<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
Form 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 0-20181
SAPIENS INTERNATIONAL CORPORATION N.V.
-----------------------
(Translation of registrant's name into English)
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:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Shares, per value DG 1.00 per share NASDAQ National Market System
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
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:
Common Shares 20,147,656
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
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 2
Item 2. Description of Property 15
Item 3. Legal Proceedings 15
Item 4. Control of Registrant 15
Item 5. Nature of Trading Market 17
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders 17
Item 7. Taxation 18
Item 8. Selected Financial Data 19
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 10. Directors and Officers of Registrant 28
Item 11. Compensation of Directors and Officers 31
Item 12. Options to Purchase Securities from Registrant or Subsidiaries 31
<PAGE>
The "Company" includes, where appropriate, Sapiens International Corporation
N.V., its directly wholly owned subsidiary, Sapiens International Corporation
B.V. ("SIC B.V.") and the operating subsidiaries of SIC B.V.
Item 1. Description of Business
OVERVIEW
Sapiens develops and markets large-scale, business-critical information
technology (IT) solutions. These solutions consist primarily of rapid
application development ("RAD") and reengineering services that integrate the
Company's rule-based object technology, efficient RAD methodology, and
extensive consulting expertise. In addition, Sapiens is increasingly providing
e-commerce solutions and integrating legacy systems into new applications and
technologies. The Company also offers solutions to specialized software
redevelopment problems, such as those related to the Year 2000 and the
adoption of a single European currency.
The Company enables its customers to meet the challenges of constant business
change by updating, maintaining the functionality and enhancing their
business-critical IT assets in a timely, cost-effective manner. The Company
believes that the architecture of its technology combined with its accumulated
expertise in legacy systems position it to take advantage of emerging markets
such as e-commerce and enterprise application integration.
The Company provides solutions to organizations in a broad range of industries
worldwide. The Company markets its solutions and services through its direct
sales force and distributors located in 20 countries and through system
integrators such as IBM, EDS, HDS, Keane and Olivetti-Wang. Representative
customers of Sapiens include AGF Systems d'Informatique, Berlinische Leiben,
Guardian Royal Exchange, Honda, IBM, La Redoute, Norwich Union, Principal
Financial, Siemens Energy & Automation, and the State of North Carolina
Department of Transportation.
INDUSTRY BACKGROUND
Organizations rely extensively on the management of business information. As
the pace of business and technology accelerates, firms increasingly need to
leverage IT as a critical competitive asset. The increasing importance of
information, together with the proliferation and complexity of information
technologies, has placed greater demands on organizations to develop, maintain
and modernize software systems in a timely and cost-effective manner.
The need to modernize systems especially affects the significant investments
that organizations have made in mainframe or large-scale legacy systems. For
example, in 1997 alone, IDC estimated that organizations invested about $18
billion in large-scale servers, comprised substantially of mainframe systems.
The Company believes that organizations will continue to maintain and improve
such large-scale systems for a variety of reasons: (i) existing systems
represent an enormous investment; (ii) mainframe-based systems offer proven
reliability, scalability, security and administration advantages; (iii) such
existing systems are critical to the functioning of businesses and contain
vital business information and processes and; (iv) host-centric mainframe
computing is increasingly being used in new ways as Internet and E-commerce
technologies develop.
2
<PAGE>
Regardless of the size of their systems, organizations that developed
applications through traditional line-by-line software construction now find
such systems error-prone, cumbersome and expensive to modify and maintain. In
fact, industry analysts estimate that many large organizations dedicate
between 40% and 60% of their IT budgets to the maintenance of existing
applications. Organizations must also incorporate new technologies into IT
systems that were not designed to evolve with changing business needs. The
result is often an unmanageable patchwork of applications and platforms within
the same organization. These factors, among others, place a significant burden
on firms to locate, train and employ an increasing number of IT professionals
who have the collective skill to maintain and integrate a wide variety of
technologies.
Compounding such difficulties, organizations must also make specific urgent
modifications to their systems such as, for example, addressing the Year 2000
problem and the adoption of a single European currency. The European
Community's adoption of a single European currency presents an even more
complex challenge for organizations whose IT systems will have to examine or
execute every transaction in two different currencies during certain phases of
the transition period ending in the year 2002. In addition, European
organizations will be required to process all transactions in the single
currency, the Euro, by July 1, 2002. These requirements will affect a
multitude of applications and systems, including general ledger, order
processing, purchasing, accounts receivable and payable, taxation, price
lists, payroll, expense accounts and historical databases.
Companies address the need to modernize their existing legacy systems while
adapting them to changing technology requirements 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 internal
resources and know-how required to cost-effectively adapt and integrate their
legacy systems in a timely manner. As a result, many of these organizations
rely on stand-alone third-party tools or the expertise of external IT service
providers. However, third-party tools may not be compatible with an
organization's IT infrastructure, may be difficult to implement, or may
require significant additional investments in technology. Alternatively, while
IT service providers offer specific implementation expertise and customized
solutions, they do not provide cost-effective and timely methodologies based
on easy-to-use, flexible and robust technologies that avoid the need for
tedious, manual line-by-line modifications to existing applications. Companies
are seeking a comprehensive solution combining proven tools with consulting
expertise and development methodologies in order to extend the value of legacy
systems while providing rapid time-to-market with new applications and
technologies.
THE SAPIENS SOLUTION
We offer our customers application development, conversion and maintenance
solutions in the form of (a) fixed-price, turnkey projects and (b) per diem
consulting services. Both are based on our rule-based, object technology and
rapid application development methodology. These solutions include application
development and reengineering, Euro conversions, Y2K conversions and testing,
e-commerce, maintenance outsourcing and enterprise application integration,
which is currently under development.
3
<PAGE>
We believe that our solutions provide organizations with the following key
benefits:
o Time to market. Sapiens technology has powerful features, such as
object-orientation and extensive cross platform support, which
significantly accelerate the development process by, for example,
reusing components and programming independently of specific
platform requirements. The Company's solutions thus enable firms to
minimize costly development efforts, reduce business losses
associated with system down-time, and, importantly, to compete more
effectively by deploying new applications and services.
o Extend value of legacy systems. Sapiens' solutions enable
organizations to modify and maintain existing large-scale
applications, and to rapidly develop and integrate new applications
and technologies within their IT environments. Whether a firm
requires Euro conversion services or the development of new
functionality such as an e-commerce application, Sapiens solutions
not only extend the productive life of legacy systems but
simultaneously provide a migration path to next generation
technologies.
o Scope and Quality. Sapiens offers established solution frameworks,
such as Sapiens EuroMigration and Sapiens Y2K, which are
comprehensive in scope. The Company's technology is designed to
reduce the potential for error in coding and logic, for example by
enabling reuse of previously tested objects. Furthermore, Sapiens'
brings to its customers years of domain expertise in legacy system
environments, its understanding of key vertical markets such as
insurance and financial services, together with its consulting and
development methodologies.
o Flexible, high performance solutions. Sapiens' solutions are
designed to leverage the inherent power of mainframe systems while
providing a level of flexibility not traditionally provided by such
systems. For example, using Sapiens' rule-based approach,
organizations are able to create, deploy, integrate and maintain
new applications within existing systems much more quickly and
efficiently than by traditional line-by-line programming methods.
OUR TURNKEY SOLUTIONS
We offer application development, conversion and maintenance solutions that
integrate our rule-based object technology, efficient RAD methodology and the
extensive experience of our technical personnel. Our application development
solutions involve the development or re-engineering of core business
applications such as order entry, inventory, on-line banking and insurance
claims application. In addition, we are increasingly providing e-commerce
solutions and integrating legacy systems into new applications and
technologies into legacy systems. Our conversion solutions are designed to
respond to specialized problems such as the Year 2000 problem and the adoption
of a single European currency. Finally, our maintenance solutions consist of
application maintenance outsourcing for large organizations.
4
<PAGE>
The following table lists our solutions offerings and the related tools that
they employ:
- --------------------------------------------------------------------------------
Solution Related Tools
- --------------------------------------------------------------------------------
Sapiens ObjectPool
Application Development and Reengineering Sapiens Object Modeler
Sapiens WorkStation
- --------------------------------------------------------------------------------
Sapiens EuroMigration Euro-Virtual-Machine
Sapiens ECR
- --------------------------------------------------------------------------------
Sapiens Y2K and Independent Verification & Integrated Y2K Toolkit
Validation Falcon 2000
Sapiens Testkit
- --------------------------------------------------------------------------------
E-Commerce ObjectPool line of
products
Sapiens i.way
- --------------------------------------------------------------------------------
Maintenance Outsourcing ObjectPool line of
products
Sapiens ECR
Falcon
- --------------------------------------------------------------------------------
Application Development and Reengineering
We provide comprehensive solutions which enable users of large-scale systems
to reengineer software applications in a more cost-effective and timely
manner. Our solutions, which incorporate our rule-based, object technology and
RAD methodology, and expertise of our staff require significantly less code
writing because application logic is defined in easy-to-understand business
rules. The time and manpower required for programming are therefore
dramatically reduced, allowing customers to minimize costly development
efforts. A representative sampling of the core business solutions that we have
developed with our customers include order entry and inventory control
systems, insurance claims and pension benefits applications, shipment
management systems, and on-line mortgage processing applications. These
solutions are based on the following core technology.
SAPIENS ObjectPool is an enterprise-wide, cross-platform application
development environment that combines the flexibility of custom
development with the benefits of packaged software. ObjectPool supports
the complete application development life cycle from analysis and
design through testing and deployment. Using rule-based object
technology, the ObjectPool developer builds new applications by
assembling objects and their associated business rules and then
fine-tuning their behavior. The business objects and rules are stored
in an active repository, which automates end-user interaction, business
logic execution and data manipulation.
5
<PAGE>
Sapiens markets its ObjectPool line of products both as a component of
fixed-price projects and as a stand-alone product license supported by
per-diem consulting services. Maintenance and support contracts, which
are renewed annually, are offered concurrently with the initial license
of ObjectPool.
Sapiens Object Modeler is a client-based graphical modeling workbench
for visual application development. Using Object Modeler, the developer
begins by creating a business model that defines the application as a
set of interrelated objects. Object Modeler allows developers to modify
the behavior of the basic object and create line-of-business objects by
defining the data associated with the object and describing the
business rules that tell it how to process the data. Developers may
then create an application by assembling these line-of-business
objects.
Sapiens WorkStation is a Windows-based Graphical User Interface (GUI)
for ObjectPool applications. SWS automatically generates powerful GUI
clients for ObjectPool applications, and bypasses the need to use GUI
tools and/or complex programming to create graphical clients for
ObjectPool applications. SWS operates as a thin client, handling screen
formatting, screen flow and user validations, while the business logic
of the application is executed by the ObjectPool server.
Sapiens EuroMigration
Our SAPIENS EuroMigration(Trademark) solution addresses the entire
Euro-conversion life cycle. We implement the solution in a rapid, cost effective
manner using a 1999-2003 EuroMigration path that satisfies the requirements of
the European Monetary Union as defined by the European Commission. Our solution
addresses both the immediate dual currency need and the inevitable database
conversion phase, while preserving system-wide data integrity throughout the
project. Our Euro toolkit includes:
Euro-Virtual-Machine is our unique technology that enables end-users to
adapt their applications to the Euro while leaving source code and data
virtually untouched. Our Euro-Virtual-Machine can provide both dual
currency and multi-currency features during the Euro transition phase,
and can serve as a bridging solution during data conversion.
- EVM for screens rapidly adds dual currency functionality to
online screens.
- EVM for Reports rapidly adds dual currency functionality to
online and batch reports.
- EVM for Databases wraps databases and enables the
cluster-by-cluster Euro database conversion for large
enterprises. This is also the interface for the database
conversion itself.
Sapiens ECR, our Enterprise Configuration Repository, is an active
repository for the inventory of all system components as well as the
relationships among them. It creates a comprehensive cross-reference
among programs, databases, screens and reports. This repository can
serve as a knowledge base for additional solutions that we implement
for the same customer, such as application maintenance outsourcing.
6
<PAGE>
Sapiens Y2K and Independent Verification & Validation
Sapiens Y2K is an end-to-end solution for Y2K problems including mapping,
assessment, remediation, and final verification and testing of changed and
unchanged code. Sapiens Y2K provides the flexibility to choose between a
conventional date conversion project and a rapid re-engineering of some or all
of the customer's applications.
