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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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.
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(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
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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)
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Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
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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 21,464,511
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 [ ]Item 18
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TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Description of Property 21
Item 3. Legal Proceedings 21
Item 4. Control of Registrant 22
Item 5. Nature of Trading Market 23
Item 6. Exchange Controls and Other Limitations
Affecting Shareholders 24
Item 7. Taxation 24
Item 8. Selected Financial Data 25
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Item 10. Directors and Officers of Registrant 34
Item 11. Compensation of Directors and Officers 36
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries 37
Item 13. Interest of Management in Certain Transactions 38
Item 14. Description of Securities to be Registered 39
Item 15. Defaults Upon Senior Securities 39
Item 16. Changes in Securities and Changes in Security
For Registered Securities 39
Item 17. Financial Statements 39
Item 18. Financial Statements 39
Item 19. Financial Statements and Exhibits 39
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The "Company" includes, where appropriate, Sapiens International Corporation
N.V., its directly wholly owned subsidiary, Sapiens International Corporation
B.V., and each of their operating subsidiaries.
Item 1. Description of Business
OVERVIEW
Sapiens is a leading provider of enterprise-wide solutions for the rapid
development of scaleable mission-critical software applications. These solutions
consist primarily of rapid application development ("RAD"), integration of
legacy systems into new applications and technologies, mapping and management of
enterprise IT assets, and reengineering services that integrate the Company's
rule-based object technology, efficient RAD methodology, and extensive
consulting expertise.
The Company delivers strategic, end-to-end, customized e-business solutions to
its customers, enabling them to capitalize on their IT assets in the transition
to e-business. The Company offers both cross-industry solutions as well as those
for specific vertical markets. The Company's approach for delivering e-business
solutions focuses on an analysis of the customer's requirements, Web/application
development, Web design, technical implementation, integration, project
management, and long-term support services. The Company also offers a
specialized solution for the migration of European IT systems to the euro
currency.
The Company enables its customers to capitalize on e-business opportunities by
integrating its customers' existing Information Technology (IT) systems with new
technologies, thus allowing the customers to function in the Internet world by
leveraging their existing assets. Sapiens' flagship solution, Sapiens
eMerge(TM), covers asset discovery, non-intrusive legacy renewal, reengineering
and Web design and development, as well as integration with back-end systems and
processes, such as order processing, inventory management, logistics, and
payment processing. The Company believes that its accumulated experience in
adapting and leveraging legacy systems, its knowledge of new Web-based
technologies, and its experience in designing and implementing solutions based
on business logic and rules on the back-end, coupled with design and easy
navigation on the front-end, position it to help customers gain competitive edge
in the world of e-business, including rapidly emerging business-to-business
("B2B") and business-to-consumer ("B2C") eMarketplaces, where buyers and sellers
purchase and sell goods and services in virtual, internet-based marketplaces.
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 through marketing alliances with system integrators such as Cap
Gemini, KPMG, Computer Associates, IBM, Olivetti-Wang, and Sun Microsystems.
These alliances allow Sapiens to promote its solutions to a broader customer
base and to gain access to specific types of domain expertise. The Company also
markets its solutions through distributors in Eastern Europe and the Pacific.
Representative customers of Sapiens include 3M, Air France, Bosch, Guardian
Financial Services, Honda, IBM, La Redoute, Mutuelle du Mans Assurances, Norwich
Union, Panasonic UK, Principal Financial and Siemens Energy & Automation.
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INDUSTRY BACKGROUND
Whereas the Internet was once primarily used by enterprises as a medium to
advertise their goods and services, organizations now wish to use the Internet
to conduct business with other enterprises in B2B commerce, and to sell their
offerings to consumers in B2C commerce.
The Internet's popularity is due to the numerous benefits it affords
organizations: significant savings of overhead and human resources, global
reach, new distribution channels, improved business processes and instantaneous
access to information sources, business partners, and other contacts. To take
advantage of these benefits, traditional enterprises (a.k.a. "brick-and-mortar"
companies) need to redefine their business models and attendant IT systems in
order to become Web-enabled e-business enterprises (a.k.a. "brick-and-click"
companies).
One of the most pressing reasons for organizations to become Web-enabled quickly
is competition. Brick-and-mortar companies have discovered that they are
suddenly facing competition on two fronts: from traditional competitors that
have adapted their operations and offerings for the Web; and from Internet
start-ups (a.k.a. "dot-coms"), "virtual" companies that have none of the
overhead expenses associated with a brick-and-mortar structure.
Enterprises often encounter a number of obstacles that impede their ability to
quickly transition into an e-business. Size of the organization is one factor;
the larger the size, the greater the challenge of coordination and
enterprise-wide adaptation of business processes. Another factor is lack of
skills. Organizations' IT personnel were generally preoccupied with year 2000
("Y2K") conversions and did not have the opportunity to learn new Web
technologies. Additionally, while the Y2K projects were underway, a significant
backlog of development projects accumulated, and many of those human resources
must now tackle the backlog; i.e., they're still not free to address the
proliferation and rapid advancement of new technologies, such as those
associated with the Internet.
Yet another factor affecting an organization's ability to transform into an
e-business is the organization's own internal culture. In the past, the role of
the IT department was to support the business and to build applications. In the
world of e-business, however, IT is the e-business. If an enterprise's
organizational structure has not yet elevated the IT department to a strategic
status, its transition to e-business may be delayed.
Technical issues also play a very significant role in an organization's
transition into an e-business enterprise. At issue is whether the organization's
existing systems are open and flexible enough to deploy rapidly new business
models. To operate as an e-business, brick-and-mortar companies must create new
business processes, yet most organizations cannot afford to ignore their
existing mission-critical "back-end" systems (e.g., order and payment
processing, policy issuance, inventory management, logistics, etc.). To develop
new mission-critical systems from scratch to support these functions would be
extremely wasteful, expensive and time-consuming. As such, organizations will
want to capitalize on their investments by adapting their existing "back-end"
systems for the Internet. This process is known as "legacy renewal."
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Companies generally address the need to transition to e-business 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, as was described earlier. As a result, many of
these organizations rely on the expertise of external e-business service
providers. Today's market features a wide range of external e-business service
providers--from those that provide strategic e-business consulting, to those who
specialize in creative design and branding and building Web sites, to others who
sell tools to link back-end systems with the Web. While IT service providers
offer specific implementation expertise and solutions, they do not necessarily
provide cost-effective and timely methodologies based on easy-to-use, flexible
and robust technologies. Companies are seeking solutions that combine proven
technology with consulting expertise and development methodologies in order to
extend the value of legacy systems while providing rapid time-to-market in the
race to capture market share in the world of e-business.
In tandem with the pressure to become e-business enterprises, European
organizations face an additional challenge: they must migrate all of their IT
systems to the euro currency. Adoption of a single European currency is a
complex endeavor in itself and will affect a multitude of applications and
systems, including general ledger, inventory order processing, purchasing,
accounts receivable and payable, taxation, price lists, payroll, inventory
expense accounts and historical databases. These organizations need a rapid,
reliable euro conversion solution that addresses all aspects of the currency
conversion while preserving data integrity and maintaining business-as-usual
performance during and after the euro transition.
THE SAPIENS SOLUTION
Sapiens possesses the ability to help its customers reinvent their businesses in
a manner that produces positive results. The Company offers solutions for legacy
renewal, asset discovery, Web and traditional rapid application development, Web
design and euro migration in the form of, (a) fixed-price, turnkey projects and
(b) per diem consulting services. These solutions are based on our rule-based,
object technologies and rapid application development methodologies.
We believe that our solutions provide organizations with the following key
benefits:
o Fast Time to Market. Sapiens' solutions are based on the Company's
proprietary rapid application development technologies and
methodologies which enable the quick deployment of technology-based
solutions. Sapiens technology features object-orientation and
extensive cross platform support, which significantly accelerate the
development process by, for example, reusing components and
programming independent 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
compete more effectively by deploying new applications and services.
o Extend Value of Legacy Systems. Sapiens' solutions enable
organizations to capitalize on existing large-scale applications and
data by non-intrusively integrating them with new e-business
applications and technologies. Whether a firm requires the development
of new business processes or euro conversion
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services, 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 both cross-industry solutions, such
as Sapiens eMerge and Sapiens EuroMigration(TM), Web development and
design, legacy renewal, asset discovery, and incremental
reengineering, as well as industry-specific solution frameworks, such
as Sapiens eMerge Loan, Sapiens eMerge Insure, and Sapiens eMerge
Supply Chain. 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 experience with legacy system environments in key
vertical markets such as insurance, financial services, manufacturing
and transportation together with its consulting and development
methodologies.
o Cross-Platform Capability and Scalability. Sapiens' solutions are
designed for an extensive list of computing platforms and technologies
including: Windows 98, 2000 and NT; IBM systems including AS/400,
RS/6000 and S/390; Hitachi and Fujitsu mainframes; and various UNIX
systems. Sapiens' solutions, with their rule-based approach, allow
organizations to create, deploy, integrate and maintain new
applications within existing systems or onto different platforms much
more quickly and efficiently than by traditional line-by-line
programming methods. The platform-independent nature of Sapiens'
solutions allows them to be scaled according to the needs of the
organization.
o Incremental Implementation and Re-engineering. Although enterprises
require rapid time-to-market to become an e-business, not all
processes and systems can be adapted for the Internet overnight.
Sapiens' incremental re-engineering gives organizations the time to
create a complete strategy, build new processes and rework existing
systems to meet long-term business needs. The "incremental results"
approach allows organizations to adapt to the reality of the e-world
at their own pace.
o Euro Experience. Sapiens has pan-European experience in 10 of the 11
euro-zone countries, and chairs the Euro Working Group for euro
conversion standards under the auspices of the Association for the
Monetary Union of Europe (AMUE) and the European Commission (EC). The
Company has obtained numerous, large-scale euro projects, and its
EuroMigration technologies have received widespread acclaim.
o Vertical Industry Expertise. Sapiens provides solutions to a wide
range of industries, including financial services, insurance,
transportation, utilities and supply chain. In addition to experience
accumulated from customers of its flagship technologies, Sapiens has
enhanced its capabilities by acquiring companies that specialize in
these industries.
o Consulting & Implementation Services. Sapiens' Delivery and Global
Support division provides programmers, field and business consultants,
project management, technical consultants and factory services and
assistance for large-scale application development and programming
projects.
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OUR TURNKEY SOLUTIONS
Cross-Industry Solutions
Sapiens' solutions allow its customers to function as e-businesses by
capitalizing on their existing IT assets; legacy systems are seamlessly
integrated with new e-business processes and technologies. We do this by
offering Web and traditional application development, legacy renewal, asset
discovery, reengineering, solutions that integrate our rule-based object
technology, efficient eRAD methodology and the extensive experience of our
consulting personnel. Our conversion solutions respond to specialized problems
such as the transition to the euro currency and our outsourcing solutions
include application maintenance outsourcing for large organizations.
The following table lists our solutions offerings and the related tools that
they employ:
<TABLE>
<CAPTION>
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Cross-Industry Solutions
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<S> <C>
Solution Name Related Tools/Technologies
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Asset Discovery Asset Management Tool
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EuroMigration Euro-Virtual-Machine, Euro Configuration Repository
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Legacy Renewal eMerge Integration Technologies: Legacy, Database,
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Web Development eMerge Web Server (with external hooks to Java,
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Application Development and Re-engineering eMerge Application Server, eMerge Web Server,
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Application Maintenance Outsourcing eMerge Application Server, Asset Management Tool
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Industry-Specific Solutions (application frameworks)
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eMerge Insure eMerge Application Server, eMerge Web Server,
eMerge Application Modeler
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eMerge Loan eMerge Application Server, eMerge Web Server,
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eMerge Supply Chain eMerge Application Server, eMerge Web Server,
eMerge Application Modeler
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</TABLE>
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Sapiens eMerge
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eMerge is a comprehensive e-business solution designed to allow businesses
quickly to leverage and integrate their IT assets as part of an evolving
e-business strategy promoting faster time-to-market. eMerge is an "umbrella"
solution covering asset discovery, non-intrusive legacy renewal, re-engineering,
and Web development, as well as integration with back-end, mission-critical
systems and processes, such as order processing, inventory management and
logistic and payment processing. eMerge employs Sapiens' eRAD methodology and
combines enabling technologies with business and professional services, project
management, technical implementation, and ongoing technical and consulting
support.
