-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FH3AQwp3482NWlAU90woS62s9clP589xWKgRROo32prerpgyNoYL8vwsbStgoGS2 R8q5RVvPxrTHc2McViuftQ== 0000891554-02-000743.txt : 20020414 0000891554-02-000743.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891554-02-000743 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011213 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA SYSTEMS & SOFTWARE INC CENTRAL INDEX KEY: 0000880984 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 222786081 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19771 FILM NUMBER: 02545704 BUSINESS ADDRESS: STREET 1: 200 RTE 17 CITY: MAHWAH STATE: NJ ZIP: 07430 BUSINESS PHONE: 2015292026 MAIL ADDRESS: STREET 1: 200 ROUTE 17 CITY: MAHWAH STATE: NJ ZIP: 07430 FORMER COMPANY: FORMER CONFORMED NAME: DEFENSE SOFTWARE & SYSTEMS INC DATE OF NAME CHANGE: 19930328 8-K/A 1 d27893_8k-a.txt AMEND 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 FORM 8-K/A TO CURRENT REPORT ON FORM 8-K PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) December 13, 2001 DATA SYSTEMS & SOFTWARE INC. (Exact name of Registrant as Specified in its Charter) Delaware 0-19771 22-2786081 (State or Other Jurisdiction (Commission file Number) (IRS Employer of Incorporation) Identification No.) 200 Route 17, Mahwah, New Jersey 07430 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (201) 529-2026 ================================================================================ Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired. This Form 8-K/A amends the Form 8-K filed on December 28, 2001 reporting the acquisition ("Acquisition") by the Registrant of all of the outstanding ordinary shares of Endan IT Solutions Ltd, a company organized under the laws of Israel. The following are the (i) audited consolidated balance sheet of Endan IT Solutions Ltd. as of December 31, 2000 and the related consolidated statements of income, changes in shareholders' deficiency and cash flows for the year then ended and notes thereto and (ii) unaudited consolidated balance sheet of Endan IT Solutions Ltd. as of September 30, 2001 and the related consolidated statements of income and cash flows for the nine-month period then ended and notes thereto. ----------------------- ENDAN IT SOLUTIONS LTD. ----------------------- CONSOLIDATED FINANCIAL STATEMENTS as of December 31, 2000 ----------------------- ENDAN IT SOLUTIONS LTD. ----------------------- CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 C O N T E N T S Page ---- INDEPENDENT AUDITORS' REPORT 2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet 3 Consolidated Statement of Income 4 Consolidated Statement of Changes in Shareholders' Deficiency 5 Consolidated Statement of Cash Flows 6 - 7 Notes to the Consolidated Financial Statements 8 - 20 # # # # # # INDEPENDENT AUDITORS' REPORT We have audited the consolidated balance sheet of ENDAN IT SOLUTIONS LTD. (the "Company") and subsidiary as of December 31, 2000, and the related consolidated statements of income, changes in shareholders' deficiency and cash flows (as restated - see Note 2J) for the year then ended. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of an affiliated company the investment in which is approximately NIS 229,000 as of December 31, 2000, and for which the Company's equity in whose losses is approximately NIS 172,000 for the year then ended. The financial statements of this company were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included in respect of this company, is based on the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards in the United States and in Israel, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiary as of December 31, 2000, and the consolidated results of operations, changes in shareholders' deficiency and cash flows for the year then ended, in conformity with accounting principles generally accepted in Israel, which differ in certain respects from those generally accepted in the United States (see Note 22 to the consolidated financial statements). As described in Note 2A, the consolidated financial statements referred to above are presented in values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. s/LUBOSHITZ KASIERER --------------------- Member Firm of Arthur Andersen Tel-Aviv, Israel August 27, 2001, except for Note 22, as to which the date is December 7, 2001. ENDAN IT SOLUTIONS LTD. CONSOLIDATED BALANCE SHEET In adjusted NIS of December 2000 December 31, 2000 ------------------- Convenience translation (Note 2H) NIS U.S. dollars Note In thousands ---- ------------------- CURRENT ASSETS Cash and cash equivalents 99 24 Trade receivables, net (3) 7,003 1,733 Other receivables (4) 531 131 ------- ------ 7,633 1,888 ------- ------ INVESTMENTS AND LONG-TERM RECEIVABLES Prepayments (6C) 161 40 Investment in affiliate (5) 229 57 ------- ------ 390 97 ------- ------ FIXED ASSETS, NET (6) 2,404 595 ------- ------ OTHER ASSETS (2F) 447 111 ------- ------ 10,874 2,691 ======= ====== CURRENT LIABILITIES Short-term bank debt (7) 5,723 1,417 Trade payables (8) 691 171 Other payables and accrued expenses (9) 3,189 789 ------- ------ 9,603 2,377 ------- ------ LONG-TERM LIABILITIES Loans from banks (10) 432 107 Loans from parent company and others (11) 4,010 992 Accrued severance pay (12) 929 230 ------- ------ 5,371 1,329 ------- ------ LIENS (13) SHAREHOLDERS' DEFICIENCY (14) (4,100) (1,015) ------- ------ 10,874 2,691 ======= ====== ...s/Israel Frieder... .....s/ Jacob Neuwirth..... ....s/Avi Kurzweil... ISRAEL FRIEDER JACOB NEVWIRTH (NOY) AVI KURZWEIL Chairman of the Board of General Manager and Director In-charge of Financial Directors Matters The notes to the financial statements form an integral part thereof. -3- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENT OF INCOME In adjusted NIS of December 2000 For the year ended December 31, 2000 (*) --------------------- Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ Note In thousands ---- ------------------- REVENUES FROM SERVICES 22,652 5,606 COST OF REVENUES (15) 17,306 4,283 ------ ----- Gross profit 5,346 1,323 DEVELOPMENT COSTS (MAINLY PAYROLL) 1,435 355 SELLING AND MARKETING EXPENSES (16) 1,628 403 GENERAL AND ADMINISTRATIVE EXPENSES (17) 5,396 1,335 ------ ----- Operating loss (3,113) (770) FINANCING EXPENSES, NET (18) (557) (138) OTHER INCOME, NET 179 44 ------ ----- Loss before equity in loss of affiliate and minority interest (3,491) (864) EQUITY IN LOSS OF AFFILIATE (172) (43) MINORITY INTEREST 530 131 ------ ----- Net loss (3,133) (776) ====== ===== (*) Restated - see Note 2J. The notes to the financial statements form an integral part thereof. -4- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY In adjusted NIS of December 2000 Share Accumulated Total capital deficit ------- ---------------- -------- NIS in thousands ------------------------------------- Balance as of January 1, 2000 2 (969)(*) (967) ------- -------- ------ Net loss -- (3,133)(*) (3,133) ------- -------- ------ Balance as of December 31, 2000 2 (4,102) (4,100) ======= ======== ====== Convenience translation (Note 2H) U.S. dollars in thousands ------------------------------------- Share Accumulated Total capital deficit ------- ---------------- -------- Balance as of January 1, 2000 -- (239)(*) (239) ------- -------- ------ Net loss -- (776)(*) (776) ------- -------- ------ Balance as of December 31, 2000 -- (1,015) (1,015) ======= ======== ====== (*) Restated - see Note 2J. The notes to the financial statements form an integral part thereof. -5- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENT OF CASH FLOWS In adjusted NIS of December 2000 For the year ended December 31, 2000 (*) --------------------- Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ In thousands --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss (3,133) (776) Adjustments to reconcile net loss to net cash used in operating activities (see A below) (818) (202) ------ ------ Net cash used in operating activities (3,951) (978) ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (1,141) (282) Proceeds from disposal of fixed assets 110 27 Additions to other assets (447) (111) ------ ------ Net cash used in investing activities (1,478) (366) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Receipt of long-term loans from banks and others 514 127 Repayment of long-term loans to banks (231) (57) Short-term credit from banks, net 4,859 1,202 Increase in the balance with parent company, net (150) (37) Proceeds from issuance of shares to minority shareholders of subsidiary 307 76 ------ ------ Net cash provided by financing activities 5,299 1,311 ------ ------ DECREASE IN CASH AND CASH EQUIVALENTS (130) (33) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 229 57 ------ ------ CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 99 24 ====== ====== CASH PAID DURING THE YEAR FOR: Interest 429 95 ====== ====== Taxes 133 33 ====== ====== (*) Restated - see Note 2J. The notes to the financial statements form an integral part thereof. -6- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENT OF CASH FLOWS (Cont.) In adjusted NIS of December 2000 For the year ended December 31, 2000 (*) --------------------- Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ In thousands --------------------- A. ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES Equity in loss of affiliate 172 43 Minority interest (530) (131) Gain on issuance of shares to minority shareholders of subsidiary (182) (46) Depreciation and amortization 722 179 Increase in severance pay obligations, net 393 97 Gain on disposal of fixed assets (2) -- Purchasing power gain on long-term loans (28) (7) Increase in trade receivables (1,996) (494) Increase in other receivables (including long-term receivables) (64) (16) Decrease in trade payables (103) (25) Increase in other payables and accrued expenses 800 198 ------ ------ (818) (202) ====== ====== (*) Restated - see Note 2J The notes to the financial statements form an integral part thereof. -7- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 1 - GENERAL A. The Company is a member of the Kardan Ltd Group and is engaged in software development and in providing software and outsourcing services. The Company's principal software products are in the field of customer care and billing systems for management of medical files in oncology departments. B. In June 2001, the Company changed its name from Endan Systems Management and Computing Ltd. to Endan IT Solutions Ltd. C. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 - ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the financial statements, on a consistent basis (except for the matter discussed in J below), are: A. ADJUSTED FINANCIAL STATEMENTS GENERAL The financial statements are presented on the basis of the historical cost convention adjusted for the changes in the general purchasing power of the Israeli currency (New Israeli Shekel - "NIS"). The Group companies in Israel maintain their accounts in nominal shekels. The nominal figures are adjusted to shekels of equivalent purchasing power (shekels of December 2000) in conformity with principles prescribed by Statements of the Institute of Certified Public Accountants in Israel, on the basis of changes in the Consumer Price Index. BALANCE SHEET Nonmonetary items are adjusted in accordance with the changes in the Consumer Price Index from the date of acquisition (transaction) to balance sheet date (published on the 15th of the following month). Monetary items are presented in the adjusted balance sheet at their nominal value. The investment at equity is based on the adjusted financial statements of the affiliate. The adjusted values of nonmonetary items should not be construed as a presentation of realizable values or real economic values, but merely as the original values adjusted for the changes in the general purchasing power of the currency. -8- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 2 - ACCOUNTING POLICIES (Cont.) A. ADJUSTED FINANCIAL STATEMENTS (Cont.) STATEMENT OF INCOME Revenues are adjusted in accordance with the change in the index from transaction date to balance sheet date. Expenses, other than financing expenses and those deriving from nonmonetary items, are adjusted for the changes in the index from transaction date to balance sheet date. Expenses deriving from nonmonetary items are adjusted in correspondence with the adjusted balance sheet item. Equity in the results of the affiliate is based on the adjusted financial statements of the affiliate. The balance of the inflationary adjustment, not attributed to revenues or expenses as referred to above, is included in net financing income or expenses. B. CONSOLIDATION OF FINANCIAL STATEMENTS The financial statements of the Company are consolidated with those of its investee companies that are under its control. Material intercompany balances and transactions have been eliminated in the consolidated financial statements. C. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts is specifically computed for accounts the collectibility of which, in the view of management, is doubtful. D. INVESTMENT IN AFFILIATE The investments in the affiliate is accounted for by the equity method. E. FIXED ASSETS Fixed assets are stated at cost. Depreciation is computed by the straight-line method over the estimated useful life of the assets. F. OTHER ASSETS - SOFTWARE DEVELOPMENT COSTS Costs in respect of development of software intended for sale are capitalized only after technological feasibility of the software product has been established, in accordance with criteria set forth in U.S. Statement of financial