Our Independent Verification & Validation solution ("IV&V") offers customers
an objective audit of their Year 2000 compliance efforts. We are able to
address compliance problems that are encountered in the IV&V process through
our Y2K services. Sapiens Y2K and IV&V include the following key tools:
Y2K Data Mapper, which provides a general interface to data access
methods (DB2, VSAM, DL1 IMS) as well as the ability to develop private
interfaces to other methods
Y2K Configuration Mapper, which automatically maps application
components (data, programs and procedures) into the Y2K Knowledgebase
Y2K Date Analyzer, which allows the use of customizable templates of
suspect date strings, data types, etc. to scan the application objects
under investigation
Y2K Data Converter, which automatically converts data structures and
fields necessary to solve Y2K problems and future challenges, such as
Euro conversions
Y2K Synchronizer, which allows developers to continue day-to-day
software maintenance in their environment, while implementing Y2K
modifications in a dedicated Y2K environment
Y2K Testkit, which simplifies and automates portions of the testing
phase.
Sapiens Falcon2000. Falcon2000(Trademark) is a market-leading Year 2000
conversion workbench designed specifically for automated analysis and
conversion of IBM mainframe Assembler language programs for Year 2000
compliance. At its core, Falcon2000 uses an artificial intelligence
algorithmic design that enables powerful and flexible analyses of program
control flow and data flow.
E-Commerce
Our e-commerce solution offers our customers the ability to open their
large-scale systems to the rapidly emerging e-commerce market. We protect our
customers' investments in legacy applications by "rejuvenating" them with
Internet technologies. By integrating existing legacy systems, we help our
customers deploy high quality throughout the enterprise. The Sapiens i.way
product is at the forefront of this solution.
Sapiens i.way(Trademark) is designed to bring the full functionality and
features of ObjectPool to Internet/Intranet-based application
development. I.way extends the ObjectPool client/server application to
include Internet, intranet and extranet users as clients - all using
the same application definition. It also allows users to extend legacy
data and
7
<PAGE>
applications to the Web, and create new electronic business and
intranet applications faster.
Maintenance Outsourcing
Our maintenance outsourcing solutions are designed to ease the growing burden
of managing and maintaining existing applications. By contracting with us to
maintain and manage their core applications on an outsourcing basis, our
customers benefit from the accumulated knowledge and expertise of our off-site
International Solutions and Services center, and the comparatively lower cost
of maintaining these applications through an outsourcing arrangement. Our
maintenance outsourcing solution revolves around our core ObjectPool
technology described above. Sapien's ECR also plays an important role in our
application maintenance outsourcing solutions.
Enterprise Application Integration
We are in the process of developing our Application Integration Solution,
which will enable customers' diverse applications to communicate with each
other by providing bridges between different programming standards and
protocols. This solution, which is still under development, will allow for
full integration between different component standards. As part of our
application integration offering, we are also developing application templates
and components for specific industries, such as insurance and on-line banking.
One of the key elements in this solution is our Component Integrator
technology.
Component Integrator is a comprehensive standards-based
multidirectional component bridge providing full integration between
any number of component standards: COM, ActiveX, OLE, CORBA and
JavaBeans are supported in the core product, with other standards
available as add-ons. The bridging also includes transaction
propagation between MTS/OTS/JTS. Component Integrator is designed to
meet the needs of developing, prototyping, deploying and evolving
applications in a world of diverse changing standards.
Legacy Adapter will enable customers to adapt legacy applications
without modifying the original application. It encapsulates legacy data
and logic into common objects by wrapping their screen interface. These
objects can be distributed across multiple platforms as standard
components. By preserving these legacy applications, components
produced by the Legacy Adapter can be easily reused within modern
software development efforts or integrated with other enterprise
systems.
OUR CONSULTING SERVICES
We offer customers a wide range of consulting services that are priced on the
basis of time and materials expended. These customers seek the expertise of
our consultants on-site to provide them with project management and consulting
services, which helps them manage their development efforts. Our consultants
can assist with a range of specific needs, including application development,
database design, system audits, and project management. While not delivering a
solution package, these consultants have access to the methodologies,
technologies, and intellectual resources held by the entire solutions
organization.
8
<PAGE>
OUR CORE TECHNOLOGY
The following are some key features of our core technology that are common to
the full range of our solutions and related tools.
The Sapiens Object
The key building block of the Company's technology is the Sapiens 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 (methods)
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.
Business Rules
The rules within a Sapiens application are modeled after the business rules by
which an organization runs. Each rule is typically a one or two-line statement
that defines 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
Sapiens 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 Sapiens objects, they are easily
identifiable and maintainable. In contrast to traditional programming,
developers need not review large volumes of code when modifying a
Sapiens-based application. They simply revise the straightforward rules that
govern the behavior of the application.
The Sapiens rules engine features a power of inference called Positive
thinking. Due to this feature, the Sapiens rules need only be stated in their
positive form. Negative 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, negative implications much be specified and coded by
means of a lengthy and detailed process.
In summary, Sapiens rules reduce complexity by stating what has to be done
rather than how it should be done. This reduces the instruction that need to
be 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 Sapiens technology's power to infer. Positive thinking also
ensure the integrity of an application because the Sapiens rules engine,
rather than developers working manually, automatically addresses the negative
implications of the business logic.
9
<PAGE>
The Sapiens Repository
The Sapiens repository contains all of the information that comprises an
organization's portfolio of applications. The information within the
repository includes all Sapiens 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 a Sapiens application simply populates the
repository with application specifications, which are then governed by the
repository's own rules and objects.
Unlike passive repositories, which merely document applications, the Sapiens
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.
Three-Tier Architecture
The Company's technology is based on a three-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 Sapiens
objects and rules, and may reside on various server platforms, including
mainframe, AS/400, UNIX and Windows/NT. 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 port 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.
CUSTOMERS
The Company markets its solutions primarily to organizations with large
information technology budgets and ongoing maintenance and development needs.
The Company's largest customer accounted for approximately 28% or our total
revenues in 1998.
The Company believes that the following customers, arranged by industry, are
representative of the organizations that comprise its international customer
base.
FINANCIAL SERVICES INSURANCE
- ------------------ ---------
Abbey National Mortgage Finance AGF/SI
Bank Leumi Albany Life Assurance
Bank Hapoalim Berlinische Leibin
Canadian Imperial Bank of Commerce ELVIA Vie
NWS Bank Plc - Capital Bank Guardian Royal Exchange
10
<PAGE>
<TABLE>
<S> <C>
The Principal Financial Group Norwich Union
Woolwich Direct Virginia Farm Bureau
GOVERNMENT and OTHER MANUFACTURING
- -------------------- -------------
Israeli Construction & Housing Ministry ALPS Electric
Israel Air Force Canon France
State of Arkansas Honda Japan
State of North Carolina DOT Ideal Standard
Israel National Insurance Institute International Paper
Electra de Viesgo (Spain) Kawasaki Steel
NorAm Energy Corp-formerly ARKLA Kirin Beer
Holiday Inn Worldwide Mitsubishi Heavy Industries
IBM Information Solutions Ltd. Siemens Energy & Automation Inc.
IBM Transnet BCBS TDK
TRANSPORTATION OTHER
- -------------- -----
Canada Maritime JD Williams
Intercontainer-InterfrigoS.C. La Redoute
Queensland Rail Panasonic UK
Lufthansa
Norfolk & Southern
</TABLE>
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 distributors and system integrators.
As of December 31, 1998, the Company had 33 marketing and sales personnel
located in its operations in the United States, France, Israel, the United
Kingdom, Germany, Switzerland and the Far East. The direct sales force focuses
on large organizations within select industries. The direct sales force also
coordinates sales activities with distributors and system integrators.
The Company's independent distributors are given exclusive or non-exclusive
rights to market the Company's solutions in specific geographic regions. As of
December 31, 1998, the Company had distribution relationships with independent
distributors operating in Australia, Brazil, Canada, Eastern Europe, Italy,
Japan, Korea, Poland, South Africa, Spain and the United States. No single
distributor accounted for more than ten percent of the Company's consolidated
revenues in any of the past three fiscal years.
Value-added resellers of the Company's products include IBM's Travel and
Transportation Industry Unit and Schumann AG, which have developed
industry-specific templates for shipment management and security asset
administration, respectively. The Company also markets its solutions and
services through large system integrators, such as IBM, EDS, HDS, Keane Inc.
and Olivetti/Wang. These relationships include collaboration on Year 2000 and
Euro conversion projects and ObjectPool-based application development.
11
<PAGE>
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, authoring articles, hosting user
conferences and vision board meetings for customers and prospective customers
on technology and industry issues and direct mail marketing.
CUSTOMER TRAINING AND SUPPORT
The Company believes that a high level of 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 sales to a client includes initial
maintenance, training and consulting 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 months and entitles the customer to upgrades 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.
RESEARCH AND DEVELOPMENT
The Company conducts extensive research and development to enhance its
existing products and build new complementary products. Research and
development priorities are set on the basis of a combination of strategic
marketing requirements and requests for enhancement submitted by existing
users.
The Company intends to expand its core technology to take advantage of
emerging opportunities, such as those related to the proliferation of
Internet/Intranet technologies and the e-commerce market. The Company has
announced its Sapiens i.way product, which enables full integration of the
Internet/intranet into the ObjectPool development environment. Another major
project is the development of Component Integrator and Legacy Adapter, which
form the basis of the Company's Enterprise Application Integration solution.
In addition to the development of new technology and solutions, the Company
continually updates its core technology through enhancements and new releases.
The Company may also enhance its current product and service offerings by
selectively acquiring complementary products and technologies. The Company
expects to devote a portion of its research and development resources to the
enhancement and integration of acquired and licensed technologies.
The company generally receives grants from the office of the Chief Scientist
of Ministry of Industry and Trade of the Government of Israel ("OCS") and in
1996 the Company also
12
<PAGE>
received a grant from the Israel-United States Binational Industrial Research
and Development foundation, (the "BIRD Foundation"). During the years ended
December 31, 1996, 1997 and 1998 OCS and/or the BIRD Foundation provided
grants to the Company for research and development expenses in the aggregate
amounts of approximately $1.8 million, $1.6 million and $1.9 million,
respectively, which accounted for 25.1%, 20.4% and 21.2%, respectively, of the
Company's gross research and development expenses. The 1996 grant from the
BIRD Foundation bears royalties at the rate of 2.5% to 5% of sales of products
developed as a result of research projects so funded until a maximum of 150%
of the dollar amount received is repaid. Under the 1996 amendments to
regulations governing OCS grants, the royalty rates (i) increased from 3% to
3%-5% and (ii) apply to all revenues related to products developed from funded
projects, including from sales, services and other sources, rather than only
from product sales. These amendments effectively accelerate the repayment of
the OCS grants, although aggregate royalty payments are not to exceed 100% of
the dollar value of the OCS grant. These new regulations are applicable to the
Company's OCS grants that have been approved since January 1, 1994 and apply
to sales effected after January 1, 1996. The terms of Israeli government
participation also require that the manufacturing of products developed with
OCS grants are performed in Israel, unless a special approval has been
granted. Special Israeli government consent is required to transfer to third
parties technologies developed through projects in which the Israeli
government participates. Such restrictions do not apply to exports from Israel
of products developed with such technologies.
For the years ended December 31, 1996, 1997 and 1998, gross research and
development expenditures were $7.2, $8.0 and $9.1 million, respectively. The
Company anticipates that it will continue to commit substantial resources to
research and development in the future.
COMPETITION
The market for large-scale, business- critical software solutions is highly
competitive and characterized by rapidly changing technology, evolving
industry standards and customer requirements, and frequent new product
introductions. The following is a breakdown of the competition that we face in
each of our primary markets:
Application Development and E-Commerce
Our competitors in the application development and e-commerce marketplaces
include tool vendors and system integrators. Tool vendors with whom we compete
include Forte, Software AG, Sterling Software, Amdahl, Level 8, Oracle and Sun
Microsystems. System integrators who offer competing solutions include IBM,
CapGemini, Andersen Consulting and EDS.
Euro and Year 2000 Conversions
Competition in the Year 2000 marketplace includes software vendors such as
Viasoft Inc., Platinum, Crystal Systems Solutions, Ltd. and Data Dimension;
and large and specialized consulting organizations and system integrators who
offer the full range of Year 2000 conversion services.
In the Euro conversion marketplace, the competition includes technology
vendors such as Crystal, Viasoft and Sopra, as well as large and specialized
consulting organizations and
13
<PAGE>
system integrators who offer the full range of Euro conversion services.
Application Integration
Our competition in the enterprise application integration marketplace includes
technology providers such as NEON, TSI, MINT, Active Software and Level 8. We
also compete with system integrators and professional service organizations
that offer application integration solutions and 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.
INTELLECTUAL PROPERTY RIGHTS AND SOFTWARE PROTECTION
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.
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, 1998, the Company had a total of 686 employees, including
116 in research and development, 449 in technical support, maintenance and
consulting; 55 in marketing and sales; and 66 in administrative functions.
All male permanent residents of Israel between the ages of 18 and 45 are,
unless exempt, obligated to perform reserve duty in the Israeli Defense
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
organisation, no assessment can be made as to the full impact of such
requirements on the
14
<PAGE>
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 2. Description of Property
In 1995, the Company entered into a sale-leaseback transaction on a facility,
which resulted in a gain of $1,165,000. Under the sale-leaseback transaction,
the Company deferred and is amortizing the gain over the lease term of five
years. The Company has an option to renew the lease for an additional
five-year term.
