling to keep pace with the rapidly-changing business environment. Mergers and acquisitions, new internet-related business models aimed at improving service levels and operational efficiencies, as well as regulatory reforms, are driving IT to some of its most serious challenges ever. The velocity of business change has increased across the board, while traditional IT shops are unequipped to address these challenges, which creates what we call "The Information Age Crisis". Businesses try to address the Information Age Crisis in a variety of ways. Certain companies opt to dedicate significant in-house IT resources to solve these issues. In many cases, however, organizations lack the requisite internal resources and know-how. As a result, many of these organizations rely on the expertise of external IT service providers. The insurance industry, in particular, is under tremendous pressure to adapt core business processes to evolving business and regulatory requirements. Transforming and modernizing the business requires both enhanced and flexible INSURANCE SOLUTIONS and effective LEGACY LIFECYCLE MANAGEMENT. 12
Today's market features a wide range of external IT service providers, from those that provide strategic e-business consulting, to those that specialize in creative design and branding and building Web sites, to others that sell tools to link back-end systems with the Web. While IT service providers offer specific implementation expertise and solutions, they do not necessarily provide cost-effective and timely methodologies based on easy-to-use, flexible and robust technologies. Businesses are seeking solutions that combine proven technology with consulting expertise and development methodologies in order to extend the value of legacy systems while providing rapid time-to-market in their objective of reducing costs and streamlining operations. Businesses that are successful in leveraging their existing legacy systems and domain knowledge will survive and even profit from the Information Age Crisis. Others that ignore or fail to optimize usage of their legacy systems are not likely to fare as well. In tandem with ongoing IT pressures, European organizations face an additional challenge: they must migrate all of their IT systems to the euro currency. Adoption of a single European currency is a complex endeavor and will affect a multitude of applications and systems, including general ledger, inventory order processing, purchasing, accounts receivable and payable, taxation, price lists, payroll, inventory expense accounts and historical databases. These organizations need a rapid, reliable euro conversion solution that addresses all aspects of the currency conversion while preserving data integrity and maintaining business-as-usual performance during and after the euro transition. OUR BUSINESS SOLUTIONS Sapiens provides business-critical software solutions and services to large-scale enterprises, allowing them to adapt rapidly to ever-changing business and technology demands. These offerings include re-engineering, custom development or re-development of applications, and legacy evolution. Both re-engineering and legacy evolution rely on core technological solutions: rapid application development, rapid integration, legacy renewal and Web development. REENGINEERING The Sapiens Re-engineering solution involves delivery of new business software applications that are either re-developed from existing systems or developed from scratch. These applications are delivered globally, spanning diverse industries, levels of application complexity and computer platforms. LEGACY EVOLUTION The Sapiens Legacy Evolution solution involves the understanding, extension and transformation of existing legacy applications including their adaptation to the Internet or for intranets. 13
Both of these business solutions rely on the following: o RAPID APPLICATION DEVELOPMENT. Sapiens has a rich heritage in the rapid application development (RAD) of complex, large-scale, mission-critical applications. Sapiens applies its rules-based, object technologies in combination with its RAAD (Rapid Architected Application Development) methodology, to incrementally build new or re-engineered applications to meet changing business requirements. o RAPID INTEGRATION. The diversification of platforms and applications, as well as the move to more distributed architectures, necessitates open interfaces to external applications. eMerge Rapid Integration capabilities involves connecting disparate applications so that they can operate together seamlessly. Our solution is independent of any particular operating paradigm and it can be loosely or tightly coupled with other applications, send and receive both synchronous or asynchronous messages, and deploy at a single site or distributed network. o LEGACY SOLUTIONS. Sapiens offers two legacy-related core solutions: understanding and analyzing legacy systems, or legacy analysis, and extending legacy data and user interfaces to the Web, or legacy renewal. LEGACY ANALYSIS Legacy analysis provides a global, operational platform to assess, plan, carry out and manage all of the enterprise's IT solutions, and to assess inter-system and intra-system impacts. Legacy analysis collects inventory information about all of the customer's software components and creates a relationship map between all components in order to analyze and derive the impact of enterprise-wide IT changes. Legacy renewal allows for the capture of the required legacy presentation, session flows and session management scenarios and their encapsulation as newly defined business objects. New business rules, operations and events are added to the captured legacy processes, which then carry out the integration of legacy functionality and flow. WEB DEVELOPMENT Sapiens' Web development solution is a rules-based Internet Web development and deployment environment that handles workflow, presentation, user interaction and local validations. The solution integrates Web standards into existing non-Web applications to facilitate immediate Web enabling. For new applications, the integration of Web standards is an integral component of the overall e-business application, which is seamlessly integrated with back-office processes while providing full transaction processing capabilities. To supplement the above Web development based on Sapiens technologies, Sapiens acquired Internet Marketing Associates, an Internet design and consulting agency based in Canada in January 2000. This acquisition broadened Sapiens' offering by adding expertise in information content and architecture, Internet marketing, personalization and large-scale Web site design. With these newly integrated skill sets, Sapiens' consultants can design, develop, deploy and test Internet, intranet, and extranet sites. The Web development projects can be conducted using either eMerge-based technologies, external development tools or a combination of both. 14
MIGRATIONS Sapiens has a history of assisting its customers in adapting their IT systems to changes, whether due to internal business decisions (e.g., mergers, acquisitions, new business models) or external circumstances (e.g., year 2000, migration to euro currency, new regulations or the advent of Internet). Sapiens' established migration methodologies are used in conjunction with the Company's platform-independent technologies. Sapiens' extensive project management experience and asset discovery solution also play key roles in the migration of customers' mission-critical systems. o EUROMIGRATION(TM). Sapiens EuroMigration(TM) is a comprehensive, phased euro conversion solution designed to address dual currency needs and the inevitable changeover to a single European currency. It features gradual data and code conversions via non-intrusive wrapping and bridging, cluster analysis for project efficiency and manageability, and rapid dual-denomination functionality. This solution is now geared towards the United Kingdom, where companies are taking cautionary and preparatory steps to enable them to make a quicker transition to the euro. The EuroMigration solution incorporates Sapiens' core methodologies, technologies, project management and support services. Sapiens' approach to the euro migration problem is to minimize the data pollution and discontinuity risks; to minimize the code changes required and, overall, to ensure business-as-usual performance during and after the transition. Sapiens' euro impact analysis is designed to save conversion efforts on systems or sub-systems that could be re-engineered for e-business directly. Sapiens' core technologies, the Euro-Virtual-Machine (EVM) and the Euro Configuration Repository (ECR), are the foundation of the EuroMigration Solution. The Sapiens EuroMigration solution supports IBM mainframes and AS/400 environments. o PLATFORM AND DBMS MIGRATIONS. Sapiens has a proven methodology and field experience in enabling its customers to migrate legacy assets to new computer platforms or database management systems. Sapiens' deep understanding of legacy systems as well as its multi-platform technology have assisted numerous customers in migrating from mainframe computers to AS/400 or Unix platforms, or from older DBMSs to newer ones. SERVICES o OUTSOURCING OF APPLICATION MAINTENANCE. Sapiens' outsourcing services evolved from the Company's strong, long-term relationships with its customers. Sapiens is currently servicing multi-year outsourcing contracts with blue-chip customers involving mission-critical systems. The outsourcing projects can be performed either on or off the customers' premises. Sapiens' asset discovery solution contributes to the maintenance and management of an enterprise's IT environment. o IT SERVICES. Sapiens provides customers with specialized IT services in many areas, including project management and technical assistance. Sapiens' dedicated professionals work together with the customer for the duration of the entire project, collectively undertaking design, development and deployment tasks, coupled with hands-on-training, to 15
achieve a rapid software solution that is totally representative of the customer's business and IT goals. In a typical process of IT solution delivery, the following services are offered: PLANNING - SOLUTION CONCEPTION PHASE "BLUEPRINT" - a comprehensive mapping process of customer requirements, from e-business strategy to application architecture. PILOT/PROOF OF CONCEPT - a working model is built to demonstrate that Sapiens can deliver a solution that meets the customer's requirements within a very short period of time. DEVELOPMENT PHASE For solution development and testing, the customer is offered the options of developing (1) jointly with Sapiens staff, (2) in-house or (3) fully outsourced to Sapiens. Sapiens' RAAD methodology is used to facilitate rapid and correct development. Joint Application Development, or JAD, sessions are part of the methodology, requiring business users to actively participate in the process of application requirements definition and iterative testing. Sapiens practices what is commonly referred to in the IT industry as "knowledge transfer" by directly training developers, using one-on-one, classroom or "train the trainer" scenarios. Training occurs either at on-site customer premises or at Sapiens offices worldwide. Ongoing solution support is offered at customer premises, Sapiens premises or a combination of both. Short-term and long-term support contracts are available. ONGOING PRODUCTION Technology maintenance includes ongoing version upgrades and feature enhancements within versions designated as "releases". There are four tiers of technology support: First tier -customer site Second tier - local support center Third tier -international support center, or ISC, located at our facilities. Fourth tier - Sapiens R&D located at our facilities. Reinforcing all service offerings described above are Sapiens Technology Experts - worldwide. Sapiens project managers with significant Sapiens eMerge delivery experience oversee the entire solution planning and development process, practicing project 16
management and control while ensuring adherence to project scope and established methodology. Solution engagements can be performed on both a fixed cost and time/materials basis. OUR RAAD METHODOLOGY Sapiens' unique rapid architectured application development (RAAD) methodology provides an ARCHITECTURED approach to Rapid Application Development (RAD) that provides for the rapid and evolutionary development of the enterprise's e-business solution. Sapiens' proven field experience in RAD projects and in large-scale mission-critical system development has evolved and matured to create a methodology that supports both RAD and traditional processes under one architectured methodology. The iterative and evolutionary process of Sapiens' RAAD Methodology accommodates solutions of varying scope, from small-scale solutions to large-scale enterprise-wide mission critical solutions. Practices are collectively applied to facilitate both traditional processes that warrant the structured and formal delivery of solution deliverables, together with RAD processes that support iterative and progressive prototyping for the early development of working components. Sapiens' RAAD methodology is applied throughout the engagement process, from the initial capture of business requirements through to implementation of our solution and incorporates ongoing management involvement and active user participation throughout all phases of solution definition, development, test and implementation. Joint application development, or JAD, sessions are conducted throughout the development process, ensuring business user participation and continuing refinement of the developed solution. These sessions complement the Sapiens eMerge which allows users to review and test a fully-working solution while it is under development. OUR CORE TECHNOLOGY Sapiens' solutions are empowered by SAPIENS EMERGE, a core development and deployment technology that is designed to express business logic in a declarative manner with business rules, thus providing a unified and open platform for complete business software solutions. A key advantage of SAPIENS EMERGE is the ability to extend the productive life of existing legacy systems, while simultaneously providing a rapid migration path to new generation Internet and e-commerce technologies. The use of advanced, rapid application development technology allows enterprise-specific enhancements to be made in a shortened timeframe and with a vastly reduced maintenance burden when compared to other technologies. SAPIENS EMERGE is based on a multi-tier architecture and operates in multi-platform environments, encompassing a multitude of hardware vendors, operating system environments, and databases. Platforms supported include IBM's S/390 (zSeries), AS/400 (iSeries) and HP-UNIX. SAPIENS EMERGE supports databases such as VSAM, IMS, DB2, IDMS, Oracle and Informix. Because 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. 17
Development, deployment, integration, and administration of e-business applications are all accomplished via SAPIENS EMERGE's technology components, as presented below, providing customers with flexible, scalable and robust systems. The following are some key features of our core technology that are common to the full range of our solutions: o The eMerge Object The key building block of EMERGE is the object. An object is a unit of data containing information about a particular aspect of a business. Each object also contains a set of business rules controlling its character and interaction with other objects. For example, a product object within an inventory application will contain information about the product's name, price, identification number, quantity on hand, etc. Encapsulated within the object are rules that dictate when the product should be reordered, and how its price should be calculated. o Business Rules The rules within an eMerge application are modeled after the business rules by which an organization runs. Each rule is typically a one or two-line statement that declares a discrete business task. Since each rule resides within an object, it is necessary to define the rule only once. In contrast, traditional programming methods require numerous lines of procedural code to perform the same tasks and force developers to repeat the underlying business logic in multiple programs within an application. Consequently, developers using eMerge technology are free to concentrate their efforts on the business objectives of an application rather than being tied to the tedious tasks of procedural programming. Since these rules are encapsulated within the eMERGE objects, they are easily identifiable and maintainable. In contrast to traditional programming, developers need not review large volumes of code when modifying a EMERGE-based application. They simply revise the straightforward rules that govern the behavior of the application. The EMERGE rules engine features a power of inference called POSITIVE THINKING. Due to this feature, the EMERGE rules need only be stated in their standard, positive form. Non-standard implications of the rules are automatically inferred. For example, a positive rule within an inventory application may dictate that each item ordered should be subtracted from the inventory on hand. In traditional programming, the non-standard operations associated with this, such as adjusting inventory when the amount of an item ordered is changed, or the item is deleted or replaced, must be specified and coded by means of a lengthy and detailed process. However, with eMerge this is not necessary, since the rules engine automatically infers these operations. In summary, EMERGE rules reduce complexity by stating what has to be done rather than how it should be done. This reduces the number of instructions that are given by the application developer from a long and complicated set of machine instructions (procedural programming) to a greatly reduced number of functional statements. The "how" part of the application is generated automatically by EMERGE technology's power to infer. Positive thinking also ensures the integrity of an application because the EMERGE rules engine, 18
rather than developers working manually, automatically addresses the non-standard, "negative" implications of the business logic. o The eMerge Repository The EMERGE repository contains all of the information that comprises an organization's portfolio of applications. The information within the repository includes all EMERGE objects and rules, screen and report layouts, database mapping information and security profiles. The repository is governed by its own set of rules and objects that control the contents of the repository. The developer of an EMERGE application simply populates the repository with application specifications, which are then governed by the repository's own rules and objects. Cross-referencing is supported, making application maintenance easy. Unlike passive repositories, which merely document applications, the EMERGE repository is the active and sole knowledge base for the organization's information systems. This knowledge base, which incorporates all application information, is easily copied and migrated across multiple platforms. This cross-platform flexibility enables Sapiens customers to scale their applications in accordance with their changing needs. o Multi-Tier Architecture The Company's technology is based on a multi-tier architecture, which includes PRESENTATION, BUSINESS LOGIC and DATA. The presentation layer houses the client technology, including character-based 3270 terminals, Windows-based clients and Web browsers. The business logic layer contains the EMERGE objects and rules, and may reside on various server platforms, including mainframe, AS/400, UNIX and HP-UX. The third layer accommodates the application data, which may be stored in a wide range of database management systems, including DB2, Oracle, Informix, IMS, VSAM and others. Each tier is independent and may be replaced or modified without affecting the other tiers. This architecture allows customers to move their applications by simply moving the business logic layer from one server platform to another without affecting the presentation and data layers. This enables the flexible movement of applications within a heterogeneous computing environment. For example, customers may choose to adopt the latest Internet browser in their presentation layer or change their database management systems without impacting the business logic and functionality of their applications. o eMerge Enterprise Server EMERGE ENTERPRISE SERVER, the core of all Sapiens' solutions, is a reliable and scalable enterprise class transaction server, able to handle heavy workloads with thousands of users and millions of daily transactions. EMERGE ENTERPRISE SERVER , in its "knowledgebase", a powerful object-oriented data dictionary, contains the aforementioned application definition-objects and business rules. EMERGE ENTERPRISE SERVER resides on a server and runs under a number of operating systems and working environments, as follows: 19
- -------------------------------------------------------------------------------- SERVERS OPERATING SYSTEMS/WORKING ENVIRONMENTS - -------------------------------------------------------------------------------- IBM iSeries (AS/400) OS/400 - -------------------------------------------------------------------------------- HP Unix Server HP-UX - -------------------------------------------------------------------------------- IBM zSeries (S/390) MVS (CICS, IMS/DC, TSO, Batch), VM/CMS - -------------------------------------------------------------------------------- An application developed using EMERGE ENTERPRISE SERVER is portable. For example, if an application is developed in HP-UX, it can be seamlessly migrated to IBM iSeries or zSeries. o eMerge i.way Interaction Server Our "I.WAY" product is based on the EMERGE ENTERPRISE SERVER with the addition of HTTP and interaction servers. I.WAY enables scalable, enterprise-wide access to data in distributed environments. By using various Web standards (HTML, CSS, SSL, etc.) and Java, I.WAY provides a personalized user experience on a standard Web browser. Sapiensi.way is deployed on the Windows NT/2000 platform. I.WAY accelerates development productivity and shortens implementation time through the following features and functions: o I.WAY enables customers to access their applications via an Inter/intra/extra-net Web site. o Application forms are automatically generated as HTML pages enriched with Java applets and scripts for display on the Web client. o Users may dynamically modify the appearance of, and control interaction within, application forms by defining external components. o Performance is maximized as only the changed data is transmitted via XML, while the static HTML forms are cached in memory. o The user interaction logic - both for presentation and for session flow, are defined in a declarative manner and stored centrally in the eMerge knowledge base repository along with all other application definitions. o Multithreading is supported - at runtime, a separate session thread is allocated for each user session, with a local knowledge base per session created at the middle tier. This enhances performance without losing the productivity edge of centrally managed Web development. Furthermore, the Web development solution provides for remote administration and monitoring of servers and applications via a Web browser. Among the server and application administration tools are tools for monitoring server usage and load, for tuning the environment for optimal performance, for event notification, and managing sessions and users. o eMerge Development Workbench EMERGE DEVELOPMENT WORKBENCH is a fully integrated environment to develop applications from the initial analysis stage through the testing and maintenance of working applications. EMERGE DEVELOPMENT WORKBENCH combines rules-based technology, state-of-the-art user interfaces (GUI + WUI), and graphical modeling tools to model, define, test and modify 20