Accounting Standards No. 86, and when there is a reasonable basis to assume that a market exists for the software which will generate revenues that will cover all capitalized costs. Capitalization of costs ceases when the software product is available for general release to customers. Capitalized development costs are presented in other assets and will be amortized over a period of three years as from the date on which the products are available for sale. Development costs which do not meet the above criteria are charged to the operations as incurred. -9- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 2 - ACCOUNTING POLICIES (Cont.) G. REVENUE RECOGNITION Revenues from services are recognized as the services are provided. H. CONVENIENCE TRANSLATION INTO U.S. DOLLARS The adjusted financial statements as of December 31, 2000 have been translated into United States dollars using the representative exchange rate of the United States dollar as of December 31, 2000 (US $1 = NIS 4.041). The translation was made solely for the convenience of the readers. The translated United States dollar amounts should not be construed to represent amounts that are receivable, payable or convertible into dollars, unless otherwise stated. I. LINKED BALANCES AND BALANCES IN FOREIGN CURRENCY Balances linked to the Consumer Price Index are included on the basis of the last published index before balance sheet date. Balances in or linked to foreign currency are presented according to the representative exchange rates as of balance sheet date. In the year ended December 31, 2000 the Consumer Price Index was unchanged and the exchange rate of the U.S. dollar in relation to the NIS decreased by 2.7%. J. RESTATEMENT The Company and a subsidiary have restated their financial statements in order to reflect the effects of charging to operations in prior years of costs in connection with the establishment of a subsidiary and certain software development costs that were previously capitalized (included in other assets and subsequently amortized). Following are the effects of the restatement on the financial statements: (1) Statement of Income For the year ended December 31, 2000 -------------------- Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ In thousands -------------------- Net loss as presented previously (4,117) (1,020) ------ ------ Adjustments resulting from restatement of prior years' financial statements: Minority interest (292) (72) Software development costs 364 90 General and administrative expenses 912 226 ------ ------ 984 244 ------ ------ Net loss after restatement (3,133) (776) ====== ====== -10- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 2 - ACCOUNTING POLICIES (Cont.) J. RESTATEMENT (Cont.) (2) Statement of Changes in Shareholders' Deficiency Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ In thousands -------------------- Accumulated deficit, January 1, 2000, as presented previously 15 5 Net adjustments of prior years (984) (244) ------ ------ Accumulated deficit, January 1, 2000, after restatement (969) (239) ====== ====== Note 3 - TRADE RECEIVABLES Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars --- ------------ Open accounts 6,787 1,680 Income receivable 722 178 Less - allowance for doubtful accounts (506) (125) ------ ------ 7,003 1,733 ====== ======= Note 4 - OTHER RECEIVABLES Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars --- ------------ Government agencies 375 93 Prepaid expenses 82 20 Other 74 18 ------ ------ 531 131 ====== ====== -11- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 5 - INVESTMENTS A. INVESTMENT IN AFFILIATE (SEE B.2) Convenience translation (Note 2H) NIS U.S. Dollars --- ------------ Balance as of January 1, 2000 401 99 Equity in losses of affiliate (172) (42) ----- ----- Balance as of December 31, 2000 229 57 ===== ===== B. SUPPLEMENTARY INFORMATION (1) As of December 31, 2000 the Company owns approximately 64% of the shares of JBE Software Services Ltd ("JBE") which began operations in October 1999 and is engaged in providing software and outsourcing services. In December 2000 JBE issued shares to minority shareholders such that the Company's holdings decreased from 68% to approximately 64%. As a result of the issuance, the Company recorded a gain of NIS 182,000 which is included in other income. Subsequent to balance sheet date, in March 2001, JBE issued additional shares to a minority shareholder and the Company's holdings decreased to approximately 54%. As a result of this issuance, the Company will record a gain of NIS 