The Company leases office space in the United States, United Kingdom, France,
Switzerland, Italy, Germany, Belgium, Hong Kong and Argentina. The lease terms
are generally five to ten years. The Company believes that its existing
facilities are adequate for its current needs.
Item 3. 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.
Item 4. Control of Registrant
The following table sets forth, as of December 31, 1998, 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 10% of the
outstanding Common Shares and (ii) all officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned (1)
Number Percent
<S> <C> <C>
Meister Software N.V. (2)........................ 1,905,702 9.5%
De Ruyterdade 58A
Curacao, Netherlands Antilles
Century Holdings, Inc. (3)........................ 1,905,702 9.5%
C/o Secretary
Residence Park
P.O. Box 4258
CH-6300 Zug, Switzerland
Artemis Investment and Trading Inc. (4)....... 2,452,451 12.2%
C/o Secretary
Residence Park
P.O. Box 4258
CH-6300 Zug, Switzerland
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
Lako Enterprises S.A. (5).......................... 2,394,201 11.9%
C/o Secretary
Residence Park
P.O. Box 4258
CH-6300 Zug, Switzerland
All officers and directors as a group (12 persons) (6) 3,229,550 16%
</TABLE>
(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, 1998 is 20,147,656.
(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. Shani's and Mr.
Zuckerman's deemed ownership of Century Holdings, Inc., a Panamanian
corporation ("Century") and by Century's approximately 31.9%
ownership of Meister, Mr. Shani, and Mr. Zuckerman may be deemed to
beneficially own all of the Common Shares held by Meister (see Note
(3)).
(3) Includes the 1,905,702 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 1,905,702 shares held by Meister and deemed to be held
by Century. Artemis owns 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)).
(5) Includes the 1,905,702 shares held by Meister and deemed to be held
by Century. Lako owns 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) 1,905,702 Common Shares held by Meister, which shares
may be deemed to be beneficially owned by Messrs. Misinai, Sole,
Zuckerman, and Shani (see Notes (2), (3), (4) and (5)); (ii) 546,749
and 488,499 Common Shares held, respectively, by Artemis and Lako as
to which Mr. Shani and Mr. Zuckerman disclaim beneficial ownership,
respectively (See Notes (4) and (5)); (iii) 120,000
16
<PAGE>
Common Shares held of record by Mr. Zuckerman; and (iv) 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.
Item 5. Nature of Trading Market
Common Shares
The Company's Common Shares are quoted on the Nasdaq National Market
("Nasdaq") under the symbol "SPNS".
As of December 31, 1998, 20,147,656 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 during the indicated fiscal quarters:
1997 High Low
- ---- ---- ---
First Quarter 4 5/16 2 11/16
Second Quarter 5 3/4 2 7/8
Third Quarter 10 1/2 4 3/8
Fourth Quarter 10 3/4 6 5/16
1998
First Quarter 8 3/8 6 1/16
Second Quarter 9 7/16 6 7/16
Third Quarter 8 1/8 4 3/4
Fourth Quarter 8 1/16 3 3/8
1999
First Quarter 11 8 3/8
As of December 31, 1998, there were approximately 257 holders of record of the
Company's Common Stock, including 149 holders of record with addresses in the
United States.
Item 6. Exchange Controls and Other Limitations Affecting Shareholders
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 nonresident 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 nonresident or foreign owners to hold or vote such
securities.
17
<PAGE>
Item 7. Taxation
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.
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 nontaxable 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.
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.
18
<PAGE>
United States Backup Withholding and Information Reporting
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.
Item 8. Selected Financial Data
The following table summarises certain selected consolidated financial data
and should be read in conjunction with the Company's consolidated financial
statements for the years ended December 31, 1998, 1997, 1996, 1995, and 1994
and notes thereto, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," (see Item 9 at page 22). The selected
financial data set forth below as of and for the years ended December 31,
1998, 1997, 1996, 1995, and 1994 have been derived from the consolidated
financial statements of the Company for the years ended December 31, 1998,
1997, 1996, 1995 and 1994, 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.
19
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data (1): Year Ended December 31,
----------------------------------------------------
(In thousands; except per share data)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Products $11,027 $10,208 $13,699 $20,507 $37,181
Consulting and maintenance services 22,269 26,432 25,288 24,057 33,799
-----------------------------------------------------------
Total revenues 33,296 36,640 38,987 44,564 70,980
-----------------------------------------------------------
Operating Expenses:
Cost of products 3,344 2,347 1,473 4,473 12,690
Cost of consulting and maintenance services 16,488 17,569 16,511 15,507 21,611
Research and development, net 5,658 4,316 2,429 3,258 4,112
Selling and marketing, general and 38,587 20,567 16,781 16,316 22,921
administrative
Restructuring 0 4,456 0 0 0
-----------------------------------------------------------
Total operating expenses 64,077 49,255 37,194 39,554 61,334
-----------------------------------------------------------
Income (loss) from operations (30,781) (12,615) 1,793 5,010 9,646
-----------------------------------------------------------
Finance income (expenses), net (2,387) 16 198 107 457
Other income (expenses), net 2,121 (2,798) (8,842) (417) (328)
-----------------------------------------------------------
Income (loss) before taxes on income (31,047) (15,397) (6,851) 4,700 9,775
-----------------------------------------------------------
Taxes on income (33) (41) (35) (57) (55)
Equity earnings (losses) of an affiliate 0 (211) (150) (203) 0
Minority interests (155) 83 317 104 15
-----------------------------------------------------------
Income (loss) before extraordinary item (31,235) (15,566) (6,719) 4,544 9,735
-----------------------------------------------------------
Extraordinary item-early extinguishment of debt 1,686 15,911 96 0 0
-----------------------------------------------------------
Net income (loss) (29,549) 345 (6,623) 4,544 9,735
-----------------------------------------------------------
Preferred stock cash dividend (1,211) (2,406) (645)
------- ------- -----
-----------------------------------------------------------
Net income (loss) to Common shareholders $(29,549) $345 ($7,834) $2,138 $9,090
--------- ---- -------- ------ ------
-----------------------------------------------------------
Basic earnings (loss) per share:
Before extraordinary item (2.58) (1.29) (0.63) $0.14 0.48
Extraordinary item 0.14 1.32 0.01 - -
-----------------------------------------------------------
Basic earnings (loss) per share $(2.44) $0.03 $(0.62) $0.14 $0.48
------- ----- ------- ----- -----
-----------------------------------------------------------
Weighted average number of shares
used in computing Basic earnings (loss) per share 12,089 12,075 12,601 15,210 18,966
------ ------ ------ ------ ------
Diluted earnings (loss) per share:
Before extraordinary item (2.58) (1.29) $(0.63) $0.12 $0.43
Extraordinary item 0.14 1.32 0.01 - -
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------
Diluted earnings (loss) per share $(2.44) $0.03 $(0.62) $0.12 $0.43
-----------------------------------------------------------
Weighted average number of shares
used in computing Diluted earnings (loss) per share 12,089 12,075 12,601 17,951 21,387
Balance Sheet Data:
Cash and cash equivalents $17,094 $11,064 $6,876 $10,338 $20,222
Working capital (deficit) 26,117 14,386 9,611 20,062 21,028
Total assets 71,595 55,951 50,218 57,648 73,324
Long term debt 47,867 18,405 16,979 16,088 7,273
Total stockholders' equity (deficit) (3,371) 9,541 7,191 20,069 33,115
</TABLE>
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's
financial statements and notes thereto. Certain matters discussed below and
throughout this Annual Report are forward-looking statements that are based on
the beliefs and assumptions made by the Company's management as well as
information currently available to management. Such forward-looking statements
may be identified by the use of the words "anticipate", "believe", "estimate",
"expect", "plan" and similar expressions. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks and uncertainties. Although the Company believes 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, 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 the Company believes could cause actual
results to differ materially from those contemplated by the forward-looking
statements. The Company does not intend to update these forward-looking
statements.
Results of Operations
The following table presents certain operational data from the Company's
condensed statements of income as a percentage of total revenues for the years
indicated:
21
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Products 35.1% 46.0% 52.4%
Consulting and other services 64.9 54.0 47.6
---- ---- ----
Total Revenues 100.0 100.0 100.0
Gross Profit 53.9 55.2 51.7
R&D, Gross 18.6 17.9 12.8
Total operating expenses 49.3 43.9 38.1
Operating Income 4.6% 11.2% 13.6%
</TABLE>
Revenues. Total revenues in 1998 increased 59% to $71.0 million from $44.6
million in 1997, and $39.0 million in 1996. Revenues in Europe, primarily
France, rose 126% to $43.0 million and represented 61% of total revenues
compared with 43% in 1997. Revenues in North America increased 25% to $17.8
million, representing 25% of revenues in 1998 versus 32% in the prior year;
revenues in Israel and other parts of the world declined 10% in 1998 to $10.2
million or 14% of total revenues compared with 25% in 1997.
Product revenues rose 81% in 1998 to $37.2 million, after increasing 50% in
1997 and 34% in 1996. The increase in product revenues in 1998 is due
primarily to higher revenue from turnkey, fixed-price project sales, mainly
related to the Company's year 2000 solution offering. Revenues from turnkey
project contracts in 1998 amounted to $28.4 million compared with $9.0 million
in 1997. License and other product revenues declined to $8.8 million in 1998
from $11.5 million in 1997. The Company believes that revenues from turnkey
projects will represent a higher proportion of product revenues in the future
as a result of the Company's strategy to provide complete solutions to a broad
range of large-scale application development issues.
Consulting and other services revenues increased 41% to $33.8 million from
$24.1 million in 1997 and $25.3 million in 1996. The increase in 1998 is
primarily attributable to the acquisitions of Societe Auxilliaire
d'informatique et de communication (hereinafter "SAIC") and InsureTech
Alternatives, a 23% increase in the Company's professional consulting staff,
and increases in average billing rates.
Gross Profit. Gross profit increased 49% to $36.7 million from $24.6 million
in 1997 and $21.0 million in 1996. Gross margin was 51.7%, 55.2% and 53.9% in
1998, 1997 and 1996, respectively. Product revenue gross profit rose 53% in
1998 to $24.5 million from $16.0 million in 1997; product gross margin was
65.9% in 1998 compared with 78.2% in 1997. The decline in product gross margin
is due principally to the higher proportion of comparatively lower gross
margin turnkey project revenues versus license sales in the product revenue
mix. Consulting and other services gross profit increased 43% to $12.2 million
in 1998 from $8.6 million in 1997. Consulting and other services gross margin
rose in 1998 to 36.1% from 35.5% in the prior year due mainly to higher
average billing rates. The Company believes that product and consulting and
other services gross margins are at the high end of the sustainable range and
may decline in the future. Additionally, the
22
<PAGE>
relative proportions of product revenues and consulting and other services
revenues in the total revenue mix may affect total gross margin in the future.
Research and Development. Research and development expenditures, before
capitalization of software development costs and royalty-bearing grants,
increased 14% in 1998 to $9.1 million from $8.0 million in 1997 and $7.2
million in 1996. The increase in research and development expenditures is due
primarily to a 16% increase in engineering staff and higher subcontractor
expenses both related mainly to the development of the Company's
EuroMigration, e-commerce and enterprise application integration solution
offerings.
A portion of the Company's R&D expenditures is funded by the Office of the
Chief Scientist of the Government of Israel ("OCS") pursuant to programs
entitling the Government to receive royalties on sales of products developed
as a result of research projects so funded. R&D funding was $1.9 million in
1998 (21.2% of gross R&D expenditures) compared with $1.6 million (20.4% of
gross R&D expenditures) in 1997. The Company expects that the percentage of
funded R&D will decline in the future due principally to reductions in the
Government of Israel's budget for such programs. Moreover, there can be no
assurance that such grants will continue to be available or that the Company
will receive any such grants. Termination or substantial reduction of such
grants would have a material adverse effect on the Company's results of
operations.
Royalties payable pursuant to these funding programs, included in cost of
products, were $0.8 million and $0.5 million in 1998 and 1997, respectively.
Software development costs capitalized were $3.0 million in 1998 compared with
$3.1 million in 1997. Amortization of capitalized software development costs,
included in cost of products, was $3.1 million in 1998 and $2.1 million in
1997. As a result of all of the above, net research and development
expenditures rose 26% in 1998 to $4.1 million from $3.3 million in 1997.