objects, attributes and rules covering the entire back office and Web front-end life cycle, in one controlled workgroup environment. Object modeling is graphically performed to define the business model, presentation forms, all application entities (Classes and Compound Classes), and the relationships between all application entities. Presentation forms can be developed for screens and menus, as well as Web pages, where the presentation created can be commonly used in both client/server environments and in Web browsers without necessitating changes. Business rules that define all validations, operations and events to be triggered are defined using a high level declarative language, instead of procedural coding. This raises the level of abstraction in applications, translating into clearer, more modular and maintainable applications. Additionally, the business rule concept enables encapsulation of rules within the presentation layer. Thus, functions such as navigation, flow, validity checks, help, and browse can be encapsulated and controlled by the business rules. The eMerge Development Workbench runs on the Windows NT/2000 platform connected to the server development environment and is constantly synchronized with application changes, thereby reducing maintenance. o eMerge Integration Tools The EMERGE Integration Tools integrate EMERGE applications with legacy, back-office applications and Web environments non-intrusively, thereby avoiding disruption of operational systems. EMERGE Integration Tools connect eMerge applications to external Java and COM applications, 3270 and 5250 legacy applications, external DBMS's, MQSeries and XML. EMERGE BUSINESS COMPONENTS EMERGE BUSINESS COMPONENTS provide eMerge with openness to COM/COM+ and Java applications. Through EMERGE BUSINESS COMPONENTS, COM/COM+ and Java application clients can access EMERGE applications by exposing EMERGE objects as components with properties and behaviors (methods) that can be invoked. To these applications, EMERGE objects appear as classes that can be manipulated and integrated as application components. EMERGE BUSINESS COMPONENTS provide EMERGE with the features needed to successfully integrate within emerging Web application serving platforms such as IBM's WebSphere, BEA's Weblogic and Microsoft's Enterprise Server. EMERGE XML ADAPTER EMERGE XML ADAPTER is a peer-to-peer environment (inbound and outbound), that serves cases where disparate, remote, and separately-controlled applications need to be integrated. The typical and primary utilization of the XML ADAPTER is in B2B integration scenarios. A few design highlights of the XML ADAPTER: * Documents are declaratively defined in the EMERGE KNOWLEDGEBASE and mapped to application elements. * Messages may be defined manually, or message definitions may be automatically created (imported) based on existing XML DTDs/schemas/messages. 21
* Both XML message and schema are generated (no user coding is involved, giving better productivity, etc.). XML Schema Definition is fully supported (on top of DTDs). * The solution is compatible with various XML exchange standards (ebXML, BizTalk, TPA). * Inbound and Outbound messages are sent from within eMerge rules. * Both point integration and hub-based, many-to-many integration scenarios are supported; various transports may be used. EMERGE LEGACY ADAPTER EMERGE LEGACY ADAPTER meets the requirements for full, non-intrusive legacy integration. The development environment automates much of the process of building an interface between the legacy application and an e-business application. The runtime environment is robust and efficient, and is transparent to the user of the e-business application. The key benefit of using LEGACY ADAPTER as opposed to a standard legacy renewal tool (such as one based on screen scraping technology), is that once the proper mapping is done, eMerge sees the legacy application as an object that can have new business rules applied to it, just like any other eMerge object. New objects can be also added that interact with the legacy objects. This, in effect, enables business processes embedded in the legacy application to participate as equal peers in a complex integration scenario. The LEGACY ADAPTER solution is based on an EMERGE application that communicates with the legacy application as a 3270 or 5250 terminal. The aim is not to mimic the legacy application, but rather to provide a contemporary application that uses the legacy application screens as an external data source. Thus, instead of modifying the legacy application, it can be accessed through the interface it already has: its 3270 or 5250 screens. In the development process, LEGACY ADAPTER uses tree controls and a customized LEGACY SCREEN EDITOR. DBMS ADAPTER The EMERGE DBMS ADAPTER enables application developers to incorporate external data into EMERGE applications. As there is a complete separation between the presentation, process and data layers, external data resides in a database maintained by any supported DBMS. DBMS ADAPTER makes external data appear as native EMERGE data, so that access to the external data is transparent to both the application and the end user. Thus, the full strength of EMERGE can be applied to external data. IBM MQSERIES ADAPTER SAPIENS EMERGE databases and applications can be accessed from any program or application that use the MQSeries messaging system. These programs and applications function as clients and the EMERGE application functions as a server. The client application can run in any environment that offers MQSeries messaging. There is no need to install any EMERGE software on the client computer. 22
o Euro-Virtual-Machine (EVM) The EURO-VIRTUAL-MACHINE (EVM) is a wrapping engine that enables rapid euro compliance, dual currency functionality, and cluster-by-cluster conversions of databases of mainframe host applications. Data becomes available in all required currencies (online screens and online or batch reporting) and a simple toggle transforms local denominations to and from the euro denomination. Additional euro fields can be added with minimal effort. Functionality phase changes involve minor adjustments. Currency transformation is performed via PC WYSIWYG tool connected online to the mainframe host and the EVM rules-based repository. No source code changes are necessary. o Enterprise Configuration Repository (ECR) The ENTERPRISE CONFIGURATION REPOSITORY (ECR) is a global, operational platform designed to manage, view and access all enterprise IT components and data and to assess intersystem and intrasystem impacts. ECR is the repository for EVM layouts. It also stores the EVM rulebase for data, screens and reports, allowing multi-phased euro projects to be centrally managed and orchestrated. KEY BENEFITS TO SAPIENS CUSTOMERS o FAST TIME TO MARKET (HIGH ROI). Sapiens' combination of a RAD methodology, rules-based development tools, and experienced consultants have resulted in significant productivity increases at customer sites. Declarative development with business rules replaces traditional programming methods, addressing the full application life cycle, meaning that no programming code development is required. This represents a reduction in logic specification and application maintenance of 5 to1 and dramatically enhances the quality of the delivered application since most "bugs" arise in the non-standard logic. o DOMAIN EXPERTISE. Sapiens supports its target markets with the domain expertise of its consultants, the proven methodologies developed by Sapiens Technologies and Sapiens' accumulated experiences with customers in these markets. o STRONG R&D DIVISION. Sapiens' 100-plus person research and development (R&D) division plays a central role in the Company. R&D is responsible for developing the enabling technologies used in the Company's solutions. A full 10% of the Company's revenues are redirected to R&D to ensure the development of innovative technologies for continued growth. o EURO EXPERIENCE. Sapiens has pan-European experience and is Chair of the Euro Working Group for euro conversion standards under the auspices of the Association for the Monetary Union of Europe (AMUE) and the European Commission (EC). The Company has obtained numerous, large-scale euro projects, and its wrapping technology has received widespread recognition. o EXTEND VALUE OF LEGACY SYSTEMS. Sapiens' solutions enable organizations to capitalize on existing large-scale applications and data by non-intrusively integrating them with new e-business applications and technologies. Whether a firm requires the development of new business processes or euro conversion services, Sapiens solutions not 23
only extend the productive life of legacy systems but simultaneously provide a migration path to next-generation technologies. o CROSS-PLATFORM CAPABILITY AND SCALABILITY. Sapiens' solutions are designed for an extensive list of computing platforms and technologies including: Windows 98, 2000 and NT; IBM systems including AS/400 and S/390; and various UNIX systems. Sapiens' solutions, with their rules-based approach, allow organizations to create, deploy, integrate and maintain new applications within existing systems or onto different platforms much more quickly and efficiently than by traditional line-by-line programming methods. The platform-independent nature of Sapiens' solutions allows them to be scaled according to the needs of the organization. CUSTOMERS The Company markets its solutions primarily to organizations with large information technology budgets and ongoing maintenance and development needs. The Company believes that the following customers, arranged by industry, are representative of the organizations that comprise its international customer base. <TABLE> <CAPTION> INSURANCE <S> <C> AXA Global Risks Banco Credicoop AXA Insurance Banco Sudameris Berlinische Leben Bank Hapoalim Canada Life (Albany) Bank Leumi Delta Lloyd General Insurance Bank of Ireland ELVIA Vie Leben Vita Bank Slaski S.A Guardian Financial Services Barclays Retail Financial Services Helvetia Patria Versicherungen Canadian Imperial Bank of Commerce ING Canada Capital Bank (NWS Bank Plc) Liverpool Victoria National Australian Goup MediRisk PKO BP S.A. Bank Menora Insurance Company Principal Financial Group Mutuelle du Mans Assurances (MMA) Woolwich Direct Nationale Nederlanden Sanwa Bank New Jersey Manufacturers Thomas Cook Financial Services Nissan Kasai Norwich Union GOVERNMENT & UTILITIES OneBeacon Ameritech Principal Life Insurance ELMU-Budapesti Elektromos Muvek Royal London Insurance Houston Industries Scottish Provident Israeli Civil Service Commission Surplus Line Ass'n of California Israeli Ministry of Construction & Housing The Prudential Israeli Ministry of Labor & Social Affairs US Automobile Association Israeli Ministry of Defense (Malan) Virginia Farm Bureau Israeli Ministry of Health Israeli Ministry of Transportation Israeli Social Security Institution FINANCIAL SERVICES Israeli Air Force Abbey National Mortgage Finance Israel Defense Forces (Mamram) </TABLE> 24
Israel National Police TDK Corporation JA Chiba Keizairen Visy KRUS-Farmers' National Insurance of Social Security Office of Thailand TRANSPORTATION State of Arkansas Belgian National Railway State of North Carolina, Dept. of (NMBS/SNCB) Transportation Canada Maritime InterContainer-Interfrifo Natural AG (Cronat) MANUFACTURING Norfolk Southern Railway 3M ALPS Electric RETAIL Canon France Argos Dunaferr Rt Groupe Andre Haworth, Inc. HAC Kimisawa Co. Honda JA Kumamoto Agricultural International Paper Kawasaki Heavy Industries MISCELLANEOUS Kirin Brewery American Assn. of Retired Persons Mazda Parts Europe Bass Hotels (Holiday Inn) Mercedes-Benz Schweiz AG Oxmoor House Media Services PZL Renault Siemens Energy & Automation Inc. Stomana Metal Industries JD Williams & Company Mega Sports Corporation Panasonic UK For information regarding the principal markets in which the Company competes, see Note 14 to the Company's financial statements. COMPETITION The market for e-business software solutions is highly competitive and characterized by rapidly changing technology, evolving industry standards and customer requirements, and frequent innovations. The following is a breakdown of the competition that we face in each of our primary markets: RAPID APPLICATION DEVELOPMENT Our competitors in the application development and e-commerce marketplaces include tool vendors and system integrators. RAD Tool vendors with whom we compete include Versata, Software AG, HNC (Blaze), ARTEch (GeneXus), Magic and Lansa. Consultants and system integrators who offer competing solutions include IBM, EDS, Cap Gemini, Computer Associates International, Andersen Consulting, and KPMG. 25
LEGACY EVOLUTION Our competitors in the legacy evolution marketplaces include tool vendors and system integrators. Tool vendors with whom we compete include SAGA Systems, Seagull, Neon, Relativity, Merant, SEEC, Most, Intercomp and IBM. Web consultants and system integrators who offer competing solutions include IBM, Cap Gemini, Xpedior, Sapient, Cambridge Technology Partners, Computer Associates International, Andersen Consulting, USWeb/CKS and EDS. EURO CONVERSIONS Competition in the euro conversion marketplace includes technology vendors such as Crystal, as well as large and specialized consulting organizations and system integrators, such as IBM, who offer the full range of euro conversion services. Many of our competitors have formidable financial, marketing, technical and other resources. Our ability to compete will depend in large part upon our ability to implement large-scale projects in a timely manner, expand out marketing channels and develop new technologies and solutions in line with market needs. SALES AND MARKETING To reach the broadest potential customer base, the Company has pursued multiple distribution channels, including a direct sales force and relationships with system integrators and, in certain geographic areas, with distributors. The Company has marketing and sales personnel located in its operations in the United States, the United Kingdom, France, Germany, Canada, Japan, and Israel. The direct sales force focuses on large organizations within select industries. It also coordinates sales activities with system integrators such as Cap Gemini, CSC and IBM. These partnerships allow Sapiens to further expand its own solutions, and to gain access to specific types of domain. The Company employs a variety of business development and marketing techniques to communicate directly with current and prospective clients. These techniques include exhibiting at trade shows and industry conferences, disseminating product brochures and other literature, direct-mail marketing, authoring articles, and hosting user conferences and business forums for customers and prospective customers on technology and industry issues. CUSTOMER TRAINING AND SUPPORT The Company believes that a high level of post-contract customer support is important to the successful marketing and sale of the Company's solutions. The Company employs a team of technical specialists who provide the full range of training and support services. The typical direct sale to a client includes initial maintenance, training and consulting 26
services. In addition, substantially all of the clients for whom the Company has developed an application elect to enter into an ongoing maintenance and support contract with the Company, which is typically for twelve-month intervals and entitles the customer to technology upgrades, when generally made available and technical support. The Company also offers introductory and advanced classes and training programs available at the Company's offices and customer sites. On a worldwide basis, the Company's authorized distributors, value-added resellers and system integrators also provide customers with training, product support and consulting services. Each of the Company's software distributors is capable of providing training in its respective country. In addition, many international partners and distributors, particularly independent software vendors, operate their own technology training programs. DESCRIPTION OF PROPERTY The Company leases office space in the United States, Canada, United Kingdom, France, Israel, Switzerland, Germany, Belgium, and The Netherlands. The lease terms are generally five to ten years. The Company believes that its existing facilities are adequate for its current needs. III. ORGANIZATIONAL STRUCTURE We operate globally through our operating subsidiaries. The following chart shows the corporate structure of our Company and our material operating subsidiaries. Unless indicated otherwise, each subsidiary is wholly-owned by its parent. [GRAPHIC OMITTED] 27
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and notes thereto. Certain matters discussed below and throughout this annual report are forward-looking statements that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words "anticipate", "believe", "estimate", "expect", "plan" and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those described herein. Please read the section below entitled "Factors That May Affect Future Results" to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. The Company's discussion and analysis of its financial condition and result of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles in the United States (US GAAP). The preparation of these financial statements required the Company to make estimations and judgments, in accordance with US GAAP, that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, goodwill and other intangible assets, capitalized software development costs, deferred taxes, income taxes and legal contingencies. The Company based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following accounting policies form the basis of the above-referenced estimates and judgments that the Company made in preparing these consolidated financial statements. REVENUE RECOGNITION The Company recognizes revenue in accordance with Statement of position No. 97-2, "Software Revenue Recognition" ("Sop 97-2"), as amended. SAB 101 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of the existence of an agreement; (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 judgments regarding the fixed nature of the fee charged for services rendered, products delivered and the collectibility of those fees. The Company's project business derives a significant portion of its revenue from fixed price contracts. Revenues from fixed-price contracts are recognized based on Statement of Opinion No. 81-1 "Accounting for Performance of Construction Type and Certain Production Type Contracts" ("SOP 81-1") which require the accurate estimation of the cost, scope and duration for each project. Revenue and related cost for these projects are recognized on percentage of completion, using the input measure to assess the percent completed with revisions to estimates reflected in the period in which changes become 28
known. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its project properly within the projected periods of time or satisfy its obligations under the contract, then project margins may be significantly and negatively affected, which may result in losses on existing contracts. Any such resulting reductions in margins or contract losses in a large, fixed-price contract, may have a material adverse impact on the Company's results of operations. BAD DEBT The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS Goodwill associated with the excess purchase price over the fair value of assets acquired and other identifiable intangible assets, are currently amortized on the straight-line method over their estimated useful lives. These assets are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As discussed herein, the Federal Accounting Standards Board issued SFAS 141 and SFAS 142 in June 2001. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. We plan to adopt these pronouncements effective January 1, 2002. At such time, we anticipate that amortization associated with purchased goodwill will cease. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Our policy on capitalized software costs determines the timing of our recognition of certain development costs. In addition, this policy determines whether the cost is classified as a development expense or cost-of-license fee. Management is required to use professional judgment in determining whether development costs meet the criteria for treatment as immediate expenses or as capitalized development costs. DEFERRED TAXES The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period in which such determination is made. Likewise, should the Company determine that it will not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period in which such determination is made. 29
INCOME TAXES The Company, through its operating subsidiaries, operates within multiple tax jurisdictions and may be subject to tax audit in these jurisdictions. These tax audits can involve complex issues, which may require an extended period of time to resolve. In management's opinion, adequate provisions for income taxes have been made for all years We are currently involved in certain legal proceedings and claims that arose in the ordinary course of business. As discussed in Note 11 of our consolidated financial statements, as of December 31, 2001, we have accrued our estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. We do not believe these claims and/or proceedings will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these claims and proceedings. RESULTS OF OPERATIONS REVENUES. Product Revenues are comprised of sales of licenses, license upgrades, application development and re-engineering projects, and platform and/or computing environment migration projects. These projects are performed either on a fixed-price or time & materials basis. Service revenues include mainly time & material consultants and Maintenance support. Total revenues in 2001 decreased 12.8% to $63.4 million from $72.7 million in 2000, and $91.8 million in 1999. Products revenues decreased 27.3% in 2001 to $27.9 million, after a decrease of 19% in 2000 and an increase of 27% in 1999 . Consulting and other service revenues increased 3.8% to $35.6 million from $34.3 million in 2000, and decreased 22.7% from $44.4 million in 1999. Our product and consulting revenues for the year ended December 31, 2001 were adversely affected by the following factors and events. Throughout the second half of the year 2000, our entire operation, particularly management, was focused on the attempt to complete the merger with Ness Technologies, Inc. which was finally aborted. The defocus caused by the merger preparations and the cancellation of the merger had a material adverse effect on the Company's sales, order entry and build-up of sales pipeline. This disruption of the sales process in the second half of the year 2000 had a material impact on revenues in 2001 - particularly in the first half - due to the lengthy sales cycle of our typical solution project. As reflected in our operating results during 2001, revenues suffered from a slow start followed by a moderate buildup that was not sufficiently offset by consulting and other service revenues, which have shorter sales cycles. Our operating results for 2001 also were adversely affected by the general economic slowdown that impacted the entire software industry. The main effect of the general slowdown was a lengthening of the negotiation process of our sales contracts, which 30