797,000. (2) The Company owns 33.3% of the shares of Mileon Ltd. which is engaged in providing services to the municipal sector. Subsequent to balance sheet date, it was decided to sell the Company's holdings in Mileon Ltd to a related party at a price approximating carrying value. The sale is subject to the approval of the shareholders. (3) The Company owns approximately 60% of Binsoft Ltd ("Binsoft") which was engaged in the sale of software tools and in providing software services, including Year 2000 modifications. At the beginning of the year 2000, Binsoft ceased its operations. (4) The Company owns shares of inactive companies, the investment in which have been fully written off. -12- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 6 - FIXED ASSETS, NET A. COMPOSITION AND MOVEMENT
Office Motor Computers and Leasehold furniture vehicles software improvements Total --------- -------- -------- ------------ ----- COST - As of January 1, 2000 370 1,252 1,078 158 2,858 Additions 100 328 669 45 1,142 Disposals (9) (73) (68) -- (150) ----- ----- ----- ----- ----- As of December 31, 2000 461 1,507 1,679 203 3,850 ----- ----- ----- ----- ----- ACCUMULATED DEPRECIATION - As of January 1, 2000 78 305 367 15 765 Provision 41 200 434 48 723 Eliminated on disposal -- (36) (6) -- (42) ----- ----- ----- ----- ----- As of December 31, 2000 119 469 795 63 1,446 ----- ----- ----- ----- ----- NET BOOK VALUE - As of December 31, 2000 342 1,038 884 140 2,404 ===== ===== ===== ===== ===== Convenience translation (Note 2H) U.S. dollars 85 257 219 34 595 ----- ----- ----- ----- ----- Annual depreciation rates 6% - 15% 15% 20% - 33% 10% (mainly 7%) (mainly 33%) ===== ===== ===== =====
B. The Company entered into an agreement for rental of offices for a period of three years ending in September 2001. The Company has a renewal option for an additional six years. Annual rent is approximately NIS 480,000. C. The Company and its subsidiary entered into operating lease agreements for vehicles for periods of three years. Annual lease fees are approximately NIS 630,000. As security for these leases, the companies prepaid the final monthly payments, which are presented as long-term prepaid expenses. D. Liens - see Note 13. -13- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 7 - SHORT-TERM BANK DEBT Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Bank overdraft 32 8 Short-term loans (1) 5,453 1,349 Current maturities of long-term loans 238 60 ----- ----- 5,723 1,417 ===== ===== (1) The loans are not linked and bear interest at a weighted average annual rate of 9.1% as of December 31, 2000. (2) Collateral - see Note 13 Note 8 - TRADE PAYABLES Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Open accounts 547 135 Checks payable 144 36 ----- ----- 691 171 ===== ===== Note 9 - OTHER PAYABLES AND ACCRUED EXPENSES Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Salaries and related expenses (*) 2,407 596 Government authorities 324 80 Related party 293 73 Other 165 40 ----- ----- 3,189 789 ===== ===== (*) Include accrued vacation pay in the amount of NIS 626,000. -14- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 10 - LONG-TERM LOANS A. COMPOSITION Convenience Annual December 31, translation interest 2000 (Note 2H) rate (*) NIS U.S. Dollars -------- ------------ ------------ Linked to the U.S. dollar 6.8% 528 131 Linked to the Consumer Price Index 5.4% 142 36 ----- ----- 670 167 Less - current maturities 238 60 ----- ----- 432 107 ===== ===== (*) Average weighted rate as of December 31, 2000. B. MATURITIES Convenience translation (Note 2H) NIS U.S. Dollars ------------ ------------ First year - current maturities 238 60 Second year 196 49 Third year 145 36 Fourth year 58 14 Fifth year 33 8 ---- ---- 670 167 ==== ==== (*) Collateral - see Note 13 Note 11 - LONG-TERM LOANS FROM PARENT COMPANY AND OTHERS Convenience Annual December 31, translation interest 2000 (Note 2H) rate NIS U.S. Dollars -------- ------------ ------------ From parent company (*) Linked to the Consumer Price Index 4% 4,010 992 From minority shareholder of subsidiary Linked to the U.S. dollar -- 868 215 ----- ----- 4,878 1,207 Less - minority interest in shareholders' deficiency of subsidiary 868 215 ----- ----- 4,010 992 ===== ===== (*) Repayment date of loans has not yet been determined. The parent company has undertaken not to request repayment before January 1, 2002. -15- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 12 - ACCRUED SEVERANCE PAY, NET Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Accrued severance