The Company believes that a significant level of investment for research and
development is essential for it to attain market leadership and for the
long-term development of its business. Accordingly, the Company anticipates
that it will continue to devote substantial resources to product research and
development for the foreseeable future. However, there can be no assurance
that the development of products will be successful or will not be rendered
obsolete by future technology developments or acquisitions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 41% to $22.9 million in 1998 from $16.3
million in 1997 and $16.8 million in 1996. Expressed as a percent of revenues,
selling, general and administrative expenses declined to 32.3% in 1998 from
36.6% in 1997. The increase in selling, general and administrative expenses in
1998 is due principally to the expansion of direct operations in Europe
(mainly France), further enhancement of marketing, product management and
administrative infrastructure, and promotional activities related to the
launch of the Sapiens' EuroMigration solution. The Company expects that its
selling, general and administrative expenses will increase in 1999 to support
continued revenue growth.
Net Income. Net income increased 114% to $9.7 million in 1998 from $4.5
million in 1997 and a net loss of $6.6 million in 1996. Preferred stock
dividends in 1998 were $0.6 million compared with $2.4 million in 1997,
including $0.2 million and $1.0 million, respectively, representing the
amortization of the discount to the market price on the conversion of
convertible preferred shares at the date of grant given to certain preferred
23
<PAGE>
shareholders. The Company expects that dividends on preferred shares will be
lower in 1999 due mainly to the full year impact of conversions of preferred
shares to common shares during 1998.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at the end of 1998 were
$33.0 million compared with $23.1 million at the end of 1997 and $20.5 million
at the end of 1996. Approximately $8.5 million of the Company's short-term
investments were pledged as collateral for its short-term debt and
sale-leaseback obligations compared with $10.9 million at the end of 1997. The
decrease is due to primarily to the replacement of $2.4 million of credit line
facilities secured by short-term investments with up to a total of $10 million
of unsecured revolving credit facilities with four commercial banks.
Net cash provided by operations in 1998 was $17.6 million compared with net
cash used in operations of $0.4 million in 1997 and $2.0 million in 1996. The
increase in 1998 reflects higher accrued expenses, higher net income and lower
trade receivables days sales outstanding.
Net cash used in investing activities was $7.3 million in 1998, $2.9 million
in 1997 and $3.2 million in 1996. The increase in 1998 was due principally to
the acquisition of SAIC, the repurchase of distribution rights in Italy, the
purchase of the Component Integrator technology and to higher capital
expenditures. Capital expenditures, which totaled $2.4 million in 1998,
included investments in computer systems for research and development
purposes, computer and communication systems for regional offices and a new
accounting and financial reporting system.
Net cash used in financing activities totaled $0.1 million in 1998 compared
with net cash provided by financing activities of $7.1 million and $1.1
million in 1997 and 1996, respectively. The decrease in 1998 is due mainly to
the 1997 placement of $7.8 million (net proceeds) of convertible preferred
shares. The Series D1, Series E and Series D2 Convertible Preferred Shares are
convertible at the lower of a fixed conversion price or a price equal to 15%
below the five-day average closing market price of the Company's common shares
prior to the date of conversion. The Series D1, E and D2 Convertible Preferred
Shares include five-year warrants to purchase one-half of the number of shares
of common shares issued upon conversion of the Preferred Shares.
Management believes that available working capital and credit lines will be
sufficient for the next 12 months to meet its operating requirements, the
addition of research and development personnel, and marketing initiatives.
Depending upon the Company's future growth and acquisition opportunities, the
Company will consider from time to time various financing alternatives and may
seek to raise additional capital though equity or debt financing or to enter
into strategic arrangements.
24
<PAGE>
Qualitative and Quantitative Disclosure About Market Risk
Market risks relating to the Company's operations result primarily from
changes in exchange rates, interest rates or weak economic conditions in the
markets in which the Company sells its products and services. These exposures
are actively monitored by management. To manage the volatility relating to
these exposures, the Company enters into various derivative transactions. The
Company's 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. It is the Company's policy and practice to
use derivative financial instruments only to manage exposures. The Company
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
Foreign Currency Risk. The Company conducts business in various foreign
currencies, primarily in Europe and to a lesser extent in Israel, Canada,
Australia and Japan. The Company monitors its foreign currency exposure and,
from time to time, will enter into currency forward contracts to hedge sales
transactions. The Company uses 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.
The Company seeks to minimize the risk that the fair value of sales of its
products and services and cash flow required for the Company's expenses
denominated in a currency other than the functional currency, the US dollar,
will be affected by changes in exchange rates.
The following table summarizes the Company's foreign currency forward exchange
agreements. The table presents the notional amounts (dollars in millions) and
the weighted average exchange rates by expected (contractual) maturity dates
of derivative instruments. Notional values and average contract rates are
calculated based on forward rates at December 31, 1998.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
1999 2000 2001-03 Total
---- ---- ------- -----
<S> <C> <C> <C> <C>
Forward contracts to sell
foreign currencies for U.S. dollars
French Francs
Notional value $12.8 $2.3 - $15.1
Average contract rate 5.866 5.636
German Marks
Notional value $ 0.2 - - $ 0.2
Average contract rate 1.792
</TABLE>
Interest Rate Risk. The Company's interest expenses are most sensitive to
changes in the London Interbank Offered Rate (LIBOR) as its short-term
borrowings bear a LIBOR based interest rate. Excess liquidity invested in
short-term investments bears minimal interest rate risk.
At December 31, 1998, the Company had approximately $5.2 million outstanding
on its revolving line of credit and short term credit agreements and $311
thousand recorded as
25
<PAGE>
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, 1998 would be approximately $55 thousand.
Impact of Inflation
Inflation has not had a significant impact on the Company's operating results
to date. However, a portion of the Company's expenses are paid in New Israel
Shekels ("NIS") and are affected by changes in the Consumer Price Index in
Israel ("Israel CPI"). If inflation in Israel exceeds the devaluation of the
NIS against the dollar or if the timing of such devaluation lags behind
inflation, the US dollar value of the Company's Israel CPI-linked NIS expenses
will increase.
Factors That May Affect Future Results
The Company operates 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 the Company's business, financial condition or results of
operations.
The Company's business is characterized by relatively large projects or
engagements that can have a significant impact on the Company's total revenue
and cost of revenue from quarter to quarter. As a high percentage of the
Company's expenses, particularly employee compensation, is relatively fixed, 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.
The Company's turnkey projects are generally sold as fixed-price contracts
with delivery requirements spanning more than one year. If the Company's
actual cost-to-complete of these projects differs significantly from the
estimated cost-to-complete, there could be a material adverse effect on the
Company's results of operations and financial position.
The market for software products and related services, in general, is highly
competitive. The Company's principal competitors generally have significantly
greater resources than the Company. Price reductions or declines in demand for
the Company's solutions and services, whether as a result of competition,
technological change, an increase in application development, reengineering or
maintenance performed internally by the Company's customers or potential
customers, or otherwise would have a material adverse effect on the Company's
results of operations and financial position.
The operating results of many software and services companies reflect seasonal
trends, and the Company expects to be affected by such trends in the future.
Although the Company has not experienced consistent seasonal fluctuations in
operational results to date, the Company believes that it is likely that it
will experience relatively higher revenues in the fourth quarter due mainly to
customers' annual purchasing and budgetary practices. To the extent future
operations in Europe constitute a high percentage of the Company's total
revenues, the Company anticipates that it may also experience relatively
weaker demand in the third quarter as a result of reduced activities in Europe
during the summer months.
26
<PAGE>
Variations in the Company's revenue and operating results could occur as a
result of a number of other factors, such as the budgeting and purchasing
practices of its customers, the length of the customer product evaluation
process, the timing of its customers' system conversions, the timing and cost
of new product introductions and product enhancements, and the timing of any
acquisitions and associated costs. Employee hiring and utilization rates may
also affect the Company's revenues and results of operations.
The Company has experienced significant annual increases in revenue since
1996. This growth has placed, and if it continues will place, a significant
strain on the Company's management, operations and resources. To accommodate
its recent growth, the Company is implementing a variety of new or expanded
business and financial systems, procedures and controls, including
implementation of a global financial reporting and accounting system. There
can be no assurance that the implementation of such systems, procedures,
controls and other internal systems can be completed successfully. If the
Company's growth continues, the Company will be required to hire and integrate
large numbers of new employees. There can be no assurance that the Company
will be able to successfully recruit and integrate new employees. Competition
for highly skilled employees, including sales, technical and management
personnel, is high in the software and services industry. The Company's
failure to manage growth effectively, including its failure to attract
talented employees or retain the services of key personnel, could have a
material adverse effect on the Company's results of operations and financial
position.
As part of its growth strategy, the Company may, from time to time, acquire or
invest in complementary businesses, products or technologies. The Company's
management frequently evaluates the tactical or strategic opportunity
available related to complimentary businesses, products or technologies. The
process of integrating an acquired company's business into the Company's
operations may result in unforeseen operating difficulties and expenditures
and may absorb significant management attention that would otherwise be
available for the ongoing development of the Company's business. Moreover,
there can be no assurance that the anticipated benefits of any acquisition or
investment will be realized. Future acquisitions or investments contemplated
and/or consummated could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, amortization
expenses related to goodwill and other intangible assets, any of which could
have a material adverse affect on the Company's operating results and
financial condition.
Additional factors that may cause actual results to differ materially from
management's expectations include industry specific factors; the Company's
ability to continuously develop, introduce and deliver commercially viable
solutions and technologies, and the market's rate of acceptance of the
solutions offered by the Company; the Company's ability to keep pace with
market changes and to compete successfully, and its ability to manage the
competitive risks associated with the strategic alliances that it has entered
into.
The Company sells products that focus specifically on organizations'
business-critical applications including those related to specialized
redevelopment issues such as the year 2000 and the adoption of the single
European currency. The provisions of the Company's sales contracts limit its
exposure to potential liability claims. Although the Company carries 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 the Company with adequate protection
against any such claims. A
27
<PAGE>
significant liability claim against the Company could have a material adverse
effect on the Company's results of operations and financial position.
As many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year, they may be unable to process
accurately certain data before, during or after the year 2000. As a result,
business and governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business operations. This is
commonly known as the Year 2000 ("Y2K") issue. The Company has established an
internal Year 2000 project team to coordinate the four phases of its internal
project to assure its key automated systems and related processes will remain
functional into the next millennium. Those phases include: (i) assessment,
(ii) remediation, (iii) testing and (iv) implementation of the necessary
modifications. The Company's key automated systems consist of (a) internally
developed computer applications, (b) hardware and equipment and (c)
third-party-developed software. The Company has substantially completed the
assessment and remediation phases of its internal Year 2000 project and
expects to complete all phases of the project by mid 1999.
The Company is recording the costs of this project as they are incurred. Such
expenses have not been and are not anticipated to be material to the Company's
financial position or results of operations. Despite the Company's internal
compliance efforts, Year 2000 issues faced by financial service organizations,
suppliers and customers with which the Company interacts, could adversely
affect the Company. There can be no assurance that the Company will be able to
detect all potential failures of third party computer systems. A significant
failure could have a material adverse impact on the Company's business,
financial condition and results of operations.
The Company's share price, has been and will continue to be, subject to
significant volatility. If revenues or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate and
significant impact on the Company's share price. The share price may also be
affected by broader market trends or the economic and political situation in
the markets in which the Company operates.
Item 10. Directors and Officers of Registrant
The following table sets forth certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ron Zuckerman 42 Chairman and Chief Executive Officer
Dan Falk 54 President and Chief Operating Officer
Yehuda Doron 47 Executive Vice President, Worldwide Sales
Shlomo (Shai) Sole 48 Executive Vice President, Chief
Technology Officer and Director
Lauri Hanover 39 Executive Vice President and CFO
Steven Kronengold 39 Executive Vice President, Secretary and
General Counsel
Irit Machtey 43 ExecutiveVice President, Human Resources
and Administration
Harry Yuklea 45 Executive Vice President, Business
Development and Marketing
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
L. Robert Libutti (2) 62 Director
Tsvi Misinai 53 Director
Kenneth J. Bialkin (1) 70 Director
Michel Berty (1) (2) 59 Director
Harold H. Leach, Jr. (1) 45 Director
Holland Intertrust (Curacao) N.V. (3) Director
</TABLE>
1) Member of Compensation Committee
2) Member of Audit Committee
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 is a founder of the Company and has been a director of the
Company since May 1991. He has served as Chief Executive Officer of the
Company since January 1995 and assumed the position of Chairman of the Board
of Directors on January 1, 1998. Mr. Zuckerman served as Chief Operating
Officer of the Company from its incorporation until April 1994.
Dan Falk will assume the position of President and Chief Operating Officer of
the Company in July 1999. Mr. Falk has served as Executive Vice President of
Orbotech Ltd. since 1995. From 1985 through 1995, he served as Orbotech's V.P.
of Finance and Chief Financial Officer. Prior to joining Orbotech, Mr. Falk
served in a wide range of management positions at Israel Discount Bank.
Yehuda Doron has served as Executive V.P., Worldwide Sales of the Company
since April 1999. Mr. Doron previously served as Executive V.P. at Cheyenne
Software. Prior to joining Cheyenne, he helped develop a software division at
Texas Instruments.