The Sapiens eRAD methodology is designed to facilitate legacy application
renewal, security and transactional integrity. It offers rapid application
development and deployment by combining technology with business management,
project management and technical services. Sapiens' core development technology
is designed to separate business logic from programming logic via
object-oriented technology and the use of components and business rules. The
eRAD methodology, therefore, allows business users to participate throughout the
entire process of transforming into and developing an e-business. The
methodology is also designed to organize the entire migration, providing
well-defined, iterative stages--each having its own deliverables of working
models.
Sapiens eMerge Blueprint enables the derivation of e-business technical
specifications based on particular business requirements. It includes an
extensive evaluation of the existing business environment and its e-business
objectives, concluding with recommendations on e-business strategy and
architecture. The Blueprint process includes the following steps:
o Business review
o Data model review
o Security investigation o Web and application server evaluation
o Information requirement review
o Existing applications categorization
This eMerge solution is backed by Sapiens' professional services, which include
business requirements and analysis, technical definitions and implementation and
strategic project management.
eMerge Enabling Technologies
The eMerge solution employs a number of enabling technologies, including the
following:
o eMerge Application Servers (eMerge Application Server, eMerge Web Server)
ensure that the information derived from the business rules is correct,
personalized and implemented. These servers are designed to offer a robust,
secure and scalable environment for running mission-critical e-business
applications.
o eMerge Development Workbench (eMerge Application Modeler) ensures that the
solutions are adaptable and scalable. The eMerge Development Workbench
supports all aspects of eMerge's eRAD application development, covering
modeling and design; data, logic, content, and Web user interface
development; interoperability with external applications; and testing. The
Development Workbench provides a one-stop development and maintenance
environment for rapidly creating flexible and adaptable
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applications.
o eMerge Integration Tools integrate with legacy, back-office applications
and Web environments non-intrusively, thereby avoiding disruption of
operational systems. eMerge integration tools consist of adapters
(Legacy/Database/MQSeries/XML/EDI Adapters), connectors (Component
Integrator for integration with COM, CORBA, and Java), and business object
interfaces that provide all integration points and interoperability
features in eMerge applications. These tools are used with DBMSs, file
systems, legacy applications and component-based applications, as well as
EDI, XML and other types of messaging environments.
o eMerge Management Tools (eMerge Asset Management Tool, eMerge Resource
Monitor) support the diverse management aspects of development and
deployment of eMerge e-business applications. They incorporate all the
various stages of the solution development life cycle, such as asset
discovery and application runtime administration management.
eMerge Blueprint
Sapiens' Blueprint solution is designed to provide flexible, adaptable solutions
by applying proven B2B and B2C models. Sapiens consultants merge the creative
component required for the Web front-end development with the Company's
experience in building complex business systems and integrating legacy,
packaged, and newly developed solutions to deliver best-of-breed e-business
solutions. Sapiens employs a methodology and discovery process for its Blueprint
solution. In the first stage, consultants analyze the client's business and
market, from strategic and marketing positioning issues to technical
architecture and requirements. This results in the creation of an e-business
strategy and a solution architecture so that the optimal e-business solution can
be implemented for the client. The second stage involves the design,
development, deployment, and testing of a site, but this stage also includes the
requisite application and enterprise integration, as well as Web enablement.
The Blueprint solution features:
o Strategy and architecture definition and validation (eMerge BluePrint
methodology)
o Application design, development, deployment, testing and end-user training
o User interface development with creative and navigational design
o Strategic market research and meta tag/key word development
o Strategic branding and co-branding development
o Creative Services, with experienced third-party alliances
o Legacy Renewal and web enablement
o Enterprise integration and web enablement
o Expertise in Java (Script), EJB, JDBC, CORBA, PERL/CGI, COM/DCOM, XML,
HTML/DHTML, ASP, ActiveX and more
o Compatibility with databases such as DB2, SQL, Sybase, Oracle and Informix
o Support for all major applications and Web servers
eMerge Legacy Renewal
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eMerge Legacy Renewal is a solution that non-intrusively integrates legacy
systems for new e-business processes, extending legacy applications and
maintaining business-as-usual performance during the transition to e-business.
Legacy integration takes place on three levels, including:
o Physical integration--eMerge wraps either single or encapsulated multiple
screens that support a single business abstraction (such as entry order).
This process manages complex issues, such as underlying flow and legacy
session management, without the need for programming.
o Business Process Integration--eMerge allows business process developers to
build business processes supporting new requirements while reusing older
business processes. Old and new processes are integrated by defining new
business rules and tying them together with the old processes across
multiple data sources (DBMSs and legacy screen-originating objects).
o Response to Legacy System Events--eMerge triggers new business processes to
respond to events in legacy systems as they occur. These events can derive
from user interaction with the legacy screens or from updates in the legacy
data. The legacy renewal solution utilizes Sapiens' eMerge Integration
Technologies and the eMerge Web Server.
The Sapiens eMerge Integration Technologies are composed primarily of:
Component Integrator - a comprehensive, standards-based, multi-directional
component bridge providing integration between component standards. Standards
support for COM, ActiveX, OLE, CORBA and Java are incorporated in the core
product, with other standards support available as add-ons. Component Integrator
allows legacy, in-house, packaged and application frameworks, such as ERP
systems, to speak to each other by providing a bridge between different
programming standards and protocols. The bridging also includes transaction
propagation between OTS/MTS/JTS. Component Integrator supports multi-directional
bridging and offers transaction propagation.
eMerge Adapters - These adapters include capabilities for accessing EDI sources,
sending and receiving XML-based messages and providing tight integration with
MQSeries.
o The Database Adapters enable rapid mapping to existing databases and enable
access to multiple data
sources simultaneously.
o The Legacy Adapter enables non-intrusive integration with legacy
applications, such as IBM mainframe 3270 applications. 3270 screens are
regarded as data sources, and underlying complex issues, such as screen
identification, flow management and session management are shielded from
the application logic developer. Developers can mix legacy sources with
other (e.g., DBMS-based) sources freely.
Web Development
Our Web development solution offers our customers the ability to open their
large-scale systems to the world of e-commerce on the Internet, and also offers
Internet design and consulting services including Internet marketing,
personalization and large-scale Web site design. The eMerge Web Server is at the
forefront of this solution.
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eMerge Web Server - This rapid application Web development environment enables
scalable, enterprise-wide access to data in distributed environments. The Web
Server enables business-to-business workflow integration, and manages the
policies and rules governing customer relationships. Using various Web standards
(DHTML, CSS, SSL, etc.) and Java, the Web Server provides a personalized user
experience on a standard Web browser. Additionally, the Web Server provides a
secure environment for its applications. Authentication (including the single
sign-on interoperability with a host-based security manager), data integrity and
privacy are all supported.
Rapid Application Development and Reengineering
Sapiens' RAD re-engineering solutions enable customers to reengineer core
software applications in a cost-effective and timely manner to meet changing
business requirements. 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.
RAD re-engineering complements legacy renewal because together they constitute
the most effective way to meet immediate and long-term business needs.
The RAD/re-engineering solution utilizes these technologies:
eMerge Application Server - a server-centric application development environment
that combines cross-platform compatibility and a scalable architecture.
Platforms supported include Windows NT; UNIX; AS/400; and IBM, Hitachi, and
Fujitsu mainframes. Databases supported include DB2, IMS, Oracle, SQL Server,
Informix, and VSAM.
eMerge Application Modeler - a graphical modeling environment for visual
application development. The Application Modeler allows multiple developers to
operate in a workgroup environment employing graphical tools to model, define,
test, and modify objects, attributes, and rules covering the whole solution life
cycle.
eMerge Asset Discovery
The eMerge Asset Discovery solution provides a global, operational platform
designed to manage, view, and access all enterprise IT components and data, and
to assess inter-system and intra-system impacts. The Asset Management Tool and
Resource Monitor (currently in development) can be used for large IT challenges
such as euro conversion, enterprise application integration, application
development and maintenance, ERP/ERM testing, e-business, mergers and
acquisitions, re-engineering, etc.
The Asset Management Tool (AMT), a server-centric repository featuring PC GUI
navigation and browsing, is a foundation tool employed in most of Sapiens'
integrated solutions. AMT serves as both the repository for all system
components and inter-relations, as well as the environment in which mapping,
analysis, planning, project management, and implementation are performed. It
operates on MVS, VM, and VSE, and its GUI front-end is available on Windows 98,
2000 and NT.
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Sapiens EuroMigration
Sapiens' EuroMigration is a comprehensive, phased euro conversion solution
designed to address dual currency needs and the inevitable base currency
cut-over. This non-intrusive bridging solution promotes enterprise-wide data
integrity. Since underlying programming does not need to be changed, there is
only a minimal impact on source code. The EuroMigration solution incorporates a
comprehensive methodology, Sapiens' core technologies, project management, and
implementation and support services.
The EuroMigration solution addresses the entire multiphase euro conversion life
cycle, including:
o Assessment
o Analysis
o Configuration mapping
o Wrapping of screens, reports, and databases
o Program and data conversions
o Currency conversion routines
o Re-engineering
o Project management
o Testing
Using any combination of these functions together with RAD technologies and
methodology, Sapiens works with customers to determine the most appropriate
business solutions and implements them in ways designed to be reliable and
cost-effective, using a conversion path focused on the satisfaction of
requirements established by the European Commission to the European Monetary
Union.
Sapiens' approach to the euro is to minimize the data pollution and
discontinuity risks; to minimize the code changes required; and, overall, to
ensure business-as-usual performance during and after the transition. Sapiens'
euro impact analysis is designed to save conversion efforts on systems or
sub-systems that could be re-engineered for e-business directly.
Sapiens' core technologies, the Euro-Virtual-Machine (EVM) and the Euro
Configuration Repository (ECR), are the foundation of the EuroMigration
Solution. The Sapiens EuroMigration solution supports IBM mainframes, AS/400,
and UNIX environments. It also includes testing facilities and processes.
Sapiens' Euro-Virtual-Machine (EVM) - EVM is a wrapping engine that enables
rapid euro compliance, dual currency functionality and cluster-by-cluster
conversions of databases of mainframe host applications. Data becomes available
in all required currencies (online screens and online or batch reporting) and a
simple toggle transforms data to and from the euro denomination. Additional euro
fields can be added with minimal effort. Decimal point issues (wherever
applicable) present minimal problems. Functionality phase changes involve minor
adjustments. Currency transformation is performed via PC WYSIWYG tool connected
online to the mainframe host and the EVM rule-based repository. No source code
changes are necessary.
There are EVMs designed for specific tasks. These include the following:
o EVM for Screens--Rapidly adds dual currency functionality to online screens
by
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capturing or parsing screen descriptions, editing the data to make
modifications for euro-readiness (in a Windows-based GUI environment), and
by running the EVM runtime engine, which intercepts and manipulates online
data streams.
o EVM for Reports--Rapidly enables dual currency functionality in online and
batch reports and batch output files during the transition period with no
need to change the programming source code
o EVM for Data--Bridges between the physical currency data and the programs
in which the system logic is processed, enabling data to be converted
gradually by clusters, without making changes to the program source code
and without incurring currency conversion ("rounding") errors. The
following common databases are supported: DB2, IMS, IDMS, ADABAS, Datacom
and VSAM.
Euro Configuration Repository (ECR) - ECR is a global, operational platform
designed to manage, view, and access all enterprise IT components and data, and
to assess inter-system and intra-system impacts. ECR is the repository for EVM
layouts. It also stores the EVM rulebase for data, screens, and reports,
allowing multi-phased euro projects to be centrally managed and orchestrated.
Outsourcing Services
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
Delivery and Global Support division, and the comparatively lower cost of
maintaining these applications through an outsourcing arrangement. Our
maintenance outsourcing solution revolves around our eMerge Application Server
and our Asset Management Tool, as described above.