pay 1,775 439 Less - deposits with provident funds 846 209 ----- ----- 929 230 ===== ===== Under Israeli law, the Company and its subsidiary in Israel are required to make severance payments to terminated employees. The calculation is based on the employee's latest salary and the period employed. For most of their employees, the obligation for severance pay is discharged by payment of premiums to insurance companies under approved plans and by regular payments to pension funds. The amounts maintained with insurance companies and the pension funds are not under the control of the Company and its subsidiary and therefore such amounts and the corresponding obligation are not reflected in the financial statements. The obligation under Israeli law for severance pay not covered by the aforementioned payments is presented in the balance sheet, net of deposits in provident funds. Note 13 - LIENS The liabilities of the Company and of a subsidiary to banks, amounting to approximately NIS 6.2 million as of December 31, 2000, are collateralized by fixed and floating charges of various priorities on the companies' assets, including contractual rights in respect thereof, and by charges on their share capital and goodwill. Note 14 - SHARE CAPITAL A. COMPOSITION December 31, 2000 ----------------- Issued and Authorized paid-up ---------- ---------- Number of shares ---------------------------- Ordinary shares of NIS 1 par value 21,400 1,031 ====== ===== B. In 1998 the Company signed an agreement with a senior employee in the framework of which it was agreed that 3% of the Company's share capital would be issued and transferred to a trustee and that after two years from the date of the transfer of the shares to the trustee, the shares would be transferred to the employee. In May 2000 the shares were issued (in consideration for their par value) and transferred to the trustee. C. Subsequent to balance sheet date, the Board of Directors approved the grant of options to an employee to purchase 2% of the shares of the Company at an exercise price based on a Company valuation of US$ 5 million which amount approximates the fair value of the Company on the date of the grant. The options may be exercised prorata over a period of three years. The Board of Directors also approved that, in the event of a split-up of the Company and an investment of at least US$ 1.5 million by an outside investor in the split-up company, the employee will be entitled to 5% of the shares of the split-up company at no consideration, and that, in the event that US$ 10 million is invested in the split-up company, the employee will be entitled to 7% of the shares of the split-up company at no consideration. -16- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 15 - COST OF REVENUES For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Payroll and related expenses 11,883 2,941 Subcontractors 3,371 834 Depreciation 234 58 Vehicle maintenance 1,197 296 Other 621 154 ------ ----- 17,306 4,283 ====== ===== Note 16 - SELLING AND MARKETING EXPENSES For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Payroll and related expenses 1,036 256 Advertising 152 38 Depreciation 117 29 Rental 118 29 Other 205 51 ----- ----- 1,628 403 ===== ===== Note 17 - GENERAL AND ADMINISTRATIVE EXPENSES For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Payroll and related expenses 1,898 470 Management fees 921 228 Office maintenance 915 226 Professional fees 329 81 Bad and doubtful debts 499 123 Depreciation 353 88 Other 481 119 ----- ----- 5,396 1,335 ===== ===== -17- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 18 - FINANCING EXPENSES, NET For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ In respect of loans from parent company 160 40 In respect of long-term loans from banks 28 7 In respect of short-term loans from banks 308 76 Other expenses, net 61 15 ----- ----- 557 138 ===== ===== Note 19 - TAXES ON INCOME A. TAX LAWS APPLICABLE The Company and its subsidiary are subject to the Income Tax Law (Inflationary Adjustments), 1985. B. EFFECTIVE TAX The difference between income taxes computed on loss before equity in loss of affiliate and minority interest at the regular tax rate and the income tax expense as reflected in the financial statements, is explained as follows: For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Tax benefit computed at regular tax rate (36%) (1,257) (311) Increase (decrease) in tax liability due to: Losses in respect of which no tax benefit was recorded 1,221 302 Non-taxable gain on issuance of