Shlomo (Shai) Sole is a founder of the Company and has served as Chief
Technology Officer since March 1997 and 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 (former name of SAPIENS) development team.
Lauri Hanover has served as Chief Financial Officer of the Company since March
1997. Prior to joining the Company, Ms. Hanover served in a variety of
capacities at Scitex Corporation Ltd. from 1984 to 1997, including Corporate
Controller and Director of Corporate Budgeting.
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.
29
<PAGE>
Irit Machtey has served as Vice President, Human Resources of the Company
since May 1996. Prior to joining the Company, Ms. Machtey served as Human
Resources Manager of National Semiconductor I.C. from 1993 to 1996; as Manager
of Human Resources and Administration for Teva Pharmaceutical Industries from
1989 to 1993; and as Manager of Training and Managerial Development of
Tadiran, Ltd. from 1985 to 1986.
Harry Yuklea has served as the Company's Executive Vice President of Business
Development and Marketing since January 1998. Prior to joining Sapiens, Mr.
Yuklea served as Vice President of Business Development for Lannet Data
Communication Ltd. and Madge Networks Ltd. from 1993 to 1997. He previously
served as the Director of Business Development at Fibronics Ltd. from 1992 to
1993.
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 Weizmann 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 Travelers, Inc., 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.
Harold H. Leach Jr. has served as a director of the Company since January
1996. Mr. Leach practiced general corporate law at the Boston law firm of
Choate, Hall & Stewart from 1979 to 1992. In 1992, Mr. Leach retired as a
partner of Choate, Hall & Stewart and co-founded Legal Computer Solutions,
Inc., which develops intranet applications and other computer solutions for
law firms and corporate legal departments.
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.
30
<PAGE>
Executive officers are appointed by the Board of Directors of the Company and
serve at the discretion of the Board of Directors.
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 16% 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.
Item 11. Compensation of Directors and Officers
The aggregate amount of compensation paid by the Company during the fiscal
year ended December 31, 1998, to all directors and executive officers as a
group for services in all capacities was $1,955,000 which includes amounts set
aside or accrued to provide pension, retirement or 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,
1998, to provide pension, retirement and similar benefits for directors and
executive officers of the Company was $255,000.
The Company has employment agreements with ten officers. The Company, in the
ordinary course of its business, enters into confidentiality agreements with
most of its technical personnel in Israel. The Company has entered into
non-competition and confidentiality agreements with its Chief Executive
Officer and Chief Technological Officer. The Company does not maintain key
person life insurance on any of its executive officers.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
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 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 1 million
31
<PAGE>
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 1 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 1 million
Common Shares each for the purpose of attracting new talent to the Company.
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 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
32
<PAGE>
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, 1998, options to purchase 3,489,981 Common Shares
(1,942,000 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 2008. As of that date, the Company had granted
restricted stock awards of 214,500 (8,775 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.
Item 13. Interest of Management in Certain Transactions
None
PART II
Item 14. Description of Securities to be Registered
None
PART III
Item 15. Defaults Upon Senior Securities
None
Item 16. Changes in Securities and Changes in Security for Registered
Securities
None
PART IV
Item 17. Financial Statements
None
Item 18. Financial Statements
The Financial Statements, included under Item 19 - "Financial Statements and
Exhibits", are incorporated herein by reference.
Item 19. Financial Statements and Exhibits
(a) Financial Statements
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1997 and 1996.
33
<PAGE>
3. Consolidated Statements of Operations and Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
4. Notes to Consolidated Financial Statements
(b) EXHIBITS
None
34
<PAGE>
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: /s/ Steve Kronengold
--------------------
Steve Kronengold
General Counsel
Date: June 1, 1999
35
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
IN U.S. DOLLARS
INDEX
Page
--------------
Report of Independent Auditors F - 2
Consolidated Balance Sheets F - 3 - F - 4
Consolidated Statements of Operations F - 5
Statements of Changes in Shareholders' Equity F - 6 - F - 8
Consolidated Statements of Cash Flows F - 9 - F - 10
Notes to the Financial Statements F - 11 - F - 31
- - - - - - - -
<PAGE>
ERNST & YOUNG [LOGO]
KOST FORER & GABBAY
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
SAPIENS INTERNATIONAL CORPORATION N.V.
We have audited the consolidated balance sheets of Sapiens
International Corporation N.V. and its subsidiaries as of December 31, 1998
and 1997, 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, 1998. 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 generally accepted
auditing standards 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 present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1998 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States.
Tel-Aviv, Israel KOST FORER and GABBAY
January 25, 1999 Certified Public Accountants (Israel)
A Member of Ernst & Young International
F - 2
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1998
--------------- ---------------
U.S. dollars in thousands
-------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,338 $ 20,222
Short-term investments including amounts pledged of
$8,500 as of December 31, 1998
(Note 3 and Note 10) 12,803 12,826
Trade receivables (net of allowance for
doubtful accounts of $ 1,278 and $2,057
as of December 31, 1997 and 1998, respectively) 14,091 16,351
Other receivables and prepaid expenses 3,204 4,180
--------------- ---------------
Total current assets 40,436 53,579
--------------- ---------------
Property and equipment, net (Note 4) 4,428 5,068
--------------- ---------------
Other assets:
Capitalized software development costs, net
of accumulated amortization of $7,795 and
$10,854 as of December 31, 1997 and 1998,
respectively (Note 5a) 9,114 9,080
Goodwill, net of accumulated amortization
of $154 and $364 as of December 31, 1997
and 1998, respectively (Note 5c) 446 3,077
Other, net of accumulated amortization of $1,825 and
$2,207 as of December 31, 1997
and 1998, respectively (Note 5b) 3,224 2,520
--------------- ---------------
Total other assets 12,784 14,677
--------------- ---------------
Total assets $ 57,648 $ 73,324
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 3
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998
----------------- ---------------
U.S. dollars in thousands
-----------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Short-term bank debt (Note 7a) $ 6,935 $ 5,182
Current maturities of long-term debt (Note 7b) 950 92
Senior subordinated notes payable (Note 7b) - 8,743
Trade payables 2,448 3,092
Other liabilities and accrued expenses (Note 6) 8,560 12,401
Deferred revenues 1,481 3,041
----------------- ---------------
Total current liabilities 20,374 32,551
----------------- ---------------
Long-term liabilities:
Long-term debt (Note 7b) 16,088 7,273
Other long-term liabilities (Note 8) 1,117 385
----------------- ---------------
Total long-term liabilities 17,205 7,658
----------------- ---------------
Shareholders' equity:
Cumulative convertible
preferred shares (authorized 608,000 par
value Dutch Guilder 1) issued and
outstanding 6,200 at December 31, 1997
and 5,250 at December 31, 1998 4 4
Common shares (authorized
40,000,000 par value Dutch Guilder 1);
1997 - 18,534,000 issued and 18,321,000
outstanding; 1998 - 20,264,423 issued 7,200 7,996
and 20,051,656 outstanding
Additional paid-in capital 59,878 63,494
Treasury shares (2,423) (2,423)
Common shares accrued as dividends 335 720
Accumulated other comprehensive income (loss) (1,052) (2,055)
Accumulated deficit (43,873) (34,621)
----------------- ---------------
Total shareholders' equity 20,069 33,115
----------------- ---------------
Total liabilities and shareholders' equity $ 57,648 $ 73,324
================= ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 4
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF OPERAIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1996 1997 1998
------------ -------------- -------------
U.S. dollars in thousands
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Products $ 13,699 $ 20,507 $ 37,181
Consulting and other services 25,288 24,057 33,799
------------ -------------- -------------
Total revenues 38,987 44,564 70,980
------------ -------------- -------------
Cost of revenues:
Products 1,473 4,473 12,690
Consulting and other services 16,511 15,507 21,611
------------ -------------- -------------
Total cost of revenues 17,984 19,980 34,301
------------ -------------- -------------
Gross profit 21,003 24,584 36,679
Operating expenses:
Research and development, net (Note 15c) 2,429 3,258 4,112
Selling, general and administrative 16,781 16,316 22,921
------------ -------------- -------------
Total operating expenses 19,210 19,574 27,033
------------ -------------- -------------
Operating income 1,793 5,010 9,646
Financial income, net 198 107 457
Other expenses, net (Note 14a) (8,842) (417) (328)
------------ -------------- -------------
Income (loss) before income taxes (6,851) 4,700 9,775
Income taxes 35 57 55
------------ -------------- -------------
(6,886) 4,643 9,720
Share in losses of equity investments 150 203 -
Minority interests in losses 317 104 15
------------ -------------- -------------
Income (loss) before extraordinary item (6,719) 4,544 9,735
Extraordinary item-gain on early extinguishment
of debt (Note 15d and 15e) 96 - -
------------ -------------- -------------
Net income (loss) $ (6,623) $ 4,544 $ 9,735
============ ============== =============
Dividends on preferred shares (Note 12h) $ (1,211) $ (2,406) $ (645)
============ ============== =============
Net income (loss) to shareholders of common shares $ (7,834) $ 2,138 $ 9,090
============ ============== =============
Basic earnings (loss) per share
before extraordinary item $ (0.63) $ 0.14 $ 0.48
============ ============== =============
Diluted earnings (loss) per share
before extraordinary item $ (0.63) $ 0.12 $ 0.43
============ ============== =============
Basic earnings (loss) per share (Note 15e) $ (0.62) $ 0.14 $ 0.48
============ ==============
=============
Diluted earnings (loss) per share (Note 15e) $ (0.62) $ 0.12 $ 0.43
============ ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 5
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned
compensation
Additional from
Preferred Common paid-in Treasury restricted
shares shares capital shares share awards
----------- ----------- ------------ ----------- ---------------
U.S. dollars in thousands
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 $ 25 $ 4,166 $ 48,095 $ (2,283) $ (578)
Comprehensive income (loss):
Net loss - - - - -
Other comprehensive income (loss):
Unrealized gains on securities,
net of reclassification
adjustment - - - - -
Foreign currency translation - - - - -
Other comprehensive loss - - - - -
Comprehensive loss - - - - -
Issue of Series A preferred shares 1 - 104 - -
Issue of Series B preferred shares
in settlement of class action 203 - 3,297 - -
Issue of common shares in settlement
of class action - 322 1,678 - -
Conversion of Series A preferred
shares to common shares - 50 (50) - -
Purchase of treasury shares - - - (140) -
Employee stock options
exercised - 15 42 - -
Cancellation of restricted
share awards - - (578) - 578
Compensation expense recorded on
issue of warrants - - 20 - -
Cash dividends on preferred shares - - - - -
----------- ----------- ------------ ----------- ---------------
Balance as of December 31, 1996 $ 229 $ 4,553 $ 52,608 $ (2,423) $ -
=========== =========== ============ =========== ===============
<CAPTION>
Accumulated
other
comprehensive
income Accumulated
(loss) deficit Total
--------------- -------------- ----------
-----------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1996 $ (668) $ (39,216) $ 9,541
Comprehensive income (loss):
Net loss - (6,623) (6,623)
----------
Other comprehensive income (loss):
Unrealized gains on securities,
net of reclassification
adjustment 26 - 26
Foreign currency translation (84) - (84)
----------
Other comprehensive loss - - (58)
----------
Comprehensive loss - - (6,681)
----------
Issue of Series A preferred shares - - 105
Issue of Series B preferred shares
in settlement of class action - - 3,500
Issue of common shares in settlement
of class action - - 2,000
Conversion of Series A preferred
shares to common shares - - -
Purchase of treasury shares - - (140)
Employee stock options
exercised - - 57
Cancellation of restricted
share awards - - -
Compensation expense recorded on
issue of warrants - - 20
Cash dividends on preferred shares - (1,211) (1,211)
--------------- -------------- ----------
Balance as of December 31, 1996 $ (726) $ (47,050) $ 7,191
=============== ============== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 6
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Additional shares
Preferred Common paid-in Treasury accrued as
shares shares capital shares dividends
----------- ----------- --------------- ----------- --------------
U.S. dollars in thousands
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 $ 229 $ 4,553 $ 52,608 $ (2,423) $ -
Comprehensive income (loss):
Net income - - - - -
Other comprehensive income
(loss):
Unrealized gains on
securities, net of - - - - -
reclassification adjustment
Foreign currency translation - - - - -
Other comprehensive loss - - - - -
Comprehensive income
Issue of Series D1, D2 and E
preferred shares 4 - 7,770 - -
Conversion of preferred shares to
common shares:
Series "A" (25) 1,660 (1,635) - -
Series "B" (204) 296 (92) - -
Series "D1" - 179 (179) - -
Series "E" - 32 (32) - -
Common shares issued in
acquisition of distribution - 35 415 - -
rights
Additional shares issued in class
action (Note 14a) - 65 (65) - -
Common shares issued as private
placement expenses - 77 (77) - -
Employee stock options exercised - 283 898 - -
Compensation expense recorded
on issue of warrants - - 47 - -
Cash dividends on preferred shares - - - - -
Common shares issued as
dividends on Series B, D1, and E
preferred shares - 20 220 - -
Common shares accrued as
dividends on preferred shares - - - - 335
----------- ----------- --------------- ----------- --------------
Balance as of December 31, 1997 $ 4 $ 7,200 $ 59,878 $ (2,423) $ 335
