SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF DECEMBER 2003
SAPIENS INTERNATIONAL CORPORATION N.V.
(translation of registrant's name into English)
C/O LANDHUIS JOONCHI
KAYA RICHARD J. BEAUJON Z/N
P.O. BOX 837
WILLEMSTAD
CURACAO, NETHERLANDS ANTILLES
(599) (9) 7366277
(address of principal executive offices)
[Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F]
Form 20-F _X_ Form 40-F ___
[Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of
1934]
Yes ___ No _X_
The following are included in this report on Form 6-K:
Sequential
Exhibit Description Page Number
------- ----------- -----------
A Press release, dated December 2, 2003 3
B English translation of portions of the prospectus
made public in connection with the offering
referred to Exhibit A that discuss new information
not previously disclosed in our public filings. 5
C Condensed Interim Consolidated Financial
Statements as of June 30, 2003 (Unaudited) 23
2
EXHIBIT A
SAPIENS ANNOUNCES RECEIPT OF PERMIT FROM ISRAEL
SECURITIES AUTHORITY TO PUBLISH PROSPECTUS IN ISRAEL
Research Triangle Park, N.C., December 4, 2003 - Sapiens International
Corporation (NASDAQ and TASE: SPNS), today announced that it has received a
permit from the Israel Securities Authority to publish a prospectus in Israel,
under which it will offer to the public in Israel the following securities:
Up to 100,000 units, each consisting of 800 Debentures (Series A), two Options
(Series A) exercisable into Debentures (Series A) and six Warrants (Series 1)
exercisable into common shares of Sapiens.
The price of each unit will be determined by a tender to be held on December 10,
2003, subject to a minimum of price of NIS 752 (approximately $170) per unit.
The offering is secured by an underwriting commitment. Completion of the
offering is subject to certain conditions, including that after the public
offering the holdings of the Debentures (Series A) meet the minimum dispersal
rules of the Tel Aviv Stock Exchange ("TASE").
The following is a description of the main terms of the securities offered under
the prospectus:
The Debentures (Series A) are linked to the US dollar and bear annual interest
at the rate of 6.0%, payable on the 5th of June and the 5th of December each
year commencing on June 5, 2004. Principal is payable in four installment on the
5th of December of the years 2006-2009. During the period beginning 45 days
after the registration of the Debentures (Series A) for trading on TASE and
ending December 21, 2009, the Debentures (Series A) are convertible in common
shares at a conversion rate of one common share per each NIS 27 (approximately
$6.10) amount of the Debentures. The conversion rate is subject to certain
adjustments. The Debentures (Series A) are unsecured.
Each Option (Series A) is exercisable into 100 Debentures (Series A) no later
than March 3, 2004 for an exercise price of NIS 96 (approximately $21.70).
Each Warrant (Series 1) is exercisable into one common share of the Company
during the period beginning 45 days after the registration of the Debentures
(Series A) for trading on TASE and ending November 16, 2007 for an exercise
price of NIS 27 (approximately $6.10) linked to the US dollar.
Sapiens intends to use the net proceeds from the offering to finance its
activities and those of its subsidiaries in accordance with the decisions of its
Board of Directors from time to time.
The offering is made to the public in Israel only in accordance with Israeli
securities laws. It is not open to persons resident in the United States or to
other US persons (other than distributors).
The securities offered have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration under such Act or an applicable exemption from registration.
3
ABOUT SAPIENS INTERNATIONAL
Sapiens International Corporation (NASDAQ and TASE: SPNS) is a leading global
provider of proven IT solutions that modernize business processes and enable
insurance organizations and other leading companies to adapt quickly to change.
Sapiens' modular solutions are widely recognized for their ability to
cost-effectively align IT with the business demands for speed, flexibility and
efficiency. Sapiens operates through wholly owned subsidiaries in North America,
EMEA and Asia Pacific. The Company has partnerships with market leaders such as
IBM and EDS and its clients include AXA, Liverpool Victoria, Norwich Union,
OneBeacon, Principal Financial, Prudential, Abbey National, Honda, International
Paper and Panasonic UK, among others. For more information, please visit
www.sapiens.com.
###
--------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
Yuval Hadari Itzick Sharir
Chief Financial Officer Chief Executive Officer
Sapiens International Sapiens International
Tel: +1-877-554-2426 Tel: +44-1895-464 265
+972-8-938-2721 E-mail: itzick.s@sapiens.com
E-mail: yuval.h@sapiens.com
--------------------------------------------------------------------------------
Except for historical information contained herein, the matters set forth in
this release are forward-looking statements that are dependent on certain risks
and uncertainties, including such factors, among others, as market acceptance,
market demand, pricing, changing regulatory environment, changing economic
conditions, risks in new product and service development, the effect of the
company's accounting policies and other risk factors detailed in the Company's
SEC filings.
# # #
4
EXHIBIT B
TABLE OF CONTENTS
Information about the Company 5
Analysis of Financial Condition and Results 6
The Issuer's Capitalization 16
Description of the Issuer' Common Shares 18
Legal Proceedings 20
Additional Disclosures 21
[TRANSLATED FROM THE HEBREW]
INFORMATION ABOUT THE COMPANY
Research and Development
In 2002 the total expenses of the Issuer for research and development ("R&D")
were $9.4 million as compared with $11 in 2001 and $14.6 in 2000. The R&D
activities of the Issuer are concentrated in three primary areas: (1)
continuation of development and improvement of eMerge which constitutes the
basis of the Issuer's technology; (2) creation and development of the Issuer's
INSIGHT products for the insurance and financial services areas, including but
not limited to adaptation of the Issuer's products to various platforms and
increasing the connectivity of its products to many types of systems; and (3)
support of existing customers, fixing bugs and minor improvements.
Principal Investments in Fixed Assets
The principal investments which the Issuer made in fixed assets during the years
2000 through 2002 and in 2003 to the date of the prospectus were as follows:
Principal Investments
in Fixed Assets
Year (in millions of dollars) Comment
2000 3.7 Primarily for computer hardware
and software
2001 0.5
2002 1.0 Primarily for Oracle ERP system
2003* 0.4 Primarily for computer hardware
and software
* 2003 data: to the date of the prospectus
5
ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE ISSUER
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.
PRINCIPAL DATA FROM THE ISSUER'S CONSOLIDATED FINANCIAL STATEMENTS
The following are the principal data from the Issuer's audited consolidated
financial statements for the year ended December 31, 2002 and from the Issuer's
unaudited financial statements for the period ended June 30, 2003 which have
been prepared in accordance with US GAAP. These data should be read in
conjunction with the Issuer's unaudited consolidated financial statements for
the period ended June 30, 2003 which were furnished to the United States
Securities and Exchange Commission (the "SEC") on Form 6-K on September 3, 2003
and to the Israel Securities Authority (the "Securities Authority") on August 5
and September 4, 2003, and together with the unaudited consolidated financial
statements of the Issuer for the period ended September 30, 2003 which were
furnished to the SEC on Form 6-K on November 6, 2003 and to the Securities
Authority on November 3, 2003, and which are incorporated by reference herein as
well as in conjunction with the Issuer's audited consolidated financial
statements and the notes included therein which were filed with the SEC as part
of the Annual Report on Form 20-F on June 27, 2003 and to the Securities
Authority on July 3, 2003 and which are incorporated by reference herein.