Industry-Specific Solutions
eMerge Loan
eMerge Loan is Sapiens' framework for Web-enabled loans and mortgages. This
solution provides financial service corporations with the ability to launch new
loan and mortgage products rapidly and is designed to process loan and mortgage
transactions cost-effectively and efficiently over the Web. The framework
features built-in, Internet-capable quotes and application tracking information,
a customer system, and multi-currency capabilities allowing lenders to offer
loans in any currency needed. The framework runs on IBM mainframe operating
systems, AS/400 and UNIX.
The eMerge Loan framework consists of five main components:
o Customer Database--provides an overview of the customer, summarizing all
the relationships that the lender holds with the customer.
o Systems Tables--drive system behavior to maximize the flexibility of
business processes with the Product and Procedural Templates.
o Loan Quotation System--captures basic data from a range of delivery
channels and processes the data to generate single or multiple quotations.
o Loan Application System--captures all required data from the quotation and
enables the efficient underwriting and processing of the applications to
completion of the loan.
o Loan Processing System--processes the loan from completion to redemption.
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eMerge Insure
eMerge Insure is Sapiens' framework for Web-enabled expert property and casualty
insurance solutions. This solution empowers insurance providers to launch new
insurance products and services rapidly and to process applications and other
related policy transactions cost-effectively and efficiently. The framework
covers the entire policy life-cycle--from issuance, endorsement, point-in-time
views, and risk clearance through cancellation, reinstatement, and renewal.
The framework features built-in Internet/intranet capabilities for policy
quotes, risk evaluation, issuance and policy life support, in addition to
high-level security features. Product definition, underwriting, rating, and data
entry are developed and maintained in a GUI, rule-based, table-driven
environment that can be directly accessed if changes are required without
requiring the assistance of professional programmers.
The eMerge Insure framework is a flexible, data-driven insurance processing
system that consists of several subsystems. The generic architecture, based on
IBM's Insurance and Application Architecture (IAA) Gold principles, supports
processing for all lines of business and company-specific processing
requirements.
The eMerge Insure framework includes the following primary subsystems:
o Business Analyst Subsystem--used to record definitions of insurable risks
and coverage, and their associated relationships, data edits and
eligibility criteria. The menu-driven subsystem facilitates rate data
entry, algorithms and formulas to calculate premiums. Versioning is
supported, creating the basis for data presentation, further system
customization, and processing of workflow.
o Eligibility Subsystem--enables users to customize coverage eligibility
criteria.
o Underwriting Subsystem--launches manual intervention for policy review,
based on responses to underwriting queries that could not be automated.
o Pricing Subsystem--facilitates the further refinement of rating criteria by
applying modification factors and credit or debit plans.
o Life-Cycle Subsystem--enables the policy flow to be tailored to meet
specific company requirements.
eMerge Supply Chain
eMerge Supply Chain is Sapiens' Web-enabled framework for inventory forecasting
and planning. This solution is designed to help businesses accurately predict
future product sales so that they can plan their inventories and order
correctly.
eMerge Supply Chain has three modules, including:
o Planning Module--reviews customer and product sales histories to promote
effective inventory replenishment. This application provides
point-and-click control over inventory management and a graphical view of
future demand requirements. It operates equally well for time-based
planning (replenishment figuring and production planning) and order-point
planning (for distribution environments).
o Forecasting Module--analyzes information from the Planning Module and
provides an outlook of future stock demand. This application offers a
hierarchical approach to help businesses forecast at a chosen level and to
accumulate at other levels. This module
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covers all aspects of sales forecasting, budgeting, performance monitoring,
promotion control and margin analysis.
o Promotions Forecasting Module--designed to help businesses plan, track and
evaluate the impact promotions have on the company's bottom line. This
module allows the company to view actual demand for a promoted product and
to change the balance of the promotion accordingly. Additionally, it
presents management and analysis of promotions in a weekly and monthly
forecast system.
EZONEXCHANGE.COM
In addition to the Sapiens eMerge offering, the Company has identified a market
segment in the evolving new economy: the supply of specialized fulfillment
solutions to market makers of on-line B2B marketplaces. In March 2000, the
Company founded eZoneXchange.com for the purpose of pursuing its initiative in
this new market segment.
The objective of eZoneXchange.com is to extend and enhance the capabilities of
on-line marketplaces. More specifically, eZoneXchange.com will provide its
customers access to the following services: (1) e-Integration - extending the
capabilities of the existing on-line marketplace to be integrated with the back
office systems of its buyers, sellers and suppliers (2) e-Fulfillment - enabling
on-line marketplaces to offer eFulfillment services, such as Supply Chain
Execution ("SCE") services, through eZoneXchange.com's Logistics CommerceHub
("LCH").
e-Integration
eZoneXchange.com will provide e-integration services based on the Sapiens eMerge
technology as well as third-party technology, when necessary.
e-Fulfillment
eZoneXchange.com will provide on-line marketplaces with access to its LCH, which
will optimize the transportation and order fulfillment processes. LCH also will
provide comprehensive SCE services, which will allow the on-line marketplace to
track the purchase orders until final delivery of the goods or services. Access
to the LCH will be granted on a non-exclusive basis to on-line marketplaces and,
when necessary, to their clients.
Training and Support Services
eZoneXchange.com will provide training and support services to on-line
marketplaces and their clients in order to maximize the benefits of the
e-Integration and e-Fulfillment offerings. These training and support services
will also be offered by LCH to designated vendors.
Private Placement
On May 4, 2000 the Company completed a $15 million private placement of 7.7% of
the outstanding shares of common stock of eZoneXchange.com. The Investors, First
Mezzanine Investors, Ltd. and Israel Discount Bank, may require the Company to
re-purchase their shares in eZoneXchange.com during the fifth year following the
date of the
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transaction for 50% in cash and 50% in shares of Sapiens International common
stock amounting to $15 million plus 5% interest per annum. The Investors also
received a warrant to purchase an additional 2.25% of the common stock of
eZoneXchange.com at the same private placement share price ($25 per share),
which is subject to future adjustment. According to the terms of the
transaction, the Company may repurchase the Investors' shares of
eZoneXchange.com at specified prices.
The proceeds of the investment will be used as working capital to establish a
marketing infrastructure and further develop integrated solution offerings for
market-makers of these rapidly emerging B2B e-Marketplaces.
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 our entire solutions
organization.
OUR CORE TECHNOLOGY
The following are some key features of our core technology that are common to
the full range of our solutions:
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
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<PAGE>
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 must 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 instructions that are given
by the application developer from a long and complicated set of machine
instructions (procedural programming) to a greatly reduced number of functional
statements. The "how" part of the application is generated automatically by
Sapiens technology's power to infer. Positive thinking also ensures the
integrity of an application because the Sapiens rules engine, rather than
developers working manually, automatically addresses the negative implications
of the business logic.
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
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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 believes that the following customers, arranged by industry, are
representative of the organizations that comprise its international customer
base.
FINANCIAL SERVICES
Abbey National Mortgage Finance
Banco Credicoop
Banco Sudameris
Bank Hapoalim
Bank Leumi
Canadian Imperial Bank of Commerce
Capital Bank (NWS Bank Plc)
National Australian Group
P.K.O. BP Bank
Principal Financial Group
Woolwich Direct
Sanwa Bank
INSURANCE
Mutuelle du Mons
Canada Life (Albany Life Assurance)
AXA Global Risks
Delta Lloyd General Insurance
ELVIA Vie Leben Vita
Guardian Financial Services
Menora Insurance Company
Mutuelle de L'Industrie du Petrole
Norwich Union
The Prudential
US Automobile Association
Virginia Farm Bureau
GOVERNMENT and UTILITIES
Ameritech
ELMU-Budapesti Elektromos Muvek
Houston Industries (formerly ARKLA)
Israeli Civil Service Commission
Israeli Ministry of Construction &
Housing
Israeli Ministry of Labor & Social Affairs
Israeli Social Security Institute
Social Security Office of Thailand
State of NC Dept. of Transportation
MISC.
American Assn. of Retired Persons
Bass Hotels (Holiday Inn Worldwide)
MANUFACTURING
3M
ALPS Electric
Robert Bosch
Canon France
Haworth, Inc.
Honda Motor Company of Japan
International Paper
Kawasaki Heavy Industries
Kirin Beer
Mazda Parts Europe
Mercedes-Benz Schweiz AG
Renault
Siemens Energy & Automation Inc.
TDK Corporation
TRANSPORTATION
Air France
Canada Maritime
Canadian Pacific Rail
Deutsche Lufthansa
Greyhound Pioneer Australia
Intercontainer-InterfrigoS.C.
Norfolk Southern Railway
Queensland Rail
RETAIL
JD Williams & Company
La Redoute
Panasonic UK
Seiko
SOGO Information Service
Group Andre
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SALES AND MARKETING
To reach the broadest potential customer base, the Company has pursued multiple
distribution channels, including a direct sales force and relationships with
system integrators and, in certain geographic areas, with distributors.
As of December 31, 1999, the Company had 96 marketing and sales personnel
located in its operations in the United States, France, the United Kingdom,
Germany, Canada, The Netherlands, Japan, Australia and Israel. The direct sales
force focuses on large organizations within select industries. It also
coordinates sales activities with system integrators such as Cap Gemini, KPMG,
IBM, Computer Associates, Olivetti Wang, Hitachi Data Systems, and Sun
Microsystems. These partnerships allow Sapiens to further expand its own
solutions, and to gain access to specific types of domain.
The Company employs a variety of business development and marketing techniques
to communicate directly with current and prospective clients. These techniques
include exhibiting at trade shows and industry conferences, disseminating
product brochures and other literature, direct-mail marketing, authoring
articles, and hosting user conferences and business forums for customers and
prospective customers on technology and industry issues.
CUSTOMER TRAINING AND SUPPORT
The Company believes that a high level of customer support is important to the
successful marketing and sale of the Company's solutions. The company employs a
team of technical specialists who provide the full range of training and support
services. The typical direct sale to a client includes initial maintenance,
training and consulting services. In addition, substantially all of the clients
for whom the Company has developed an application elect to enter into an ongoing
maintenance and support contract with the Company, which is typically for
twelve-month intervals and entitles the customer to technology upgrades 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 technologies to take advantage of
emerging opportunities, such as those related to the proliferation of
Internet/Intranet technologies and the e-business market. The Company has
announced its Sapiens eMerge e-business
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solution, which enables full integration of the Internet/intranet into the
existing development environment.
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 solution 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.
For the years ended December 31, 1997, 1998 and 1999, gross research and
development expenditures were $8.0, $9.1 million and $9.9 million, respectively.
The Company anticipates that it will continue to commit substantial resources to
research and development in the future.
COMPETITION
The market for e-business software solutions is highly competitive and
characterized by rapidly changing technology, evolving industry standards and
customer requirements, and frequent innovations. The following is a breakdown of
the competition that we face in each of our primary markets:
Web Development and Legacy Renewal
Our competitors in the application development and e-commerce marketplaces
include tool vendors and system integrators. Tool vendors with whom we compete
include Software AG, SAGA Systems, Forte/Sun Microsystems, Lansa, Sterling
Software, Oracle and Sun Microsystems. Web consultants and system integrators
who offer competing solutions include IBM, Cap Gemini, Xpedior, Sapient,
Cambridge Technology Partners, Computer Associates International, Andersen
Consulting, USWeb/CKS and EDS.
Euro Conversions
Competition in the euro conversion marketplace includes technology vendors such
as Crystal, Viasoft and Sopra, as well as large and specialized consulting
organizations and system integrators, such as IBM and Sema, who offer the full
range of euro conversion services.
Many of our competitors have formidable financial, marketing, technical and
other resources. Our ability to compete will depend in large part upon our
ability to implement large-scale projects in a timely manner, expand out
marketing channels and develop new technologies and solutions in line with
market needs.
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
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technologies 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, 1999, the Company had a total of 785 employees, including 131
in research and development, 477 in consulting and technical support; 96 in
marketing and sales; and 81 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 Defence Forces,
presently consisting of approximately 30 days of service annually. Additionally,
all such residents are subject to being called to active duty at any time upon
the outbreak of hostilities. Many of the Company's officers and employees are
currently obligated to perform annual reserve duty. While the Company has
operated effectively under these requirements since its organisation, no
assessment can be made as to the full impact of such requirements on the
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 exercised its option to renew the lease for an additional
five-year term.