=========== =========== =============== =========== ==============
<CAPTION>
Accumulated
other
comprehensive
income Accumulated
(loss) deficit Total
--------------- -------------- ------------
------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1997 $ (726) $ (47,050) $ 7,191
Comprehensive income (loss):
Net income - 4,544 4,544
------------
Other comprehensive income
(loss):
Unrealized gains on
securities, net of - - 3
reclassification adjustment
Foreign currency translation - - (329)
------------
Other comprehensive loss (326) - (326)
------------
Comprehensive income 4,218
------------
Issue of Series D1, D2 and E
preferred shares - - 7,774
Conversion of preferred shares to
common shares:
Series "A" - - -
Series "B" - - -
Series "D1" - - -
Series "E" - - -
Common shares issued in
acquisition of distribution - - 450
rights
Additional shares issued in class
action (Note 14a) - - -
Common shares issued as private
placement expenses - - -
Employee stock options exercised - - 1,181
Compensation expense recorded
on issue of warrants - - 47
Cash dividends on preferred shares - (792) (792)
Common shares issued as
dividends on Series B, D1, and E
preferred shares - (240) -
Common shares accrued as
dividends on preferred shares - (335) -
--------------- -------------- ------------
Balance as of December 31, 1997 $ (1,052) $ (43,873) $ 20,069
=============== ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 7
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Additional shares
Preferred Common paid-in Treasury accrued as
shares shares capital shares dividends
----------- ----------- --------------- ----------- --------------
U.S. dollars in thousands
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1998 $ 4 $ 7,200 $ 59,878 $ (2,423) $ 335
Comprehensive income (loss):
Net income - - - - -
Other comprehensive income
(loss):
Unrealized losses on
securities, net of - - - - -
reclassification adjustment
Foreign currency translation - - - - -
Other comprehensive loss - - - - -
Comprehensive income
Conversion of preferred shares to
common shares:
Series "D1" - 39 (39) - -
Series "D2" - 71 (71) - -
Employee stock options exercised - 500 1,821 - -
Warrants exercised - 39 293 - -
Compensation expense recorded
on issue of warrants - - 27 - -
Common shares issued as dividends
on Series D1, and D2 preferred - 12 86 - (98)
shares
Common shares accrued as
dividends on preferred shares - - - - 483
Shares issued in connection to
prior security issuance - 24 (24) - -
Shares issued in connection to
purchase of acquisitions - 111 1,523 - -
----------- ----------- --------------- ----------- --------------
Balance as of December 31, 1998 $ 4 $ 7,996 $ 63,494 $ (2,423) $ 720
=========== =========== =============== =========== ==============
<CAPTION>
Accumulated
other
comprehensive
income Accumulated
(loss) deficit Total
--------------- -------------- ------------
------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1998 $ (1,052) $ (43,873) $ 20,069
Comprehensive income (loss):
Net income - 9,735 9,735
-----------
Other comprehensive income
(loss):
Unrealized losses on
securities, net of - - (51)
reclassification adjustment
Foreign currency translation - - (952)
-----------
Other comprehensive loss (1,003) - (1,003)
-----------
Comprehensive income 8,732
-----------
Conversion of preferred shares to
common shares:
Series "D1" - - -
Series "D2" - - -
Employee stock options exercised - - 2,321
Warrants exercised - - 332
Compensation expense recorded
on issue of warrants - - 27
Common shares issued as dividends
on Series D1, and D2 preferred - - -
shares
Common shares accrued as
dividends on preferred shares - (483) -
Shares issued in connection to
prior security issuance - - -
Shares issued in connection to
purchase of acquisitions - - 1,634
--------------- -------------- -----------
Balance as of December 31, 1998 $ (2,055) $ (34,621) $ 33,115
=============== ============== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 8
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1997 1998
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,623) $ 4,544 $ 9,735
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,075 3,834 5,364
Amortization on deferred gain on sale - leaseback transaction (169) (276) (223)
Gain in value (and accrued interest) on short-term
investments (134) (636) (452)
Share in losses of equity investments 150 203 -
Loss (gain) on disposal of property and equipment 24 217 (93)
Writedown of capitalized software development costs 101 - -
Compensation expense related to restricted
share awards and warrants issued 20 47 27
Gain on early extinguishment of debt (96) - -
Issuance of shares in respect of class action settlement 5,500 - -
Changes in receivables and prepaid expenses 1,204 (4,133) (928)
Changes in payables and other liabilities (5,058) (4,178) 4,180
------------- ------------- -------------
Net cash provided by (used in) operating activities (2,006) (378) 17,610
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (545) (1,560) (2,404)
Increase in capitalized software development costs (3,000) (3,092) (3,025)
Purchase of short-term investments (5,375) (3,280) (4,620)
Proceeds from sale of short-term investments 5,489 4,787 4,322
Proceeds from sale of property and equipment 369 206 11
Purchase of interest in and loans to affiliates (131) - -
Purchase of other assets - - (613)
Cash paid for purchase of SAIC
(excluding cash and cash equivalents)(1) - - (1,002)
------------- ------------- -------------
Net cash provided by (used in) investing activities (3,193) (2,939) (7,331)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 9
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1997 1998
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividends on preferred shares (914) (792) -
Amortization of bond issuance costs 90 142 141
Proceeds received on exercise of options 57 1,181 2,199
Net proceeds from issuance of preferred shares - 7,774 -
Increase (decrease) in short-term bank debt 3,045 (99) (1,753)
Payment on long-term liabilities (1,183) (1,098) (930)
Payments received on long-term notes receivable - - 224
------------- ------------- -------------
Net cash provided by (used in) financing activities 1,095 7,108 (119)
------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents (84) (329) (276)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (4,188) 3,462 9,884
Cash and cash equivalents at beginning of year 11,064 6,876 10,338
------------- ------------- -------------
Cash and cash equivalents at end of year $ 6,876 $ 10,338 $ 20,222
============= ============= =============
(1) The net fair value of the assets acquired of SAIC
(see Note 1b) was as follows:
Working capital deficiency (excluding cash and cash
equivalents) (215)
Fixed assets 10
Excess of cost over net fair values upon acquisition 2,491
-------------
2,286
Less amounts financed by the issuance of shares
(see Note 12g) (1,284)
-------------
$ 1,002
=============
</TABLE>
F - 10
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1997 1998
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,645 $ 1,758 $ 1,055
============= ============= =============
Income taxes $ 227 $ 146 $ 407
============= ============= =============
Non-cash transactions:
Issue of cumulative convertible preferred shares in the
framework of the Exchange Offer $ 105 $ - $ -
============= ============= =============
Issue of common shares in exchange for distribution rights $ - $ 450 $ -
============= ============= =============
Investment in affiliate in exchange for reduction of
debt $ - $ 104 $ -
============= ============= =============
Common shares accrued as dividends $ 297 $ 335 $ 483
============= ============= =============
Common shares issued as dividends on preferred shares $ - $ 240 $ 98
============= ============= =============
Repurchase of common shares in exchange for forgiveness of debt
$ 140 $ - $ -
============= ============= =============
Issue of common shares in a purchase of subsidiary $ - $ - $ 1,634
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 11
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: BUSINESS AND ORGANIZATION
a. General:
Sapiens is a leading provider of enterprise-wide
solutions for the rapid development of scaleable
mission-critical software applications. The Company
provides comprehensive software solutions that
substantially improve software developer productivity,
reduce the cost of building and maintaining software
applications, and preserve investment in legacy systems.
These solutions integrate the Company's core rule-based
object technology; efficient rapid application
development (RAD) methodology; project management skills
and comprehensive consulting expertise. The Company's
solutions also are targeted at specialized software
redevelopment problems, such as those related to the
"year 2000" and the adoption of a single European
currency.
b. Acquisition of companies:
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 of costs related to the acquisition) of which 51%
was paid in cash and 49% in Sapiens common stock
(including 60,000 shares of common stock set aside in
escrow as a contingent payment). An amount of $ 2,000 out
of the total acquisition cost was attributed to goodwill
and is being amortized over its estimated useful life.
The acquisition agreement called for payment of an
additional amount conditioned upon the actual performance
of SAIC. Such payment will be recorded as additional
goodwill, when it will become probable.
Pro-forma information in accordance with APB 16 has not
been provided as the revenues of SAIC for 1997 and 1998
were not material in relation to total consolidated
revenues.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
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.
F-12
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
b. Financial statements in U.S. dollars:
The currency of the primary economic environment in which
the operations of the Company and most of its
subsidiaries are conducted is the U.S. dollar ("dollar").
Thus the dollar is the functional currency of the Company
and most of its subsidiaries.
For the Company and its subsidiaries whose functional
currency is the dollar, transactions and balances
denominated in dollars are presented at their original
amounts. Gains and losses arising from non-dollar
transactions and balances are included in the
determination of net income or loss.
The financial statements of certain subsidiaries whose
functional currency is their local currency are
translated into dollars in accordance with the principles
set forth in Statement No. 52 ("SFAS No. 52") of the
Financial Accounting Standards Board of the United
States. Assets and liabilities are translated using the
year end rate of exchange; results of operations are
translated at average exchange rates. The resulting
aggregate translation adjustments are reported as a
component of shareholders' equity.
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.
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:
The Company applies SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
Available-for-sale securities are carried at fair value.
Unrealized gains and losses for available-for-sale
securities are presented as a separate component of
shareholders' equity as other comprehensive income
(loss). Realized gains and losses are determined using
specifically identified costs.
f. Property and equipment, net:
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful
lives of the assets:
Equipment and furniture 4 - 15 years
Computers and software 3 - 5 years
Motor vehicles 4 - 6 years
Leasehold improvements (over the shorter of the term
of the lease or the estimated
useful life of the asset)
F-13
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
g. Capitalized software development costs:
Research and development costs incurred in the process of
software development before establishment of
technological feasibility are charged to income as
incurred. Based on the Company's product development
process, technological feasibility is established upon
the completion of a detailed program design. Costs
incurred subsequent to the establishment of technological
feasibility are capitalized.
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.
h. Other assets:
Other assets are stated at cost. Amortization is computed
using the straight-line method as follows:
Prepaid royalties 15 years
Distribution rights 7 years
Bond issue costs (over the duration of the
debt)
Acquired technology 8 years
i. Goodwill and other intangible assets:
Goodwill is amortized by the straight-line method over a
period of up to ten 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 asset. Any impairment loss is
recognized in the statement of operations.
j. Revenue recognition:
Product revenues include software license sales,
fixed-price contracts (which include the sale of software
technology and services) and fees for the use of
software. Revenues earned under software licensing
agreements with end-users are recognized when evidence
exists that the software has been delivered, payment is
fixed or determinable, and due within one year,
collectibility is probable, and there are no significant
obligations remaining. Revenues from fixed-price
contracts are recognized using the 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. Fees for the use of
software are recognized when earned.
F-14
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consulting and other services revenue includes
consulting, training and post contract maintenance
services. Revenues from consulting and training services
are recognized ratably over the contractual period or as
services are performed. Maintenance revenues are
recognized ratably over the term of the agreement.
Deferred revenues are comprised principally of advance
payments under maintenance contracts.
k. Advertising expenses:
Advertising expenses are charged to income as incurred.
l. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for
funding of marketing activities and for research and
development are recognized at the time the Company is
entitled to such grants on the basis of the related costs
incurred.
m. Income taxes:
Deferred tax assets and liabilities are recognized for
the estimated future tax consequences of temporary
differences and income tax credits. Temporary differences
result primarily from differences between the tax bases
of assets and liabilities and their financial reporting
amounts. Deferred tax assets and liabilities are measured
by applying enacted statutory tax rates applicable to the
future years in which deferred tax assets or liabilities
are expected to be settled or realized. Valuation
allowances are established to reduce deferred tax assets
to the amounts expected to be realized. Income tax
expense consists of the taxes payable for the current
period and the change during the period in deferred tax
assets and liabilities.
n. Concentrations of credit risk:
Financial instruments that potentially subject the
Company to concentrations of credit risk consist
principally of cash, short-term investments, trade
receivables and notes receivable. The Company's cash and
cash equivalents are invested in deposits with major
international banks. 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 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.