6
SUMMARY OF OPERATING RESULTS (IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
For the three months ended For the six months ended
6/30/2003 6/30/2002 6/30/2003 6/30/2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues 13,381 16,316 25,437 32,352
Total cost of revenues 7,400 8,699 14,801 17,822
----------------- ---------------- ----------------- -----------------
Gross Profit 5,981 7,617 10,636 14,530
Research and development, net 1,020 1,473 2,421 2,795
Selling, marketing, general and
administrative 5,160 5,509 10,567 10,734
----------------- ---------------- ----------------- -----------------
Operating Income/(Loss) (199) 635 (2,352) 1,001
Financial expenses, net (140) (191) (310) (354)
Other income/(expenses), net (a) 47 (20) 383 (9)
----------------- ---------------- ----------------- -----------------
Net Income/(Loss) before taxes on income (292) 424 (2,279) 638
Taxes on income 95 300 95 351
----------------- ---------------- ----------------- -----------------
Net Income/(Loss) for the period (387) 124 (2,374) 287
================= ================ ================= =================
Basic earnings/(loss) per share $ (0.04) $ 0.02 $ (0.22) $ 0.04
================= ================ ================= =================
Diluted earnings/(loss) per share $ (0.04) $ 0.01 $ (0.22) $ 0.03
================= ================ ================= =================
Weighted average shares used to compute:
Basic earnings/(loss) per share 10,693 7,266 10,692 7,249
================= ================ ================= =================
Diluted earnings/(loss) per share 10,693 9,427 10,692 9,241
================= ================ ================= =================
7
YEAR ENDED DECEMBER 31,
2000 2001 2002
---- ---- ----
Revenues 72,744 63,435 64,828
Cost of revenues 50,935 42,613 36,110
---------------- --------------- ---------------
Gross profit 21,809 20,822 28,718
Research and development, net 10,317 5,458 6,017
Selling, marketing, general and administrative, net 46,682 28,725 23,782
Aborted merger costs 1,252 -- --
Restructuring costs 2,558 -- 481
---------------- --------------- ---------------
Operating loss 39,000 13,361 1,562
Financial income expenses, net 632 3,187 971
Other expenses, net 403 665 1,173
---------------- --------------- ---------------
Loss before taxes on income 40,035 17,213 3,706
Taxes on income (benefit) (1,949) 726 1,408
---------------- --------------- ---------------
Minority interests in income of a subsidiary -- 31 39
Net loss 38,086 17,970 5,153
Dividends on preferred shares 107 -- --
---------------- --------------- ---------------
Net loss to shareholders of common shares 38,193 17,970 5,153
================ =============== ===============
Basic and diluted net earnings loss per share 8.46 $3.91 $1.03
================ =============== ===============
Weighted average number of shares
used in computing basic and diluted loss per
share (in thousands) 4,511 4,600 4,999
BALANCE SHEET DATA (IN THOUSANDS OF DOLLARS)
-------------------------------------------
As at
As at December 30,
June 30, 2003 2003
(Unaudited) (Audited)
-------------------------------------------
Cash and cash equivalents 20,262 22,001
Working capital 7,193 9,615
Total assets 66,433 65,152
Long term debt and other liabilities 7,715 7,787
Total stockholders' equity 14,054 15,895
8
THE SIX MONTHS ENDING JUNE 30, 2003 AS COMPARED WITH THE SIX MONTHS ENDING JUNE
30, 2002
REVENUES
Revenues from the sale of products are comprised of sales of eMerge(TM) program
licenses, license upgrades, specially designed software products for the
insurance industry such as "Policy INSIGHT", "Closed Books INSIGHT" and "Claims
INSIGHT", application development, re-engineering computer systems and
converting operating systems. These projects are performed either on a fixed
price basis or a time and materials basis. Revenues from services primarily
include consultants on a time and materials basis and maintenance support.
Total revenues in the six months ending June 30, 2003 declined by 21.4% to $25.4
million, from $32.4 million in the corresponding period last year. Revenues from
products in this period declined by 29.6% to $14.6 million, from $20.8 million
in the corresponding period last year. Revenues from consultancy and other
services in this period declined by 6.6% to $10.8 million, from $11.6 million in
the corresponding period last year.
Revenues from the sale of products in the six months ending June 30, 2003
primarily decreased in consequence of the discontinuation of projects during the
course of the performance in December 2002, by three of the Issuer's customers -
NAG and Prudential in England and NJM in the United States, for these customers'
internal considerations. The revenue volume from the projects that were
discontinued during the course of the performance was approx. $2.0 million per
quarter, and the effect of this contraction is continuing at a decreasing rate
per quarter during 2003. The decline in revenues primarily from consultancy and
other services primarily derived from the Issuer focusing on activities with
higher profit margin and discontinuing activities with low profit margins,
primarily in France and Germany, while the revenues from maintenance remained
unchanged.
An examination of the revenues from activities according to geographical
regions, on the basis of the location of the Issuer's customers, indicates that
the principal decline in revenues derived from a decrease in revenues of the
subsidiaries in the United Kingdom and the United States. In the first six
months ending June 30, 2003 the UK subsidiary's revenues declined by 21.3% to
$9.6 million, from $12.1 million in the corresponding period last year. In the
first six months ending June 30, 2003 the US subsidiary's revenues declined by
21.0% to $8.4 million, from $10.7 million in the corresponding period last year.
The decline in revenues in these regions derives from the effect of the projects
that were discontinued, as described above. The French subsidiary's revenues in
the first six months ending June 30, 2003 were $1.2 million, a decrease of
26.7%, compared with $1.6 million in the corresponding period last year. The
German subsidiary's revenues were $1.3 million, an increase of 3.2%, from $1.26
million in the corresponding period last year. The Israeli subsidiary's revenues
in the six months ending June 30, 2003 declined by 12.6% to $2.7 million, from
$3.1 million in the corresponding period last year. Revenues of the other small
subsidiaries (Switzerland and Japan) were $2.2 million, a decrease of 37.0%,
from $3.5 million in the corresponding period last year. The decline in revenues
in these countries resulted primarily from prolongation of the periods of time
in negotiation processes to close transactions against a background of the
general weakness of the economies in these countries.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues is mainly comprised of labor costs of software consultants and
engineers, direct overhead of professional services, overhead, amortization of
capitalized software development costs and royalties to the Office of the Chief
Scientist of the Ministry of Industry, Trade and Labor (the "Chief Scientist").
Cost of service revenues also includes depreciation of fixed assets. Gross
profit in the six months ending June 30, 2003 declined by 26.9% to $10.6
million, from $14.5 million in the corresponding period last year. The gross
profit margin in this period, which was 41.8%, is 7.0%
9
lower than the gross profit margin in the corresponding period last year, which
was 44.9%. The decline in the gross profit margin in the six months ending June
30, 2003 principally derived from a decline in revenues from the sale of
products having higher gross margin and also from special expenses amounting to
$1.8 million related to a reduction in the Issuer's work force in the cost of
revenues, that offset a positive effect of the continued improvement in the
efficiency and utilization of the Issuer's professional teams.
Gross profit from product revenues from the sale of products in the six months
ending June 30, 2003 decreased by 40.7% to $6.1 million, from $10.4 million in
the corresponding period last year. Gross margin from product revenues in the
period was 41.9%, representing a decrease of 15.7% as compared with 49.8% in the
corresponding period last year. The decline in gross profit and the gross margin
from product revenues principally derived from a relatively low rate of revenues
from the sale of new licenses and upgrading existing licenses out of the total
revenues together with special expenses relating to a reduction of the
professional work force as part of planned efficiency measures. Product revenues
from the sale of licenses and upgrading existing licenses in the six months
ending June 30, 2003 were $2.0 million compared with $6.2 million in the
corresponding period last year.
Amortization of capitalized software development expenses for the six months
ending June 30, 2003 were unchanged and amounted to $1.4 million, similar to the
corresponding period last year.
Royalty expenses to the Chief Scientist, included in the cost of products,
declined in the six months ending June 30, 2003 by 75.0% to $0.2 million, from
$0.8 million in the corresponding period last year. The decline in royalties to
the Chief Scientist in the period under review derived from the decline in
revenues from sales and also from an arrangement with the Chief Scientist with
regard to a dispute relating to 1977 to 2002, which brought about a decrease in
the Issuer's liability.
The salaries and other personnel-related expenses component of the cost of
product revenues in the six months ending June 30, 2003 was 82.6%, compared with
76.7% in the corresponding period last year. The increase of 7.6% in the payroll
component in the period principally derived from special expenses relating to a
reduction of the Issuer's professional work force in the period under review.
Gross profit from consultancy, maintenance and other services in the six months
ending June 30, 2003 increased by 7.5% to $4.5 million, from $4.2 million in the
corresponding period last year. At the same time, the gross margin from
consultancy, maintenance and other services increased by 15.1% to 41.6%, from
36.2% in the corresponding period last year. The improvement in the gross margin
derived primarily from continuing efficiency measures by the Issuer, at the
center of which is better utilization of manpower resources and an increase in
the share of the revenues from consultancy services in which the margin is high
as compared with the share of those in which the margin is lower.