The Company leases office space in the United States, Canada, United Kingdom,
France, Switzerland, Germany, Belgium, and The Netherlands. The lease terms are
generally five to ten years. The Company believes that its existing facilities
are adequate for its current needs.
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
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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, 1999, 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)
<S> <C> <C>
Number Percent
------ -------
Meister Software N.V. (2)........................ 1,800,702 8.4%
De Ruyterdade 58A
Curacao, Netherlands Antilles
Century Holdings, Inc. (3)........................ 1,800,702 8.4%
C/o Secretary
Residence Park
P.O. Box 4258
CH-6300 Zug, Switzerland
Lako Enterprises S.A. (4).......................... 2,289,201 10.7%
C/o Secretary
Residence Park
P.O. Box 4258
CH-6300 Zug, Switzerland
All officers and directors as a group (14 persons) (5) 2,600,551 12%
</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, 1999 is 21,464,511.
(2) Tsvi Misinai and Shlomo (Shai) Sole beneficially own approximately 23% and
approximately 9.7%, respectively, of the voting stock of Meister. By virtue
of their ownership of Meister and their positions as officers and directors
of Meister (see "Management"), Mr. Misinai and Mr. Sole may be deemed to
beneficially own all of the outstanding Common Shares held by Meister. By
virtue of Mr. Zuckerman's deemed ownership of Century Holdings, Inc., a
Panamanian corporation ("Century") and by Century's approximately 31.9%
ownership of Meister, Mr. Zuckerman may be deemed to beneficially own all
of the Common Shares held by Meister (see Note (3)).
(3) Includes the 1,800,702 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.
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<PAGE>
(4) Includes the 1,800,702 shares held by Meister and deemed to be held by
Century. Lako owns 488,499 Common Shares and 50% of the voting shares of
Century. A trust (the Bornali Foundation) for the benefit of the estate of
Mr. Zuckerman owns all the outstanding voting shares of Lako. Mr. Zuckerman
disclaims beneficial ownership of the Common Shares held by Lako. By virtue
of Lako's ownership of Century, Mr. Zuckerman may be deemed to beneficially
own all the Common Shares held by Century (see Notes (2) and (3)).
(5) Includes (i) 1,800,702 Common Shares held by Meister, which shares may be
deemed to be beneficially owned by Messrs. Misinai, Sole, Zuckerman, (see
Notes (2), (3), and (4)); (ii) 488,499 Common Shares held by Lako as to
which Mr. Zuckerman disclaim beneficial ownership, (See Note (4)); (iii)
120,000 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, 1999, 21,464,511 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:
1998 HIGH LOW
---- ---- ---
First Quarter 8.375 6.0625
Second Quarter 9.4375 6.4375
Third Quarter 8.125 4.75
Fourth Quarter 8.0625 3.375
1999
----
First Quarter 11 8.375
Second Quarter 10.625 8.625
Third Quarter 12.25 8.313
Fourth Quarter 17.063 9
2000
----
First Quarter 21.125 12.063
As of December 31, 1999, there were approximately 257 holders of record of the
Company's Common Stock, including 149 holders of record with addresses in the
United States.
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<PAGE>
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.
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.
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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.
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
25
<PAGE>
ended December 31, 1999, 1998, 1997, 1996, and 1995 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, 1999, 1998, 1997, 1996, and
1995 has been derived from the consolidated financial statements of the Company
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995 which have
been prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") and which have been audited by Kost, Forer and Gabbay,
a member of Ernst & Young International.
<TABLE>
<CAPTION>
Selected Financial Data (1): Year Ended December 31,
-------------------------------------------------------------------------
(In thousands; except per share data)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Products $10,208 $13,699 $20,507 $37,181 $47,390
Consulting and maintenance services 26,432 25,288 24,057 33,799 44,440
-------------------------------------------------------------------------
Total revenues 36,640 38,987 44,564 70,980 91,830
-------------------------------------------------------------------------
Operating Expenses:
Cost of products 2,347 1,473 4,473 12,690 16,354
Cost of consulting and maintenance services 17,569 16,511 15,507 21,611 29,333
Research and development, net 4,316 2,429 3,258 4,112 5,021
Selling and marketing, general and 20,567 16,781 16,316 22,921 27,880
administrative
Restructuring 4,456 0 0 0 2,019
-------------------------------------------------------------------------
Total operating expenses 49,255 37,194 39,554 61,334 80,607
-------------------------------------------------------------------------
Income (loss) from operations (12,615) 1,793 5,010 9,646 11,223
-------------------------------------------------------------------------
Finance income (expenses), net 16 198 107 457 412
Other income (expenses), net (2,798) (8,842) (417) (328) (220)
-------------------------------------------------------------------------
Income (loss) before taxes on income (15,397) (6,851) 4,700 9,775 11,415
-------------------------------------------------------------------------
Taxes on income (41) (35) (57) (55) 1,678
Equity earnings (losses) of an affiliate (211) (150) (203) 0 0
Minority interests 83 317 104 15 (25)
-------------------------------------------------------------------------
Income (loss) before extraordinary item (15,566) (6,719) 4,544 9,735 13,068
-------------------------------------------------------------------------
Extraordinary item-early extinguishment of debt 15,911 96 0 0 0
-------------------------------------------------------------------------
Net income (loss) 345 (6,623) 4,544 9,735 13,068
-------------------------------------------------------------------------
Preferred stock dividend (1,211) (2,406) (645) (418)
------- ------- ----- -----
-------------------------------------------------------------------------
Net income (loss) to Common shareholders $345 ($7,834) $2,138 $9,090 $12,650
---- -------- ------ ------ -------
-------------------------------------------------------------------------
Basic earnings (loss) per share:
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Before extraordinary item $(1.29) $(0.63) $0.14 $0.48 $0.61
Extraordinary item 1.32 0.01 - - -
-------------------------------------------------------------------------
Basic earnings (loss) per share $0.03 $(0.62) $0.14 $0.48 $0.61
----- ------- ----- ----- -----
-------------------------------------------------------------------------
Weighted average number of shares
used in computing Basic earnings (loss) per share 12,075 12,601 15,210 18,966 20,813
------ ------ ------ ------ ------
Diluted earnings (loss) per share:
Before extraordinary item (1.29) $(0.63) $0.12 $0.43 $0.53
Extraordinary item 1.32 0.01 - - -
-------------------------------------------------------------------------
Diluted earnings (loss) per share $0.03 $(0.62) $0.12 $0.43 $0.53
-------------------------------------------------------------------------
Weighted average number of shares
used in computing Diluted earnings (loss) per share 12,075 12,601 17,951 21,387 24,558
Balance Sheet Data:
Cash and cash equivalents $11,064 $6,876 $10,338 $20,222 $8,735
Working capital (deficit) 14,386 9,611 20,062 21,028 30,319
Total assets 55,951 50,218 57,648 73,324 85,105
Long term debt 18,405 16,979 16,088 7,273 7,930
Total stockholders' equity (deficit) 9,541 7,191 20,069 33,115 51,414
</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 our financial
statements and notes thereto. Certain matters discussed below and throughout
this annual report are forward-looking statements that are based on our beliefs
and assumptions as well as information currently available to us. Such
forward-looking statements may be identified by the use of the words
"anticipate", "believe", "estimate", "expect", "plan" and similar expressions.
Such statements reflect our current views with respect to future events and are
subject to certain risks and uncertainties. While we believe such
forward-looking statements are based on reasonable assumptions, should one or
more of the underlying assumptions prove incorrect, or these risks or
uncertainties materialize, our actual results may differ materially from those
described herein. Please read the section below entitled "Factors That May
Affect Future Results" to review conditions that we believe could cause actual
results to differ materially from those contemplated by the forward-looking
statements.
Results of Operations
Revenues. Total revenues in 1999 increased 29% to $91.8 million from $71.0
million in 1998, and $44.6 million in 1997. Revenues in the European region rose
19% to $60.5 million and represented 66% of total revenues compared with 72% in
1998. Revenues in the Americas increased 49% to $26.2 million, representing 29%
of revenues in 1999 versus 25% in the prior year; revenues in the Asia-Pacific
region rose 114% in 1999 to $5.1
27
<PAGE>
million or 5% of total revenues compared with 3% in 1998. We expect that a
significant portion of our revenues will continue to be denominated in European
currencies, mainly the euro, and a growing portion of our revenues will be
denominated in the Japanese yen. As a result, movements in the exchange rates
between the US dollar and the euro and/or the US dollar and the Japanese yen
could have a material unfavorable impact on our revenues and results of
operations.
Product revenues rose 27% in 1999 to $47.4 million, after increasing 81% in 1998
and 50% in 1997. The increase in product revenues in 1999 is due primarily to
revenues generated from the Sapiens EuroMigration(TM) and Sapiens eMerge
solution offerings, only partly offset by lower revenue from "year 2000" related
products.
Consulting and other services revenues increased 31% to $44.4 million from $33.8
million in 1998, and $24.1 million in 1997. The increase in 1999 is primarily
attributable to the acquisition of Syspart, a consulting firm based in Germany;
the consolidation of the results of Sapiens Japan, following the purchase of an
additional 70.1% of the shares of that company and the inclusion for a full year
of the consulting activities of SAIC, acquired in 1998.
Gross Profit. Gross profit increased 26% to $46.1 million from $36.7 million in
1998 and $24.6 million in 1997. Gross margin was 50.2%, 51.7% and 55.2% in 1999,
1998 and 1997, respectively. Product revenue gross profit rose 27% in 1999 to
$31.0 million from $24.5 million in 1998; product gross margin was 65.5% in 1999
compared with 65.9% in 1998. The decline in product gross margin is due
principally to the unfavorable movement of exchange rates. We believe that
product gross margin may decline in the future due to adverse movements in
exchange rates, the increasing utilization of third party personnel in the
implementation of projects (mainly EuroMigration), and an increase in the rate
of royalties payable to 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 and development
efforts so funded.
Consulting and other services gross profit increased 24% to $15.1 million in
1999 from $12.2 million in 1998. Consulting and other services gross margin
declined in 1999 to 34.0% from 36.0% in the prior year due mainly to the impact
of the industry-wide slowdown on development efforts prior to January 1, 2000.
We believe that consulting and other services gross margin is at the high end of
the sustainable range and may decline in the future. Additionally, changes in
the 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 9% in 1999 to $9.9 million from $9.1 million in 1998, and $8.0 million
in 1997. Net research and development expenditures rose 22% in 1999 to $5.0
million from $4.1 million in 1998, and $3.3 million in 1997.
The increase in research and development expenditures is due primarily to higher
average labor costs reflecting the highly competitive market for software
engineers. We believe that a significant level of investment for research and
development is essential for us to attain market leadership and to achieve our
long-term business objectives. Accordingly,
28
<PAGE>
we anticipate that research and development expenditures will increase
significantly in the future due mainly to the development of our Internet
application integration and B2B-Internet technologies. However, there can be no
assurance that these development efforts will be successful or will not be
rendered obsolete by future technology developments or acquisitions.
Software development costs capitalized were $2.8 million in 1999 compared with
$3.0 million in 1998. Amortization of capitalized software development costs,
included in cost of products, was $2.8 million in 1999 and $3.1 million in 1998.
A portion of our R&D expenditures is funded by the Office of the Chief Scientist
("OCS") in Israel pursuant to programs entitling the Government to receive
royalties on sales of products developed as a result of research projects so
funded. We received R&D funding of $2.0 million in 1999 (20.6% of gross R&D
expenditures) compared with $1.9 million (21.2% of gross R&D expenditures) in
1998. Royalty expense pursuant to the OCS funding programs, included in cost of
products, was $1.1 million and $0.8 million in 1999 and 1998, respectively.
In 1999 the financial terms of the OCS research and development funding program
was modified by law. We believe that these modifications significantly reduce
the attractiveness of the OCS program and, consequently, we do not anticipate
that we will continue to participate in such programs. As a result, we expect
that net research and development expenditures will increase significantly in
the future.