resulted in an even more protracted sales cycle. A review of revenues from operations within geographic areas based on our customers' locations shows that our subsidiary in France suffered the heaviest impact of the foregoing factors and ended the year 2001 with revenues of $6.0 million down from $16.6 million in 2000 and $26.4 million in 1999. Most of the decline in France was due to the completion of euro conversion projects, while no other projects that were in negotiations during the year 2001 were actually closed. Revenues from our German operation declined to $4.8 million in 2001 compared with $6.3 million in 2000 and $10.7 million in 1999. Revenues from our other small territories also declined to $6.8 million in 2001 versus $11.4 million in 2000 and $9.6 million in 1999. These territories include Switzerland, Japan, Holland, Spain, Belgium, Australia and South Africa. In contrast with the foregoing territories, revenues in our major territories improved during 2001 versus 2000. Sapiens U.K. produced revenues of $21.3 million in 2001 versus $17.7 million in 2000 and $12.4 million in 1999; Sapiens Americas reported revenues of $18.5 million in 2001 versus $15.1 million in 2000 which was a decrease from $25.9 million in 1999. Finally, Sapiens Israel increased revenues to $6.1 million in 2001 versus $5.6 million in 2000 which was a decrease from $6.9 million in 1999. CURRENCY FLUCTUATION. We expect that a significant portion of our revenues will continue to be denominated in European currencies, mainly the euro and the GBP, and some of our revenues will be denominated in the Japanese yen. As a result, movements in the exchange rates between the US dollar and the euro and/or the US dollar and the Japanese yen could have a material adverse impact on our revenues and results of operations within Europe and Japan. COST OF SALES AND GROSS PROFIT. Cost of sales are mainly comprised of labor costs of software consultants and engineers, amortization of capitalized software and royalties to the "OCS. Cost of sales for Service revenues also includes depreciation of fixed assets. Our Overall gross profit decreased 3.5% to $19.9 million from $20.6 million in 2000 and $46.1 million in 1999 which represent a decrease of 55.3 %. However, gross profit as a percentage of revenues, increased to 31.3% in 2001 from 28.3% in 2000 which was a decrease from 50.2% in 1999. Gross profit from product revenue decreased 40.6% in 2001 to $7.5 million from $12.7 million in 2000 and $31.0 million in 1999, and gross margin from product revenues was 27.0% in 2001 compared with 33.0% in 2000 and 65.5% in 1999. The decline in gross profit as a percentage of product revenues resulted primarily from the following factors: high level capitalized software amortization ($4.6 million in 2001 versus $3.2 million in 2000 and $2.8 million in 1999) and unexpected additional efforts in completing the performance of euro migration projects. Capitalized software development costs were $4.0 million in 2001 compared with $4.3 million in 2000 and $2.8 million in 1999. The increase in amortization of capitalized software is resulting from our strategic focus on our future component-based eMerge solutions and the defocus on other non- strategic 31
areas. Royalty expense pursuant to the OCS funding programs, included in cost of products, was $1.5 million and $1.3 million in 2001 and 2000, respectively. In contrast to product revenues, gross profit from Service revenues, consulting and maintenance increased 55.8% to $12.3 million in 2001 from $7.9 million in 2000 which was a decrease from $ 15.1 million in 1999. Gross margin from consulting and other services improved in 2001 to 34.7% from 23.1% in 2000 and 34.0% in 1999 mainly due to improved utilization of our professional resources and replacement of low margin consulting services with those that have higher margins. Improved efficiencies and better utilization of our maintenance professionals also contributed to the improvement in gross profit and gross margin from our consulting and other services. RESEARCH AND DEVELOPMENT, NET. Research and development ("R&D") costs are mainly comprised of labor costs and depreciation of fixed assets net of grants from the OCS. Net research and development expenditures declined 50.5% in 2001 to $4.5 million from $9.1 million in 2000, and $5.0 million in 1999. A portion of our research and development expenditures is funded by the Office of the Chief Scientist ("OCS") in Israel pursuant to programs entitling the Government to receive royalties on sales of products developed as a result of research projects so funded. The net R&D expenditure in 2001 benefited from OCS funding in the amount of $1.6 million. Due to the late approval of the R&D grant in the year 2000, the Company did not record any R&D funding in 2000 compared with $2.0 million (20.6% of gross R&D expenditures) in 1999. In the year 2001, our Research and Development before capitalization of software development costs and royalty-bearing grants, decreased 24.7% to $10.0 million from $13.4 million in 2000 and $9.9 million in 1999. The decrease in research and development gross expenditures in the year 2001 is mainly due to the closing of our eZoneXchange operation, the decline of investment in euro conversion technology and the streamlining of the R&D organization as part of the Company's overall cost-reduction efforts . SELLING AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES, NET. Selling and marketing, general and administrative, net ("SG&A") expenses decreased 38.5% to $28.7 million in 2001 from $46.7 million in 2000 which was an increase from $27.9 million in 1999. Expressed as a percent of revenues, SG&A expenses decreased to 45.3% in 2001 from 64.2% in 2000 which was an increase from 30.4% in 1999. The decrease in SG&A expenses in 2001 is the result of the aggressive cost efficiency program that management implemented throughout 2001. Among other things, management has materially reduced headcount throughout the organization, including headcount in sales and marketing and general and administrative departments. As part of its continuous commitment to achieve maximal operational and organizational efficiencies, management in 2001 streamlined infrastructure across-the-board. The Company has closed its small-scale offices in Spain, Brazil, Thailand, Hong Kong, Australia and The Netherlands, while maintaining local support for existing clients. The Company is also taking steps to improve efficiencies within its organizational structure. In 2001, the Company merged its various subsidiaries in North America and Canada into one wholly-owned subsidiary, Sapiens Americas Corporation (a New York corporation). We are currently in the process of merging our various subsidiaries into one wholly-owned subsidiary in each territory. The territories in which our subsidiaries are in process of merging are France, UK and Germany. 32
RESTRUCTURING EXPENSES. On December 31, 2000 we recorded a restructuring charge in the amount of $2.6 million, which represented involuntary termination benefits for approximately 200 employees as part of our recovery plan for the year 2001. The restructuring plan was aimed at streamlining the Company by improving gross performance margins and reduction of SG&A costs. TAXES ON INCOME. Tax expenses were $0.7 million in 2001 compared with a net tax benefit of $1.9 million in 2000 and a net tax benefit of $1.7 million in 1999. The Company's entire provision for taxes on income relates to operations in jurisdictions other than the Netherlands Antilles. The effective income tax rate varies from period to period as the result of the various jurisdictions in which the Company operates and where each one has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company did not recognize a majority of the deferred tax assets relating to the net operating losses of the Company's subsidiaries worldwide due to the uncertainty of the realization of such tax benefits. Approximately $350 thousand of the tax accrual in 2001 is the result of an agreement reached on December 9, 2001 between Sapiens Technologies Ltd. and some of the Company's group entities, with the Israeli Tax Authorities ("the ITA") following a tax audit. In accordance with the agreement's provisions, the Company agreed to pay an amount of approximately $1 million for the tax years through 1999, which will be paid in 12 equal monthly payments, commencing with the agreement date. NET INCOME/LOSS. Net loss for 2001 was $18.0 million compared with a net loss of $38.2 million in 2000 and net income of $13.1 million in 1999. LIQUIDITY AND CAPITAL RESOURCES. Cash, cash equivalents and short term investments at the end of 2001 were $16.0 million compared with $19.9 million at the end of 2000 and $ 16.8 million at the end of 1999. In addition restricted cash deposits at the end of 2001 were approximately $2.5 million. Restricted cash deposits are maintained with banks as security for the Company's short-term debt. Net Cash used in operations was $2.6 million in 2001 compared with $ 21.1 net cash used in operations in 2000 and with break-even net cash used in operations in 1999. The improvement in 2001 versus 2000 was due primarily to the aggressive reduction of costs throughout the Company's operations, a material decrease in trade receivables due to efficient collection efforts. Net cash used in investing activities was $4.3 million in 2001, compared with $3.7 million in 2000 and $4.2 million in 1999. Net cash provided by financing activities totaled $6.4 million in 2001, compared with net cash provided in financing activities of $33.4 million in 2000 and net cash used in financing activities of $7.0 million in 1999. The decrease in 2001 was the net effect of the Company's redemption of $4.2 million of redeemable shares in its eZoneXchange subsidiary and $9.9 million proceeds from issuance of Series F convertible preferred shares and warrants, as described below. There was no material change in the Company's use of 33
short-term bank credit lines during 2001. In March 2002, the Company received approval from its lender banks to extend the existing credit lines in the amount of $25.5 million for an additional twelve-month period beginning March 31, 2002. Of the $23.5 million credit lines, the bank approved the extension of $6 million through March 31, 2005. In December 2000, the Company entered into a memorandum of understanding with Yarnfield International Limited, an affiliate of Magnum Technologies Fund, and Formula Systems Ltd., for a $15 million investment in exchange for issuance of Series F preferred shares, which remained subject to shareholder approval. On December 25, 2000 the Company received a $5 million nonrefundable deposit, for which it agreed to issue 5 million common shares if the agreement was not approved by shareholders, or Series F preferred shares if the agreement was approved. In February 2001, the Company's shareholders approved the share purchase agreement, and the Company issued to the investors an aggregate of 10,000 Series F preferred shares par value 1,500 Dutch guilder per share. We believe that available working capital and credit lines will be sufficient for the next 12 months to support our operating requirements. The Company may consider other financing alternatives to finance strategic goals and future growth. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND OFFICERS OF REGISTRANT The following table sets forth certain information regarding the current executive officers and directors of the Company. <TABLE> <CAPTION> <S> <C> <C> NAME AGE POSITION Ron Zuckerman (1) 45 Chairman of the Board Yitzhak Sharir 51 President and Chief Executive Officer Yuval Hadari 61 Chief Financial Officer Jacob Sivan 51 Executive Vice President, Business Marketing and Sales Development Amos Shattner 51 Executive Vice President, Technologies and Operations Haim Zysberg 46 Chief Technology Officer Steven Kronengold 42 Secretary and General Counsel Dani Goldstein 48 Director Shlomo (Shai) Sole 51 Director L. Robert Libutti (2) 65 Director Tsvi Misinai 56 Director Kenneth J. Bialkin (1) 73 Director Michel Berty (1) (2) 62 Director Holland Intertrust (Curacao) N.V. (2) (3) Director </TABLE> (1) Member of Compensation Committee (2) Member of Audit Committee 34
(3) Holland Intertrust (Curacao) N.V. is a corporate body organized under the laws of the Netherlands Antilles. The Articles of Incorporation of the Company provide that a corporate body may be a member of the Board of Directors. Ron Zuckerman has served as a director of the Company since May 1991 and assumed the position of Chairman of the Board of Directors on January 1, 1998. He served as Chief Executive Officer of the Company from January 1995 until March 31, 2000. Mr. Zuckerman served as Chief Operating Officer of the Company from its incorporation until April 1994. Yitzhak Sharir joined the Company as Chief Executive Officer in November 2000. Prior to joining the Company, Mr. Sharir served as General Manager of Nilit Industries from 1994 through 2000. Prior to joining Nilit, Mr. Sharir served as President & CEO of Orlite Industries from 1990 through 1994. Mr. Sharir also served as Executive V.P. and General Manager of Oshap Technologies (1985-1989), V.P. Technology of Urdan Industries (1983-1985), and manager of engineering teams at Israel Aircraft Industries and Israel's Nuclear Research Center. Mr. Sharir currently serves as a member of the Board of Directors of Israel Discount Bank. Yuval Hadari joined the Company as Chief Financial Officer in March 2001. Prior to joining the Company, Mr. Hadari served as V.P. Finance and Chief Financial Officer of Nilit Ltd. from 1996 to February 2001 and Chief Financial Officer of Scitex Europe S.A. from 1991 through 1995. Jacob Sivan has served as Executive Vice President, Sales Marketing and Business Development since November 2000. From 1993 through November 2000, Mr. Sivan served in various management positions with the Company, including Vice President, Products and Solutions and General Manager of Sapiens Technologies. Prior to joining the Company in 1993, Mr. Sivan served in the Israeli Air Force and rose to the rank of lieutenant colonel after 20 years of service in a wide range of data processing fields. Amos Shattner joined the Company as Executive Vice President, Technologies and Operations in March 2001. Prior to joining the Company, Mr. Shattner most recently served as Chief Executive Officer of Varicom Communications. Haim Zysberg currently holds the position of Chief Technology Officer of the Company. Prior to this, he served as the R&D Group Manager, V.P. Technologies of Sapiens Technologies. In 1989 be became the R&D Team Manager of Umanei Tochna. He also worked for Advanced Automated Applications as their Software Engineer from 1987. Steven Kronengold has served as Vice President, Secretary and General Counsel of the Company since June 1995. Prior to joining the Company, Mr. Kronengold served as an associate at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps") from 1984 to 1995. In the period from September 1991 to June 1992, Mr. Kronengold was on leave from Skadden, Arps and served as law clerk to then Chief Justice Meir Shamgar of the Supreme Court of Israel. Dani Goldstein has served as a director of the Company since March 5, 2001, the date on which the private placement transaction described in Item 5, above, under "Liquidity and Capital Resources" was completed. Pursuant to the terms of the private placement, Mr. 35
Goldstein filled the vacancy caused by the resignation of Mr. Harold Leach. Mr. Goldstein holds a B.Sc. degree in Mathematics and Computer Science and a Masters degree in Business Administration, both from Tel-Aviv University. Subsequent to his studies in Mathematics and Computer Science, Mr. Goldstein became an Information Technology Consultant. In 1982 he founded the first company in the Formula Group. Since then he has been CEO and Chairman of the group. Shlomo (Shai) Sole is a founder of the Company and has served as a Director since May 1991. Mr. Sole served as Executive Vice President-Research & Development from April 1990 through December 1996. Since 1990, Mr. Sole has served as a director of Meister Software N.V. Mr. Sole worked at the Weizmann Institute of Science located in Rehovot, Israel (the "Weizmann Institute") as a researcher and member of the DB1 development team, the predecessor of Sapiens. L. Robert Libutti has served as a director of the Company since August 1992 and served Chairman of the Board of Directors from January 1995 through December 1997. Since January 1992, Mr. Libutti has been employed as a private consultant. From 1988 to 1991, Mr. Libutti served as Programming Systems Director of Market Strategy for IBM in Somers, New York. From 1984 to 1988, Mr. Libutti served as Group Director of Market Development for IBM in Paris, France. Tsvi Misinai is a founder of the Company and has served as a director since April 1990. Mr. Misinai served as President and Chief Technological Officer of the Company from its formation in 1990 through March 1997. Mr. Misinai is currently Chairman of NewFrame Corporation, Ltd., a software company based in Israel. Since 1990, Mr. Misinai has been a director of Meister Software N.V. Mr. Misinai worked at the Weizman Institute, as an initiator and manager of the DB1 project. Kenneth J. Bialkin has been a director of the Company since August 1992. Mr. Bialkin has been a partner at Skadden Arps for more than five years. Mr. Bialkin is a director of Citigroup, OSHAP, Municipal Assistance Corporation for the City of New York, and Tecnomatix. Michel Berty has served as a Director of the Company since March 1997. Mr. Berty served as Chairman and Chief Executive Officer of Cap Gemini America from 1993 through March 1997; and as General Secretary of the Cap Gemini Group from 1986 to 1993. Holland Intertrust (Curacao) N.V. is a corporate body organized and existing under the laws of the Netherlands Antilles. It has provided the Company with corporate-related services since April 1990, including but not limited to serving as the Company's transfer agent and register, maintaining the corporate-related records of the Company, and filing various corporate documents with the governmental authorities in the Netherlands Antilles. All directors of the Company are appointed by the General Meeting of Shareholders and hold office until suspended or dismissed by the General Meeting of Shareholders. Executive officers are appointed by the Board of Directors of the Company and serve at the discretion of the Board of Directors. 36
By virtue of their beneficial ownership or deemed beneficial ownership of Common Shares the current directors and officers of the Company may be deemed to beneficially own approximately 20% of the outstanding Common Shares and will be in a position to control the election of the Company's directors and thus the direction and future operations of the Company. There are no family relationships among the executive officers or directors of the Company. The Company has no current intent or plan to change its compensation arrangements with respect to directors for serving as directors. B. COMPENSATION OF DIRECTORS AND OFFICERS The aggregate amount of compensation paid by the Company during the fiscal year ended December 31, 2001, to all directors and executive officers as a group for services in all capacities was $2,308,922 which includes amounts set aside or accrued to provide pension, retirement severance or bonuses and similar benefits, but does not include amounts expended by the Company for automobiles made available to its officers or expenses (including business travel and professional and business association dues) reimbursed to such officers. The aggregate amount set aside or accrued by the Company during its fiscal year ended December 31, 2001, to provide pension, retirement severance and similar benefits for directors and executive officers of the Company was $153,419. The foregoing amounts also exclude stock option grants to the Company's directors and officers pursuant to the Company's 1992 Stock Option Plan, which is described below. The Company has employment agreements with its officers. The Company, in the ordinary course of its business, enters into confidentiality agreements with its personnel in Israel and has entered into non-competition and confidentiality agreements with its officers and high-level technical personnel. The Company does not maintain key person life insurance on any of its executive officers. BOARD FEES AND EXPENSES The Company pays its independent directors the sum of $1,000 for each Board or committee meeting attended in person and the sum of $500 for each telephonic meeting. The Company reimburses all Board members for reasonable out-of-pocket expenses incurred in connection with their attendance at Board or committee meetings. The Company grants to its independent directors options to purchase 20,000 shares of the Company's common stock annually. The options are granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. The term of the options is 10 years and the options vest at a rate of 25% per annum. STOCK OPTION AND INCENTIVE PLAN On April 2, 1992, the Company adopted the 1992 Stock Option and Incentive Plan (the "1992 Stock Plan"), which was submitted for approval and approved in April, 1992, by the Company's shareholders, pursuant to which, officers, directors, and dey employees of the Company will be eligible to receive awards of stock options and restricted stock. The 1992 Stock Plan is administered by a committee (the "Committee"), established by the 37