RESEARCH AND DEVELOPMENT EXPENSES, NET
Net research and development ("R&D") expenses are mainly comprised of labor
costs, depreciation of fixed assets and partial capitalization of expenses,
reduced by grants from the Chief Scientist. Net R&D expenses in the six months
ending June 30, 2003 declined by 13.4% to $2.4 million, from $2.8 million in the
corresponding period last year. The decrease in expenses reflects the Issuer's
efforts to make the development activity efficient while reducing work force and
salaries on the one hand, while on the other hand accelerating the development
of specially-designed products for the insurance industry, such as "Policy
INSIGHT" and "Closed Book INSIGHT." Part of the R&D expenses are financed by the
Chief Scientist, pursuant to programs entitling the Government to receive
royalties on sales of products developed as a result of R&D projects that were
supported by the Chief Scientist's grants. In the six months ending June 30,
2003, no development grants were
10
received from the Chief Scientist, as compared with grants of $0.5 million that
were received in the corresponding period last year.
In addition, capitalized software development expenses in the six months ending
June 30, 2003 increased by 23.1% to $1.7 million, compared with $1.4 million in
the corresponding period last year.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES, NET
Net selling, marketing, administrative and general expenses include salaries and
other personnel-related expenses and also commissions and additional costs
associated with the Issuer's marketing and sales efforts. Administrative and
general expenses also include offices and the maintenance thereof,
communications and external consultants and also other expenses. Net selling,
marketing, administrative and general expenses in the six months ending June 30,
2003 decreased by a moderate rate of 1.6% to $10.6 million, from $10.7 million
in the corresponding period last year. The decrease in net selling, marketing,
administrative and general expenses was a result of planned and consistent
efficiency measures that were implemented by the Issuer's management. These
measures included INTER ALIA a decrease in the work force, salary reductions,
reducing office areas, improving procurement terms in all spheres and other
changes in the costs structure. At the same time, sales promotion activity and
related expenses remained at a level similar to the corresponding period last
year in order to support and accelerate the implementation of the Issuer's
strategy of penetrating the insurance industry as a targeted market. Marketing
and selling expenses in the six months ending June 30, 2003 were $8.1 million,
representing a moderate decrease of 2.7% as compared with $8.3 million in the
corresponding period last year.
TAXES ON INCOME
Taxes on income in the six months ending June 30, 2003 were $0.1 million, a
decrease of 72.9% as compared with tax expenses of $0.4 million in the
corresponding period last year.
The decrease in the period under review is primarily a result of an agreement
with the Israeli tax authorities described in the next paragraph. The Issuer'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 a result of various jurisdictions in which the Issuer
operates and where each has its own taxation system (not only with regard to the
nominal tax rate, but also with respect to the allowance of deductions, credits
and other benefits). The Issuer records a valuation allowance to reduce its
deferred tax assets to the amount that that is more likely than not to be
realized. The Issuer does not recognize the majority of the deferred taxes
relating to business losses of its subsidiaries world-wide due to the
uncertainty of the realization of such tax benefits in the foreseeable future.
In December 2001, Sapiens Technologies (1982) Ltd. ("Technologies"), Sapiens
Israel Software Systems Ltd, Sapiens International Corporation N.V. and Sapiens
International Corporation B.V. entered into an agreement with the Israeli tax
authorities (the "ITA") following a tax audit. In accordance with this
agreement's provisions, the Issuer agreed to pay in installments a sum of
approximately $1 million in respect of the tax liability for the 1997 to 1999
(inclusive) tax years. The payment of these installments was completed in
November 2002. In addition, the agreement provided that the Issuer would have a
contingent tax liability to pay an additional amount ("the additional amount").
Payment of the additional amount was contingent on Technologies obtaining
certain final approvals from the Investment Center regarding the status of the
Approved Enterprise under the Encouragement of Capital Investments Law,
5719-1959. In July 2002, an agreement was reached between Technologies and the
ITA according to which the additional amount was determined to be $0.6 million.
Payment of these additional amounts was completed in October 2003.
11
NET INCOME/PROFIT
Net loss in the six months ending June 30, 2003 was $2.4 million, compared with
a net profit of $0.3 million in the corresponding period last year. The
transition from net profit to loss between the periods primarily reflects the
decline in revenues from sales and also the decline in the gross margin, as
described above.
THE THREE MONTHS ENDING JUNE 30, 2003 AS COMPARED WITH THE THREE MONTHS ENDING
JUNE 30, 2002
REVENUES
Total revenues from sales in the three months ending June 30, 2003 decreased by
18.0% to $13.4 million, from $16.3 million in the corresponding period last
year,
Revenues from the sale of products in the said period declined by 21.7% to $8.3
million, from $10.6 million in the corresponding period last year.
Revenues from consultancy and other services decreased in the period by 11.1% to
$5.1 million, from $5.7 million in the corresponding period last year.
The major part of the decrease in revenues in the three months ending June 30,
2003, as compared with the corresponding period last year, derived from the
decline in revenues from the sale of products. The majority of the decline was
the result of a decrease in revenues from three projects that were discontinued
by three of the Issuer's customers in December 2002 and which is still affecting
the results of operations in the period under review, and also prolongation of
the periods of time in negotiation processes with the Issuer's customers due to
the general state of the markets, particularly in the insurance industry.
The decrease in revenues from consultancy and other services derived from low
revenues from consultancy services, while maintenance services remained stable
and unchanged. The decline in consultancy services principally derived from the
Issuer concentrating on activities with higher profit margins and discontinuing
activities with low profit margins.
An examination of the revenues from activities according to geographical
regions, on the basis of the location of the Issuer's customers, indicates a
decline in revenues mainly of the subsidiaries in the United Kingdom and the
United States. In the three months ending June 30, 2003 the UK subsidiary's
revenues declined by 13.1% to $5.2 million, from $6.0 million in the
corresponding period last year. In the first three months ending June 30, 2003
the US subsidiary's revenues declined by 9.6% to $4.8 million, from $5.3 million
in the corresponding period last year. The decline in revenues in these regions
derives from the effect of the projects that were discontinued, as described
above, and materially affected the said subsidiaries' revenues. The French
subsidiary's revenues in the first three months ending June 30, 2003 were $0.5
million, a decrease of 37.6%, from $0.8 million in the corresponding period last
year. The German subsidiary's revenues were $0.6 million, virtually unchanged as
compared with the revenues of $0.6 million in the corresponding period last
year. The Israeli subsidiary's revenues in the three months ending June 30, 2003
declined by 25.1% to $1.2 million, from $1.6 million in the corresponding period
last year. Revenues of the other small subsidiaries (Switzerland and Japan) were
$1.0 million, a decrease of 48.2%, from $1.9 million in the corresponding period
last year. The decline in revenues in these countries resulted primarily from
prolongation of the periods of time in negotiation processes to close
transactions against a background of the general weakness of the economies in
these countries.
12
COST OF REVENUES AND GROSS PROFIT
Gross profit in the three months ending June 30, 2003 declined by 21.5% to $6.0
million, from $7.6 million in the corresponding period last year. Gross margin
in this period of 44.7%, is 4.3% lower than gross margin in the corresponding
period last year, which was 46.7%. The decline in gross margin in the three
months ending June 30, 2003 principally derived from a decline in revenues from
the sale of products having higher gross margin and also from special expenses
amounting to $1.2 million related to the continued reduction in the Issuer's
work force that offset a positive effect of the continued improvement in the
efficiency and utilization of the Issuer's professional teams, as emerges from
the analysis of expenses above.
Goss profit from product revenues in the three months ending June 30, 2003
decreased by 30.7% to $3.7 million, from $5.3 million in the corresponding
period last year. Gross profit margin from product revenues in the period was
44.1%, representing a decrease of 11.6% as compared with 49.9% in the
corresponding period last year. The decline in gross profit and gross margin
from product revenues principally derived from a relatively low rate of revenues
from the sale of new licenses and upgrading existing licenses out of the total
revenues together with special expenses relating to a reduction in the
professional work force as part of planned efficiency measures. Revenues from
the sale of new licenses and upgrading existing licenses in the three months
ending June 30, 2003 were $1.1 million, a decline of 50% compared with $2.2
million in the corresponding period last year.