Selling, General and Administrative expenses. Selling, general and
administrative expenses increased 22% to $27.9 million in 1999 from $22.9
million in 1998 and $16.3 million in 1997. Expressed as a percent of revenues,
selling, general and administrative expenses declined to 30.4% in 1999 from
32.3% in 1998. The increase in selling, general and administrative expenses in
1999 is due principally to the expansion of our direct operations in Europe
(mainly Germany, the Netherlands and Spain) and in Japan, promotional activities
related to the launch of the Sapiens eMerge e-business solution offerings, and
product marketing efforts related to our B2B-Internet initiative. We expect that
our selling, general and administrative expenses will increase significantly in
2000 to support revenue growth based on our eMerge solution as well as to
develop our B2B-Internet subsidiary's marketing infrastructure.
We recorded a restructuring charge in the amount of $2.0 million, which
represents the involuntary termination benefits provided to 40 employees who
were dismissed as a result of our change in strategic direction to e-business
solutions.
Taxes on Income. The net tax benefit was $1.7 million in 1999 compared with a
net tax expense of $55 thousand in 1998 and $57 thousand in 1997. The tax
benefit in 1999 reflects the reduction of a portion of the valuation allowances
recorded by certain of our foreign subsidiaries due mainly to the actual or
expected realization of the underlying deferred tax assets. We will continue to
evaluate the realizability of deferred tax assets on a regular basis.
Net Income. Net income increased 34% to $13.1 million in 1999 from $9.7 million
in 1998 and $4.5 million in 1997. Preferred stock dividends in 1998 were $0.4
million compared with $0.6 million in 1998. We expect that dividends on
preferred shares will be
29
<PAGE>
lower in 2000 due mainly to the full year impact of conversions of preferred
shares to common shares during 1999.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at the end of 1999 were $16.8
million compared with $33.0 million at the end of 1998, and $23.1 million at the
end of 1997. Approximately $2.3 million of our short-term investments were
pledged as collateral for certain short-term debt compared with $8.5 million at
the end of 1998. The decrease is due primarily to the liquidation of
collateralized short-term investments in the payment of the Senior Subordinated
Notes.
Net cash used in operations in 1999 was $27 thousand compared with net cash
provided by operations of $17.6 million in 1998 and net cash used in operations
of $378 thousand in 1997. The decrease in 1999 was due primarily to higher trade
receivables which resulted mainly from payment delays by a number of our year
2000 project customers.
Net cash used in investing activities was $4.2 million in 1999, $7.3 million in
1998 and $2.9 million in 1997. The decrease in 1999 was due principally to the
sale of short-term investments in connection with the payment of the Senior
Subordinated Notes. Capital expenditures, which totaled $2.2 million in 1999,
included investments in software and computer systems for research and
development purposes and computer and communication systems for new regional
offices.
Net cash used in financing activities totaled $7.0 million in 1999 compared with
$119 thousand in 1998 and net cash provided by financing activities of $7.1
million in 1997. The increase in 1999 is due mainly to the payment of the Senior
Subordinated Notes.
We believe that available working capital and credit lines will be sufficient
for the next 12 months to meet our operating requirements. Depending upon our
future growth, the success of our strategic initiatives and acquisition
opportunities, we will consider from time to time various financing alternatives
and may seek to raise additional capital to finance our growth and strategic
efforts through equity or debt financing or to enter into strategic
arrangements.
Qualitative and Quantitative Disclosure About Market Risk
Market risks relating to our operations result primarily from changes in
exchange rates, interest rates or weak economic conditions in the markets in
which we sell our products and services. We actively monitor these exposures. To
manage the volatility relating to these exposures, we may enter into various
derivative transactions. Our objective is to reduce, where it is deemed
appropriate to do so, fluctuations in earnings and cash flows associated with
changes in foreign currency rates and interest rates. It is our policy and
practice to use derivative financial instruments only to manage exposures. We do
not use financial instruments for trading purposes and are not a party to any
leveraged derivatives.
Foreign Currency Risk. We conduct our business in various foreign currencies,
primarily those of Europe and to a lesser extent of Japan, Israel, Canada, and
Australia. We monitor our foreign currency exposure and, from time to time, will
enter into currency forward contracts to hedge sales transactions. We use such
contracts to hedge exposure to changes
30
<PAGE>
in foreign currency exchange rates associated with revenue denominated in a
foreign currency and anticipated costs to be incurred in a foreign currency. In
doing so, we seek to minimize the risk that the fair value of sales of our
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, 1999.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
2000 2001 2002-04 Total
---- ---- ------- -----
<S> <C> <C> <C> <C>
Forward contracts to sell
foreign currencies for U.S. dollars
French Francs
Notional value $ 4.5 - - $4.5
Average contract rate 5.824
Euro
Notional value $ 0.5 - - $0.5
Average contract rate 1.008
Japanese Yen
Notional value $0.5 - - $0.5
Average contract rate 101.684
</TABLE>
Interest Rate Risk. Our interest expenses are most sensitive to changes in the
London Interbank Offered Rate (LIBOR) as our short-term borrowings bear a LIBOR
based interest rate. Excess liquidity invested in short-term investments bears
minimal interest rate risk.
At December 31, 1999, we had approximately $3.6 million outstanding on our
short-term credit agreements and $268 thousand recorded as long-term lease
obligations. The potential loss to the Company over one year that would result
from a hypothetical, instantaneous and unfavorable change of 100 basis points in
the interest rates of all applicable financial assets and liabilities on
December 31, 1999 would be approximately $40 thousand.
Impact of Inflation
Inflation has not had a significant impact on our operating results to date.
However, a major portion of our 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.
31
<PAGE>
Factors That May Affect Future Results
We operate globally in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section lists some, but not all,
of those risks and uncertainties that may have a material adverse effect on our
business, financial condition or results of operations.
Our business is characterized by relatively large projects or engagements that
can have a significant impact on our total revenue and cost of revenue from
quarter to quarter. As a high percentage of our 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.
Our turnkey solutions are generally sold as fixed-price projects with delivery
requirements spanning more than one year. If our actual cost-to-complete of
these projects differs significantly from the estimated cost-to-complete, there
could be a material adverse effect on our results of operations and financial
position. The sales cycle for our solutions is variable, typically ranging
between a few weeks to several months from initial contact with the potential
client to the signing of a contract. Occasionally sales require substantially
more time. Delays in executing client contracts may affect our revenue and cause
our operating results to vary widely. Our turnkey solutions are generally priced
in excess of $1 million and are delivered over periods of time ranging from
several months to several years. Payment terms are generally based on periodic
payments or on the achievement of milestones. Any delays in payment or on the
achievement of milestones may have a material adverse impact on our financial
position.
The market for software products and related services, in general, is highly
competitive and the market for e-Business solutions is evolving at a fierce
pace. Our principal competitors generally have significantly greater resources
than do we. Price reductions or declines in demand for our solutions and
services, whether as a result of competition, technological change, changes in
the level of application development, reengineering or maintenance performed
internally by our customers or potential customers would have a material adverse
effect on our results of operations and financial position.
The operating results of many software and services companies reflect seasonal
trends, and we expect to be affected by such trends in the future. Although we
have not experienced consistent seasonal fluctuations in operational results to
date, we believe that it is likely that we will experience relatively higher
revenues in the fourth quarter and relatively lower revenues in the first
quarter due mainly to customers' annual purchasing and budgetary practices. To
the extent future operations in Europe constitute a high percentage of our total
revenues, we anticipate that we may also experience relatively weaker demand in
the third quarter as a result of reduced activities in Europe during the summer
months.
Variations in our revenue and operating results could occur as a result of a
number of other factors, such as the budgeting and purchasing practices of our
customers, the length of the customer product evaluation process, the timing of
our customers' system conversions, the timing and cost of new product
introductions and product enhancements, and the timing of any acquisitions and
associated costs. Employee hiring and utilization rates may also affect our
revenues and results of operations.
32
<PAGE>
We have 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, we are implementing a variety of new or expanded business systems,
procedures and controls. There can be no assurance that the implementation of
such systems, procedures, controls and other internal systems can be completed
successfully. If our growth continues, we will be required to hire and integrate
large numbers of new employees. There can be no assurance that we 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. Our failure to manage growth effectively,
including our failure to attract talented employees or retain the services of
key personnel, could have a material adverse effect on our results of operations
and financial position.
As part of our growth strategy, we may, from time to time, acquire or invest in
complementary businesses, products or technologies. We frequently evaluate the
tactical or strategic opportunity available related to complementary businesses,
products or technologies. The process of integrating an acquired company's
business into our operations and/or of investing in new technologies, such as
our B2B-Internet initiative, may result in unforeseen operating difficulties and
large expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of our 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 effect on our operating results and financial condition.
Additional factors that may cause actual results to differ materially from our
expectations include industry specific factors; our ability to continuously
develop, introduce and deliver commercially viable solutions and technologies,
and the market's rate of acceptance of the solutions we offer; our ability to
keep pace with market and technology changes and to compete successfully, and
our ability to manage the competitive risks associated with the strategic
alliances that we have entered into.
Our products focus specifically on organizations' business-critical applications
including those related to specialized redevelopment issues such as the adoption
of the single European currency. The provisions of our sales contracts limit our
exposure to potential liability claims. Although we carry errors and omissions
insurance against such claims, there can be no assurance that such insurance
will continue to be available on acceptable terms, if at all, or that such
insurance will provide us with adequate protection against any such claims. A
significant liability claim against us could have a material adverse effect on
our results of operations and financial position.
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 we operate.
33
<PAGE>
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 43 Chairman of the Board
Dan Falk 55 President and Chief Executive Officer
Yehuda Doron 48 Executive Vice President, Worldwide Sales
Dror Ginossar 50 Executive Vice President, Research and
Development
Avi Nir 41 Executive V.P. of Human Resources and Administration
Shlomo (Shai) Sole 49 Executive Vice President, Chief
Technology Officer and Director
Lauri Hanover 40 Executive Vice President and CFO
Steven Kronengold 40 Executive Vice President, Secretary and
General Counsel
Gil Arbel 36 Executive Vice President of Sapiens
Americas
L. Robert Libutti (2) 63 Director
Tsvi Misinai 54 Director
Kenneth J. Bialkin (1) 71 Director
Michel Berty (1) (2) 60 Director
Harold H. Leach, Jr. (1) 46 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 has served as a director of the Company since May 1991 and assumed
the position of Chairman of the Board of Directors on January 1, 1998. He served
as Chief Executive Officer of the Company from January 1995 until March 31,
2000. Mr. Zuckerman served as Chief Operating Officer of the Company from its
incorporation until April 1994.
Dan Falk assumed the position of President of the Company in July 1999 and the
position of Chief Executive Officer on March 31, 2000. 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.
34
<PAGE>
Dror Ginnosar, Executive Vice President, Research and Development, joined the
Company in December 1999. Prior to joining the Company, Mr. Ginnosar served as
CEO of Polyglot (Formula Group) from 1998. Prior to joining Polyglot, he was the
Managing Director and VP Development for RUN Ltd. (Rad-Bynet Group) from 1992 to
1997. From 1975 to 1991, Mr. Ginnosar served in various capacities for the
Israeli Air Force including Head of Operational Systems Software Center and Head
of Real Time Systems Software Center.
Avi Nir has served as Executive V.P. of Human Resources and Administration of
the Company since January 2000. He previously served as a Corporate Director of
Human Resources at Orbotech from 1997 through 1999.
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.
Gil Arbel has served as Executive V.P., Sapiens Americas, since February 2000.
Prior to joining the Company, Mr. Arbel served as Vice President of Product
Marketing for Computer Associates from November 1996 through February 2000.
Before this, he was the Director of Product Management for Cheyenne Software
from March 1996 through November 1996. He also worked as a Senior Procurement
Agent for the Government of Israel from September 1990 through March 1996.
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
35
<PAGE>
director of Meister Software N.V. Mr. Misinai worked at the Weizman Institute,
as an initiator and manager of the DB1 project.
Kenneth J. Bialkin has been a director of the Company since August 1992. Mr.
Bialkin has been a partner at Skadden Arps for more than five years. Mr. Bialkin
is a director of 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. 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, 1999, to all directors and executive officers as a group for
services in all capacities was $2,039,300 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,
36
<PAGE>
1999, to provide pension, retirement and similar benefits for directors and
executive officers of the Company was $305,900.
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 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.