Company's Board of Directors. Options granted under the 1992 Stock Plan may be "incentive stock options" ("ISOs"), within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options ("non-Qualified Stock Options"). Restricted stock may be granted in addition to or in lieu of any other award granted under the 1992 Stock Plan. In 1992, the Company reserved 500,000 Common Shares for issuance of awards under the 1992 Stock Plan. In February 1994, the shareholders adopted the resolution to increase the number of shares reserved for grant under the 1992 Stock Plan by an additional one million Common Shares. In October 1995 and January 1997 the Company increased the number of shares available for grant under the 1992 Stock plan by an additional one million Common Shares each in order to retain and attract management and other key personnel essential to the Company's achievement of various performance milestones based on net operating profit, excluding extraordinary items. In March 1998 and October 1998 the Company increased the number of shares available for grant under the Plan by an additional one million Common Shares each for the purpose of attracting new talent to the Company. In January 2000 and November 2000, the Company increased the number of shares available for grant under the Plan by an additional two million and four million Common Shares respectively. These increases were necessary in light of the decline in the market price of the Company's Common Shares, which rendered previous option grants valueless, and the need to retain the Company's talented personnel under difficult conditions. Subject to the provisions of the 1992 Stock Plan, the Committee determines the type of award, when and to whom awards will be granted, and the number of shares covered by each award. The Committee also determines the terms, provisions, and kind of consideration payable (if any), with respect to awards. In addition, the Committee may authorize loans in connection with the exercise of options under the 1992 Stock Plan. The Committee has discretionary authority to interpret the 1992 Stock Plan and to adopt rules and regulations related thereto. In determining the persons to whom awards shall be granted and the number of shares covered by each award, the Committee takes into account the contribution to the management, growth and/or profitability of the business of the Company by the respective persons and such factors as the Committee shall deem relevant, including the length of employment of the respective persons, the nature of their responsibilities to the Company, and their flexibility with regard to location of their employment and other employment-related factors. An option may be granted on such terms and conditions as the Committee may approve, and generally may be exercised for a period of up to 10 years from the date of grant. Options granted under the 1992 Stock Plan vest and become exercisable in cumulative installments of 25% a year beginning with the first anniversary of the date of the grant, or pursuant to such other schedule as the Committee may provide in the option agreement. The exercise price of such options generally will be not less than 100% of the fair market value per share of the Common Shares at the date of the grant. In the case of ISOs, certain limitations will apply with respect to the aggregate value of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations will apply to "Ten Percent Stockholders" (as defined in the 1992 Stock Plan). The Committee may provide for the payment of the option price in cash, by delivery of other Common Shares having a fair market value equal to such option exercise price, by a combination thereof or by any method in accordance with the terms of the option 38
agreements. The 1992 Stock Plan contains special rules governing the time of exercise of options in the case of death, disability, or other termination of employment. Options are not transferable except by will or pursuant to applicable laws of descent and distribution upon death of the employee. The 1992 Stock Plan also provides for the granting of restricted stock awards, which are awards of Common Shares that may not be disposed of, except by will or the laws of descent and distribution, for such period as the Committee determines (the "restricted period"). The Committee may also impose such other conditions and restrictions on the shares as it deems appropriate, including the satisfaction of performance criteria. The Committee may provide that such restrictions will lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of the award. During the restricted period, the grantee is entitled to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee's continuous employment with the Company terminates for any reason, any shares remaining subject to restrictions will be forfeited. The Committee has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period, including cancellation of restrictions in connection with certain types of termination of employment. As of December 31, 2001, options to purchase 7,848,494 Common Shares (1,879,200 of which were held by officers and directors) were outstanding with exercise and vesting dates beginning in June 1993 and expiring at various dates through December 2011. As of that date, the Company had granted restricted stock awards of 214,500 (1,750 of which were held by current and former officers and directors) to employees. As of December 31, 1997, all of the restricted shares had vested under the restricted stock awards. Restricted stock awards vested at various dates beginning in June 1993. III. 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. Each executive officer serves until his/her removal by the Board of Directors or resignation from office. AUDIT COMMITTEE The Audit Committee of the Board of Directors is comprised of three external directors, nominated by the Board of Directors. During the year 2001, Messrs. Libutti, Berty and Holland Intertrust (Curacao) N.V. served as members of the Audit Committee. Its primary function is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial information, internal controls and the audit process. The Committee is governed by a Charter and meets at regularly scheduled quarterly meetings. COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors is comprised of three external directors, nominated by the Board of Directors. During the year 2001, Messrs. Zuckerman, Bialkin and Berty served as members of the Compensation Committee. The primary function of the Compensation Committee is to manage the Company's Stock Option Plan and review and approve all matters relating to the compensation of the Company's officers and directors. The Committee meets at regularly scheduled quarterly meetings. 39
D. EMPLOYEES Competition for personnel in the Company's industry is intense. The Company believes that its future success will depend in part on its continued ability to hire and retain qualified personnel. There can be no assurance that the Company will be successful in attracting and retaining sufficient numbers of qualified personnel to conduct its business in the future. As of December 31, 2001, the Company had a total of 622 employees, including 83 in research and development, 414 in consulting, delivery and technical support; and 125 in SG&A. E. SHARE OWNERSHIP See Item 7. ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS The following table sets forth, as of December 31, 2001, certain information with respect to the beneficial ownership of the Company's Common Shares by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Shares and (ii) all officers and directors of the Company as a group. NAME AND ADDRESS SHARES BENEFICIALLY OWNED (1) - ---------------- -------------------------- NUMBER PERCENT ------ ------- Capital International Inc. 1,789,000 7.3% 333 South Hope Street 50th Floor Los Angeles, CA , USA Meister Software N.V. (2) 1,704,000 7% De Ruyterdade 58A Curacao, Netherlands Antilles Century Holdings, Inc. (3) 1,704,000 7% C/o Secretary Residence Park P.O. Box 4258 CH-6300 Zug, Switzerland Artemis Investment and Trading Inc. (4) 2,003,000 8.2% C/o Secretary Residence Park P.O. Box 4258 CH-6300 Zug, Switzerland Lako Enterprises S.A. (5) 2,192,499 8.9% 40
C/o Secretary Residence Park P.O. Box 4258 CH-6300 Zug, Switzerland DIRECTORS AND OFFICERS Ron Zuckerman (6) 3,208,999 13.1% Itzick Sharir (7) 1,500,000 6.1% Tsvi Misinai (8) 1,726,666 7% Shai Sole (9) 2,014,100 8.2% Each of the remaining directors and officers owns less than 1% of the Company's Common Shares. As of December 31, 2001 there were approximately 165 holders of record of the Company's Common Stock, including 108 holders of record with addresses in the United States. (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 number of Common Shares deemed outstanding as of December 31, 2001 is 24,505,694. (2) Tsvi Misinai and Shlomo (Shai) Sole beneficially own approximately 23% and approximately 9.7%, respectively, of the voting stock of Meister. By virtue of their ownership of Meister and their positions as officers and directors of Meister (see "Management"), Mr. Misinai and Mr. Sole may be deemed to beneficially own all of the outstanding Common Shares held by Meister. By virtue of Mr. Zuckerman's deemed ownership of Century Holdings, Inc., a Panamanian corporation ("Century") and by Century's approximately 31.9% ownership of Meister, Mr. Zuckerman may be deemed to beneficially own all of the Common Shares held by Meister (see Note (3)). (3) Includes the 1,704,000 Common Shares held by Meister. Century owns approximately 31.9% of the outstanding voting shares of Meister. By virtue of Century's ownership of Meister, Century may be deemed to beneficially own all the Common Shares held by Meister. (4) Includes the 1,704,000 Common Shares held by Meister and deemed to be held by Century. Artemis owns 299,000 Common Shares and 50% of the voting shares of Century. A trust (the Angold Foundation) for the benefit of the estate of Mr. Shani owns all the outstanding voting shares of Artemis. Mr. Shani disclaims beneficial ownership of the Common Shares held by Artemis. By virtue of Artemis' ownership of Century, Mr. Shani may be deemed to beneficially own all the Common Shares held by Century (see Notes (2) and (3)). 41
(5) Includes the 1,704,000 shares held by Meister and deemed to be held by Century. Lako owns 488,499 Common Shares and 50% of the voting shares of Century. A trust (the Bornali Foundation) for the benefit of the estate of Mr. Zuckerman owns all the outstanding voting shares of Lako. Mr. Zuckerman disclaims beneficial ownership of the Common Shares held by Lako. By virtue of Lako's ownership of Century, Mr. Zuckerman may be deemed to beneficially own all the Common Shares held by Century (see Notes (2) and (3)). (6) Includes (i) 1,704,000 Common Shares held by Meister, which shares may be deemed to be beneficially owned by Mr. Zuckerman, (see Notes (2), (3), and (4)); (ii) 488,499 Common Shares held by Lako as to which Mr. Zuckerman disclaims beneficial ownership, (See Note (4)); (iii) 120,000 Common Shares held of record by Mr. Zuckerman; and (iv) options to purchase 896,500 Common Shares held by Lako to which Mr. Zuckerman disclaims beneficial ownership. The options have exercise prices ranging from $0.001 to $6.50 per share. (7) Includes 1, 500,000 shares that are currently being held in escrow by the General Counsel of the Company pursuant to a share purchase agreement between Red Coral Holdings, Inc. and the Company. Mr. Sharir disclaims beneficial ownership of such Common Shares. (8) Includes (i) 1,704,000 Common Shares held by Meister, which shares may be deemed to be beneficially owned by Mr. Misinai, (see Notes (2), (3), and (4)); (ii) 1,166 Common Shares held of record by Mr. Misinai; and (iii) options to purchase 21,500 Common Shares at an exercise price of $2.25 per share. Includes (i) 1,704,000 Common Shares held by Meister, which shares may be deemed to be beneficially owned by Mr. Sole, (see Notes (2), (3), and (4)); (ii) 168,600 Common Shares held of record by a trust (the ADANAC Trust) for the benefit of Mr. Sole's children, as to which Mr. Sole disclaims beneficial ownership; and (iii) options to purchase 141,500 Common Shares at exercise prices ranging from $2.25 to $6.50 per share. RELATED PARTY TRANSACTIONS 1. On December 25, 2000, the Company entered into an agreement with Yarnfield International Limited, an affiliate of the Magnum Technologies Fund, and Formula Systems (1985) Ltd., pursuant to which they agreed to invest $15 million in the Company in return for convertible preferred shares to be issued by the Company. According to the terms of the private placement, the preferred shares, which have a three-year term of maturity, were initially convertible into common stock at $1.50 per common share. On August, 2001 the conversion price has been adjusted to $1.14 per common share. There will be no further adjustment to the Conversion Price. At maturity, 3 years from the date of investment, the Company will redeem all of the outstanding series F convertible preferred shares through payment of cash or delivery of common shares, at the Company's election. If common shares are issued, the redemption price will be the average closing sale price of the Company's common share for the 30 trading days preceding maturity. The Company's inetention as of December 31, 2001 is to redeem the investment in shares. Other key terms of the transaction include the investors' three-year option to invest an additional $15 million on the same terms as the current transaction and according to 42
the current conversion price. The investors will also be entitled to nominate two representatives to the Company's Board of Directors, subject to shareholder approval at the annual general meetings of shareholders. The Company's shareholders approved the private placement transaction at a special meeting of shareholders held on February 22, 2001, and the transaction was closed on March 6, 2001. Ron Zuckerman, Chairman of the Board of the Company, is an advisor to Magnum. 2. On April 4, 2001, the Company entered into a share purchase and loan agreement with Red Coral Holdings, Inc. ("Red Coral"), owned by the Company's President and Chief Executive Officer. According to the terms of the agreement, Red Coral purchased 1,500,000 Common shares of the Company for a purchase price $975,000. As part of the agreement, the Company granted to Red Coral a loan in the amount of $975,000 for the purpose of acquiring the common shares. The term of the loan is six years with accrued interest at a rate of 4%, which is payable on January 15th of each calendar year. The interest amount is fully-recourse and fixed. To secure payment of the loan, Red Coral granted the Company a lien and security interest on all of the common shares. To secure fulfillment of the terms of the agreement, the common shares are being held in escrow by the General Counsel of the Company. ITEM 8. FINANCIAL INFORMATION See Item 18. LEGAL PROCEEDINGS The Company is subject to certain legal proceedings and claims that arise in the conduct of its business. In the opinion of management, the amount of liability, if any, as a result of these claims and proceedings is not likely to have a material effect on the financial condition or results of operations of the Company. In 2000, the Company filed a lawsuit against GIE AGF Systems D'Information (hereinafter - "AGF SI"), a customer, regarding an unpaid balance related to a year two thousand project performed during 1998 and 1999. On February 14, 2001 the French court ruled that AGF SI must pay the Company the sum of approximately $3 million. Following the French court ruling, AGF SI filed an appeal to the Court of Appeals of Paris. On January 26, 2002, the Company filed a counter pleading in reply rejecting the claims presented by AGF SI and claiming an additional amount of approximately $3.5 million in respect with the contract signed between the parties. The Company, based on the advice of its legal counsel, believes that the court will not accept AGF SI's appeal. ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS The Company's Common Shares are quoted on the Nasdaq National Market ("Nasdaq") under the symbol "SPNS". 43
As of December 31, 2001, 24,505,694 Common Shares were outstanding and additionally 213,000 shares were held in treasury by the Company. The table below sets forth the high and low last reported sale prices for the Common Shares on an annual basis for the years 1996 through 1998 and on a quarterly basis for the years 1999 and 2000: HIGH LOW ---- --- 1997 (ANNUAL) 6.3125 2.6875 - ---- 1998 (ANNUAL) 9.4375 3.375 - ---- 1999 (ANNUAL) 17.063 8.313 - ---- 2000 - ---- First Quarter 22.000 11.625 Second Quarter 12.75 5.063 Third Quarter 7.625 3.875 Fourth Quarter 4.25 0.719 2001 - ---- First Quarter 1.6562 0.8438 Second Quarter 1.491 0.656 Third Quarter 1.33 0.54 Fourth Quarter 1.10 0.56 The table below sets forth the high and low last reported sale prices for the Common Shares during the most recent six-month period: HIGH LOW ---- --- September 2001 1.05 0.57 October 2001 0.72 0.56 November 2001 1.20 0.64 December 2001 1.10 0.85 January 2002 1.10 0.93 February 2002 1.37 0.96 March 2002 1.32 1.20 ITEM 10. ADDITIONAL INFORMATION 44
I. SHARE CAPITAL Not applicable. II. MEMORANDUM AND ARTICLES OF ASSOCIATION (THE "ARTICLES") 1. REGISTRATION AND OBJECTIVES. The Company is organized and existing under the laws of the Netherlands Antilles. Its registered number is: 53368. The objects and purposes of the Company, which are itemized in Article II of the Articles, may be summarized as follows: o to establish, participate in or have any other interest in business enterprises concerned with the development and commercial operation of software; o to finance directly or indirectly the activities of the Company, its subsidiaries and affiliates; o to borrow and to lend moneys; o to engage in the purchase and sale of securities, futures, real estate, business debts, commodities and intellectual property; o to undertake and promote research and development; o to guarantee, pledge, mortgage or otherwise encumber assets as security for the obligations of the Company or third parties; and o to do all that may be useful or necessary for the attainment of the above purposes. 2. BOARD OF DIRECTORS. A member of the Board of Directors may vote on a proposal or transaction in which he/she has a material interest if a majority of the disinterested directors authorize the proposal or transaction and the material facts as to the director's self-interest are disclosed to the Board of Directors. Members of the Board of Directors do not have power, in the absence of an independent quorum, to vote compensation to themselves. All matters related to compensation are within the authority of the Compensation Committee, which is comprised of independent directors. Our Articles of Association do not grant borrowing powers to directors; nor do they require directors to resign at a certain age or to purchase a certain number of shares of the Company's common stock. 3. RIGHTS AND PREFERENCES. The Company has two classes of shares currently outstanding: Common Shares and Series F Preferred Shares. All previous issuances of Preferred Shares have been converted into Common Shares. The rights and preferences of the holders of Common Shares and Series F Preferred Shares may be summarized as follows: I. COMMON SHARES 45
Holders of the Common Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Common Shares do not have cumulative voting rights in the election of directors. All Common Shares are equal to each other with respect to liquidation and dividend rights. Holders of the Common Shares are entitled to receive dividends, subject to shareholder approval, out of funds legally available under Netherlands Antilles law. See "Dividend Policy." In the event of the liquidation of the Company, all assets available for distribution to the holders of the Common Shares are distributable among them according to their respective holdings, subject to the preferences of any shares having a preference upon liquidation that may be then outstanding. Holders of the Common Shares have no preemptive rights to purchase any additional, unissued Common Shares. The foregoing summary of the Common Shares does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Articles of Incorporation, which are included as an exhibit to the Registration Statement of which this Prospectus forms a part, and by provisions of applicable law. II. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Shares and does not anticipate paying cash dividends in the foreseeable future. It is the present intention of the Company's Board of Directors to retain all earnings in the Company in order to support the future growth of its business. Any determination in the future to pay dividends will be dependent upon the Company's consolidated results of operations, financial condition, cash requirements, future prospects and other factors. In addition, the ability of the Company to pay dividends is subject to the limitations of the Corporate Law of the Netherlands Antilles, which provides, among other things, that dividends, while permitted to be paid periodically during a fiscal year, are subject to being proposed by the Board of Directors of the Company and approved thereafter at the General Meeting of Shareholders. III. SERIES F PREFERRED SHARES The Series F Shares will have all of the rights of the common shares into which they are convertible, on an as-converted basis. In addition, each Series F Share entitles its holder to the following powers, preferences and rights: IV. PREFERENCE RIGHTS In the event of any voluntary or involuntary liquidation, dissolution or winding up of Sapiens, the holders of the Series F Shares will be entitled to be paid out of the assets and funds of Sapiens' legally available for distribution to its shareholders, before any payment is to be made to the holders of Sapiens common shares, PRO RATA among such holders, (i) an amount per share equal to the price per share, as adjusted for any bonus shares, combinations or splits with respect to such shares, and (ii) all declared but unpaid dividends. In addition, Sapiens has agreed not to authorize or issue any equity securities of any class with rights equal or senior to the Series F Shares or other securities convertible into such securities, or enter into any contract or grant any option for the issuance of any such securities or take any other action that would have the effect of amending the rights, 46
preferences or privileges of the Series F Shares without the affirmative vote of the holders of record of at least a majority of the outstanding Series F Shares voting as a separate class. V. VOTING RIGHTS Each Series F Preferred Share is convertible into 1,000 Common Shares, subject to adjustment, and the holders of the Series F Shares are entitled to vote their shares on an as-converted basis. VI. REDEMPTION The redemption date of the Series F Preferred Shares is March 6, 2004, at which time the Company will redeem, in cash or common shares at the Company's option, all of the Series F Shares then outstanding at the redemption price of $1,500 per Series F Share. In the event the Company chooses to redeem Series F preferred Shares with the Company's common shares, the Company shall issue the number of common shares determined by dividing the redemption price by the average closing market price for common share for the 30 trading day prior to the Redemption Date. Our articles of association do not contain any provisions relating to the establishment of a sinking fund nor do they contain any provisions that discriminate against any existing or future shareholder as a result of such shareholder owning a substantial number of shares. 4. CHANGING THE RIGHTS OF THE SHAREHOLDERS. The general meeting of our shareholders decides upon any change in the articles of association. A resolution to amend the articles of association requires the approval of the absolute majority of all shares outstanding and entitled to vote. Our Articles of Association make no provision for changing the rights of holders of Series F Preferred Shares. 5. GENERAL MEETINGS. At least one general meeting of our shareholders must be held each year within nine months of the close of our financial year, which is the calendar year. General meetings must be held in Curacao. Special general meetings of shareholders may be called at any time by the Chairman of the Board or by the Board of Directors upon no less than 10 nor more than 60 days written notice to the Company's shareholders. Every shareholder has the right to attend any meeting of shareholders in person or by proxy and to address the meeting. No action may be taken at any meeting of shareholders unless a quorum consisting of holders of at least one-half of the shares outstanding and entitled to vote are present at the meeting in person or by proxy. 6. LIMITATIONS TO OWN SECURITIES. Our articles of association contain no limits on the right to own securities. 7. CHANGE OF CONTROL. Our articles of association contain no provisions that would prevent or delay a change of control of our Company. 8. DISCLOSURE OF OWNERSHIP. By-laws do not exist under Netherlands Antilles law. Our articles of association contain no provisions requiring a shareholder to disclose his or 47