The salaries and other personnel-related expenses component of the cost of the
revenues from the sale of products in the three months ending June 30, 2003 was
70.7%, compared with 79.9% in the corresponding period last year. The material
increase of 11.4% in the payroll component in the period reflects the positive
contribution of the efficiency measures and improvement of the utilization of
the Issuer's professional teams to gross margin. This improvement contributed to
the reduction of the erosion in gross profit and gross margin.
Gross profit from consultancy, maintenance and other services in the three
months ending June 30, 2003 was $2.3 million, unchanged from $2.3 million in the
corresponding period last year. At the same time, gross margin from consultancy,
maintenance and other services increased by 12.1% to 45.7%, compared with 40.7%
in the corresponding period last year. The improvement in the gross margin
primarily derived from continuing efficiency measures by the Issuer, at the
center of which is better utilization of manpower resources and a replacement of
consultancy services in which the margin is high as compared with the share of
those in which the margin is lower, and also continued improvement and efficient
in providing maintenance services.
Depreciation of capitalized software development expenses for the three months
ending on June 30, 2003 increased by 20.5% from $0.6 million in the
corresponding period last year to $0.7 million and had a moderate effect on the
reduction in gross profit.
RESEARCH AND DEVELOPMENT EXPENSES, NET
Net R&D expenses in the three months ending June 30, 2003 declined by 30.6% to
$1.0 million, from $1.5 million in the corresponding period last year. The
decrease in the net R&D expenses for this period partially reflects the increase
in capitalization of software development costs and also the Issuer's efforts to
make the development activity efficient while reducing work force and salaries
on the one hand, while on the other hand accelerating the development of
specially-designed products for the insurance industry, such as "Policy
INSIGHT", "Closed Book INSIGHT" and "Claims INSIGHT". Part of the R&D expenses
are financed by the Chief Scientist, pursuant to programs entitling the
Government to receive royalties on sales of products developed as a result of
R&D projects, that were supported by the Chief Scientist. In the three months
ending June 30, 2003, no development grants were received from the Chief
Scientist, as compared with grants of $0.25 million that were received in the
corresponding period last year.
13
In addition, capitalized software development expenses in the three months
ending June 30, 2003 increased by 50.5% to $1.0 million, compared with $0.7
million in the corresponding period last year. The increase in capitalized
software costs in the period under review reflects capitalized development costs
that were created in a specific project that is being performed for Israel
Police for innovative and advanced border control management.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES, NET
Net selling, marketing, administrative and general expenses in the three months
ending June 30, 2003 decreased by 6.4% to $5.2 million, from $5.5 million in the
corresponding period last year. The decrease in net selling, marketing,
administrative and general expenses was a result of planned and consistent
efficiency measures that were implemented by the Issuer's management during 2002
and the six months ending June 30, 2003. These measures included INTER ALIA a
decrease in the work force, salary reductions, reducing office areas, improving
procurement terms in all spheres and other changes in the costs structure. At
the same time, sales promotion activity and related expenses remained at a level
similar to the corresponding period last year, this in order to support and
accelerate the implementation of the Issuer's strategy of penetrating the
insurance industry as a targeted market.
NET INCOME/PROFIT
Net loss in the three months ending June 30, 2003 was $0.4 million, compared
with a net profit of $0.1 million in the corresponding period last year. The
transition from net profit to loss between the periods primarily reflects the
decline in revenues from sales and also the decline in the gross margin, as
described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, marketable securities and short term investments as at
June 30, 2003 were $24.6 million, compared with $15.7 million as at June 30,
2002 and $23.7 million as at December 31, 2002.
Net cash used in operations in the six months ending June 30, 2003 amounted to
$0.5 million, compared with $2.6 million provided by operations in the
corresponding period last year. The change described above reflects more or less
the profit and loss results for the period under review, and collection from
customers represents a continued improvement in comparison between the periods.
The source of financing the cash consumption in operations in the period is
primarily the increase in utilization of the Issuer's short term bank credit,
which amounted to $13.1 million on June 30, 2003 and $9.1 million on June 30,
2002.
Net cash used for investment activity in the six months ending June 30, 2003
amounted to $4.7 million, compared with $0.6 million cash derived from
investment activities in the corresponding period last year.
Net cash derived from financing activities in the six months ending June 30,
2003 amounted to $3.3 million, compared with $3.7 million that was used for
financing activities in the corresponding period last year.
In June 2003, the Issuer received approval from its lender banks to extend the
period of its existing credit lines in an amount of $24.0 million, of which
$16.1 million will be available until March 31, 2004 and $7.9 million until
March 31, 2005. In such context, the Issuer undertook to give one of its lender
banks a first ranking charge over a monetary deposit that shall not be less than
$3 million.
14
In December 2002, Formula invested an additional sum of $10 million in the
Issuer by exercising an existing option to purchase common shares of the Issuer.
In December 2002, the Issuer repaid $3.4 million of convertible debentures that
were issued in 1992.
The Issuer's management believes that the available working capital and credit
lines will be sufficient to support the Issuer's operating requirements for at
least the 12 months from June 30, 2003.
CONTRACTUAL OBLIGATIONS
The following is a summary of the contractual obligations of the Issuer as at
December 31, 2002 (in thousands of dollars).
TOTAL UP TO 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS OVER 5 YEARS
----- ------------ ------------ ------------ ------------
Redeemable shares of a
subsidiary 11,185 -- 11,185 -- --
Convertible debentures 4,205 4,205 -- -- --
Short-term bank credit 1,146 1,146 -- -- --
Short-term bank loans 3,860 3,860 -- -- --
Long-term bank loans 7,824 272 7,552 -- --
Capital leasing 150 -- 150 -- --
Operational leasing 9,278 2,920 5,008 1,350 --
----- ----- ----- -----
TOTAL 37,648 12,403 23,895 1,350 --
====== ====== ====== ===== ==
TREND INFORMATION
During the past three years, the global insurance industry has been exposed to
two material types of occurrences: the first, events such as September 11 and
other terrorist incidents as well as great natural disasters (flooding in
Germany, for example); and the second, the collapse of the financial and real
estate markets. To these were added regulatory changes in various countries. As
a result of all these factors, changes are occurring in the insurance and
financial services industries which affect the decisions related to investing
resources in information technology. These changesmay have a material adverse
effect on the short term operating results of the Issuer.
15
THE ISSUER'S CAPITALIZATION
Following is set forth the capital structure of the Issuer - cash and cash
equivalents, short term investments, short-term debt including current
maturities of long-term debt, the Debentures (Series A), long-term debt, net of
current maturities, and shareholders' equity as of June 30, 2003, actually and
on the assumption that all of the units offered by means of this prospectus are
purchased:(1)
As of September 30, 2003
Actual Assuming all the
offered units are
purchased
In thousands of dollars
Unaudited
Cash and cash equivalents 18,026 33,471
Short-term investments 2,159 2,159
Short term debt, including current maturities
of long-term debt(2) 10,944 10,944
The Debentures (Series A) -- 15,445
Long-term debt, net of current maturities 7,601 7,601
Share capital, 2.3 euro n.v. per share;
Authorized capital - 20,000,000 shares(3)
Issued and outstanding capital - 10,993,935 shares(4) 23,788 23,788
Treasury shares - 19,297 shares (2,423) (2,423)
Shareholders' equity 13,402 13,402
Total capital of the Issuer 31,947 47,392
(1) Assuming that all of the units offered by means of this prospectus are
purchased for a minimum amount of NIS 752 per unit, in consideration for
94% of the nominal value of the Debentures. The amount to be actually
received for each unit has not yet been determined. This amount will be
determined by a tender and could reach NIS 784 per unit.
(2) The obligation of the Issuer as set forth above is guaranteed by charges.