37
<PAGE>
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 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, 1999, options to purchase 4,342,775 Common Shares (2,301,500
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 2009. As of that date, the Company had granted restricted stock awards
of 214,500 (750 of which were held by current and former officers and directors)
to employees. As of December 31, 1997, all of the restricted shares had vested
under the restricted stock awards. Restricted stock awards vested at various
dates beginning in June 1993.
Item 13. Interest of Management in Certain Transactions
None
PART II
38
<PAGE>
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.
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
39
<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/Ron Zuckerman
-------------------------------
Ron Zuckerman
CEO, Chairman of the Board
Date: May 23, 2000
40
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
IN U.S. DOLLARS
INDEX
Page
------------------
Report of Independent Auditors F - 2
Consolidated Balance Sheets F - 3 - F - 4
Consolidated Statements of Income F - 5
Statements of Changes in Shareholders' Equity F - 6 - F - 8
Consolidated Statements of Cash Flows F - 9 - F - 11
Notes to the Consolidated Financial Statements F - 12 - F - 31
- - - - - - - -
<PAGE>
[GRAPHIC OMITTED]ERNST & YOUNG |X| Kost Forer & Gabbay |X|Phone: 972-3-6232525
2 Kremenetski St. Fax: 972-3-5622555
Tel-Aviv 67899, Israel
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
SAPIENS INTERNATIONAL CORPORATION N.V.
We have audited the consolidated balance sheets of Sapiens
International Corporation N.V. and its subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 27, 2000 A Member of Ernst & Young International
F-2
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
--------------- -------------
U.S. dollars in thousands
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,735 $ 20,222
Short-term investments including amounts pledged of $ 2,318 and
$ 8,500 as of December 31, 1999 and 1998, respectively
(Note 3 and Note 11) 8,055 12,826
Trade receivables (net of allowance for doubtful accounts of $ 2,511
and $2,057 as of December 31, 1999 and 1998, respectively) 31,943 16,351
Other current assets (Note 4) 7,118 4,180
------------- ------------
Total current assets 55,851 53,579
------------- ------------
Property and equipment, net (Note 5) 5,207 5,068
------------- ------------
Other assets:
Capitalized software development costs, net of accumulated amortization of
$ 13,050 and $ 10,854 as of December 31, 1999
and 1998,respectively (Note 6a) 9,312 9,080
Goodwill, net of accumulated amortization of $ 2,398 and $ 364 as of December
31, 1999 and 1998, respectively (Note 6c) 10,056 3,077
Other, net of accumulated amortization of $ 2,389 and $ 2,207 as of December
31, 1999 and 1998, respectively (Note 6b) 4,679 2,520
------------- ------------
Total other assets 24,047 14,677
------------- ------------
Total assets $ 85,105 $ 73,324
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
----------------- -------------
U.S. dollars in thousands
---------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Short-term bank debt (Note 8a) $ 3,590 $ 5,182
Current portion of long-term debt (Note 8b) 67 92
Senior subordinated notes payable - 8,743
Trade payables 3,495 3,092
Other liabilities and accrued expenses (Note 7) 15,988 12,401
Deferred revenues 2,392 3,041
------------- -------------
Total current liabilities 25,532 32,551
------------- -------------
Long-term liabilities:
Long-term debt (Note 8b) 7,930 7,273
Other long-term liabilities (Note 9) 229 385
------------- -------------
Total long-term liabilities 8,159 7,658
------------- -------------
Shareholders' equity:
Cumulative convertible preferred shares (authorized 608,000 par value Dutch
Guilder 1) issued and outstanding 4,500 at December 31, 1999
and 5,250 at December 31, 1998 4 4
Common shares (authorized 40,000,000 par value Dutch Guilder 1);
1999 - 21,677,278 issued and 21,464,511 outstanding;
1998 - 20,264,423 issued and 20,051,656 outstanding; 8,694 7,996
Additional paid-in capital 69,593 63,494
Treasury shares (2,423) (2,423)
Common shares accrued as dividends 967 720
Accumulated other comprehensive loss (3,450) (2,055)
Accumulated deficit (21,971) (34,621)
------------- -------------
Total shareholders' equity 51,414 33,115
------------- -------------
Total liabilities and shareholders' equity $ 85,105 $ 73,324
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1999 1998 1997
------------ -------------- -------------
U.S. dollars in thousands
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Products $ 47,390 $ 37,181 $ 20,507
Consulting and other services 44,440 33,799 24,057
------------ ------------ -----------
Total revenues 91,830 70,980 44,564
------------ ------------ -----------
Cost of revenues:
Products 16,354 12,690 4,473
Consulting and other services 29,333 21,611 15,507
------------ -------------- ------------
Total cost of revenues 45,687 34,301 19,980
------------ -------------- ------------
Gross profit 46,143 36,679 24,584
Operating expenses:
Research and development, net (Note 16a) 5,021 4,112 3,258
Selling, general and administrative, net 27,880 22,921 16,316
Restructuring costs (Note 1c) 2,019 - -
------------ -------------- ------------
Total operating expenses 34,920 27,033 19,574
------------ -------------- ------------
Operating income 11,223 9,646 5,010
Financial income, net 412 457 107
Other expenses, net (220) (328) (417)
------------ -------------- ------------
Income before income taxes 11,415 9,775 4,700
Income tax benefit (expense) 1,678 (55) (57)
------------ -------------- ------------
13,093 9,720 4,643
Share in losses of equity investments - - (203)
Minority interests in (income) losses (25) 15 104
------------ -------------- ------------
Net income $ 13,068 $ 9,735 $ 4,544
------------ -------------- ------------
Dividends on preferred shares (Note 13h) $ (418) $ (645) $ (2,406)
------------ -------------- ------------
Net income to shareholders of common shares $ 12,650 $ 9,090 $ 2,138
============ ============== ============
Basic earnings per share (Note 16b) $ 0.61 $ 0.48 $ 0.14
============ ============== ============
Diluted earnings per share (Note 16b) $ 0.53 $ 0.43 $ 0.12
============ ============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<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:
Net income - - - - -
Other comprehensive loss:
Unrealized gains on
securities, net of - - - - -
reclassification adjustment
Foreign currency translation
adjustment - - - - -
Other comprehensive loss - - - - -
Comprehensive income
Issue of Series D1, D2 and E
preferred shares (Note 13a) 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 - 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
=========== =========== =============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
Loss Deficit Total
------------------ -------------- -------------
U.S. dollars in thousands
-----------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1997 $ (726) $ (47,050) $ 7,191
Comprehensive income:
Net income - 4,544 4,544
-------------
Other comprehensive loss:
Unrealized gains on
securities, net of - - 3
reclassification adjustment
Foreign currency translation
adjustment - - (329)
-------------
Other comprehensive loss (326) - (326)
-------------
Comprehensive income 4,218
-------------
Issue of Series D1, D2 and E
preferred shares (Note 13a) - - 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 - - -
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 consolidated 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, 1998 $ 4 $ 7,200 $ 59,878 $ (2,423) $ 335
Comprehensive income:
Net income - - - - -
Other comprehensive loss:
Unrealized losses on
securities, net of - - - - -
reclassification adjustment
Foreign currency translation
adjustment - - - - -
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 shares - 12 86 - (98)
Common shares accrued as
dividends on preferred shares - - - - 483
Shares issued in connection to
prior security issuance - 24 (24) - -
Shares issued in connection with
acquisitions - 111 1,523 - -
----------- ----------- --------------- ----------- --------------
Balance as of December 31, 1998 $ 4 $ 7,996 $ 63,494 $ (2,423) $ 720
=========== =========== =============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
Loss Deficit Total
-------------------- --------------- --------------
U.S. dollars in thousands
---------------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1998 $ (1,052) $ (43,873) $ 20,069
Comprehensive income:
Net income - 9,735 9,735
--------------
Other comprehensive loss:
Unrealized losses on
securities, net of - - (51)
reclassification adjustment
Foreign currency translation
adjustment - - (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 shar - - -
Common shares accrued as
dividends on preferred shares - (483) -
Shares issued in connection to
prior security issuance - - -
Shares issued in connection with
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 consolidated 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, 1999 $ 4 $ 7,996 $ 63,494 $ (2,423) $ 720
Comprehensive income:
Net income - - - - -
Other comprehensive loss:
Unrealized losses on
securities, net of
reclassification adjustment - - - - -
Foreign currency translation
adjustment - - - - -
Other comprehensive loss - - - - -
Comprehensive income
Conversion of preferred shares to
common shares:
Series "D1" - 73 (73) - -
Employee stock options exercised - 352 1,996 - -
Warrants exercised - 109 1,180 - -
Compensation expense recorded
on issue of warrants - - 57 - -
Common shares issued as dividends
on Series D1 preferred shares - 17 154 - (171)
Common shares accrued as
dividends on preferred shares - - - - 418
Shares issued in connection with
acquisitions - 147 2,785 - -
----------- ----------- --------------- ----------- --------------
Balance as of December 31, 1999 $ 4 $ 8,694 $ 69,593 $ (2,423) $ 967
=========== =========== =============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
comprehensive Accumulated
loss deficit Total
-------------------- --------------- --------------
U.S. dollars in thousands
---------------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, 1999 $ (2,055) $ (34,621) $ 33,115
Comprehensive income:
Net income - 13,068 13,068
--------------
Other comprehensive loss:
Unrealized losses on
securities, net of - - (261)
reclassification adjustment - - (1,134)
--------------
Foreign currency translation
adjustment - -
Other comprehensive loss (1,395) - (1,395)
--------------
Comprehensive income 11,673
--------------
Conversion of preferred shares to
common shares:
Series "D1" - - -
Employee stock options exercised - - 2,348
Warrants exercised - - 1,289
Compensation expense recorded
on issue of warrants - - 57
Common shares issued as dividends
on Series D1 preferred shares - - -
Common shares accrued as
dividends on preferred shares - (418) -
Shares issued in connection with
acquisitions - - 2,932
---------------- --------------- --------------
Balance as of December 31, 1999 $ (3,450) $ (21,971) $ 51,414
================ =============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,068 $ 9,735 $ 4,544
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,024 5,364 3,834
Amortization of deferred gain on sale - leaseback transaction (160) (223) (276)
Gain in value (and accrued interest) on short-term investments (222) (452) (636)
Share in losses of equity investments - - 203
Loss (gain) on disposal of property and equipment (11) (93) 217
Compensation expense related to restricted
share awards and warrants issued 57 27 47
Changes in trade receivables (16,790) (1,137) (2,882)
Changes in other receivables and prepaid expenses (2,959) 209 (1,251)
Changes in deferred taxes (1,443) - -
Changes in payables and other liabilities 2,409 4,180 (4,178)
------------- ------------- -------------
Net cash provided by (used in) operating activities (27) 17,610 (378)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (2,174) (2,404) (1,560)
Increase in capitalized software development costs (2,814) (3,025) (3,092)
Purchase of short-term investments (3,253) (4,620) (3,280)
Proceeds from sale of short-term investments 8,124 4,322 4,787
Proceeds from sale of property and equipment 103 11 206
Purchase of other assets (1,059) (613) -
Cash paid for purchase of Sapiens Japan (excluding cash and
cash equivalents) (1) 184 - -
Cash paid for purchase of Syspart (excluding cash and
cash equivalents) (2) (3,360) - -
Cash paid for purchase of SAIC (excluding cash and
cash equivalents) (3) - (1,002) -
------------- ------------- -------------
Net cash used in investing activities (4,249) (7,331) (2,939)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividends on preferred shares $ - $ - $ (792)
Amortization of bond issuance costs 142 141 142
Proceeds received on exercise of options and warrants 3,637 2,199 1,181
Net proceeds from issuance of preferred shares - - 7,774
Decrease in short-term bank debt (1,973) (1,753) (99)
Payment of Senior Subordinated Notes (8,743) - -
Payment of long-term liabilities (48) (930) (1,098)
Payments received on long-term notes receivable - 224 -
------------- ------------- -------------
Net cash provided by (used in) financing activities (6,985) (119) 7,108
------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents (226) (276) (329)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (11,487) 9,884 3,462
Cash and cash equivalents at beginning of year 20,222 10,338 6,876
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,735 $ 20,222 $ 10,338
============= ============= =============
(1) The net fair value of the assets acquired of Sapiens Japan
(see Note 1b) was as follows:
Working capital deficiency (excluding cash and cash
equivalents) $ (74)
Fixed assets, net 73
Long-term liabilities (1,177)
Excess of cost over net fair values upon acquisition 1,762
-------------
584
Less amounts financed by the issuance of shares
(see Note 13f) (768)
-------------
$ (184)
=============
(2) The net fair value of the assets acquired of Syspart
(see Note 1b) was as follows:
Working capital deficiency (excluding cash and cash
equivalents) $ (1,249)
Fixed assets, net 99
Excess of cost over net fair values upon acquisition 6,674
-------------
5,524
Less amounts financed by the issuance of shares
(see Note 13g) (2,164)
-------------
$ 3,360
=============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
(3) 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, net 10
Excess of cost over net fair values upon acquisition 2,491
-------------
2,286
Less amounts financed by the issuance of shares
(see Note 13e) (1,284)
-------------
$ 1,002
=============
Supplemental cash flow information: Cash paid during the year for:
Interest $ 750 $ 1,055 $ 1,758
============= ============= =============
Income taxes $ 261 $ 407 $ 146
============= ============= =============
Non-cash transactions:
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 $ 418 $ 483 $ 335
============= ============= =============
Common shares issued as dividends on preferred shares $ 171 $ 98 $ 240
============= ============= =============
Issue of common shares in purchases of subsidiaries $ 2,932 $ 1,634 $ -
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated 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. These solutions consist primarily of
rapid application development ("RAD"), integration of
legacy systems into new applications and technologies,
mapping and management of enterprise IT assets, and
reengineering services that integrate the Company's
rule-based object technology, efficient RAD methodology,
and extensive consulting expertise.