her interest at a certain time; however holders of our shares are subject to the reporting provisions of the Securities and Exchange Commission. III. MATERIAL CONTRACTS A. AMENDMENT OF PUT/CALL AGREEMENT On February 13, 2001, the Company and the investors in eZoneXchange agreed to amend the terms of the Put and Call Option Agreement that the Company entered into in connection with the investors' purchase of 600,000 shares of eZoneXchange for $15 million in April 2000. According to the terms of the amendment, the investors put 173,100 shares of eZoneXchange to the Company in return for $4.5 million. As a result, the amount of the principal portion of the redeemable shares in a subsidiary was decreased by $ 4.2 million, net of expenses. In addition, if the market price of the Company Common stock reaches $2 per share, the investors will have the right to put an additional 192,333 shares of its eZoneXchange stock in return for the Sapiens Common stock at a price of $2.75 per share. The remaining portion of the investment in eZoneXchange will continue to be subject to the original terms of the Put and Call Option Agreement. B. EXCHANGE CONTROLS Although there are Netherlands Antilles laws which may impose foreign exchange controls on the Company and may affect the payment of dividends, interest, or other payments to non-resident holders of the Company's securities, including the Common Shares, the Company has been granted an exemption from such foreign exchange control regulations by the Central Bank of the Netherlands Antilles. Other jurisdictions in which the Company conducts operations may have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed on the operations of the Company. As to the Company's securities, Netherlands Antilles law and the Company's Articles of Incorporation impose no limitations on the right of non-resident or foreign owners to hold or vote such securities. C. TAXATION The Israel Tax Authority has commenced an audit of the Company's subsidiaries, Sapiens Technologies, Ltd. and Sapiens Israel Software Systems Ltd. In December 2001, the Company has reached an agreement with the Israeli Tax Authorities ("the ITA") as a result of a tax assessment. In accordance with the agreement's provisions, the tax liability for the tax years through 1999 will be increased by approximately $1 million, which will be paid in 12 equal monthly payments, commencing the agreement date. In addition, the Company have a contingent tax liability to pay additional $2.6 million, based on the provisions of the above mentioned agreement. The Company would need to obtain certain approvals from the "Investment Center" regarding the status of the 48
"Approved Enterprise", under the "Law for Encouragement of Capital Investment, 1959" to some of its plans, within 6 months from the agreement date, in order to avoid paying the additional tax liability. The following discussion is a summary of certain anticipated tax consequences of an investment in the Common Shares under U.S. Federal income tax laws and Netherlands Antilles tax laws. The discussion does not deal with all possible tax consequences relating to an investment in the Common Shares. In particular, the discussion does not address the tax consequences under state, local and other (e.g., non-U.S., non-Netherlands Antilles) tax laws. Accordingly, each prospective investor should consult its tax advisor regarding the tax consequences of an investment in the Common Shares. The discussion is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are subject to change. D. UNITED STATES FEDERAL INCOME TAXATION The following discussion addresses the U.S. Federal income taxation of a U.S. person (e.g., a U.S. citizen or resident, a U.S. corporation, and an estate or trust subject to U.S. tax on all of its income regardless of source) (a "U.S. Investor") making an investment in the Common Shares. Persons other than U.S. Investors may be subject to tax rules that differ significantly from those summarized below. Such persons are advised to consult their tax advisors regarding the tax considerations incident to an investment in the Common Shares. A U.S. Investor receiving a distribution on the Common Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. Federal income tax purposes, as a non-taxable return of capital to the extent of the U.S. Investor's basis in the Common Shares and then as gain from the sale or exchange of a capital asset, provided that the Common Shares constitute capital assets in the hands of the U.S. Investor. Dividends received on the Common Shares will not be eligible for the corporate dividends received deduction. Gain or loss on the sale or exchange of Common Shares will be treated as capital gain or loss (if the Common Shares are held as a capital asset). Such capital gain or loss will be long-term capital gain or loss if the U.S. investor has held the Common Shares for more than one year at the time of the sale or exchange. E. 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. F. UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING 49
The receipt of dividends on the Common Shares by a holder of the Common Shares (a) made by mail or wire transfer to an address in the United States, (b) made by a paying agent, broker or other intermediary in the United States or (c) made by a U.S. broker or a "United States-related" broker to such holder outside the United States may be subject to U.S. information reporting requirements. Holders of Common Shares who are not U.S. persons ("non-U.S. holders") generally would be exempt from these reporting requirements, but may be required to comply with certification and identification procedures in order to prove their exemption. Treasury regulations currently in effect do not require backup withholding with respect to dividends paid by a foreign corporation such as the Company. The U.S. Treasury Department is considering, however, whether to extend the backup withholding rules to dividends from certain foreign corporations. The payment of the proceeds of the disposition of Common Shares by a holder to or through the U.S. office of a broker generally will be subject to information reporting and backup withholding at a rate of 20% unless the holder either certifies its status as a non-U.S. holder under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds of the disposition by a holder of Common Shares to or through a non-U.S. office of a broker will generally not be subject to backup withholding and information reporting. Information reporting (but not "backup" withholding) may apply, however, to such a holder who sells beneficial interest in Common Shares through a non-U.S. branch of a U.S. broker, or through a non-U.S. office of a "United States-related" broker, in either case unless the holder established an exemption or the broker has documentary evidence in its files of the holder's status as a non-U.S. holder. For purposes of these rules, a "United States-related" broker is a broker or other intermediary that is a controlled foreign corporation for U.S. Federal income tax purposes or that is a person for which 50% or more of the gross income from all sources, over a specified three-year period, is effectively connected with a U.S. trade or business. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded (or credited against the holder's U. S. Federal income tax liability, if any) provided that the required information is furnished to the U.S. Internal Revenue Service. IV. DIVIDENDS AND PAYING AGENTS Not applicable. V. STATEMENT BY EXPERTS Not applicable. VI. DOCUMENTS ON DISPLAY We are currently subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended. Our SEC filings are filed electronically on the EDGAR reporting system and may be obtained through that medium. In addition, our SEC filings are available for inspection and copying at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and the Commission's regional offices located in New York, New York and Chicago, Illinois. Copies of all or any part of the registration statement may be obtained 50
from these offices after payment of fees prescribed by the Commission. Please call the Commission at 1-800-SEC-0300 for further information on the public reference rooms. As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements to shareholders. Because we are a foreign private issuer, we, our directors and our officers are also exempt from the shortswing profit recovery and disclosure regime of section 16 of the Exchange Act. VII. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risks relating to our operations result primarily from changes in exchange rates, interest rates or weak economic conditions in the markets in which we sell our products and services. We have been and we are actively monitoring these potential exposures. To manage the volatility relating to these exposures, we may enter into various forward contracts. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates and interest rates. FOREIGN CURRENCY RISK. We conduct our business in various foreign currencies, primarily those of Europe and to a lesser extent of Japan, Israel, Canada, and Australia. We monitor our foreign currency exposure and, from time to time, may enter into currency forward contracts to hedge sales transactions. We will use such contracts to hedge exposure to changes in foreign currency exchange rates associated with revenue denominated in a foreign currency and anticipated costs to be incurred in a foreign currency. INTEREST RATE RISK. Our interest expenses are most sensitive to changes in the London Interbank Offered Rate (LIBOR) as our short-term borrowings bear a LIBOR-based interest rate. As of December 31, 2001, we had approximately $16.2 million outstanding on our short-term credit agreements and $167 thousand recorded as long-term lease obligations. The potential loss to the Company over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates of all applicable financial assets and liabilities on December 31, 2002 would be approximately $180 thousand. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 51
None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. PART III ITEM 15. [RESERVED] ITEM 16. [RESERVED] PART IV ITEM 17. FINANCIAL STATEMENTS See Item 18. ITEM 18. FINANCIAL STATEMENTS The Company's Consolidated Financial Statements beginning on pages F-2 through F-36, as set forth in the following index, are hereby incorporated herein by reference. Such Consolidated Financial Statements are filed as part of this Annual Report. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3-4 Consolidated Statement of Operations F-5 Consolidated Statement of Changes in Shareholders' Equity F-6-8 Consolidated Statement of Cash Flow F-9-11 Notes to the Consolidated Financial Statements F-12-42 ITEM 19. EXHIBITS 1. Articles of Association of Sapiens International Corporation N.V. 2. Share Purchase Agreement by and between Sapiens International Corporation N.V. and Formula System (1985) Ltd.-On File 3. Amendment to Put/Call Agreement between The Israel Mezzanine Fund, L.P., Israel Discount Bank Ltd. and Sapiens International Corporation N.V. dated February 13, 2001.-On File. 52
SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certified that it meets all of the requirements for filing on Form 20-F and has duly caused this registration statement (annual report) to be signed on its behalf by the undersigned, thereunto duly authorized. SAPIENS INTERNATIONAL CORPORATION N.V. By: ------------------------------ Yitzhak Sharir President & CEO Date: April 15, 2002 53
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 IN U.S. DOLLARS INDEX PAGE ------------------ REPORT OF INDEPENDENT AUDITORS F - 2 CONSOLIDATED BALANCE SHEETS F - 3 - F - 4 CONSOLIDATED STATEMENTS OF OPERATION F - 5 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F - 6 - F - 8 CONSOLIDATED STATEMENTS OF CASH FLOWS F - 9 - F - 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F - 12 - F - 42 - - - - - - - -
ERNST & YOUNG o KOST FORER & GABBAY o Phone: 972-3-6232525 3 Aminadav St. Fax: 972-3-5622555 Tel-Aviv 67067, Israel REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SAPIENS INTERNATIONAL CORPORATION N.V. We have audited the consolidated balance sheets of Sapiens International Corporation N.V. ("the Company") and its subsidiaries as of December 31, 2000 and 2001, 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, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2000 and 2001, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel KOST FORER & GABBAY February 12, 2002, except Note 18 for A Member of Ernst & Young International which the date is March 25, 2002 F - 2
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ================================================================================ <TABLE> <CAPTION> DECEMBER 31, ------------------------------------- 2000 2001 --------------- --------------- U.S. DOLLARS IN THOUSANDS ------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $17,038 $16,087 Restricted cash deposits (Note 3) - 2,500 Marketable securities including pledged amounts of $2,548 and $50 as of December 31, 2000 and 2001, respectively (Notes 4 and 12) 2,872 50 Trade receivables (net of allowance for doubtful accounts of $ 4,834 and $4,599 as of December 31, 2000 and 2001, respectively) (Note 5) 31,663 17,563 Other receivables and prepaid expenses (Note 6) 7,713 7,084 --------------- --------------- Total current assets 59,286 43,284 --------------- --------------- PROPERTY AND EQUIPMENT, NET (Note 7) 6,707 4,097 --------------- --------------- OTHER ASSETS: Capitalized software development costs, net of accumulated amortization of $16,226 and $20,719 as of December 31, 2000 and 2001, respectively (Note 8a) 10,385 9,444 Goodwill, net of accumulated amortization of $3,303 and $4,878 as of December 31, 2000 and 2001, respectively (Note 8b) 9,197 7,579 Other, net of accumulated amortization of $2,141 and $3,305 as of December 31, 2000 and 2001, respectively (Note 8c) 6,825 6,059 --------------- --------------- Total other assets 26,407 23,082 --------------- --------------- Total assets $92,400 $70,463 =============== =============== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F - 3
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ================================================================================ <TABLE> <CAPTION> DECEMBER 31, -------------------------------- 2000 2001 -------------- -------------- U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA) -------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank credit (Note 10a) $ 16,767 $ 16,209 Current maturities of long-term debt (Note 10b) 214 245 Trade payables 6,112 3,242 Deferred revenues 3,172 1,633 Other liabilities and accrued expenses (Note 9) 25,131 20,318 -------------- -------------- Total current liabilities 51,396 41,647 -------------- -------------- LONG-TERM LIABILITIES: Convertible subordinated notes and other long-term liabilities (Note 10b) 7,433 7,365 -------------- -------------- REDEEMABLE SHARES IN A SUBSIDIARY (Note 1d) 14,675 10,711 -------------- -------------- COMMITMENT AND CONTINGENT LIABILITIES (Note 11) SHAREHOLDERS' EQUITY (Note 14): Share capital: Convertible preferred shares: Authorized - 0 and 20,000 Dutch Guilders of 1,500 par value at December 31, 2000 and 2001, respectively; Issued and outstanding - 0 and 10,000 at December 31, 2000 and 2001, respectively; Aggregate liquidation preference of approximately $ 0 and $ 15 million as of December 31, 2000 and 2001, respectively. -- 6,361 Common shares: Authorized 40,000,000 and 70,000,000 of 1 par value at December 31, 2000 and 2001, respectively; Issued: 23,214,661 and 24,714,661 at December 31, 2000 and 2001, respectively; Outstanding: 23,001,894 and 24,505,694 at December 31, 2000 and 2001, respectively. 9,364 10,020 Additional paid-in capital 71,945 80,514 Deferred stock compensation (175) (68) Proceeds on account of shares (Note 14a) 5,000 -- Treasury shares (2,423) (2,423) Note receivable from a related party shareholder - (975) Accumulated other comprehensive loss (4,651) (4,555) Accumulated deficit (60,164) (78,134) -------------- -------------- Total shareholders' equity 18,896 10,740 -------------- -------------- Total liabilities and shareholders' equity $ 92,400 $ 70,463 ============== ============== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. <TABLE> <CAPTION> <S> <C> <C> , 2002 - ---------------------------------------------------- -------------------------- ----------------------------- Date of Approval of financial statements Yitzhak Sharir Ron Zuckerman President and Chief Chairman of the Executive Officer Board of Directors </TABLE> F - 4
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================ <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------- -------- -------- U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA) -------------------------------------------- <S> <C> <C> <C> Revenues (Note 15b and 1a): Products $47,390 $ 38,403 $ 27,876 Consulting and other services 44,440 34,341 35,559 ------- -------- -------- Total revenues 91,830 72,744 63,435 ------- -------- -------- Cost of revenues: Products 16,354 25,737 20,358 Consulting and other services 29,333 26,414 23,212 ------- -------- -------- Total cost of revenues 45,687 52,151 43,570 ------- -------- -------- Gross profit 46,143 20,593 19,865 ------- -------- -------- Operating expenses: Research and development, net (Note 16a) 5,021 9,101 4,501 Selling, marketing, general and administrative, net 27,880 46,682 28,725 Aborted merger costs (Note 17) -- 1,252 -- Restructuring costs (Note 1c) 2,019 2,558 -- ------- -------- -------- Total operating expenses 34,920 59,593 33,226 ------- -------- -------- Operating income (loss) 11,223 (39,000) (13,361) Financial income (expenses), net (Note 16b) 412 (632) (3,187) Other expenses, net (220) (403) (665) ------- -------- -------- Income (loss) before taxes on income 11,415 (40,035) (17,213) Taxes on income (benefit) (Note 13) (1,678) (1,949) 726 ------- -------- -------- 13,093 (38,086) (17,939) Minority interest in earnings of a subsidiary (25) -- (31) ------- -------- -------- Net income (loss) $13,068 $(38,086) $(17,970) ------- -------- -------- Dividends on preferred shares (Note 14f) $ (418) $ (107) $ -- ------- -------- -------- Net income (loss) to shareholders of common shares $12,650 $(38,193) $(17,970) ======= ======== ======== Basic net earnings (loss) per share (Note 16c) $ 0.61 $ (1.69) $ (0.78) ======= ======== ======== ======== Diluted net earnings (loss) per share (Note 16c) $ 0.53 $ (1.69) $ (0.78) ======= ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F - 5
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ================================================================================ <TABLE> <CAPTION> COMMON ACCUMULATED ADDITIONAL SHARES OTHER PREFERRED COMMON PAID-IN TREASURY ACCRUED AS COMPREHENSIVE SHARES SHARES CAPITAL SHARES DIVIDENDS LOSS ------------- ------------ ------------ ----------- ------------ -------------- U.S. DOLLARS IN THOUSANDS ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance as of January 1, 1999 $4 $7,996 $ 63,494 $ (2,423) $ 720 $(2,055) Comprehensive income: Net income -- -- -- -- -- -- Other comprehensive loss: Unrealized losses on available-for-sale marketable -- -- -- -- -- -- securities, net Foreign currency translation adjustments -- -- -- -- -- -- Other comprehensive loss -- -- -- -- -- (1,395) Total comprehensive income Conversion of preferred shares to common shares: Series "D1" (*-- 73 (73) -- -- -- Employee stock options exercised -- 352 1,996 -- -- -- Warrants exercised -- 109 1,180 -- -- -- Compensation expense related to issuance of warrants to service providers -- -- 57 -- -- -- Common shares issued as dividends on Series D1 preferred shares -- 17 154 -- (171) -- Common shares accrued as dividends on preferred shares -- -- -- -- 418 -- Shares issued in connection with the acquisitions of Syspart and Sapiens Japan -- 147 2,785 -- -- -- ------------- ------------ ------------ ----------- ------------ -------------- Balance as of December 31, 1999 $4 $8,694 $69,593 $(2,423 $ 967 $(3,450) ============= ============ ============ =========== ============ ============== </TABLE> ACCUMULATED DEFICIT TOTAL - -------------- ------------ - ---------------------------- $(34,621) $ 33,115 13,068 13,068 ------------ -- (261) -- (1,134) ------------ -- (1,395) ------------ 11,673 ------------ -- -- -- 2,348 -- 1,289 -- 57 -- -- (418) -- -- 2,932 - -------------- ------------ $(21,971) $ 51,414 ============== ============ The accompanying notes are an integral part of the consolidated financial statements. *) Represents an amount lower than $1. F - 6
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ================================================================================ <TABLE> <CAPTION> PROCEEDS COMMON ACCUMULATED ADDITIONAL DEFERRED ON SHARES OTHER PREFERRED COMMON PAID-IN STOCK ACCOUNT TREASURY ACCRUED AS COMPREHENSIVE SHARES SHARES CAPITAL COMPENSATION OF SHARES SHARES DIVIDENDS LOSS --------- ------ --------- ------------ --------- -------- ---------- ------------- U.S. DOLLARS IN THOUSANDS - ----------------------------------- -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance as of January 1, 2000 $ 4 $8,694 $69,593 $ -- $ -- $(2,423) $967 $(3,450) Comprehensive loss: Net loss -- -- -- -- -- -- -- -- Other comprehensive loss: Unrealized losses on available-for-sale marketable securities, net -- -- -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- -- -- Other comprehensive loss -- -- -- -- -- -- -- (1,201) Total comprehensive loss Conversion of preferred shares to common shares: Series "D1" (1) 131 (130) -- -- -- -- -- Series "E" (2) 169 (167) -- -- -- -- -- Series "D2" (1) 104 (103) -- -- -- -- -- Employee stock options exercised -- 166 832 -- -- -- -- -- Warrants exercised -- 2 6 -- -- -- -- -- Compensation expense related to issuance of warrants to service providers -- -- 78 -- -- -- -- -- Deferred stock compensation related to options repriced -- -- 628 (628) -- -- -- -- Amortization expense on re-priced options -- -- -- 453 -- -- -- -- Deferred tax benefit on exercised options -- -- 547 -- -- -- -- -- Common shares accrued as dividends on preferred shares -- -- -- -- -- -- 107 -- Common shares issued as dividends on preferred shares Series "D1" -- 31 326 -- -- -- (357) -- Series "E" -- 40 366 -- -- -- (406) -- Series "D2" -- 25 286 -- -- -- (311) -- Shares issued as payment in respect of acquisitions adjustments of SAIC, Syspart and Sapiens Japan -- 2 (317) -- -- -- -- -- Proceeds on account of shares -- -- -- -- 5,000 -- -- -- --- ------ ------- ----- ----- -------- ----- ------- Balance as of December 31, 2000 $-- $ 9,364 $71,945 $(175) $5,000 $(2,432) $-- $(4,651) === ====== ======= ===== ===== ======== ===== ======= </TABLE>
ACCUMULATED DEFICIT TOTAL ---------- --------- U.S. DOLLARS IN THOUSANDS - ------------------------- $(21,971) $ 51,414 (38,086) (38,086) ------- -- (58) -- (1,143) ------- -- (1,201) ------- (39,287) ------- -- -- -- -- -- -- -- 998 -- 8 -- 78 -- -- -- 453 -- 547 (107) -- -- -- -- -- -- -- -- (315) -- 5,000 ------- $(60,164) $ 18,896 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. F - 7