(3) Not including 1,000,000 Preferred Shares (see the chapter "Description of
the common shares of the Issuer" on page 6 of the prospectus).
(4) Including treasury shares
The information in the table above does not include:
o 1,589,075 options exercisable for up to 1,589,075 common shares of the
Issuer, granted pursuant to options plans for employees and service
providers of the Issuer, at a weighted average exercise price of
$10.63 per share, of which 971,592 are vested and the weighted average
exercise price of which is $13.17; in addition, 171,561 options are
16
available for future grant to employees of the Issuer and service
providers. The options granted to employees and service providers
expire on various dates, the last of which is October 1, 2013. Of the
options granted as set forth above, 90,000 options were granted during
2002, at exercise prices ranging between $3.75 and $5.70 per share and
exercise periods ending from January 14 2012 until October 29, 2012.
o Warrants to purchase up to 225,086 common shares of the Issuer which
were given to banks, an investment fund and a private investor, at
prices as set forth in the following table:
----------------------------------------------------------------------------------------------------
Warrant holder No. of shares Exercise price Expiry date
(dollars)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Bank Leumi Leyisrael Ltd. 35,000 4.40 April 17, 2004
----------------------------------------------------------------------------------------------------
Tarshish Holdings and Investments
Poalim Ltd. 35,000 4.40 April 17, 2004
----------------------------------------------------------------------------------------------------
Israel Discount Bank Ltd. 6,000 6.90 May 5, 2004
----------------------------------------------------------------------------------------------------
United Mizrahi Bank Ltd. 5,000 4.40 May 5, 2004
----------------------------------------------------------------------------------------------------
Capital Ventures International 8,843 21.40 October 14, 2003
----------------------------------------------------------------------------------------------------
Capital Ventures International 17,939 21.40 December 16, 2004
----------------------------------------------------------------------------------------------------
Capital Ventures International 16,842 21.40 January 18, 2005
----------------------------------------------------------------------------------------------------
Capital Ventures International 19,299 21.40 February 2, 2005
----------------------------------------------------------------------------------------------------
Capital Ventures International 46,803 23.75 March 21, 2005
----------------------------------------------------------------------------------------------------
Capital Ventures International 31,360 48.65 August 8, 2005
----------------------------------------------------------------------------------------------------
Gil Tamir 3,000 45.00 November 2, 2004
----------------------------------------------------------------------------------------------------
o A put option granted to a group of investors that invested in
eZoneXchange.com, Inc. ("eZone") which grants them, upon the
fulfillment of certain conditions, the right to have the Issuer
purchase part of their shares in eZone in consideration for
approximately 364,000 common shares of the Issuer (the value of which
shares was determined for the purposes of the [investment] agreement
to be $13.75 per share), and in addition, during the period from May
4, 2004 to May 3, 2005, the right to sell to the Issuer all or part of
their remaining holdings in eZone in consideration of a cash payment
of about $3.7 million and in consideration of common shares of the
Issuer of a value of approximately $3.0 million, in the event of
realization of all their remaining holdings. The Issuer estimates that
in certain circumstances, the investors will have the right to receive
about 13 million common shares of the Issuer as a result of the
foregoing put option, but this number could change if the market value
of the Issuer's common share changes and if certain additional
conditions included in the put option are fulfilled. The Issuer has a
difference of opinion with the investors concerning the manner of
calculating the interest provided for in the agreement. The amount at
issue is approximately $1.4 million.
o An option for Formula to purchase up to 1,204,819 common shares of the
Issuer at an exercise price of $4.15 per share, valid until December
25, 2003. The Issuer is considering the possibility of extending the
exercise period of Formula's option until the end of June 2004.
17
DESCRIPTION OF THE ISSUER'S COMMON SHARES
The authorized capital of the Issuer as of the date of the prospectus is
48,300,000 euro divided into 20,000,000 common shares, par value 2.3 euro each,
and 1,000,000 preferred shares, par value 2.3 each.
The issued and outstanding capital of the issuer as of the date of the
prospectus is 25,241,667 euro divided into 10,974,638 common shares, par value
2.3 euro each.*
* Not including 19,297 common shares of the Issuer held by the Issuer. As of
June 30, 2003, the nominal value of the shares held by the Issuer as treasury
stock was 44,383 euro while their book value was $2.4 million
As of January 1, 2002, the Issuer's outstanding paid-up capital included
4,091,138 common shares of the Issuer, and as of December 31, 2002, the Issuer's
outstanding paid-up capital included 10,987,115 common shares of the Issuer (all
figures reflect the reverse split which was carried in June 2003). The increase
in the number of outstanding shares resulted from issuance of shares to Formula
and Yarnfield International Limited ("Yarnfield") and from exercise of options
by employees.
Pursuant to the incorporation documents of the Issuer the common shares do not
carry with them a preemptive right to buy additional shares not yet issued by
the Issuer. The Issuer is authorized from time to time, subject to the approval
of the general meeting of its shareholders, to increase its authorized capital.
All the shares of issued capital of the Issuer are shares registered in a
holder's name.
The holders of common shares of the Issuer are entitled to one vote for each
common share on every subject voted on by the shareholders, including the
appointment of directors. Holders of common shares of the Issuer are not
entitled to any right of cumulate voting when appointing directors. All the
common shares have equal rights in the event of liquidation and distribution of
dividends. The holders of common shares are entitled to receive dividends from
the profits of the Issuer if and when such a dividend is declared and
distributed. Such distribution of dividends is to be made unless the general
meeting of shareholders decides to reserve all profits. In addition, the Board
of Directors of the Issuer has the authority to exercise its discretion and
decide to reserve the profits of the Issuer. Profits which have been reserved
pursuant to such decision by the Board of Directors will be distributed to the
shareholders only if a written recommendation by the board of directors
concerning their distribution is submitted to the general meeting of
shareholders and the general meeting approves the decision in accordance with
the recommendation. Distribution of the profits of the Issuer will be made
according to the class of shares. At the time of liquidation of the Issuer, all
the assets available for distribution to the holders of common shares of the
Issuer will be divided among them in proportion to their holdings of common
shares of the Issuer, subject to the preference of any preferred share at the
time of liquidation that may be outstanding at that time.
The holders of common shares of the Issuer are entitled to participate in and
vote at general meetings, whether in person or by proxies. Pursuant to the
Articles of Association of the Issuer, a quorum at a general meeting will exist
if there are present shareholders, either in person or by their proxies,
together holding not less than half of the shares issued by the Issuer have
voting rights. If at the time set for the meeting a quorum is not present, the
meeting will be postponed to any later day but not more than two months
following the original time, as the Board of Directors shall determine in its
notice to the shareholders. If at the postponed meeting a quorum is not present
at time set for the postponed meeting, the shareholders present at the meeting,
in person or by their proxies, will constitute a quorum. This provision is
subject to the provisions for adoption of a resolution at a general meeting
regarding the following matters: amending the incorporation documents,
liquidation of the Issuer or sale of the assets of the Issuer. A resolution
concerning one or more of these matters
18
shall be adopted only by a majority of the shares of the Issuer outstanding and
having voting rights, and in the case of a resolution concerning an amendment of
the Articles of Incorporation adversely affecting the rights of a class of
preferred shareholders, a majority of 66% of the holders of such class of shares
is required.
The primary market for trading of the common shares of the Issuer is the Nasdaq
National Market, on which the common shares of the Issuer are registered for
trade under the symbol "SPNS."
HISTORY OF THE ISSUER'S SHARE CAPITAL
The following is a summary of changes in the Issuer's share capital in the three
years preceding the date of this prospectus.
In February 2001, the shareholders of the Issuer approved amendments to the
articles of association of the Issuer which, among other things, authorized a
new series of preferred shares (the Series F Shares), and granted each holder of
Series F Shares 1,500 votes per each Series F Share.
In March 2001, the Issuer issued an aggregate of 10,000 Series F Shares to
Formula Systems (1985) Ltd. ("Formula") and Yarnfield International Limited
("Yarnfield") in exchange for $15,000,000 and an option to invest an additional
$15,000,000 on the same terms as the initial purchase. These Series F Shares
were initially convertible into 2,000,000 common shares.