The Company delivers strategic, end-to-end, customized
e-business solutions to its customers, enabling them to
capitalize on their IT assets in the transition to
e-business. The Company offers both cross-industry
solutions as well as those for specific vertical markets.
The Company's approach for delivering e-business solutions
focuses on analysis of customers' requirements,
Web/application development, technical implementation,
integration, project management, and long-term support
services. The Company also offers a specialized solution
for the migration of European IT systems to the euro
currency.
b. Acquisition of companies:
(1) In May 1999, the Company acquired an additional 70.1%
of the outstanding shares of Sapiens Japan Co., a
Japanese corporation (hereafter - "Sapiens Japan").
The Company previously owned 19.9% of the outstanding
shares of Sapiens Japan Co. The total consideration
was approximately $ 1.5 million of which 48% was paid
in cash and 52% in Sapiens common stock. An amount of
$ 1,762 (including the pre-existing investment) out
of the total acquisition cost was attributed to
goodwill and is being amortized over its estimated
useful life.
Pro forma information in accordance with APB 16 has
not been provided as the net income and earnings per
share of Sapiens Japan for 1998 and 1999 were not
material in relation to total consolidated net income
and earnings per share.
(2) In May 1999, the Company acquired all of the shares
of Syspart (Deutschland) GmbH, a German corporation
(hereafter - "Syspart"). The total consideration was
approximately $ 6 million (Including $ 354 of costs
related to the acquisition) of which 64% was paid in
cash and 36% in Sapiens common stock. An amount of $
6,674 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 contingent
upon the actual performance of Syspart. Such payment
will be recorded as additional goodwill, when the
performance goals have been achieved.
Pro forma information in accordance with APB 16 has
not been provided as the net income and earning per
share of Syspart for 1998 and 1999 were not material
in relation to total consolidated net income and
earnings per sahre..
(3) 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
F-12
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
F-13
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 contingent
upon the actual performance of SAIC. Such payment
will be recorded as additional goodwill, when the
performance goals have been achieved.
Pro-forma information in accordance with APB 16 has
not been provided as the net income and earnings per
share of SAIC for 1997 and 1998 were not material in
relation to total consolidated net income and
earnings per share.
c. Restructuring costs
In 1999, the Company recorded restructuring charges of $
2,019 of which $ 990 paid in 1999 and $ 1,029 was accrued
as a short-term liability as of December 31, 1999. The
restructuring costs consist of employee termination
benefits associated with the involuntary terminations of 40
employees. The involuntary terminations result from the
change in the Company's strategy to focus on e-business and
Internet-related technologies.
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.
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 and reporting 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, "Foreign Currency Translation" ("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.
F-14
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 3 - 6 years
Leasehold improvements (over the shorter of the term
of the lease or the estimated
useful life of the asset)
g. Capitalized software development costs:
Research and development costs incurred in the process of
developing new products or product improvements, are
charged to expense as incurred, net of participation by the
Office by the Office of the Chief Scientist in the Israeli
Ministry of Industry and Trade ("the OCS").
Statement of Financial Accounting Standards (SFAS) No. 86
"Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility. Based on the
Company's product development process, technological
feasibility is established upon completion of a detailed
program design.
Capitalized software costs are amortized by the greater of
the amount computed using: (i) the ratio that current gross
revenues from sales of the software bear to the total of
current and anticipated future gross revenues from sales of
that software, or (ii) the straight-line method over the
estimated useful life of the software product (three to
five years). The Company assesses the recoverability of
this intangible asset on a regular basis by determining
whether the amortization of the asset over its remaining
life can be recovered through undiscounted future operating
cash flows from the specific software product sold.
F-15
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 5-8 years
i. Goodwill:
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 fixed-price contracts (which
include the sale of software technology and services),
software license sales, and fees for the use of software.
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.
Revenues earned under software licensing agreements with
end-users are recognized in accordance with Statement of
Position (SOP) 97-2 "Software Revenue Recognition" (as
amended by SOP 98-4), upon delivery of the software when
collection is probable, all license payments are due within
one year, the license fee is otherwise fixed or
determinable, vendor-specific objective evidence exists to
allocate the total fee to the elements of the arrangement
and persuasive evidence of an arrangement exists. Fees for
the use of software are recognized when earned.
Consulting and other services revenue includes consulting,
training and post contract maintenance services. Revenues
from consulting, maintenance and training services are
recognized ratably over the contractual period or as
services are performed.
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.
F-16
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 financial
institutions. 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.
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 and cash
equivalents, accounts receivables, short-term investments,
short-term loans and accounts payable approximate fair
values.
The carrying amounts of the Company's long-term borrowings
arrangements approximate their fair value. Fair values were
estimated using discounted cash flow analyses, based on
prevailing market borrowing rates.
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".
F-17
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
The total number of shares related to outstanding
securities excluded from the calculations of diluted net
income per share were 93,506 for the year ended December
31, 1999, because they were antidilutive for part of the
period.
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. 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.
t. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board
issued No. 133 ("SFAS No. 133"), "Accounting for Derivative
instruments and Hedging Activities". This 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 also
requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria 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. The FASB has
issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133". The Statement defers for one year
the effective date of SFAS No. 133. The rule will apply to
all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the impact of
this new statement on the Company's consolidated balance
sheets or results of operations to be material.
u. Reclassification:
Certain prior year amounts have been reclassified to
conform with the current year's presentation.
F-18
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3: SHORT-TERM INVESTMENTS
At December 31, 1999 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 1999, 1998 and
1997 totaled $ 222, $328 and $ 343, respectively. Gross realized
losses on sales of these securities in 1999, 1998 and 1997 totaled
$ 0, $63 and $ 46, respectively.
The aggregate fair value, gross unrealized holding gains, gross
unrealized holding losses and amortized cost for securities at
fair value by major security type at December 31, 1999 and 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, 1999:
U.S. treasury securities $ 24 $ 6 $ - $ 30
Non-U.S. corporate debt a
securities 7,898 204 (77) 8,025
--------------- --------------- --------------- --------------
$ 7,922 $ 210 $ (77) $ 8,055
=============== =============== =============== ==============
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
=============== =============== =============== ==============
</TABLE>
The scheduled maturities of available-for-sale marketable
securities as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair
Value
---------------- -----------------
U.S. dollars in thousands
--------------------------------------
<S> <C> <C>
Due within one year $ 2,873 $ 3,046
Due after one year through five years 5,049 5,009
Due after five years - -
--------------- --------------
$ 7,922 $ 8,055
=============== ==============
</TABLE>
F-19
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4: OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- --------------
U.S. dollars in thousands
--------------------------------
<S> <C> <C>
Sales and other taxes receivable $ 2,913 $ 387
Prepaid expenses 1,747 1,277
Deferred taxes 957 326
Other receivables 1,501 2,190
-------------- --------------
$ 7,118 $ 4,180
============== ==============
</TABLE>
NOTE 5: PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------------------------- ---------------------------
December 31 December 31
------------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ----------- ------------
U.S. dollars in thousands
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Equipment and furniture $ 2,267 $ 2,103 $ 1,158 $ 967
Computers and software 9,115 7,858 6,078 5,063
Motor vehicles 209 351 130 234
Leasehold improvements 1,566 1,486 584 466
------------- ------------- ----------- ------------
$ 13,157 $ 11,798 $ 7,950 $ 6,730
============= ============= =========== ============
</TABLE>
Depreciation expense totaled $ 1,839, $ 1,670 and $1,476 for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-20
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6: OTHER LONG-TERM ASSETS
a. Amortization expense for capitalized software development
costs for 1999, 1998 and 1997 was $ 2,842, $ 3,059 and $
2,129, respectively. Amortization expense is included in
cost of products.
b. Other assets, net of amortization, are comprised of the
following:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------------------------- ------------------------------
December 31 December 31
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
U.S. dollars in thousands
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid royalties $ 2,083 $ 2,001 $ 966 $ 761
Bond issuance costs 1,279 1,279 1,279 1,137
Other assets 4,248 1,447 686 309
------------ ------------- ------------- ------------
$ 7,610 $ 4,727 $ 2,931 $ 2,207
============ ============= ============= ============
</TABLE>
Amortization of other assets charged to expense was $ 622,
$382 and $ 313 for the years 1999, 1998 and 1997,
respectively.
c. Goodwill amortization amounted to $ 863, $ 210 and $ 60 for
the years 1999, 1998 and 1997, respectively.
NOTE 7: OTHER LIABILITIES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- --------------
U.S. dollars in thousands
--------------------------------
<S> <C> <C>
Employee and related payroll accruals $ 5,331 $ 2,772
Sales and other taxes payable 5,508 3,420
Interest payable 35 186
Accrued restructuring costs (Note 1c) 1,029 -
Accrued expenses 4,085 6,023
-------------- --------------
$ 15,988 $ 12,401
============== ==============
</TABLE>
F-21
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8: DEBT
a. Short-term debt:
The Company's short-term debt is comprised of short-term
loans with maturities of less than three months. These
loans bear interest at rates ranging between the London
Interbank Offered Rate plus 0.65% to plus 0.75% and on
Japanese Yen borrowings at a rate of 2.625%. A portion of
the Company's short-term loans requires that the Company
pledge cash or short-term investments as collateral for its
borrowings (Note 11).
The Company has available unsecured revolving credit line
facilities for borrowings of up to a total of $ 17 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% and on
New Israeli Shekel ("NIS") borrowings, at the prime rate of
interest in Israel.
b. Long-term debt:
<TABLE>
<CAPTION>
December 31,
Rate of --------------------------
interest Maturity 1999 1998
--------- ------------------ ----------- ------------
U.S. dollars in thousands
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Convertible subordinated notes
("Old Notes" - conversion price $ 32 September 20,
per common share) 5 2003 $ 6,930 $ 6,930
Capital lease obligations (Note 10) - 268 311
Other loans 5 - 8 799 124
----------- ------------
7,997 7,365
Less - current portion (67) (92)
----------- ------------
$ 7,930 $ 7,273
=========== ============
</TABLE>
Long-term debt maturities after December 31, 1999 are as
follows (U.S. dollars in thousands):
2000 $ 67
2001 808
2002 45
2003 6,980
Thereafter 97
------------------
$ 7,997
==================
Interest expense was $ 0.9 million, $ 1.0 million and $ 1.1
million for the years 1999, 1998 and 1997, respectively.
F-22
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9: OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
-------------- --------------
U.S. dollars in thousands
---------------------------------
<S> <C> <C>
Deferred gain on sale - leaseback (1) $ 225 $ 385
Other 4 -
-------------- --------------
$ 229 $ 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 exercised its option to renew
the lease for five additional years, terminating in August
2005.