F-15
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
o. 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, receivables,
short-term investments, long and short-term loans and
accounts payable approximate fair values.
p. Derivatives:
Gains or losses related to qualifying hedges of firm
commitments are deferred and included as part of the
measurement of the results of the underlying hedged
transactions.
q. Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share is computed based on the
weighted average number of common shares outstanding
during each year including contingent shares. Diluted
earnings per share is computed based on the weighted
average number of common shares outstanding during each
year, plus the dilutive potential of common shares
considered outstanding during the year, in accordance
with SFAS No. 128, "Earnings Per Share".
r. Stock-based compensation:
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), in accounting for its employee
stock options plans. Under APB 25, when the exercise
price of the Company's employee stock options equals the
market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Company has adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" with respect to warrants issued
to non-employees. SFAS No. 123 requires use of option
valuation models to measure the fair value of the warrants
at the grant date.
s. Comprehensive income:
As of January 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of
comprehensive income and its components; however, the
adoption of this statement has no impact on the Company's
net income or shareholders' equity. With respect to the
Company's financial statements, SFAS No. 130 requires
unrealized gains or losses on the Company's
available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year
financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
F-16
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
t. Segment reporting:
The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", in
1997. SFAS No. 131 supercedes SFAS No. 14, replacing the
"industry segment approach" with the "management
approach", whereby companies report financial and
descriptive information about their operating segments.
Operating segments are revenue-producing components of
the enterprise for which separate financial information
is produced internally and are subject to evaluation by
the chief operating decision-maker in deciding the
allocation of resources to segments.
u. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring
that every derivative instrument (including certain
derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be
recognized currently in earnings, unless specific hedge
accounting cirteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the
income statement, and requires that a company must
formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June
15, 1999, and must be applied to instruments issued,
acquired, or substantively modified after December 31,
1997. The Company does not expect the adoption of the
accounting pronouncement to have a material effect on its
financial position or results of operations.
v. Reclassification:
Certain prior year amounts have been reclassified to
conform with the current year's presentation.
F-17
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3: SHORT-TERM INVESTMENTS
At December 31, 1997 and 1998, a portion of 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 1996, 1997
and 1998 totaled $209, $343 and $ 328, respectively. Gross
realized losses on sales of these securities in 1996, 1997 and
1998 totaled $189, $46 and $ 63, 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, 1997 and 1998,
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------------- ------------- ------------- --------------
U.S. dollars in thousands
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. treasury securities $ 3,732 $ - $ - $ 3,732
Non-U.S. corporate debt
securities 9,068 85 (82) 9,071
-------------- ------------- ------------- --------------
$ 12,800 $ 85 $ (82) $ 12,803
============== ============= ============= ==============
December 31, 1998:
U.S. treasury securities $ 3,922 $ - $ - $ 3,922
Non-U.S. corporate debt
securities 8,541 394 (31) 8,904
-------------- ------------- ------------- --------------
$ 12,463 $ 394 $ (31) $ 12,826
============== ============= ============= ==============
The scheduled maturities of available-for-sale marketable
securities as of December 31, 1998 are as follows:
<CAPTION>
Amortized Estimated
cost Fair value
---------------- -----------------
U.S. dollars in thousands
--------------------------------------
<S> <C> <C>
Due within one year $ 6,729 $ 7,033
Due after one year through five years 5,591 5,641
Due after five years 143 152
---------------- -----------------
$ 12,463 $ 12,826
================ =================
</TABLE>
F-18
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4: PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated
Cost depreciation
---------------------------- ----------------------------
December 31 December 31
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
U.S. dollars in thousands
------------------------------------------------------------
<S> <C> <C> <C> <C>
Equipment and furniture $ 1,856 $ 2,103 $ 859 $ 967
Computers and software 6,823 7,858 4,413 5,063
Motor vehicles 419 351 248 234
Leasehold improvements 1,246 1,486 396 466
------------ ------------ ------------ ------------
$ 10,344 $ 11,798 $ 5,916 $ 6,730
============ ============ ============ ============
</TABLE>
Depreciation expense totaled $1,588, $1,476 and $1,670 for the
years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 5: OTHER LONG-TERM ASSETS
a. Amortization expense for capitalized software development
costs for 1996, 1997 and 1998 was $1,256, $2,129 and
$3,059, respectively. Amortization expense is included in
cost of products.
b. Other assets, net of amortization, are comprised of the
following:
<TABLE>
<CAPTION>
Accumulated
Cost amortization
----------------------------- -----------------------------
December 31 December 31
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------- ------------
U.S. dollars in thousands
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Note receivable (1) $ 896 $ - $ - $ -
Prepaid royalties 2,001 2,001 629 761
Bond issuance costs 1,279 1,279 996 1,137
Other assets 873 1,447 200 309
------------ ------------ ------------- ------------
$ 5,049 $ 4,727 $ 1,825 $ 2,207
============ ============ ============= ============
</TABLE>
(1) Reclassified in 1998 to other receivables due to
maturity.
Amortization of other assets charged to expense was $252,
$313 and $382 for the years 1996, 1997 and 1998,
respectively.
F-19
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
c. Goodwill amortization amounted to $60, $60 and $210 for the
years 1996, 1997 and 1998, respectively.
NOTE 6: OTHER LIABILITIES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998
-------------- --------------
U.S. dollars in thousands
--------------------------------
<S> <C> <C>
Employee and related payroll accruals $ 2,798 $ 2,772
Sales and other taxes payable 2,174 3,420
Interest payable 115 186
Accrued expenses 3,473 6,023
-------------- --------------
$ 8,560 $ 12,401
============== ==============
</TABLE>
NOTE 7: DEBT
a. Short-term debt:
The Company's short-term debt is comprised of revolving
credit agreements, with maturities of less than three
months. Borrowings under these agreements bear interest
at rates ranging between the London Interbank Offered
Rate plus 1.25% to plus 3% and on New Israeli Shekel
("NIS") borrowings, generally, at the prime rate of
interest in Israel plus 1%. The agreements require that
the Company pledge cash or short-term investments as
collateral for its borrowings under these agreements.
(See Note 10).
In 1998, the Company established credit line facilities
for borrowings of up to a total of $ 10 million. Under
the terms of these credit line agreements, the Company
is not required to pledge assets, but 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%.
b. Long-term debt:
<TABLE>
<CAPTION>
December 31,
Rate of --------------------------
interest Maturity 1997 1998
----------- ------------------ ----------- ------------
U.S. dollars in
% thousands
----------- --------------------------
<S> <C> <C> <C> <C>
Convertible subordinated notes September 20,
("Old Notes" - conversion price $ 32 2003
per common share) 5 $ 6,930 $ 6,930
Senior subordinated notes December 31,
("New Notes") (1) 10 1999 9,538 -
Capital lease obligations (Note 9) 381 311
Other loans 5 - 8 189 124
----------- ------------
17,038 7,365
Less - current maturities (950) (92)
----------- ------------
$ 16,088 $ 7,273
=========== ============
</TABLE>
(1) Reclassified to current maturities at December 31,
1998.
F-20
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Long-term debt maturities after December 31, 1998 are as follows
(U.S. dollars in thousands):
1999 $ 92
2000 70
2001 47
2002 47
Thereafter 7,017
--------------------
$ 7,273
====================
Interest expense was $ 1.0 million, $1.1 million and $ 1.0 million
for the years 1996, 1997 and 1998, respectively.
NOTE 8: OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998
-------------- --------------
U.S. dollars in thousands
---------------------------------
<S> <C> <C>
Deferred gain on sale - leaseback (1) $ 609 $ 385
Provision for losses of an affiliate 334 -
Other 174 -
-------------- --------------
$ 1,117 $ 385
============== ==============
</TABLE>
(1) In 1995, the Company entered into a sale-leaseback
transaction on a facility, which resulted in a gain of
$1,165. Under the sale-leaseback transaction, the Company
deferred and is amortizing the gain over the lease term
of five years. The Company has the option to renew the
lease for five additional years.
NOTE 9: COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company 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 that country.
In exchange for participation in the programs by the OCS,
the Company agreed to pay 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. 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.
As of December 31, 1998, the Company had a contingent
liability to pay royalties of approximately $ 11.4
million.
F-21
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
b. The Company leases 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>
1999 $ 1,600 $ 38
2000 1,625 42
2001 1,230 47
2002 919 47
2003 and thereafter - 138
-------------- ---------------
Total future minimum lease payments $ 5,374 312
==============
Less - amount representing interest 1
---------------
Principal payments remaining on capital lease obligations $ 311
===============
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and
1998 was $1,273, $1,218 and $1,358, respectively.
NOTE 10: SECURITY INTERESTS AND PLEDGES
In connection with the Senior Subordinated Notes, the Company
has pledged $ 3.4 million of its short-term investments in favor
of Chase Manhattan Bank.
The Company has also pledged $ 3.4 million of its short-term
investments as collateral for certain short-term debt.
All of the Company's leased assets are pledged to the finance
companies that provided the lease financing.
The Company also purchased bank guarantees in the amount of $
1.7 million as security for the building that was sold and
leased back in 1995.
NOTE 11: INCOME TAXES
At December 31, 1998, the Company had net operating loss
carryforwards for U.S. federal income tax purposes of
approximately $9,460, which are available to offset future
federal taxable income and expire in years 2008 to 2012 and tax
credits of $716, which generally expire in 2002 to 2010. In
addition, the Company had net operating loss carryforwards
relating to non-U.S. subsidiaries totaling approximately
$18,442, which are available to offset future taxable income.
Generally, such amounts expire in years 1999 to 2002, or, in
some cases, have no expiration dates.
F-22
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The subsidiaries incorporated in Israel have been granted
"Approved Enterprise" status which entitles them to a four-year
tax holiday beginning from the first year in which the companies
have accumulated taxable income.
The income tax effect of temporary differences that result in
recognition of deferred tax assets and liabilities at December
31, 1997 and 1998 are presented below.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
------------------------------- ------------------------------
Current Non-current Current Non-current
------------ -------------- ----------- ---------------
U.S. dollars in thousands
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating losses carryforward $ - $ 12,450 $ - $ 11,135
Tax credits carryforward - 716 - 716
Other temporary differences 356 147 613 196
------------ -------------- ----------- ---------------
Gross deferred tax assets 356 13,313 613 12,047
Less - valuation allowance (356) (13,313) (287) (12,047)
------------ -------------- ----------- ---------------
Net deferred tax asset (liability) $ - $ - $ 326 $ -
============ ============== =========== ===============
The Company has provided a valuation allowance against
substantially all of the deferred tax assets in respect of its
tax losses carryforward and other temporary differences due to a
history of losses and current uncertainty concerning its ability
to realize these deferred tax assets in the future.
Provisions for income tax expense are comprised of the following:
<CAPTION>
Year ended December 31,
-------------------------------------------------
1996 1997 1998
-------------- -------------- -------------
U.S. dollars in thousands
-------------------------------------------------
<S> <C> <C> <C>
Current (foreign) $ 127 $ 141 $ 381
Deferred (foreign) (92) (84) (326)
-------------- -------------- -------------
$ 35 $ 57 $ 55
============== ============== =============
</TABLE>
The Company is not subject to income taxes in the Netherlands
Antilles. All of the Company's 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, 1996, 1997 and 1998, does not include the recognition of
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.
F-23
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: SHAREHOLDERS' EQUITY
a. In connection with the Exchange Offer, (see Note 15d),
the Company issued 39,390 and 350 shares of Series A
convertible preferred shares on December 21, 1995 and on
June 30, 1996, respectively. As of December 31, 1997 all
of the Series A convertible preferred shares had been
converted to common shares at the conversion price of $
3.50 per share.
b. In December 1996, in connection with the Class Action
Settlement Stipulation (see Note 14a), the Company issued
554,017 common shares and 350,000 Series B convertible
preferred shares (with a $ 10 principal and liquidation
value). The Company issued an additional 134,155 common
shares in January 1997 pursuant to an adjustment
provision in the Settlement Stipulation. As of December
31, 1997, all of the Series B convertible preferred
shares had been converted to common shares at the
conversion price of $ 5.91 per share.
c. In February 1997, the Company completed a $ 4,000 private
placement of 4,000 of Series D1 convertible preferred
shares ("the Series D1 preferred shares"). The Series D1
preferred shares are convertible into the Company's common
shares at a price not to exceed the lower of $ 5.95 per
share or 15% below the market value of the common share
during a specified period of time. For each common share
issued to the investors, upon conversion of their Series D1
shares, the investors will receive a warrant to purchase
0.5 common shares at an exercise price of $ 4.28 per share.
The Company has the option to redeem the shares in cash or
in common shares at the end of five years from the date of
issuance.
In March 1997, the Company issued an additional 2,000 of
Series E convertible preferred shares, ("the Series E
preferred shares") for $2,000. The Series E preferred
shares are convertible into the Company's common shares
at a price not to exceed the lower of $4.50 per share or
15% below the market value of the common share during a
specified period of time. For each common share issued to
the investors upon conversion of their Series E preferred
shares, the investors will receive a warrant to purchase
0.5 common shares at an exercise price of $ 4.75 per
share. The Company has the option to redeem the shares in
cash or in common shares at the end of five years from
the date of issuance.