In April 2001, the Issuer issued 300,000 common shares to Red Coral Holdings,
Inc. ("Red Coral"), a related party, for a purchase price $975,000. As part of
the share purchase agreement between the Issuer and Red Coral, the Company
granted Red Coral a loan in the amount of $975,000 for the purpose of acquiring
the common shares.
In November 2002, Formula and Yarnfield converted all their outstanding Series F
Shares into common shares at a reduced conversion price of $4.15 per common
share and Formula invested an additional $10,000,000 in the Issuer in return for
common shares. As a result of this transaction, the Issuer issued Formula a
total of 4,819,277 common shares and issued Yarnfield 1,204,819 common shares.
In November 2002, the shareholders of the Issuer approved amendments to the
articles of association which, among other things (a) converted the share
capital of the Issuer from Dutch guilder to euro, (b) cancelled all authorized
Series A and Series F preferred shares, (c) increased the total number of
authorized common shares to 20,000,000, (d) converted each issued and
outstanding common share into one new euro denominated common share and (e)
authorized a series of 1,000,000 preferred shares.
In June 2003, the Issuer carried out a 1 for 5 reverse split of its stock. The
shareholders of the Issuer approved amendments to the articles of association to
provide that (a) the authorized capital of the Issuer of (euro)48,300,000 would
be divided into 20,000,000 common shares (instead of 100,000,000 as was the case
previously) and 1,000,000 preferred shares (instead of 5,000,000 previously) and
(b) the par value of all shares would be (euro)2.30 (instead of (euro)0.46
previously).
From time to time during the three years preceding the date of this prospectus,
the Company has issued common shares as a result of exercise of options granted
to employees.
HISTORICAL SHARE PRICES
Set forth below are the high and low prices for the Issuer's shares on the
Nasdaq National Market (the "National Market") on an annual basis for the years
1998 through 2002 and on a quarterly basis
19
for from 2001 through the third quarter of 2003. The information takes into
account the reverse split of the Issuer that was carried out in June 2003 (that
is, the share price before the reverse split was multiplied by 5):
YEAR HIGH LOW
---- ---
1998 47.20 16.55
1999 86.25 39.40
2000 109.40 3.60
2001 8.30 2.80
2002 6.85 3.00
2001
First Quarter 8.30 4.20
Second Quarter 7.45 3.30
Third Quarter 6.65 2.85
Fourth Quarter 5.95 2.80
2002
First Quarter 6.85 4.65
Second Quarter 6.30 4.30
Third Quarter 5.75 3.85
Fourth Quarter 5.10 3.00
2003
First Quarter 4.25 3.55
Second Quarter 4.75 3.50
Third Quarter 4.64 3.30
The table below sets forth the high and low prices for the Issuer's shares on
the National Market during the most recent six-month period:
HIGH LOW
June 2003 3.75 3.55
July 2003 4.06 3.32
August 2003 3.98 3.30
September 2003 4.64 3.37
October 2003 4.64 4.00
November 2003 6.01 4.01
LEGAL PROCEEDINGS
The Issuer has previously disclosed that in 2000, the Company filed a lawsuit in
France 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 November 6, 2003, the
20
Court of Appeals rejected the appeal and counter appeal and ruled that AGF was
to pay the Issuer the full amount awarded in the lower court, i.e. $3.8 million
[already paid to the Issuer], and in addition was liable for expenses for the
proceedings in both courts in the amount of (euro)27,245. AGF has the right to
appeal to the Supreme Court within 60 days from the date on which it is served
with the judgment of the Court of Appeals.
ADDITIONAL DISCLOSURES
THE CHIEF SCIENTIST
A portion of the Issuer's research and development expenses are funded by the
Chief Scientist of the Ministry of Industry, Trade and Labor (the "Chief
Scientist"), and the Issuer must obtain the approval of the Chief Scientist for
an issuance of its securities. On November 26, 2003, the Issuer obtained the
approval of the Chief Scientist for the issuance of the Debentures to the extent
of $20 million.
Pursuant to the provisions of section 19 of the Encouragement of Industrial
Research and Development Law, 5744-1984 (the "Development Law"), knowhow which
results from research and development in accordance with an approved plan, and
which is not a product which was development in the framework of such plan, and
any right resulting from it, may not be transferred to another party outside of
Israel. Either the Research Committee of the Industrial Research and Development
Administration or a subcommittee may approve the transfer of knowhow to another
party in Israel on condition that the obligations of the Development Law and of
the approved plan will be binding on the recipient of the knowhow, including the
obligation not to transfer the knowhow to another party without the approval of
the Research Committee and including the obligation to pay royalties.
The Development Law further provides that a product or any part of it which is
developed as a result of the research and development will be manufactured in
Israel only, in a proportion that is not less that the extent of manufacturing
and the amount of added value in Israel that were included in the declaration of
the recipient of the approval concerning the extent of manufacturing and the
amount of added value. However, in order to realize the purposes of the
Development Law, the Research Committee is authorized, in special circumstances
and for reasons that are to be noted, to approve, either during the performance
of the plan or after its completion, the transfer of part of the manufacturing
rights for the product outside of Israel, in the manner and on the terms it
provides.
In a settlement agreement entered into in 2003 between the Issuer and "Tmura"
Fund of the Office of the Chief Scientist relating to the years 1997 through
2002, the parties agreed on the amounts that the Issuer was to pay the fund for
such years, and that the balance of the agreed debt, which amounted to NIS
11,378,000, would be paid in installments during the years 2003 and 2004.
BANK CREDIT
As a condition for receiving credit from the banks which finance the Issuer's
activities - Bank Leumi Leyisrael Ltd., Bank Hapoalim Ltd., Israel Discount Bank
Ltd. and United Mizrahi Bank Ltd. - the Issuer undertook, among other things,
not to charge or sell its assets to any entity whatever without the advance
written consent of the banks, and in addition that the total debts and
obligations of the Issuer to the banks will not at any time exceed $26 million,
and after deducting cash will not exceed $6 million and will not exceed 70% of
the Issuer's accounts receivable. In addition, the Issuer undertook that its
quarterly, cumulative earnings before income tax, depreciation and amortization
(operating income plus depreciation and amortization) will not be less than
$5.15 million in the fourth quarter of 2003 and than $2 million per quarter,
beginning with the first quarter of 2004. Among themselves, the banks are
entitled to repayment of the Issuer's debts in proportion to the debts
21
of the Issuer to each bank (PARI PASSU). As part of the credit agreements, the
Issuer granted the banks warrants to purchase its common shares (see "The
Issuer's Capitalization"). The above-mentioned banks consented to the issuance
of the Debentures (Series A) offered pursuant to this prospectus.
In the second and third quarters of 2003, the Issuer did not fulfill one of the
covenants in the credit agreements. The Issuer received from the lending banks
specific written waivers of the covenant which it did not fulfill in the second
and third quarters, except from Discount Bank, from which it received a written
confirmation regarding the second quarter and an oral assurance that the Issuer
would be given a specific written waiver concerning the covenant which it did
not fulfill in the third quarter.
22
EXHIBIT C
SAPIENS INTERNATIONAL CORPORATION N.V.
CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(Unaudited)
CONTENTS
PAGE
---------
CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in Shareholders' Equity 26 - 27
Consolidated Statements of Cash Flows 28 - 29
Notes to the Condensed Interim Consolidated Financial 29 - 32
Statements
# # # # # # #
23
SAPIENS INTERNATIONAL CORPORATION N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share data
JUNE 30, DECEMBER 31,
2003 2002
----------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,262 $ 22,001
Marketable securities and short-term deposits 4,330 1,652
Trade receivables (net of allowance for doubtful accounts of $4,228 and
$4,001 as of June 30, 2003 and December 31, 2002, respectively) 8,739 10,405
Other receivables and prepaid expenses 7,184 5,842
----------- -------------
Total current assets 40,515 39,900
----------- -------------
PROPERTY AND EQUIPMENT, NET 3,318 3,426
----------- -------------
OTHER ASSETS:
Capitalized software development costs, net of accumulated
amortization of $24,567 and $21,072 as of June 30, 2003 and
December 31, 2002, respectively 9,228 8,170
Goodwill 8,621 8,621
Other, net 4,751 5,035
----------- -------------
Total other assets 22,600 21,826
----------- -------------
Total assets $ 66,433 $ 65,152
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit and current maturities of long-term debt $ 13,105 $ 9,483
Trade payables 2,943 2,578
Deferred revenues 3,870 3,683
Other liabilities and accrued expenses 13,404 14,541
----------- -------------
Total current liabilities 33,322 30,285
----------- -------------
LONG-TERM LIABILITIES:
Convertible subordinated notes and other long-term liabilities 7,715 7,787
----------- -------------
REEDEMABLE SHARES IN A SUBSIDIARY 11,342 11,185
----------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital:
Common shares: Authorized - 20,000,000 of (Euro) 2.30 par value at June
30, 2003 and December 31, 2002; Issued - 10,993,935
and 10,987,115 at June 30, 2003 and December 31, 2002,
respectively; Outstanding - 10,974,638 and 10,967,818 at
June 30, 2003 and December 31, 2002, respectively 23,788 23,773
Additional paid-in capital 82,616 82,648
Deferred stock compensation (10) (21)
Treasury shares - at cost (2,423) (2,423)
Note receivable from a related party shareholder (975) (975)
Accumulated other comprehensive loss (3,281) (3,820)
Accumulated deficit (85,661) (83,287)
----------- -------------
Total shareholder's equity 14,054 15,895
----------- -------------
Total liabilities and shareholders' equity $ 66,433 $ 65,152
=========== =============
THE ACCOMPANYING NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS FORM AN INTEGRAL PART THEREOF.
24
SAPIENS INTERNATIONAL CORPORATION N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share data
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
----------------------- ------------------------ FOR THE YEAR
JUNE 30 ENDED
-------------------------------------------------- DECEMBER 31,
2003 2002 2003 2002 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
--------------------------------------------------
REVENUES:
Products $ 14,645 $ 20,793 $ 8,321 $ 10,622 $ 42,008
Consulting and other services 10,792 11,559 5,060 5,694 22,820
---------- ---------- ---------- ---------- ----------
Total revenues 25,437 32,352 13,381 16,316 64,828
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Products 8,502 10,459 4,651 5,325 22,567
Consulting and other services 6,299 7,363 2,749 3,374 13,543
---------- ---------- ---------- ---------- ----------
Total cost of revenues 14,801 17,822 7,400 8,699 36,110
---------- ---------- ---------- ---------- ----------
Gross profit 10,636 14,530 5,981 7,617 28,718
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Research and development, net 2,421 2,795 1,020 1,473 6,017
Selling, marketing, general and
administrative, net 10,567 10,734 5,160 5,509 23,782
Restructuring costs - - - - 481
---------- ---------- ---------- ---------- ----------
Total operating expenses 12,988 13,529 6,180 6,982 30,280
---------- ---------- ---------- ---------- ----------
Operating income (loss) (2,352) 1,001 (199) 635 (1,562)
Financial expenses, net (310) (354) (140) (191) (971)
Other income (expenses), net 403 43 55 (1) (1,173)
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes on income (2,259) 690 (284) 443 (3,706)
Taxes on income 95 351 95 300 1,408
---------- ---------- ---------- ---------- ----------
(2,354) 339 (379) 143 (5,114)
Minority interest in earnings of a
subsidiary 20 52 8 19 39
---------- ---------- ---------- ---------- ----------
Net income (loss) to shareholders of
common shares $ (2,374) $ 287 $ (387) $ 124 $ (5,153)
========== ========== ========== ========== ==========
Basic net income (loss) per share $ (0.22) $ 0.04 $ (0.04) $ 0.02 $ (1.03)
========== ========== ========== ========== ==========
Diluted net income (loss) per share $ (0.22) $ 0.03 $ (0.04) $ 0.01 $ (1.03)
========== ========== ========== ========== ==========
Weighted average number of shares
used in computing:
Basic earnings (loss) per share 10,692 7,249 10,693 7,266 4,999
========== ========== ========== ========== ==========
Diluted earnings (loss) per share 10,692 9,241 10,693 9,427 4,999
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS FORM AN INTEGRAL PART THEREOF.
25
SAPIENS INTERNATIONAL CORPORATION N.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In thousands
NOTE
RECEIVABLE
CONVERTIBLE ADDITIONAL FROM A RELATED
PREFERRED COMMON PAID-IN DEFERRED STOCK TREASURY PARTY
SHARES SHARES CAPITAL COMPENSATION SHARES SHAREHOLDER
-------- --------- --------- -------- --------- ---------
BALANCE AS OF JANUARY 1, 2002 (AUDITED) $ 6,361 $ 10,020 $ 80,514 $ (68) $ (2,423) $ (975)
Total comprehensive loss:
Net loss - - - - -
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities, net - - - - -
Foreign currency translation adjustments - - - - -
Other comprehensive loss
Total comprehensive loss - - - - -
Employee stock options exercised - 117 (105) - - -
Amortization expense on re-priced options - - - 47 - -
Conversion of Series F Preferred shares and
exercise of warrants (6,361) 13,636 2,725 -
Payment in respect of acquisition
adjustment of Syspart - - (486) - - -
-------- --------- --------- -------- --------- ---------
BALANCE AS OF DECEMBER 31, 2002 (AUDITED) - 23,773 82,648 (21) (2,423) (975)
Total comprehensive loss:
Net loss (unaudited)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities, net (unaudited) - - - - -
Foreign currency translation adjustments
(unaudited) - - - - -
Other comprehensive loss (unaudited) - - - - -
Total comprehensive loss (unaudited) - - - - -
Employee stock options exercised - -
(unaudited) 15 12 -
Amortization expense on re-priced options
(unaudited) - - 11
Expenses in connection with the conversion
of Series F Preferred shares (unaudited) - - (44) - - -
-------- --------- --------- -------- --------- ---------
BALANCE AS OF JUNE 30, 2003 (UNAUDITED) $ - $ 23,788 $ 82,616 $ (10) $ (2,423) $ (975)
======== ========= ========= ======== ========= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT EQUITY
--------- ---------- ----------
BALANCE AS OF JANUARY 1, 2002 (AUDITED) $ (5,088) $ (78,134) $ (10,207)
Total comprehensive loss:
Net loss - (5,153) (5,153)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities, net - - (5)
Foreign currency translation adjustments - - 1,273
----------
Other comprehensive loss 1,268
----------
Total comprehensive loss 1,268 - (3885)
Employee stock options exercised - - 12
Amortization expense on re-priced options - - 47
Conversion of Series F Preferred shares and
exercise of warrants - - 10,000
Payment in respect of acquisition
adjustment of Syspart - - (486)
--------- ---------- ----------
BALANCE AS OF DECEMBER 31, 2002 (AUDITED) (3,820) (83,287) 15,895
Total comprehensive loss:
Net loss (unaudited) (2,374) (2,374)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities, net (unaudited) - - (1)
Foreign currency translation adjustments
(unaudited) - - 540
----------
Other comprehensive loss (unaudited) - - 539
----------
Total comprehensive loss (unaudited) 539 - (1,835)
Employee stock options exercised
(unaudited) - - 27
Amortization expense on re-priced options
(unaudited) - - 11
Expenses in connection with the conversion
of Series F Preferred shares (unaudited) - - (44)
--------- ---------- ----------
BALANCE AS OF JUNE 30, 2003 (UNAUDITED) $ (3,281) $ (85,661) $ 14,054
========= ========== ==========
THE ACCOMPANYING NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS FORM AN INTEGRAL PART THEREOF.
26
SAPIENS INTERNATIONAL CORPORATION N.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
In thousands
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
(UNAUDITED)
---------
Accumulated unrealized gains from available-for-sale marketable securities $ 18 $ 18
Accumulated foreign currency translation adjustments (3,299) (3,838)
--------- ---------
Accumulated other comprehensive loss $ (3,281) $ (3,820)
========= =========
THE ACCOMPANYING NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS FORM AN INTEGRAL PART THEREOF.