NOTE 10: 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, 1999, the Company had a contingent
liability to pay royalties of approximately $ 12 million.
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>
2000 $ 1,471 67
2001 1,350 67
2002 1,241 67
2003 1,226 67
2004 and thereafter 1,226 111
-------------- ---------------
Total future minimum lease payments $ 6,514 379
==============
Less - amount representing interest (111)
---------------
Principal payments remaining on capital lease obligations 268
===============
</TABLE>
F-23
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Rent expense for the years ended December 31, 1999, 1998
and 1997 was $ 1,776, $ 1,358 and $ 1,218, respectively.
NOTE 11: SECURITY INTERESTS AND PLEDGES
The Company has pledged $ 2.3 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 pledged bank guarantees in the amount of $ 0.6
million as security for the building that was sold and leased back
in 1995.
NOTE 12: INCOME TAXES
At December 31, 1999, the Company had net operating loss
carryforwards for U.S. federal income tax purposes of
approximately $ 8,899, which are available to offset future
federal taxable income and expire in years 2008 to 2012 and tax
credits of $ 774, which generally expire in 2002 to 2010. In
addition, the Company had net operating loss carryforwards
relating to non-U.S. subsidiaries totaling approximately $ 13,086,
which are available to offset future taxable income. Generally,
such amounts expire in years 2000 to 2003, or, in some cases, have
no expiration dates.
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,
1999 and 1998 are presented below.
<TABLE>
<CAPTION>
December 31, 1999 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 $ - $ 8,686 $ - $ 11,135
Tax credits carryforward - 774 - 716
Other temporary differences 957 2,334 613 196
------------ --------------- ----------- -----------------
Gross deferred tax assets 957 11,794 613 12,047
Less - valuation allowance - (10,198) (287) (12,047)
------------ --------------- ----------- -----------------
Net deferred tax asset $ 957 $ 1,596 $ 326 $ -
============ =============== =========== =================
</TABLE>
The Company has provided a valuation allowance against a majority
of the deferred tax assets in respect of its tax losses
carryforward and other temporary differences due to its previous
history of losses and current uncertainty concerning its ability
to realize these deferred tax assets in the future.
F-24
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Provisions for income tax expense are comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
U.S. dollars in thousands
-------------------------------------------------
<S> <C> <C> <C>
Current (foreign) $ 549 $ 381 $ 141
Deferred (foreign) (2,227) (326) (84)
-------------- -------------- -------------
$ (1,678) $ 55 $ 57
============== ============== =============
</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, 1999, 1998 and 1997,
does not include the recognition of a majority of the deferred tax
assets relating to the net operating losses of the Company's
subsidiaries worldwide. The main reconciling item from the
statutory tax rate of the Company to the effective tax rate is the
non-recognition of tax benefits from accumulated net operating
losses carryforward among the various subsidiaries worldwide due
to the uncertainty of the realization of such tax benefits.
NOTE 13: SHAREHOLDERS' EQUITY
a. 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.
F-25
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 1999, 2,500 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, 790,551 common shares and warrants to purchase
431,234 common shares were issued. In 1999, warrants
exercised were 35,912 at $ 4.28, 34,721 at $ 4.75 and
77,655 at $ 9.73.
b. The following is a summary of the preferred shares as of
December 31, 1999 giving effect to the above changes:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
Authorized Outstanding
---------------- ------------------
Number of shares
---------------------------------------
<S> <C> <C>
Series A 100,000 -
Series B 500,000 -
Series D1 4,000 1,500
Series D2 2,000 1,300
Series E 2,000 1,700
---------------- ------------------
608,000 4,500
================ ==================
</TABLE>
c. In 1997, the Company issued 144,000 common shares to the
placement agents in connection with the private placement
transactions.
d. In February 1998, the Company issued 50,000 common shares
in connection with the purchase of 80% of InsureTech
Alternatives Inc.
e. In July 1998, the Company issued 171,300 common shares in
connection with the purchase of SAIC (see Note 1b).
f. In August 1999, the Company issued 78,000 common shares in
connection with the purchase of additional 70.1% of Sapiens
Japan (see Note 1b).
F-26
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
g. In August 1999, the Company issued 216,400 common shares in
connection with the Purchase of Syspart (see Note 1b).
h. Dividends:
In 1997, the Company paid dividends on its Series A and
Series B convertible preferred shares in the amount of $
967. These dividends were paid $ 792 in cash and $ 175 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 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
1998 and 1997 is the amortization of the discount to the
market price on the conversion of convertible shares at the
date of the g rant given to Series D1, D2 and E preferred
shareholders in the amount of $ 162 and $ 1,038,
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.
In 1999, 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 $ 418, of which, $ 57 was paid by
the issuance of 11,199 common shares. Additionally, the
Company issued 10,527 common shares in respect of $ 54 in
dividends, which were accrued in 1997 and 11,679 common
shares in respect of $ 60 in dividends which were accrued
in 1998.
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 both January
1997 and October 1998, the Company increased the number of
shares available for grant by 1.1 million 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.
In 1999, 701,000 employee options to purchase common shares
were exercised, and the Company received proceeds of
approximately $ 2.3 million.
F-27
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of the stock options activities in 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 3,860,950 $ 2.25-6.875 3,405,600 $ 2.25-2.68 2,174,425 $ 2.25
Granted 1,409,150 $ 6.875-9.50 1,547,500 $ 3.375-6.875 1,827,900 $ 2.25-2.68
Exercised (701,000) $ 2.25-6.875 (992,950) $ 2.25-2.68 (504,650) $ 2.25
Canceled (226,325) $ 2.25-8.625 (99,200) $ 2.25-2.68 (92,075) $ 2.25
--------- ------------ ---------- -------------- --------- ------------
Outstanding at
============ ============= ============== ============= =============
4,342,775 $2.25--9.50 3,860,950 $ 2.25-6.875 3,405,600 $ 2.25 - 2.68
==============
</TABLE>
The amount of options exercisable as of December 31, 1999,
1998 and 1997 was 1,778,275, 2,695,000 and 1,884,507,
respectively.
The options outstanding as of December 31, 1999, have been
classified by range of exercise price, as follows:
<TABLE>
<CAPTION>
Options Weighted Option
Outstanding Average Weighted Exerecisable Weighted
as of Remaining Average as of Average
December 31 Contractual Exercise December 31 Exercise
Exercise price 1999 Life Price 1999 Price
-------------------- ----------------- --------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.25 - $ 3.375 1,948,375 6.54 $ 2.53 1,587,400 $ 2.44
$ 6.5 - $ 9.5 2,394,400 9.18 $ 7.92 190,875 $ 6.64
----------------- ----------------
4,342,775 1,778,275
================= ================
</TABLE>
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 1999, 1998 and 1997:
risk-free interest rates of 6%, 5% and 5% respectively,
dividend yields of 0%, volatility factors of the expected
market price of the Company's common shares of 0.702, 0.465
and 0.517, respectively and a weighted-average expected
life of the options of 6, 10 and 10 years, respectively.
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.
F-28
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The weighted-average fair value of the options at their
grant dates in 1999, 1998 and 1997 was $ 2.78, $ 2.02 and
$1.83, 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 123:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1999 1998 1997
------------- -------------- -------------
U.S. dollars in thousands
--------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 12,650 $ 9,090 $ 2,138
============= ============== =============
Pro forma net income $ 6,457 $ 6,713 $ 795
============= ============== =============
Pro forma basic earnings per share $ 0.30 $ 0.35 $ 0.05
============= ============== =============
Pro forma diluted earnings per share $ 0.26 $ 0.30 $ 0.04
============= ============== =============
</TABLE>
j. Warrants:
In 1997, the Company issued 787,000 warrants to the
placement agents in connection with the private placements
implemented at an exercise price ranging from $ 2.00 to
$3.50. As of December 31, 1999, 3,100 warrants had been
exercised.
In 1999, 1998 and in 1997, the Company granted warrants to
service providers at an exercise price ranging from $ 2 to
$ 9 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.
NOTE 14: EMPLOYEE RIGHTS UPON RETIREMENT
The Company has various defined contribution plans for employees
of its subsidiaries around the world. Most of the plans are those
required according to the laws of the country in which the
subsidiary operates. Contributions made under the plans are
invested with financial institutions. Benefits under the plans are
based on contributions from employees and the Company and earnings
on insurance contracts or other investment instruments in which
the contributions are invested.
Expense for contributions made to these plans was $ 921, $ 786 and
$ 497 for 1999, 1998 and 1997, respectively.
F-29
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15: OPERATING SEGMENTS DATA
a. The Company operates in a single industry as a provider of
software solutions.
b. Geographical information:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars in thousands
--------------------------------------------------------
<S> <C> <C> <C>
1. Revenues:
U.K. $ 12,426 $ 10,970 $ 9,200
France 26,364 25,212 5,037
North America 25,905 17,765 14,168
Germany 10,711 3,745 1,431
Israel 6,870 8,285 7,756
All other 9,554 5,003 6,972
--------------- --------------- ---------------
$ 91,830 $ 70,980 $ 44,564
=============== =============== ===============
2. Long-lived assets:
France $ 2,250 $ 2,996 $ 482
Netherlands Antilles 2,050 2,324 3,285
Israel 13,294 13,426 12,445
Germany 6,150 38 37
All other 5,510 961 963
--------------- --------------- ---------------
$ 29,254 $ 19,745 $ 17,212
=============== =============== ===============
</TABLE>
c. Major customer:
In 1998, revenues from one customer represented
approximately 28% of the Company's total revenues.
NOTE 16: SELECTED STATEMENT OF OPERATIONS DATA
a. Research and development costs:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------ -------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Total costs $ 9,872 $ 9,054 $ 7,974
Less - capitalized software development costs (2,814) (3,025) (3,092)
Less - royalty-bearing grants (2,037) (1,917) (1,624)
------------- ------------ -------------
Research and development costs, net $ 5,021 $ 4,112 $ 3,258
============= ============ =============
</TABLE>
F-30
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
b. Earnings per share data:
The following table sets forth the computation of basic and
diluted earnings per share.
1) Numerator
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- -------------- ------------
U.S. dollars in thousands
------------------------------------------------
<S> <C> <C> <C>
Net income to shareholders of common shares $ 12,650 $ 9,090 $ 2,138
Effect of dilutive securities:
Preferred share dividends (*) 366 - -
------------- -------------- -------------
Numerator for diluted earnings per share
- income available to shareholders of
common shares $ 13,016 $ 9,090 $ 2,138
============= ============== =============
</TABLE>
*) The effect of the inclusion of the convertible
preferred shares in 1998 and 1997 would be
antidilutive.
2) Denominator
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1999 1998 1997
------------- --------------- --------------
Number of shares in thousands
--------------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares 20,732 18,870 15,168
Contingent common stock to be
issued as dividends 81 96 42
------------- --------------- --------------
Denominator for basic earnings per share 20,813 18,966 15,210
------------- --------------- --------------
Effect of dilutive securities:
Employee stock options 2,016 1,860 2,397
Warrants issued to third parties 665 561 344
Convertible preferred shares *) 1,064 - -
------------- --------------- --------------
Dilutive potential common shares 3,745 2,421 2,741
------------- --------------- --------------
Denominator for diluted earnings per share - adjusted
weighted average shares, assumed conversions and
exercise of options and/or warrants
24,558 21,387 17,951
============= =============== ==============
</TABLE>
*) The effect of the inclusion of the
convertible preferred shares in 1998 and 1997
would be antidilutive.
F-31
<PAGE>
SAPIENS INTERNATIONAL CORPORATION N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)
In April 2000, the Company completed a private placement of
600,000 shares ("Shares") of its subsidiary, eZoneXchange.com,
Inc. ("eZoneXchange"), for $ 15 million. The investor also
received a warrant to purchase an additional 2.25% of the common
stock of eZoneXchange at the same private placement share price of
$ 25 per share. The Shares are redeemable by the investor during
the fifth year following the date of the transaction of 50% in
cash and 50% in shares of Sapiens common stock amounting to $ 15
million plus 5% interest per annum. The warrant expires in the
event that the Shares are redeemed. Sapiens may repurchase the
Shares at specified prices.
- - - - - - - - - - - - -
F-32