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ================================================================================ <TABLE> <CAPTION> PROCEEDS CONVERTIBLE ADDITIONAL DEFERRED ON PREFERRED COMMON PAID-IN STOCK ACCOUNT TREASURY SHARES SHARES CAPITAL COMPENSATION OF SHARES SHARES ----------- ----------- ----------- -------------- ------------ ---------- - <S> <C> <C> <C> <C> <C> <C> Balance as of January 1, 2001 $ -- $ 9,364 $ 71,945 $ (175) $ 5,000 $ (2,423) Total comprehensive loss: Net loss -- -- -- -- -- -- Other comprehensive loss: Unrealized losses on available-for-sale marketable securities, net -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- Other comprehensive loss -- -- -- -- -- -- Total Comprehensive loss Employee stock options exercised -- 1 (1) -- -- -- Compensation expense related to issuance of warrants to banks -- -- 203 -- -- -- Amortization expense on re-priced options -- -- -- 107 -- -- Issuance of Series "F" convertible preferred shares 6,361 -- 8,518 -- (5,000) -- and warrants, net Common shares issued for a note -- 655 320 -- -- -- to a related party Payment in respect of acquisition adjustment of Syspart -- -- (471) -- -- -- -------- -------- -------- -------- -------- -------- Balance as of December 31, 2001 $ 6,361 $ 10,020 $ 80,514 $ (68) -- $ (2,423) ======== ======== ======== ======== ======== ======== </TABLE> NOTE ACCUMULATED RECEIVABLE OTHER FROM A COMPREHENSIVE ACCUMULATED SHAREHOLDER LOSS DEFICIT TOTAL - ------------- --------------- ------------- ----------- $-- $ (4,651) $(60,164) $ 18,896 -- -- (17,970) (17,970) -------- -- -- -- (30) -- -- -- 126 -------- -- 96 -- 96 -------- (17,874) -------- -- -- -- -- -- -- -- 203 -- -- -- 107 -- -- -- 9,879 (975) -- -- -- -- -- -- (471) -------- -------- -------- -------- $ (975) $ (4,555) $(78,134) $ 10,740 ======== ======== ======== ======== Accumulated unrealized gain from available for sale marketable $ 28 securities Accumulated foreign currency (4,583) translation adjustments -------- Accumulated other comprehensive loss $(4,555) The accompanying notes are an integral part of the consolidated financial statements. F - 8
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 -------------- ------------- -------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) $13,068 $(38,086) $(17,970) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation amortization and impairment 6,024 6,984 9,555 Amortization of deferred gain on sale - leaseback transaction (160) (226) (3) Gain on marketable securities (222) (91) (124) Loss (gain) on disposal of property and equipment (11) (8) 417 Amortization of compensation expenses related to issuance of warrants to service providers 57 78 -- Amortization expense on re-priced options -- 453 107 Decrease (increase) in trade receivables (16,790) (873) 13,372 Increase in other receivables and prepaid expenses (2,959) (251) (82) Decrease (increase) in deferred income taxes, net (1,443) (2,636) 50 Reduction of income taxes related to employee stock option exercised -- 547 -- Increase (decrease) in trade payables 50 2,702 (2,664) Increase (decrease) in deferred revenues (835) 942 (1,347) Increase (decrease) in other liabilities and accrued expenses 3,169 9,332 (4,230) Accrued interest on redeemable shares in a subsidiary -- -- 270 Minority interests in earnings of a subsidiary 25 -- 31 ------- -------- -------- Net cash used in operating activities (27) (21,133) (2,618) ------- -------- -------- Cash flows from investing activities: Purchase of property and equipment (2,174) (3,663) (508) Increase in capitalized software development costs (2,814) (4,250) (3,967) Increase in restricted cash -- -- (2,500) Purchase of marketable securities (3,253) (6,763) (2,883) Proceeds from sale of marketable securities 8,124 12,078 5,573 Proceeds from sale of property and equipment 103 38 96 Purchase of other assets (1,059) (321) -- Payment for acquisition of IMA (1) -- (275) (66) Proceeds from acquisition of Sapiens Japan (2) 184 -- -- Payment for acquisition of Syspart (3) (3,360) (164) -- Payment for acquisition of SAIC (4) -- (401) (41) ------- -------- -------- Net cash used in investing activities (4,249) (3,721) (4,296) ------- -------- -------- </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F - 9
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> Cash flows from financing activities: Proceeds from issuance of redeemable shares in a subsidiary -- 14,675 -- Redemption of redeemable shares in subsidiary -- -- (4,234) Amortization of bond issuance costs 142 -- -- Proceeds from issuance of Series "F" convertible preferred shares and warrants, net -- -- 9,879 Proceeds from exercise of options and warrants 3,637 819 -- Proceeds on account of shares -- 5,000 -- Increase (decrease) in short-term bank debt, net (1,973) 13,204 772 Payment of Senior Subordinated Notes (8,743) -- -- Principal payment of long-term liabilities (48) (255) (202) Proceeds from long-term loans -- -- 211 ------- -------- -------- Net cash provided by (used in) financing activities (6,985) 33,443 6,426 ------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (226) (286) (463) ------- -------- -------- Increase (decrease) in cash and cash equivalents (11,487) 8,303 (951) Cash and cash equivalents at the beginning of year 20,222 8,735 17,038 ------- -------- -------- Cash and cash equivalents at the end of year $ 8,735 $ 17,038 $ 16,087 ======= ======== ======== (1) Estimated net fair value of the assets acquired and liabilities assumed of IMA at the acquisition date (see Note 1b) was as follows: Working capital (excluding cash and cash equivalents) $ 90 Property and equipment Goodwill 76 109 -------- $ 275 ======== (2) Estimated net fair value of the assets acquired and liabilities assumed of Sapiens Japan at the acquisition date (see Note 1b) was as follows: Working capital deficiency (excluding cash and cash equivalents) $ (74) Property and equipment 73 Long-term liabilities (1,177) Goodwill 1,762 -------- 584 Less - amounts financed by the issuance of shares (see Note 1b) (768) -------- $ (184) ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F - 10
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> (3) Estimated net fair value of the assets acquired and liabilities assumed of Syspart at the acquisition date (see Note 1b) was as follows: Working capital deficiency (excluding cash and cash equivalents) $(1,249) Property and equipment 99 Goodwill 6,674 -------- 5,524 Less amounts financed by the issuance of shares (see Note 1b) (2,164) -------- $ 3,360 ======== (4) Estimated net fair value of the assets acquired and liabilities assumed of SAIC at the acquisition date (see Note 1b) was as follows: Goodwill $ 583 -------- 583 Less amounts financed by the issuance of shares (see Note 1b) (182) -------- $ 401 ======== Supplemental cash flow activities: Cash paid during the year for: Interest $ 750 $ 1,305 $ 1,440 ======= ======== ======== Income taxes $ 261 $ 337 $ 471 ======= ======== ======== Non-cash transactions: Common shares accrued as dividends on preferred shares $ 418 $ 107 -- ======= ======== ======== Common shares issued as dividends on preferred shares $ 171 $ 1,074 -- ======= ======== ======== Revaluation of Syspart acquisition against liability $ -- $ -- $ 471 ======= ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F - 11
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1: BUSINESS AND ORGANIZATION a. General: Sapiens International Corporation N.V. ("the Company"), which operates through its worldwide subsidiaries, is a provider of rapidly deployed business software solutions that support its clients' core business processes, such as insurance claims processing, loan/mortgage management and other key business solutions. These solutions, which are based on the Sapiens eMerge technology, consist primarily of rapid application development ("RAD"), integration of legacy systems into new applications and technologies, mapping and management of enterprise IT assets, and reengineering services. The Company focuses in the Insurance industry, and is in the process of developing customizable component-based solutions for insurance claims processing, closed-books administration, policy administration and multi-channel connectivity. The Company also provides a specialized solution for the migration of European IT systems to the Euro currency. As to major customers in 2000, revenues from one customer represented 11% of the Company's total revenues. b. Acquisition of companies: (1) In January 2000, the Company acquired all of the outstanding shares of Internet Marketing Associates, Inc. (hereafter - "IMA"), a Canadian corporation for $322,000 paid in cash. The operations of IMA are included in the consolidated statements from January 1, 2000. The acquisition was treated on the basis of the purchase method of accounting and accordingly, the purchase price has been allocated to the fair value of the assets acquired and liabilities assumed of IMA and resulted in recording of goodwill of approximately $109,000, which is being amortized over 3.5 years. In February 2001 and August 2001, the Company paid in cash additional amount of $56,000 and $10,000, respectively, to IMA. The additional amounts were recorded as additional goodwill and amortized over the remaining expected life of the original goodwill. Pro forma information in accordance with APB 16 has not been provided as the net income and net earnings per share of IMA for 1999 and 2000 were not material in relation to total consolidated net income and net earnings per share. F - 12
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1: BUSINESS AND ORGANIZATION (CONT.) (2) In May 1999, the Company acquired an additional 70.1% of the outstanding shares of Sapiens Japan Co., a Japanese corporation (hereafter - "Sapiens Japan"). The Company previously owned 19.9% of the outstanding shares of Sapiens Japan Co. The total consideration was approximately $1.5 million of which 48% was paid in cash and 52% in Sapiens common shares. The acquisition was treated on the basis of the purchase method of accounting and accordingly, the purchase price has been allocated to the fair value of the assets acquired and liabilities assumed of Sapiens Japan and resulted in recording of goodwill of approximately $1.8 million, which is being amortized over 10 years. The operations of Sapiens Japan are included in the consolidated statements from the acquisition date. On June 25, 2000 the Company issued 18,244 additional common shares due to a share price floor clause in the purchase agreement. Pro forma information in accordance with APB 16 has not been provided as the net income and net earnings per share of Sapiens Japan for 1998 and 1999 were not material in relation to total consolidated net income and net earnings per share. (3) In May 1999, the Company acquired all of the outstanding shares of Syspart (Deutschland) GmbH, a German corporation (hereafter - "Syspart"). The total consideration was approximately $6 million (Including $354,000 of costs related to the acquisition) of which 64% was paid in cash and 36% in Sapiens common shares. The acquisition was treated on the basis of the purchase method of accounting and accordingly, the purchase price has been allocated to the fair value of the assets acquired and liabilities assumed of Syspart and resulted in recording of goodwill of approximately $6.7 million, which is being amortized over 10 years. The operations of Syspart are included in the consolidated statements from the acquisition date. On June 12, 2000 the Company paid additional consideration in the amount of $ 164,000 and on June 11, 2001 the Company accrued for additional consideration of $471,000, which were paid and accrued due to a share price floor clause in the purchase agreement. The additional amounts were recorded as reduction to the additional paid-in capital. Pro forma information in accordance with APB 16 has not been provided as the net income and net earnings per share of Syspart for 1999 were not material in relation to total consolidated net income and net earnings per share. (4) In July 1998, the Company acquired all of the shares of Societe Auxilliaire d'informatique et de communication, a French corporation (hereafter - "SAIC"). The total consideration was approximately $2 million (including $205,000 of costs related to the acquisition) of which 51% was paid in cash and 49% in Sapiens common shares (including 60,000 shares of common stock set aside in escrow as a contingent payment). The acquisition was treated on the basis of the purchase method of accounting and accordingly, the purchase price has been allocated to the fair value of the assets acquired and liabilities assumed of SAIC and resulted in recording of goodwill of approximately $2.5 million, which is being amortized over 10 years. F - 13
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1: BUSINESS AND ORGANIZATION (CONT.) The operations of SAIC are included in the consolidated statements from the acquisition date. The acquisition agreement called for payment of an additional amount of up to 60,000 of the Company's shares contingent upon the actual performance of SAIC. Such payment was recorded as additional goodwill, during the fourth quarter of 2000, when the performance was evaluated and amortized over the remaining expected life of the original goodwill. The additional consideration was approximately $0.4 million of which 51% was paid in cash and 49% in Sapiens common shares. Of the 60,000 shares of common stock set aside 46,000 were released to the sellers and 14,000 were cancelled. The additional amount was recorded as additional goodwill and amortized over the remaining expected life of the original goodwill. In January 2001, the Company paid in cash additional amount of $ 41,000 to SAIC. The additional amount was recorded as additional goodwill and amortized over the remaining expected life of the original goodwill. c. Restructuring costs In 2000, the Company recorded restructuring charges of approximately $2.6 million which was accrued as a short-term liability as of December 31, 2000 and were paid in 2001. The restructuring costs consist of employee termination benefits associated with involuntary terminations of approximately 250 employees, accounted for in accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and SAB 100, "Restructuring and Impairment Charges" ("SAB 100"). The terminations resulted from the Company's strategy to reduce costs and restore profitability. In 1999, the Company recorded restructuring charges of approximately $2 million of which $ 990,000 was paid in 1999 and $1 million was accrued as a short-term liability as of December 31, 1999 and paid in the year 2000. The restructuring costs consist of employee termination benefits associated with the involuntary terminations of 40 employees accounted for in accordance with EITF 94-3. The employee terminations resulted from the change in the Company's strategy to focus on e-business and Internet-related technologies. d. Investment in eZoneXchange: In April 2000, the Company completed a private placement of 600,000 shares of Common stock ("Investor's Shares") of its wholly owned subsidiary, eZoneXchange.com, Inc. ("eZoneXchange"), for $ 15 million. The investor also received a warrant to purchase an additional 2.25% of the common stock of eZoneXchange at the same private placement share price of $ 25 per share. As part of the transaction, the Company entered into a Put and Call Option agreement pursuant to which the investors were granted the right (exercisable in whole or in part) to cause the Company during the put option exercise period (May 4, 2004 through May 3, 2005) to repurchase the Investors' Shares at the principal amount of the investor's investment plus 5% annual interest accrued thereon from May 4, 2000. F - 14
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1: BUSINESS AND ORGANIZATION (CONT.) The Put and Call agreement provides that 50% of the consideration for the Investors Shares will be paid in cash and 50% in Sapiens' common stock to be valued according to the average closing market price of Sapiens' common share over the 14 day trading period preceding the date of issuance of the Put consideration. The agreement also included a call option which grants the Company the option to purchase the Investor's Shares at a price of $30 million in the first two years after the investment date, $37.5 million in the third year, and $45 million in the fourth year. The purchase price will be multiplied by the percentage of shares purchased. The exercise period will last until the earlier of the fourth anniversary of the investment, an acquisition of, or and IPO of eZoneXchange. The amount of $15 million was accounted for as a mezzanine item under redeemable shares in a subsidiary, net of issuance expenses. During February, 2001, the Company decided to close the operations of eZoneXchange.com Inc. In February, 2001, the Company repurchased 173,100 of the investors shares in a cash repayment of $4.5 million for principal and interest, according to an amendment to the Put and Call Option agreement. As a result, the amount of the principal portion of the redeemable shares in a subsidiary was decreased by $4.2 million, net of expenses. In addition, in accordance with the amendment, if the market price of Sapiens' common share reaches $2 per share, the investors will have the right to put an additional 192,333 shares of its eZoneXchange stock in return for the Sapiens common share at a price of $2.75 per share. The remaining portion of the investment (approximately $5 million) will continue to be subject to the original terms of the Put and Call Option agreement. The results of eZoneXchange were consolidated to the results of the Company starting from April 2000. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). a. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: A substantial portion of the Company's financing is made in U.S. dollars ("dollar"). In addition, a substantial portion of the Company's and certain of its subsidiaries' costs is incurred in dollars. A majority of the revenues of the Company and certain of its subsidiaries is generated in dollars. Company's management believes that the dollar is the primary currency of the economic environment in which the Company and those subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. F - 15
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into U.S. dollars in accordance with Statement of the Financial Accounting standard Board No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains and losses of the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses as appropriate. The financial statements of foreign subsidiaries whose functional currency is not the U.S. dollar, have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as accumulated other comprehensive income (loss), in shareholders' equity. Foreign currency translation differences included in the financial income (loss) amounted to approximately $(302,000), $(210,000) and $(1,549,000) for the years 1999, 2000 and 2001, respectively. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation. d. Cash equivalents: Cash equivalents consist of interest-bearing demand deposits, money market funds and highly liquid debt instruments originally purchased with a maturity of three months or less. e. Marketable securities: Management determines the proper classification of investments in marketable debt and equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. All securities covered by Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), and were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity, accumulated other comprehensive income. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations F - 16
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) f. Property and equipment: Property and equipment are stated at cost less accumulated depreciation and depreciated using the straight-line method over the estimated useful lives of the assets: Equipment and furniture 4 - 15 years Computer equipment and software 3 - 5 years Motor vehicles 3 - 7 years Leasehold improvements (over the shorter of the term of the lease or the estimated useful life of the asset) The Company and its subsidiaries periodically assess the recoverability of the carrying amount of property and equipment and provide for any possible impairment loss based upon the difference between the carrying amount and fair value of such assets in accordance with Statement of Financial Accounting Standard No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). As of December 31, 2001, no impairment losses have been identified. g. Capitalized software development costs: Research and development costs incurred in the process of developing new products or product improvements, are charged to expense as incurred, net of participation by the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade ("the OCS"). Statement of Financial Accounting Standard No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design. Capitalized software costs are amortized by the greater of the amount computed using: (i) the ratio that current gross revenues from sales of the software bear to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the software product (three to five years). The Company assesses the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold. Based on its most recent analyses, management believes that no impairment of capitalized software development costs exists as at December 31, 2001. F - 17
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) h. Other assets: Other assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method as follows: Prepaid royalties 15 years Distribution rights 7 years Technology, usage rights and other intangible assets 5-8 years Goodwill 3.5-10 years The Company examines the realization of goodwill and other intangible assets annually and the appropriateness of the amortization period based on the estimated future undiscounted cash flows derived from the assets. Any impairment loss is recognized in the statement of operations. In 2001, such impairments were indicated and the Company recognized impairment loss in the amount of $723,000 which was included in the marketing, selling, general and administrative expenses. i. Revenue recognition: Product revenues include fixed-price contracts (which include the sale of software technology and services) and software license sales. Revenues from fixed-price contracts are recognized based on Statement of Opinion No. 81-1 "Accounting for Performance of Construction - Type and Certain Production - Type Contracts" ("SOP No. 81-1"), using contract accounting on a percentage of completion method based on the relationship of actual costs incurred to total costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, 2001 no such estimated losses were identified. Revenues earned under software licensing agreements with end-users are recognized when all criteria outlined in Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP No. 97-2") (as amended) are met. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. The Company and its subsidiaries generally do not grant rights of return. F - 18