27
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JUNE 30 ENDED
------------------------ DECEMBER 31,
2003 2002 2002
---------- ----------- -----------
(UNAUDITED)
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,374) $ 287 $ (5,153)
Adjustments required to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation, amortization and impairment 2,281 2,442 4,818
Gain on marketable securities - - -
Loss (gain) on disposal of property and equipment (5) - 24
Amortization expense on re-priced options 11 31 47
Minority interests in earnings of a subsidiary 20 52 39
Gain on payment of convertible subordinated notes (50) - (409)
Reduction of taxes on income related to employee stock option exercised - - -
Accrued interest on redeemable shares in a subsidiary 157 83 474
Decrease in trade receivables 2,091 84 8,190
Decrease (increase) in other receivables and prepaid expenses (1,046) (598) 180
Increase (decrease) in trade payables 253 (244) (960)
Increase in deferred revenues 52 3,192 1,805
Decrease in other liabilities and accrued expenses (1,941) (2,881) (4,509)
Decrease in deferred income taxes, net 100 115 407
---------- ----------- -----------
Net cash provided by (used in) operating activities (451) 2,563 4,953
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (380) (246) (1,011)
Increase in capitalized software development costs (1,663) (1,351) (2,732)
Restricted cash - 2,500 2,500
Purchase of marketable securities and short-term deposits (2,678) - (1,618)
Proceeds from sale of property and equipment 7 120 128
Payments for acquisition of Syspart - (471) (957)
---------- ----------- -----------
Net cash provided by (used in) investing activities (4,714) 552 (3,690)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Expenses in connection with the conversion of Series "F" convertible
Preferred share warrants (44) - 10,000
Proceeds from exercise of options and warrants 27 - 12
Increase (decrease) in short-term bank debt, net 3,684 (6,595) (10,621)
Payments of convertible subordinated notes (200) - (2,316)
Principal payments of long-term liabilities (136) (131) (260)
Proceeds from short-term bank loans - 3,000 7,500
---------- ----------- -----------
Net cash provided by (used in) financing activities 3,331 (3,726) 4,315
---------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 95 150 336
---------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,739) $ (461) $ 5,914
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 22,001 16,087 16,087
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 20,262 $ 15,626 $ 22,001
========== =========== ===========
28
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
In thousands
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JUNE 30 ENDED
------------------- DECEMBER 31,
2003 2002 2002
------ ------- -------
(UNAUDITED)
-------------------
SUPPLEMENTARY CASH FLOW ACTIVITIES:
CASH PAID DURING THE PERIOD FOR:
Interest $ 460 $ 650 $ 820
Income taxes $ 545 $ 540 $ 1,235
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In thousands
NOTE 1 - GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
six months ended June 30, 2003 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003. Although the Company
believes that the disclosures presented herein are adequate to make the
information presented not misleading, it is suggested that these condensed
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's annual report on Form 20-F for the year ended December 31, 2002.
The Company derived 28% and 16% of its revenue in the six months ended
June 30, 2003 and in the year ended December 31, 2002, respectively, from 2
major customers, as described in Note 5C.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. The significant accounting policies applied in the preparation of these
financial statements are identical to those followed in the preparation
of the latest annual financial statements.
29
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
In thousands, except per share data
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
B. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The effect of the
adoption of SFAS No. 146 is dependent on the Company's related activities
subsequent to the date of adoption.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" ("FIN
No. 45"). FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN No. 45 does not
prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. It also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superceded.
The disclosure provisions of FIN No. 45 are effective for financial
statements of interim or annual periods that ender after December 15, 2002, and
the provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company does not expect the
adoption of FIN No. 45 to have a material impact on its consolidated results of
operations or financial position.
NOTE 3 - STOCK- BASED EMPLOYEE COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and the FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", in accounting for its employee stock option plans. According to
APB 25, compensation expense is measured under the intrinsic value method,
whereby compensation expense is equal to the excess, if any, of the quoted
market price of the stock at the grant date of the award or other measurement
date over the exercise price.
The following unaudited pro forma information presents the effect on
the consolidated stock-based compensation expense, net income (loss) and income
(loss) per share as if the fair value based method provided under FASB Statement
No. 123 had been applied to all outstanding awards in each period.
30
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
In thousands, except per share data
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
------------------------- ----------------------- FOR THE YEAR
JUNE 30 ENDED
---------------------------------------------------- DECEMBER 31,
2003 2002 2003 2002 2002
----------- ----------- ---------- --------- -----------
Net income (loss) as reported $ (2,374) $ 287 $ (387) $ 124 $ (5,153)
Stock-based employee compensation
expense included in reported net
income (loss) - - - - -
Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 689 1,468 303 719 2,766
----------- ----------- ---------- --------- -----------
Pro forma net loss $ (3,063) $ (1,181) $ (690) $ (595) $ (7,919)
=========== =========== ========== ========= ===========
Basic net income (loss) per
share as reported $ (0.22) $ 0.04 $ (0.04) $ 0.02 $ (1.03)
=========== =========== ========== ========= ===========
Diluted net income (loss) per
share as reported $ (0.22) $ 0.03 $ (0.04) $ 0.01 $ (1.03)
=========== =========== ========== ========= ===========
Pro forma basic and diluted net
loss per share $ (0.29) $ (0.16) $ (0.06) $ (0.08) $ (1.58)
=========== =========== ========== ========= ===========
NOTE 4 - EARNINGS PER SHARE
Basic and diluted net income (loss) per share is presented in
conformity with SFAS No. 128, "Earnings Per Share", for all periods presented.
Basic and diluted net income (loss) per common share was determined by dividing
net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per common share is the same as
basic net income (loss) per common share for periods in which the Company
reported a net loss for the period, as the effects of the Company's potential
additional common shares were antidilutive. Diluted net income per share for
periods in which the Company reported net income for the period is computed
based on the weighted average number of common shares outstanding during each
period, plus potentially dilutive common shares considered outstanding during
the period. The weighted average number of common shares outstanding under the
treasury method was 2,161 and 1,992 for the three-and six-month periods ended
June 30, 2003, respectively.
The calculation of diluted net loss per share excludes outstanding
stock options because their inclusion would be antidilutive. There were
approximately 1,623 and 1,581 stock options outstanding as of June 30, 2003 and
December 31, 2002, respectively.
Note 5 - GEOGRAPHIC INFORMATION
A. The Company operates in a single segment as a provider of software
solutions. 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).
31
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
In thousands, except per share data
Note 5 - GEOGRAPHIC INFORMATION (Cont.)
B. Geographic information:
The following is a summary of operations within geographic areas based on
the end customers' location.
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
-------------------------- -------------------------- FOR THE YEAR
JUNE 30 ENDED
------------------------------------------------------- DECEMBER 31,
2003 2002 2003 2002 2002
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
-------------------------------------------------------
1. Revenues:
U.K. $ 9,551 $ 12,129 $ 5,243 $ 6,033 $ 25,438
North America 8,439 10,681 4,830 5,344 20,272
France 1,203 1,642 517 829 3,450
Germany 1,303 1,262 590 583 2,653
Israel 2,723 3,116 1,212 1,618 5,776
Other 2,218 3,522 989 1,909 7,239
------------ ------------ ------------ ------------ ------------
$ 25,437 $ 32,352 $ 13,381 $ 16,316 $ 64,828
============ ============ ============ ============ ============
JUNE 30, DECEMBER 31,
2003 2002
------------ -----------
(UNAUDITED)
2. Long-lived assets:
France $ 2,614 $ 2,426
Dutch Antilles 731 936
Israel 11,362 10,213
Germany 5,402 4,988
Other 2,439 2,816
------------ -----------
$ 22,548 $ 21,379
============ ===========
C. Sales to major customers representing more than 10% of total revenues are
as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
2002 JUNE 30, 2003
---------------- -------------------
%
-----------------------------------------
(UNAUDITED)
Customer A 9 17
Customer B 7 11
# # # # # #
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAPIENS INTERNATIONAL CORPORATION N.V.
(Registrant)
Date: December 8, 2003 By: /s/ NORMAN KOTLER
----------------------
Norman Kotler
General Counsel and
Corporate Secretary
33