In August 1997, the Company issued an additional 2,000 of
Series D2 convertible preferred shares ("the Series D2
preferred shares") for $2,000. The Series D2 preferred
shares are convertible into the Company's common shares
at a price not to exceed the lower of $ 7.30 per share or
15% below the market value of the common share during a
specified period of time. For each common share issued to
the investors upon conversion of their Series D2
preferred shares, the investors will receive a warrant to
purchase 0.5 common shares at an exercise price of $ 9.73
per share. The Company has the option to redeem the
shares in cash or in common shares at the end of five
years from the date of issuance.
As of December 31, 1998, 1,750 Series D1, 700 Series D2
and 300 Series E preferred shares had been converted to
common shares at the respective conversion prices and, as
a result, 644,566 common shares and warrants to purchase
322,283 common shares were issued, of which 76,095 were
exercised in 1998 at an exercise price of $ 4.28.
F-24
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
d. The following is a summary of the preferred shares as of
December 31, 1998 giving effect to the above changes:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
U.S. dollars in
Number of shares thousands
--------------------------------------- -----------------
Authorized Outstanding Fair Value
---------------- ------------------ -----------------
<S> <C> <C> <C>
Series A 100,000 - -
Series B 500,000 - -
Series D1 4,000 2,250 $ 2,250
Series D2 2,000 1,300 1,300
Series E 2,000 1,700 1,700
---------------- ------------------ -----------------
608,000 5,250 $ 5,250
================ ================== =================
</TABLE>
e. In 1997, the Company issued 144,000 common shares to the
placement agents in connection with the private placement
transactions.
f. In February 1998, the Company issued 50,000 common shares
in connection with the purchase of 80% of InsureTech
Alternatives Inc.
g. In July 1998, the Company issued 171,300 common shares in
connection with the purchase of SAIC (see Note 1b).
h. Dividends:
In 1996 and in 1997 the Company paid dividends on its
Series A and Series B convertible preferred shares in the
amount of $ 1,211, and $ 967, respectively. In 1996 these
dividends were paid in cash and in 1997, $ 792 was paid
in cash and $ 175 was paid by the issuance of 37,327
common shares.
Additionally in 1997, the Company issued 14,658 common
shares in respect of $ 65 in dividends on its Series D1
and E preferred shares. These dividends are only paid at
the time of conversion of the Series D1 and E preferred
shares.
In 1998, the Company accrued dividends to be paid in the
form of common stock on its series D1, D2 and E preferred
stock, in the amount of $ 483, of which $ 61, was paid by
the issuance of 14,310 common shares. Additionally, the
Company issued 9,539 common shares in respect of $ 37 in
dividends, which were accrued in 1997.
Included in the amount of dividends on preferred shares
in 1997 and in 1998 is the amortization of the discount
to the market price on the conversion of convertible
shares at the date of the grant given to Series D1, D2
and E preferred shareholders in the amount of $ 1,038 and
$ 162, respectively. Combined, this amount represents 15%
of the market value of the share at the date of the grant
of the convertible securities, multiplied by the number
of convertible securities issued. This amount is a charge
for Earnings Per Share calculations only.
F-25
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
i. Stock option plan:
Stock options granted under the Company's 1992 Stock
Option and Incentive Plan ("the Plan") are exercisable at
the fair market value at 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. In January 1997 and in October 1998, the Company
increased the number of shares available for grant by an
additional 1,000,000 shares and approved grants of such
shares, on each of those dates respectively.
The new grants vest in equal installments over a period
of four years. Options granted to certain management
members include accelerated vesting provisions in the
event the Company achieves various performance milestones
based on net operating profit excluding extraordinary
items.
In 1998, 992,950 employee options to purchase common
shares were exercised, and the Company received proceeds
in the amount of approximately $2.2 million.
A summary of the stock options activities in 1996, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------------
1996 1997 1998
-----------------------------------------------------------------------------------
Exercise Exercise Exercise
Amount price Amount price Amount price
----------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 2,143,169 $ 2.25 1,803,456 $ 2.25 3,034,631 $ 2.25-2.68
Granted 142,625 $ 2.25 1,827,900 $ 2.25-2.68 1,547,500 $ 3.375-6.875
Exercised (25,250) $ 2.25 (504,650) $ 2.25 (992,950) $ 2.25-2.68
Canceled (457,088) $ 2.25 (92,075) $ 2.25 (99,200) $ 2.25-2.68
----------- --------- ------------ -------------- ------------ --------------
Outstanding at
December 31 1,803,456 $ 2.25 3,034,631 $ 2.25 - 2.68 3,489,981 $ 2.25-6.875
=========== ========= ============ ============== ============ ==============
</TABLE>
The amount of options exercisable as of December 31, 1996,
1997 and 1998 was 694,549, 1,884,507 and 2,695,000,
respectively.
The weighted average exercise price of the options
outstanding at December 31, 1996, 1997 and 1998 was
$2.25, $ 2.39 and $4.05, respectively, with a weighted
average expected life of 8 years.
F-26
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under SFAS No. 123, pro forma information regarding net
income and earnings 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 1996, 1997
and 1998: risk-free interest rates of 5%, dividend yields
of 0%, volatility factors of the expected market price of
the Company's common shares of 0.874, 0.517 and 0.465,
respectively and a weighted-average expected life of the
options of 10 years.
The Black-Scholes option pricing model was developed for
use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable.
In addition, option valuation models require subjective
assumptions, including the expected stock price
volatility. Because the Company's employee stock options
have characteristics significantly different from traded
options, and because changes in the subjective
assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do
not necessarily provide a reliable measure of the fair
value of its employee stock options.
The weighted-average fair value of the options at their
grant dates in 1996, 1997 and 1998 was $0.91, $1.83 and
$2.02, respectively.
For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the
options' vesting period. Because SFAS No. 123 is
applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully
reflected until the year 2002.
Pro forma information under SFAS No. 123:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1996 1997 1998
------------- -------------- -------------
U.S. dollars in thousands
--------------------------------------------------
<S> <C> <C> <C>
Net income (loss) as reported $ (7,834) $ 2,138 $ 9,090
============= ============== =============
Pro forma net income (loss) $ (8,341) $ 795 $ 6,713
============= ============== =============
Pro forma basic earnings (loss) per share $ (0.66) $ 0.05 $ 0.35
============= ============== =============
Pro forma diluted earnings (loss) per share $ (0.66) $ 0.04 $ 0.30
============= ============== =============
</TABLE>
j. Warrants:
In 1996 and in 1997, the Company granted warrants to
service providers at an exercise price ranging between $
2.00 to $ 3.50 per share (the market value of the share
at the grant date). As required by SFAS No. 123, these
warrants were measured at fair value (according to the
Black-Scholes option pricing model) and are expensed
accordingly.
The weighted-average fair value of the warrants granted in
1996 and in 1997 was $ 1.00 and $ 1.47, respectively.
F-27
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1998, 3,100 warrants
had been exercised.
NOTE 13: 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 $455, $ 497 and
$786 for 1996, 1997 and 1998, respectively.
NOTE 14: LEGAL PROCEEDINGS
a. Class Action:
On November 26, 1996, plaintiffs, the Company and certain
other defendants entered into a Stipulation of Settlement
("the Settlement Stipulation") pertaining to five
purported shareholder class actions entitled, In re
Sapiens Securities Litigation, 94 Civ. 3315 (RPP), which
were filed against the Company and certain of its
officers and directors in the United States District
Court for the Southern District of New York in May 1994
("the Securities Class Action"). The Settlement
Stipulation provided for the release of any claims
against the Company and the other settling defendants in
exchange for payment of $ 3 million in cash, $ 2 million
in common shares and $ 3.5 million in Cumulative
Convertible Series B Preferred Shares (with a principal
value of $ 10 per share). In November 1996, the Court
approved the Settlement Stipulation and the Company
recorded a charge in the amount of $ 8.8 million
including $ 300,000 in related costs, which are included
in "Other expenses, net".
b. On October 25, 1996, three holders of the Company's
convertible subordinated notes ("the Notes") commenced an
action against the Company in the United States District
Court for the Southern District of New York, captioned
Sloane Overseas Fund, Ltd., et al. v. Sapiens International
Corporation, et al., 95 Civ. 9165 (RPP) ("the Noteholder
Action"). The complaint in the Noteholder Action alleged
that the Company violated Section 10(b) of the Securities
Exchange Act of 1934 and Section 12(2) of the Securities
Act of 1933, and engaged in common law fraud. On July 30,
1997, the Company settled the Noteholder Action in
consideration for an aggregate settlement payment of
$200,000.
F-28
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15: SELECTED STATEMENT OF OPERATIONS DATA
a. Geographical information:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
U.S. dollars in thousands
-----------------------------------------------------
<S> <C> <C> <C>
1. Revenues:
U.K. $ 7,122 $ 9,200 $ 10,970
France 953 5,037 25,212
North America 13,045 14,168 17,765
Israel 5,883 7,756 8,285
All other 11,984 8,403 8,748
-------------- -------------- --------------
$ 38,987 $ 44,564 $ 70,980
============== ============== ==============
December 31,
----------------------------------
1997 1998
-------------- --------------
U.S. dollars in thousands
----------------------------------
2. Long-lived assets:
France $ 482 $ 2,996
Netherlands Antilles 3,285 2,324
Israel 12,445 13,426
All other 1,000 999
-------------- --------------
$ 17,212 $ 19,745
============== ==============
</TABLE>
b. Major customer:
In 1998, revenues from one customer represented
approximately 28% of the Company's total revenues that
year.
F-29
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
c. Research and development costs:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
U.S. dollars in thousands
-----------------------------------------------------
<S> <C> <C> <C>
Total costs $ 7,244 $ 7,974 $ 9,054
Less - capitalized software
development costs (3,000) (3,092) (3,025)
Less - royalty-bearing grants (1,815) (1,624) (1,917)
-------------- -------------- --------------
Research and development costs, net $ 2,429 $ 3,258 $ 4,112
============== ============== ==============
d. Extraordinary item - early extinguishment of debt:
The Company has realized an extraordinary gain resulting
from the Exchange Offer for its 5% convertible
subordinated notes (the "Old Notes"), due in 2003, in the
amount of $ 96 in 1996, net of income taxes. Under the
relevant tax provisions of Netherlands Antilles Law, the
Company incurred no taxes in connection with the Exchange
Offer.
e. Earnings (loss) per share data:
1. Basic earnings (loss) per share:
<CAPTION>
Year ended December 31,
----------------------------------------------
1996 1997 1998
------------ -------------- ------------
<S> <C> <C> <C>
Before extraordinary item $ (0.63) $ 0.14 $ 0.48
Extraordinary item 0.01 - -
------------ -------------- ------------
Basic earnings (loss) per share $ (0.62) $ 0.14 $ 0.48
============ ============== ============
2. Diluted earnings (loss) per share:
Before extraordinary item $ (0.63) $ 0.12 $ 0.43
Extraordinary item 0.01 - -
------------ -------------- -----------
Diluted earnings (loss) per share $ (0.62) $ 0.12 $ 0.43
============ ============== ===========
</TABLE>
F-30
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. The following table sets forth the computation of basic
and diluted earnings (loss) per share.
a) Numerator
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1997 1998
------------ -------------- ------------
U.S. dollars in thousands
----------------------------------------------
<S> <C> <C> <C>
Net income (loss) to shareholders of
common shares $ (7,834) $ 2,138 $ 9,090
Effect of dilutive securities:
Preferred share dividends (*) - - -
------------ -------------- ------------
Numerator for diluted earnings (loss)
per share - income (loss) available to
shareholders of common shares $ (7,834) $ 2,138 $ 9,090
============ ============== ============
*) The effect of the inclusion of the convertible
preferred shares in 1996, 1997 and 1998 would
be antidilutive.
b) Denominator:
<CAPTION>
Year ended December 31,
--------------------------------------------------
1996 1997 1998
------------- --------------- --------------
Number of shares in thousands
--------------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares 12,248 15,168 18,870
Contingent common stock to be
issued as dividends - 42 96
Contingent shares-class action
(see Note 14a) 353 - -
------------- --------------- --------------
Denominator for basic earnings per share 12,601 15,210 18,966
------------- --------------- --------------
Effect of dilutive securities:
Employee stock options - 2,397 1,860
Warrants issued to third parties - 344 561
Convertible preferred shares *) - - -
------------- --------------- --------------
Dilutive potential common shares - 2,741 2,421
------------- --------------- --------------
Denominator for diluted earnings per share -
adjusted weighted average shares, assumed
conversions and exercise of
options and/or warrants 12,601 17,951 21,387
============= =============== ==============
</TABLE>
*) The effect of the inclusion of the convertible
preferred shares in 1996, 1997 and 1998 would
be antidilutive.
-----------------
F-31