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor specific objective evidence ("VSOE") of the relative fair values of each element in the arrangement, in accordance with the "residual method" prescribed by Statement of Opinion No. 98-9. "Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions" ("SOP No. 98-9"). The Company's VSOE used to allocate the sales price to consulting, training and maintenance is based on the price charged when these elements are sold separately. License revenues are recorded based on the residual method. Under the residual method, revenue is recognized for the delivered elements when (1) there is VSOE of the fair values of all the undelivered elements other than those accounted for using long-term contract accounting, and (2) all revenue recognition criteria of SOP 97-2, as amended, are satisfied. Consulting and other service revenue includes also training and post-contract maintenance service. Revenues from consulting, maintenance and training services are recognized ratably over the contractual period or as services are performed. Deferred revenue includes amounts received from customers for which revenue has not yet been recognized. j. Advertising expenses: Advertising expenses are charged to the statement of operations as incurred. k. Government grants: Royalty-bearing grants from the Government of Israel for 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. Non-royalty bearing grants from the Government of Israel for funding of marketing activities 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 marketing expenses. The Company received marketing grants in the amounts of $120,000, $0 and $0 for the years ended December 31, 1999, 2000 and 2001, respectively. l. Income taxes: The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. F - 19
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) m. 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, restricted cash, and trade receivables. 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. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company's trade receivables are derived from sales to large and solid organizations located mainly in Europe and North America. 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. The Company's marketable securities include investments in debentures of non-U.S. Corporations. Management believes that those Corporations are financially sound, and accordingly, minimal credit risk exists with respect to these marketable securities. The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. n. Fair value of financial instruments: The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange. The carrying amounts of cash and cash equivalents, marketable securities, trade accounts receivables, short-term bank credit and trade accounts payable approximate fair values due to the short-term maturity of such instruments. The carrying amounts of the Company's long-term borrowings arrangements approximate their fair value. Fair values were estimated using discounted cash flow analyses, based on prevailing market borrowing rates. o. Derivative and hedging: The company accounts for derivatives and hedging based on Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended ("SFAS No. 133"). SFAS 133 requires companies to recognize all of its derivative instruments on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. F - 20
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings during the period of the change in fair values. The Company enters into forward exchange contracts to hedge certain transactions denominated in foreign currencies. The purpose of the Company's foreign currency hedging activities is to protect the Company from risk that the eventual dollar cash flows from the sale of products to international customers will be adversely affected by changes in the exchange rates. The Company's forward contracts did not qualify as hedging instruments and the changes in the forward fair value are reflected in the statement of operations as financial income or expense. p. Basic and diluted net earnings (loss) per share: Basic net earnings (loss) per share is computed based on the weighted average number of common shares outstanding during each year including contingent shares. Diluted net earnings per share is computed based on the weighted average number of common shares outstanding during each year, plus dilutive potential Common shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"). In 2000 and 2001, all convertible preferred shares, outstanding stock options, and warrants have been excluded from the calculation of the diluted net loss per Common share because all such securities were anti-dilutive for the period presented. In 1999, some of the convertible preferred shares have been excluded from the calculation of the diluted net loss per Common share because such securities were anti-dilutive for the 1999 earnings per share. The total weighted average number of shares related to the outstanding convertible Preferred shares, options and warrants excluded from the calculations of diluted net loss per share was 93,506, 7,336,725 and 13,557,257 for the years ended December 31, 1999, 2000 and 2001, respectively. q. Stock-based compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44") in accounting for its employee stock option plans. Under APB 25, when the exercise price of the Company's share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. The pro forma disclosures required by Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), are provided in Note 14. F - 21
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) The Company applies SFAS No. 123 and EITF 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF No. 96-18") with respect to warrants and options issued to non-employees. SFAS No. 123 requires use of an option valuation model to measure the fair value of the options at the grant date. r. Employee rights upon retirement: The Company has various defined contribution plans for employees of its subsidiaries around the world. Most of the plans are those required according to the laws of the country in which the subsidiary operates. Contributions made under the plans are invested with financial institutions. Benefits under the plans are based on contributions from employees and the Company and earnings on insurance contracts or other investment instruments in which the contributions are invested. Expense for contributions made to these plans was $921,000, $1,408,000 and $1,346,000 for 1999, 2000 and 2001, respectively. s. Impact of recently issued accounting standards: In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combination completed after June 30, 2001. Statement No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company will apply Statement No. 142 beginning in the January 1, 2002. Application of the nonamortization provisions of Statement No. 142 is expected to result in an increase in net income of approximately $1.1 million ($0.04 per share) in 2002. The Company will test the goodwill for impairment using the two-step process prescribed in Statement No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and identified lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment test will be reflected as cumulative effect of a change in accounting principle in the first quarter of 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. F - 22
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.) In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS No. 144 as of January 1, 2002 and it does not expect that the adoption of the Statement will have a significant impact. t. Reclassification: Certain 1999 and 2000 figures have been reclassified in order to conform with the 2001 presentation. NOTE 3: RESTRICTED CASH DEPOSITS Restricted cash deposits are maintained with banks as security for the Company's revolving credit line. The Company is restricted from withdrawing any portion of the secured balances at any time, until repayment of the credit line. Such restricted cash deposits are recorded at cost. F - 23
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 4: MARKETABLE SECURITIES At December 31, 2000 and 2001, the Company's short-term investments were classified as available-for-sale securities and were carried at fair value. Gross realized gains on sales of these securities included in earnings in 1999, 2000 and 2001 totaled $222,000, $163,000 and $124,000, respectively. Gross realized losses on sales of these securities included in earnings in 1999, 2000 and 2001 totaled $0, $49,000 and $0, respectively. The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses and amortized cost for securities at fair value by major security type at December 31, 1999 and 2000, are as follows: <TABLE> <CAPTION> GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ----------- ------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------------------------ <S> <C> <C> <C> <C> December 31, 2000: Non-U.S. corporate debt securities $ 2,799 $ 94 $ (21) $ 2,872 --------- ---------- ----------- ------- $ 2,799 $ 94 $ (21) $ 2,872 ======= ======= ======== ======= December 31, 2001 Non-U.S. corporate debt securities $ 22 $ 28 $ -- $ 50 --------- ---------- ---------- ------- $ 22 $ 28 $ -- $ 50 ========= ========= ========== ======= </TABLE> The scheduled maturities of available-for-sale marketable securities as of December 31, 2000 and 2001 are as follows: <TABLE> <CAPTION> 2000 2001 --------------------------------- ---------------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------------- ---------------- ---------------- --------------- U.S. DOLLARS IN THOUSANDS --------------------------------------------------------------------- <S> <C> <C> <C> <C> Due within one year $ 269 $ 339 $ 22 $ 50 Due after one year through five years 2,530 2,533 -- -- ------- ------- ------- ------- $ 2,799 $ 2,872 $ 22 $ 50 ======= ======= ======= ======= As for pledges see Note 12. </TABLE> NOTE 5:- TRADE RECEIVABLES The Company's trade receivables are composed of accounts receivable in the amounts of $17.7 million and $11.6 million as of December 31, 2000 and 2001, respectively and unbilled receivables in the amounts of $14 million and $6 million as of December 31, 2000 and 2001, respectively. NOTE 6: OTHER RECEIVABLES AND PREPAID EXPENSES F - 24
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ <TABLE> <CAPTION> DECEMBER 31, --------------------------- 2000 2001 ---------- ------------- U.S. DOLLARS IN THOUSANDS --------------------------- <S> <C> <C> Sales and other taxes receivable $ 3,437 3,618 Prepaid expenses 1,670 896 Deferred income taxes 1,240 655 Government grants 293 1,018 Other 1,073 897 ------- ------- $ 7,713 7,084 ======= ======= </TABLE> NOTE 7: PROPERTY AND EQUIPMENT, NET <TABLE> <CAPTION> ACCUMULATED COST DEPRECIATION ------------------------------- -------------------------- DECEMBER 31 DECEMBER 31 ------------------------------- -------------------------- 2000 2001 2000 2001 -------------- -------------- ------------ ----------- U.S. DOLLARS IN THOUSANDS ----------------------------------------------------------------- <S> <C> <C> <C> <C> Equipment and furniture $ 2,970 $ 2,532 $ 1,363 $ 1,411 Computer equipment and software 11,642 10,560 7,944 8,792 Motor vehicles 128 139 95 66 Leasehold improvements 2,082 1,974 713 839 ------- ------- ------- ------- $16,822 $15,205 $10,115 $11,108 ======= ======= ======= ======= </TABLE> Depreciation expense totaled $1,839,000, $2,213,000 and $2,318,000 for the years ended December 31, 1999, 2000 and 2001, respectively. As for pledges see Note 12. NOTE 8: OTHER ASSETS a. Amortization expense for capitalized software development costs for 1999, 2000 and 2001 was $2,842,000, $3,176,000 and $4,606,000, respectively. Amortization expense is included in cost of products. b. Goodwill amortization amounted to $863,000, $1,106,000 and $1,345,000 for the years 1999, 2000 and 2001, respectively. F - 25
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 8: OTHER ASSETS (CONT.) c. Other assets, net of amortization, are comprised of the following: <TABLE> <CAPTION> COST ACCUMULATED AMORTIZATION ------------------------------ ------------------------------ DECEMBER 31 DECEMBER 31 ------------------------------ ------------------------------ 2000 2001 2000 2001 -------------- ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ---------------------------------------------------------------- <S> <C> <C> <C> <C> Prepaid royalties $ 2,083 2,083 $ 1,099 $ 1,239 Technology and usage rights 669 895 298 716 Other intangible assets 1,183 832 184 608 Distribution rights 1,082 1,070 560 742 Long-term deferred income taxes 3,949 4,484 -- -- ------- ------- ------- ------- $ 8,966 $ 9,364 $ 2,141 $ 3,305 ======= ======= ======= ======= </TABLE> Amortization of other assets charged to expense was $622,000, $489,000 and $563,000 for the years 1999, 2000 and 2001, respectively. As for impairments see Note 2h. NOTE 9: OTHER LIABILITIES AND ACCRUED EXPENSES <TABLE> <CAPTION> DECEMBER 31, --------------------------- 2000 2001 ---------- ------------- U.S. DOLLARS IN THOUSANDS --------------------------- <S> <C> <C> Employee and related payroll accruals $ 7,046 $ 5,402 Sales and other taxes payable 4,208 5,512 Accrued restructuring costs (Note 1c) 2,558 -- Accrued expenses 11,319 9,404 ------- ------- $25,131 $20,318 ======= ======= </TABLE> NOTE 10: DEBT a. Short-term debt: The Company has available unsecured revolving credit line facilities for borrowings of up to a total of $ 25.5 million as of December 31, 2001, which are available until March 31, 2002. (As for the renewal of the credit lines see Note 18). Under the terms of these credit line agreements, the Company and various of its subsidiaries granted floating charges to the Banks and issued cross guaranties in support of the credit facilities. Additionally, the Company is required to maintain certain financial ratios. Borrowings under these agreements bear interest at rates ranging between the London Interbank Offered Rate plus 0.75% to plus 1.75% and on New Israeli Shekel ("NIS") borrowings, at the prime rate of interest in Israel less 0.5% to plus 2%. The Company had an unused credit facility in the amount of approximately $9 million as of December 31, 2001. As for warrants granted under the credit line agreement see Note 14i. F - 26
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 10: DEBT (CONT.) A portion of the Company's short-term loans require that the Company pledge cash or short-term investments and place floating charge as collateral for its borrowings (Note 12). <TABLE> <CAPTION> WEIGHTED AVERAGE INTEREST ------------------------- DECEMBER 31, DECEMBER 31, ------------------------- --------------------------------- 2000 2001 2000 2001 ------------ ----------- ---------------- -------------- LINKAGE % % U.S. DOLLARS IN THOUSANDS --------------- ------------ ----------- -------------------------------- <S> <C> <C> <C> <C> <C> Credit lines New Israeli 9.073 5.46 $ 11,175 $ 10,180 Shekel *) Short-term loans US dollar**) 7.454 3.73 5,592 6,029 ---------------- -------------- $ 16,767 $ 16,209 ================ ============== </TABLE> *) Including non-material amounts linked to the French Franc. **) Including non-material amounts linked to the Japanese Yen. b. Convertible subordinated notes and other long-term liabilities: <TABLE> <CAPTION> DECEMBER 31, RATE OF ------------------------- LINKAGE INTEREST MATURITY 2000 2001 --------------- ----------- -------------- ------------- ----------- U.S. DOLLARS % IN THOUSANDS ----------- ------------------------- <S> <C> <C> <C> <C> <C> <C> Convertible subordinated notes ("Old Notes" - conversion price September $32 per common share) US Dollar 5 2003 $ 6,930 $ 6,930 Capital lease obligations French August (Note 11b) Franc 5 2005 217 167 Other long-term debts Japanese February 2006 Yen 1.8 - 3.15 497 484 ------------- ----------- 7,644 7,581 Less - current maturities (214) (245) ------------- ----------- 7,430 7,336 ------------- ----------- Deferred gain on sale leaseback 3 - ------------- ----------- Minority interest - 29 ------------- ----------- $ 7,433 $ 7,365 ============= =========== </TABLE> Long-term debt maturities after December 31, 2001 are as follows (U.S. dollars in thousands): 2002 $ 245 2003 7,160 2004 93 2005 76 2006 7 -------------- $ 7,581 ============== F - 27
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 10: DEBT (CONT.) Interest expense was $0.9 million, $1.0 million and $1.3 million for the years 1999, 2000 and 2001, respectively. NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES a. Sapiens Technologies Ltd. (hereafter - "Technologies") partially finances its research and development expenditures under programs sponsored by the Office of the Chief Scientist ("OCS") of Israel for the support of research and development activities conducted in Israel. In exchange for participation in the programs by the OCS, the Company agreed to pay 3%-3.5% of total net sales of software developed within the framework of these programs. The royalties will be paid up to a maximum amount equaling 100%-150% of the grant provided by the OCS, linked to the dollar and for grants received after January 1, 1999 bear annual interest at a rate based on LIBOR. Repayment of such grants is not required in the event that there are no sales of products developed within the framework of such funded programs. Royalties paid or accrued amounted to $1,068,000, $1,257,000 and $1,523,000 in 1999, 2000 and 2001, respectively. As of December 31, 2001, the Company had a contingent liability to pay royalties of approximately $12 million. b. The Company and its subsidiaries lease various office equipment, office space, and motor vehicles through operating and capital leases. Future minimum lease payments for the next five years and thereafter are as follows: <TABLE> <CAPTION> OPERATING CAPITAL LEASES LEASES -------------- --------------- U.S. DOLLARS IN THOUSANDS --------------------------------- <S> <C> <C> 2002 $ 3,003 $ 56 2003 2,584 48 2004 2,268 51 2005 1,605 32 2006 and thereafter 1,252 -- ------- ------- Total future minimum lease payments $10,712 $ 187 ======= Less - amount representing interest (20) ------- Principal payment remaining on capital lease obligation $ 167 ======= </TABLE> Rent expense for the years ended December 31, 1999, 2000 and 2001 was $1,776,000, $2,892,000 and $2,631,000, respectively. F - 28
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES (CONT.) c. In 2000, the Company filed a lawsuit against GIE AGF Systems D'Information (hereinafter - "AGF SI"), a customer, regarding an unpaid balance related to a year two thousand project performed during 1998 and 1999. The Company's claim was in respect of a dispute over the implementation of contracts signed between the parties regarding the above project. While the Company, based on the advice of counsel, believed that the court would rule in its favor and the amounts recorded would be collected, on February 14, 2001 the French court ruled that AGF SI must pay the Company the sum of approximately $3 million. In accordance with SFAS No. 5 "Accounting for Contingencies", as a result of the ruling, the Company recorded a $2.4 million for selling, marketing, general and administrative expenses in the fourth quarter of 2000. Following the French court ruling, AGF SI has filed an appeal to the Court of Appeals of Paris. On January 26, 2002, the Company has filed a counter pleading in reply rejecting the claims presented by AGF SI and claiming an additional amount of approximately $3.5 million in respect with the contract signed between the parties. The Company, based on the advice of its legal counsel, believes that the court will not accept AGF SI's appeal, therefore the Company did not accrue for such potential liability. d. The Company is party to various other legal proceeding and claims that arise in the ordinary course of business in the total aggregate amount of $0.95 million. The Company based on the advise of its legal counsel has accrued for the expected implication of these proceedings and claims an amount of $ 0.25 million, in accordance with SFAS No. 5 "Accounting for Contingencies". e. As for tax assessments see Note 13c. NOTE 12: SECURITY INTERESTS AND PLEDGES The Company has pledged $2.5 million of its cash equivalents as collateral for certain short-term debt. The Company and various of its subsidiaries granted floating charges to the Banks and issued cross guaranties in support of the credit facilities. All of the Company's leased assets are pledged to the finance companies that provided the lease financing. The Company pledged bank guarantees in the amount of $0.5 million as security for the building that was sold and leased back in 1995. The Company also granted a bank guarantee in the amount of $0.3 million to a shareholder in its German subsidiary as part of his investment agreement (see Note 1b(3)) F - 29
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 13: TAXES ON INOME a. Net operating losses carryforward: At December 31, 2001, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $8.2 million, which are available to offset future federal taxable income and expire in years 2008 to 2020 and tax credits of $0.8 million, which generally expire in 2002 to 2010. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization. In addition, the Company had net operating loss carryforwards relating to non-U.S. subsidiaries totaling approximately $46.3 million, which are available to offset future taxable income. Generally, a majority of such amounts have no expiration date. However, in some cases, amounts expire in the years 2003 to 2006. b. Israeli income tax: Sapiens Technologies Ltd. (hereafter - "Technologies"), a subsidiary incorporated in Israel has been granted an "Approved Enterprise" status for six investment programs approved in 1984, 1991, 1993, 1995, 1998 and 2000, by the Israeli Government under the Law for Encouragement of Capital Investments, 1959 ("the Law"). Undistributed Israeli income derived from the "Approved Enterprise" programs entitle Technologies to a tax exemption for a period of two to four years and to a reduced tax rate of 10% - 25% for an additional period of three to eight years (depending on the level of foreign-investment in Technologies). These tax benefits are subject to a limitation of the earlier of twelve years from commencement of operations, or fourteen years from receipt of approval. Technologies completed the implementation of 1984, 1991, 1993, 1995 and 1998 investment programs. As of December 31, 2001 the "Investment Center" has not granted final approval to the implementation of the 1995 and 1998 plans. Technologies has used all the tax benefits under the 1984 plan and is entitled for additional benefits under the 1991 plan which commenced in 1992 and will expire in 2002, under the 1993 plan the benefits period commenced in 1998 and will expire in 2006 and, under the 1995 plans the benefits period commenced in 1998 and will expire in 2008. The benefits have not yet commenced for the 1998 and the 2000 plans. The law also grants entitlement to claim accelerated depreciation on machinery and equipment used by the "Approved Enterprise", during the first five years. F - 30
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 13: TAXES ON INCOME (CONT.) The tax-exempt profits that will be earned by Technologies' "Approved Enterprises" can be distributed to shareholders, without imposing tax liability to Technologies only upon the complete liquidation of Technologies. If these retained tax-exempt profits are distributed in a manner other than in the complete liquidation of Technologies they would be taxed at the corporate tax rate applicable to such profits as if Technologies had not elected the alternative system of benefits (depending on the level of foreign - investment in Technologies) for an "Approved Enterprise". Technologies has decided not to declare dividends out of such tax-exempt earnings. Accordingly, no deferred income taxes have been provided on earnings attributable to the Technologies's "Approved Enterprise". Income from sources other than the "Approved Enterprise" during the benefit periodare be subject to tax at the regular corporate tax rate of 36%. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "Approved Enterprise". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. Results of the Company's Israeli subsidiaries for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli Customer Price Index (CPI). As explained in Note 2b, the financial statements are presented in U.S. dollars. The difference between the change in the Israel CPI and in the NIS\U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss reflected in the financial statements. In accordance with paragraph 9(f) of SFAS 109, the Israeli subsidiaries have not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. c. Tax assessments In December 2001, Sapiens Technologies Ltd. and some of the Company's group entities, have reached an agreement with the Israeli Tax Authorities ("the ITA") as a result of a tax assessment. In accordance with the agreement's provisions, the tax liability for the tax years through 1999 will be increased by approximately $1 million, which will be paid in 12 equal monthly payments, commencing the agreement date. The tax liability is included in the current liabilities. In addition, the Company has a contingent tax liability to pay additional $2.6 million, based on the provisions of the above mentioned agreement. The Company would need to obtain certain approvals from the "Investment Center" regarding the status of the "Approved Enterprise", under the "Law for Encouragement of Capital Investment, 1959" to some of its plans, within 6 months from the agreement date, in order to avoid paying the additional tax liability. The Company's management believes that it is probable that such approvals would be granted by the "Investment Center", therefore such amounts were not accrued as tax liability in accordance with SFAS No. 5 "Accounting for Contingencies". F - 31
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 13: TAXES ON INCOME (CONT.) d. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries' deferred tax liabilities and assets are as follows: <TABLE> <CAPTION> DECEMBER 31, 2000 DECEMBER 31, 2001 -------------------------------- ----------------------------- NON- NON- CURRENT CURRENT CURRENT CURRENT ------------ ---------------- ----------- -------------- U.S. DOLLARS IN THOUSANDS ----------------------------------------------------------------- <S> <C> <C> <C> <C> Deferred tax assets: Net operating losses carryforward $ -- $16,586 $ 2,222 13,583 Tax credits carryforward -- 774 -- 799 Other temporary differences 1,240 406 256 1,652 ------- ------- ------- ------- Gross deferred tax assets 1,240 17,766 2,478 16,034 Less - valuation allowance -- (13,817) (1,823) (11,550) ------- ------- ------- ------- Net deferred tax asset $ 1,240 $ 3,949 $ 655 $ 4,484 ======= ======= ======= ======= </TABLE> As of December 31, 2001, the Company and its subsidiaries have decreased the valuation allowance by approximately $ 0.4 million in respect of deferred income taxes assets resulting from tax loss carryforwards and other temporary differences. Management currently believes that it is more likely than not that the deferred income taxes regarding the loss carryforwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. Provisions for income tax expense are comprised of the following: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------- 1999 2000 2001 -------------- -------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------- <S> <C> <C> <C> Current (foreign) $ 549 $ 383 676 Deferred (foreign) (2,227) (2,332) 50 -------------- -------------- ------------- $(1,678) $(1,949) $ 726 ============== ============== ============= </TABLE> F - 32
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 13: TAXES ON INCOME (CONT.) The Company's entire provision for taxes on income relates to operations in jurisdictions other than the Netherlands Antilles. The effective income tax rate varies from period to period because each jurisdiction in which the Company operates has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). In addition, the provision for income taxes for the fiscal years ended December 31, 1999, 2000 and 2001, does not include the recognition of a majority of the deferred tax assets relating to the net operating losses of the Company's subsidiaries worldwide. The main reconciling item from the statutory tax rate of the Company to the effective tax rate is the non-recognition of tax benefits from accumulated net operating losses carryforward among the various subsidiaries worldwide due to the uncertainty of the realization of such tax benefits. NOTE 14: SHAREHOLDERS' EQUITY a. In December 2000, the Company entered a memorandum of understanding with Yarnfield International Limited, an affiliate of Magnum Technologies Fund ("Magnum"), and Formula Systems Ltd., for a $15 million investment in exchange for issuance of Series F convertible preferred shares. On December 25, 2000 the Company received a $5 million nonrefundable deposit, for which it would have issued 5 million common shares if the agreement would not be approved by shareholders, or Series F preferred shares if it would have been approved. The Company recorded the $5 million cash received as proceeds on account of shares within the shareholders' equity as of December 31, 2000. The series F convertible preferred shares are convertible into common shares of the Company at any time at a ratio of $1.50 per share of common stock. In accordance with an anti dilution close, the conversion ratio will be adjusted in two stated dates, but will never increase, to 110% of the average closing sale price of the Company's common shares for the 10 trading days following August 15, 2001 and March 1, 2002. The conversion ratio shall not be adjusted to be less than $1.00 per share of common stock. At maturity, 3 years from the date of investment, the Company will redeem all of the outstanding series F convertible preferred shares through payment of cash or delivery of common shares, at the Company's election. If common shares are issued, the redemption price will be the average closing sale price of the Company's common share for the 30 trading days preceding maturity. The Company's intention is to redeem the investment in shares. The investors were also granted warrants to acquire from the Company additional 10,000 series F preferred shares at any time before December 25, 2003, at an exercise price of $1.50 per share or as adjusted in accordance with the provisions described above. The warrant fair value was measured using the Black-Scholes Option Pricing Model with the following assumptions: risk-free interest rate of 4% dividend yields of 0%, volatility factors of the expected market price of the Company's common shares of 0.7 and expected life of the warrant of 2.5 year. In February 2001, the Company's shareholders approved the share purchase agreement, which was signed on January 24, 2001, and the Company issued to the investors an aggregate of 10,000 Series F preferred shares par value 1,500 Dutch guilder per share, each of which may be converted into 1,000 common shares, subject to adjustment, at a cash price of $1,500 per Series F share. In August, 2001, the conversion ratio was adjusted to $1,139 per share. F - 33
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 14: SHAREHOLDERS' EQUITY (CONT.) The Series F preferred shares have all the rights of common shares in addition to liquidation preferrence and conversion rights. In addition, the investors have the right for "demand registrations" of an under written public offering of common shares with unlimited piggyback rights. In determining whether an instrument includes a beneficial conversion option in accordance with EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Continently Adjustable Conversion Ratios" ("EITF No. 98-5") and EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No. 00-27"), the total proceeds were allocated to the preferred shares and the detachable warrants based on their fair values. As of December 31, 2001, no beneficial conversion feature value was accounted in respect of the preferred share. On August 15, 2001 the conversion ratio was adjusted to $1,139 per Series F preferred share. Following the adjustment, and in accordance with the provisions of EITF No. 00-27, no beneficial conversion feature was recorded. In accordance with the share purchase agreement's provisions, the conversion price was not adjusted as a result of the average closing sale price of the Company's common shares for the 10 trading days following March 1, 2002. Ron Zuckerman, Chairman of the Board of the Company, is an advisor to Magnum. b. On April 4, 2001, the Company entered into a share purchase and loan agreement with Red Coral Holdings, Inc. ("Red Coral"), owned by the Company's President and Chief Executive Officer. According to the terms of the agreement, Red Coral purchased 1,500,000 Common shares of the Company for a purchase price $975,000. As part of the agreement, the Company granted to Red Coral a loan in the amount of $975,000 for the purpose of acquiring the common shares. The term of the loan is six years with accrued interest at a rate of 4%, which is payable on January 15th of each calendar year. The interest amount is fully-recourse and fixed. To secure payment of the loan, Red Coral granted the Company a lien and security interest on all of the common shares. To secure fulfillment of the terms of the agreement, the common shares are being held in escrow by the General Counsel of the Company. The issuance of common shares was accounted in the shareholders' equity and the loan amount was offseted from the shareholders' equity as a note receivable from a shareholder. In accordance with EITF 95-16 "Accounting for Stock Compensation Arrangements with Employer Loan Features under APB Opinion No. 25", the transaction was accounted for as a fixed award. c. Common shares confer upon their holders voting rights, the right to receive cash dividends and the right to share in excess assets upon liquidation of the Company. F - 34
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 14: SHAREHOLDERS' EQUITY (CONT.) d. During the first quarter of 2000, all of the remaining Series D1, and E referred shares, 1,500 and 1,700, were converted to common shares at the conversion prices and, as a result, 291,971 and 377,778 common shares were issued, respectively. As of December 31, 2000, the remaining 1300 Series D2 preferred shares had been converted to common shares at the conversion price and, as a result, 253,041 common shares were issued. In 2000, 571,519 warrants to purchase common shares were issued as part of the conversion of preferred shares. e. As for shares issued in respect of acquisitions see Note 1b. f. Dividends on preferred shares: In 1999, the Company accrued dividends to be paid in the form of common shares on its series D1, D2 and E preferred shares, in the amount of $ 418,000, of which, $57,000 was paid by the issuance of 11,199 common shares. Additionally, the Company issued 10,527 common shares in respect of $54,000 in dividends, which were accrued in 1997 and 11,679 common shares in respect of $ 60,000 in dividends which were accrued in 1998. In 2000, the Company accrued dividends to be paid out in the form of common shares on its Series D1, D2 and E preferred shares, in the amount of $107,000 thousand. In the course of the conversion of all of the company's preferred stock (see Note 14d), all of the remaining accumulated dividends, $1,074,000 thousand, were paid by the issuance of 220,249 common shares. g. Stock option plan: Stock options granted under the Company's 1992 Stock Option and Incentive Plan ("the Plan") to employees, directors and service providers are exercisable at the fair market value of the Company's common shares on the date of grant and, subject to termination of employment, expire ten years from the date of grant and are generally exercisable in four equal annual installments commencing one year from the date of grant. As of December 31, 2001, approximately 3,651,506 common shares of the Company are still available for future grant. Any options which are forfeited or cancelled before expiration become available for future grant under the Plan. In January 2000 and November 2000, the Company increased the number of shares available for grants by 2,000,000 and 4,000,000, respectively, and approved grants of such shares. In December 2000, 772,800 previously granted options with exercise price from $2.25 to $13.875 were repriced to $0 resulting in a new measurment date in total compensation expense of $628,000 of which $453,000 was recognized in 2000 for the portion already vested and $ 175,000 was deferred to be recognized over the remaining vesting period ending in 2004. During the year ended December 31, 2001, $107,000 of the amount deferred was recognized. F - 35
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ In December 2000, the Company granted 2,548,000 Time Accelerated Restricted Stock Award options (hereinafter - "TARSAP's") to employees. The TARSAP's include an acceleration feature, based on the Company's performance in the years 2001 and 2002. As of December 31, 2001, 50% of the options were vested based on the 2001 performance tests. No compensation expense was recorded, since the fair value was equal to the exercise price at the date of grant. A summary of the stock options activities in 1999, 2000 and 2001 is as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1999 2000 2001 ----------------------- ----------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE ---------- -------- ------------ --------- --------- -------- <S> <C> <C> <C> <C> <C> <C> Outstanding at January 1 3,860,950 $ 3.92 4,342,775 $ 5.50 *) 8,953,078 $ 3.66 Granted 1,409,150 $ 8.83 5,435,750 $ 3.10 1,308,500 $ 0.92 Exercised (701,000) $ 3.46 (373,250) $ 2.67 (2,800) $ 0 Cancelled and forfeited (226,325) $ 5.53 (452,197) $ 9.89 (2,410,284) $ 5.95 ---------- -------- ------------ --------- --------- -------- Outstanding at December 31 4,342,775 $ 5.50 (*8,953,078 $ 3.66 *) 7,848,494 $ 2.50 =========== ============ ============ ========== ============= ========== Exercisable options at 1,778,275 $ 2.85 2,124,166 $ 3.31 3,728,237 $ 2.46 December 31 =========== ============ ============ ========== ============= ========== </TABLE> *) Including 772,800 and 770,000 options repriced to zero, as of December 31, 2000 and 2001, respectively. The options outstanding as of December 31, 2001, have been classified by range of exercise price, as follows: <TABLE> <CAPTION> OPTIONS WEIGHTED OPTIONS OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AS OF REMAINING AVERAGE AS OF AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICE 2001 LIFE (YEARS) PRICE 2001 PRICE ---------------------- ------------------ ------------ ------------ ------------- ------------ <S> <C> <C> <C> <C> <C> $ 0 770,000 5.86 $ - 620,000 $ - $ 0.65 - 0.66 400,500 9.32 $ 0.66 - - $ 0.813 - 1.05 4,069,000 9.12 $ 0.86 1,428,000 $ 0.81 $ 2.25 - 3.375 1,004,700 4.47 $ 2.46 970,700 $ 2.43 $ 3.875 - 5.875 405,804 8.55 $ 5.74 102,806 $ 5.74 $ 6.5 -9.5 894,865 7.16 $ 7.77 528,931 $ 7.62 $ 12.25 - 13.875 303,625 8.05 $ 13.57 77,800 $ 13.56 ------------------ ------------ ------------- ------------ 7,848,494 $ 2.50 3,728,237 $ 2.81 ================== ============ ============= ============ </TABLE> F - 36
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 14: SHAREHOLDERS' EQUITY (CONT.) Under SFAS No. 123, pro forma information regarding net income (loss) and net earnings (losses) per share is required as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 2000 and 2001: risk-free interest rates of 6%, 6.5% and 2.5% respectively, dividend yields of 0% for each year, volatility factors of the expected market price of the Company's common shares of 0.702, 0.867 and 0.82, respectively and a weighted-average expected life of the options of 6 years for each year. The weighted-average fair value of the options at their grant dates in 1999, 2000 and 2001 was $2.78, $1.43 and $0.69, respectively. All options were granted at the fair market value at the date of grant. Pro forma information under SFAS No. 123: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> Net income (loss) to shareholders' of common shares as reported $12,650 $(38,193) $(17,970) ============ ============== =============== Pro forma net income (loss) to shareholders' of common shares $ 6,457 $(47,919) $(19,598) ============ ============== =============== Pro forma basic net earnings (loss) per share $ 0.30 $ (2.12) $ (0.85) ============ ============== =============== Pro forma diluted net earnings (loss) per share $ 0.26 $ (2.12) $ (0.85) ============ ============== =============== </TABLE> h. Warrants: In 1997, the Company issued 787,000 warrants to the placement agents in connection with the private placements implemented at an exercise price ranging from $2.00 to $3.50. As of December 31, 2001, 3,100 warrants had been exercised and 43,900 had been canceled. In 1999, the Company granted warrants to service providers at an exercise price ranging from $8.6 to $9 per share. As required by SFAS No. 123, these warrants were measured at fair value (according to the Black-Scholes option pricing model) and in accordance with EITF 96-18 with the following weighted-average assumptions used: risk-free interest rates of 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's common shares of 0.702, and a weighted-average expected life of the options of 6 years. As of December 31 2000, 28,100 warrants originally granted in 1996 were exercised at $2 per share. F - 37
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 14: SHAREHOLDERS' EQUITY (CONT.) i. In 2001, the Company granted Bank Leumi Le Israel B.M., Bank Hapoalim Ltd., Bank Mizrahi Ltd. and Bank Discount Ltd. (collectively the "Banks") 405,000 warrants as part of a credit-line extension agreement (see Note 10a) at an exercise price ranging from $0.88 to $1.38 per share. As required by SFAS No. 123 and APB No. 14 "Accounting for Convertible Debt and Debt Issued with stock purchase warrants", these warrants were measured at fair value (according to the Black-Scholes option pricing model) with the following weighted-average assumptions for 2001: risk free interest rate of 5%, dividend yields of 0%, volatility factors of the expected market price of the Company's common shares of 0.901 weighted-average expected life of the option of 2 years. Total compensation expense amounted to $203 thousand of which $150 thousand was recognized as financial expense in 2001 over the credit-line period. j. The Company does not intend to pay cash dividends in the foreseeable future. F - 38
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 15: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA a. The Company operates in a single segment as a provider of software solutions. See Note 1 for brief description of the Company's business. The following data is presented in accordance with Statement of Financial Accounting Standard No. 131 "Disclosure About Segments of an Enterprise and Related Information" (SFAS No. 131). b. Geographic information: The following is a summary of operations within geographic areas based on end customers' location. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> 1. Revenues: U.K $12,426 $17,744 $21,275 North America 25,905 15,098 18,523 France 26,364 16,610 5,976 Germany 10,711 6,289 4,798 Israel 6,870 5,633 6,097 Other 9,554 11,370 6,766 ------------ ------------- ------------- $91,830 $72,744 $63,435 ============ ============= ============ 2. Long-lived assets: France $ 2,250 $ 2,616 $ 2,135 Dutch Antilles 2,050 1,662 1,275 Israel 13,294 14,043 11,722 Germany 6,150 5,218 4,287 Other 3,914 5,626 3,276 ------------ ------------- ------------- $27,658 $29,165 $22,695 ============ ============= ============ </TABLE> F -39
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 16: SELECTED STATEMENTS OF OPERATIONS DATA a. Research and development costs: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> Total costs $ 9,872 $ 13,351 $ 10,049 Less - capitalized software development costs (2,814) (4,250) (3,967) Less - royalty-bearing grants (2,037) -- (1,581) ------------ ------------- ------------- Research and development costs, net $ 5,021 $ 9,101 $ 4,501 ------------ ------------- ------------- b. Financial income (expenses): Financial income: Interest $ 1,512 $ 973 $ 518 Foreign currency translation differences 622 3,904 3,728 Realized gain on sale of marketable securities 222 163 124 ------------ ------------- ------------- 2,356 5,040 4,370 ------------ ------------- ------------- Financial expenses: Interest 894 1,419 1,818 Foreign currency translation differences 924 4,114 5,277 Bank charges and others 126 139 462 ------------ ------------- ------------- 1,944 5,672 7,557 ------------ ------------- ------------- Financial income (expenses), net $ 412 $ (632) $ (3,187) ============ ============= ============= </TABLE> F - 40
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 16: SELECTED STATEMENTS OF OPERATIONS DATA (CONT.) c. Earnings per share data: The following table sets forth the computation of basic and diluted net earnings (losses) per share. 1. Numerator: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- U.S. DOLLARS IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> Net income (loss) to shareholders of common shares $12,650 $(38,193) $(17,970) Effect of dilutive securities: Preferred share dividends 366 *) -- -- ------- -------- -------- Numerator for diluted earnings per share - income available to shareholders of common shares $13,016 $(38,193) $(17,970) ======= ======== ======== </TABLE> *) The effect of the inclusion of the convertible preferred shares dividends in 2000 would be anti-dilutive. 2. Denominator: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 2000 2001 ------------- ------------- ------------- NUMBER OF SHARES IN THOUSANDS ------------------------------------------------ <S> <C> <C> <C> Weighted average number of shares 20,732 22,542 23,004 Common shares to be issued as dividends 81 17 -- ------- -------- -------- Denominator for net basic earnings per share 20,813 22,559 23,004 ------- -------- -------- Effect of dilutive securities: Employee stock options 2,016 *) -- *) -- Warrants issued to third parties 665 *) -- *) -- Convertible preferred shares 1,064 *) -- *) -- ------- -------- -------- Dilutive potential common shares 3,745 -- -- ------- -------- -------- Denominator for diluted net earnings per share - adjusted weighted average shares, assumed conversions and exercise of options and/or warrants 24,558 22,559 23,004 ======= ======== ======== </TABLE> *) The effect of the inclusion of the convertible preferred shares, options and warrants in 2000 and 2001 would be anti-dilutive. Because of the loss in 2000 and 2001, all potential dilutive securities are anti-dilutive. F - 41
SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 17: ABORTED MERGER COSTS During the year 2000, efforts were made to merge the Company in a transaction that was to be accounted for as a pooling of interest. The merger efforts were aborted and the costs incurred in relation to these efforts amounted to $1,252,000. This amount is almost entirely due to professional and legal fees. NOTE 18:- SUBSEQUENT EVENTS In March 2002, the Company extended its credit agreements with Bank Hapoalim Ltd., Bank Leumi Ltd., Israel Discount Bank Ltd. and United Mizrahi Bank Ltd regarding its existing credit lines in the total amount of $25.5 million, of which $17.5 million are available until March 31, 2003 and $6 million are available until March 31, 2005. Under the terms of these credit line agreements, the Company and various of its subsidiaries granted floating charges to the Banks and issued cross guaranties in support of the credit facilities and has pledged $2.2 million of its cash equivalents securities as collateral. Additionally, the Company is required to maintain certain financial ratios. - - - - - - - - - - - - - F-42