shares to minority shareholders of subsidiary (64) (16) Non-deductible expenses and other differences 100 25 ----- ----- -- -- ===== ===== C. DEFERRED TAX BENEFITS The Company and its subsidiary have temporary net deductible differences and loss carryforwards at December 31, 2000 of approximately NIS 1.1 million and NIS 3.1 million, respectively. Due to the uncertainty of realization, the tax benefit in respect of these losses have not been included in the financial statements. D. FINAL TAX ASSESSMENTS The Company has received final tax assessments, through 1996. The subsidiary has not received final tax assessments since incorporation. -18- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 20 - RELATED PARTIES A. BALANCES Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Trade payables 37 9 Other payables 293 73 Long-term loans (see Note 11) 4,010 992 B. TRANSACTIONS For the year ended Convenience December 31, translation 2000 (Note 2H) NIS U.S. Dollars ------------ ------------ Financing expenses to parent Company 160 40 Management fees 921 228 Note 21 - FINANCIAL INSTRUMENTS A. CREDIT RISKS Group companies perform ongoing evaluations of customer credit and make appropriate provisions for losses with regard to specific debts, the collectibility of which is doubtful. B. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments (cash and cash equivalents, trade receivables, and other current monetary assets and monetary liabilities) approximates their fair value. Note 22 - RECONCILIATION TO U.S. GAAP The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles applicable in Israel (Israeli GAAP), which differ in certain respects from those applicable in the United States (U.S. GAAP). The main differences are described below: 1. FINANCIAL STATEMENTS IN ADJUSTED NIS In accordance with Israeli GAAP, the financial statements are presented in accordance with a comprehensive basis of accounting for inflation. U.S. GAAP does not generally provide for the adjustment of financial statements for the impact of inflation of entities which do not operate in a hyperinflationary economy. Pursuant to the United States Securities and Exchange Commission requirements applicable to foreign private issuers, however, the Company has not included the impact of inflationary accounting pursuant to Israeli GAAP in the reconciliation to U.S. GAAP. -19- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.) In adjusted shekels of December 2000 Note 22 - RECONCILIATION TO U.S. GAAP (Cont.) 2. ACCRUED SEVERANCE PAY According to U.S. GAAP, accrued severance and the related funded amounts are presented separately in the balance sheet. According to Israeli GAAP, the accrual and funded amounts are presented net in the balance sheet - see Note 12 for details of amounts. The difference between the two methods described above is immaterial with respect to the financial statements of the Company. 3. TREATMENT OF COMPENSATION EXPENSE FOR OPTIONS ISSUED TO EMPLOYEES Under Israeli accounting principles, the grant of the stock option mentioned in Note 14C will not require the recognition of compensation expense. For the purpose of the reconciliation between Israeli GAAP and U.S. GAAP, the Company has adopted the provisions of APB 25 - "Accounting for Stock Issued to Employees". As the exercise price of the options approximates the fair market value of the Company's shares on the date of grant, under APB Opinion No. 25 there is no requirement to recognize compensation expense and as such no adjustment is required. # # # # # -20- ----------------------- ENDAN IT SOLUTIONS LTD. ----------------------- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS as of September 30, 2001 (Unaudited) ----------------------- ENDAN IT SOLUTIONS LTD. ----------------------- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2001 C O N T E N T S Page ---- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Changes in Shareholders' Deficiency 4 Consolidated Statements of Cash Flows 5 - 6 Notes to the Consolidated Financial Statements 7 - 9 # # # # # # # ENDAN IT SOLUTIONS LTD. CONSOLIDATED BALANCE SHEETS In Adjusted NIS of September 2001 Convenience translation (Note 3) September 30, September 30, 2001 2001 NIS U.S.$ ------------- ------------- (Unaudited) ------------------------------ In thousands ------------------------------ CURRENT ASSETS Cash and cash equivalents 202 46 Trade receivables, net of allowance for doubtful accounts of NIS 257 (U.S.$59) 7,845 1,801 Other receivables 993 228 ------ ----- 9,040 2,075 ------ ----- LONG-TERM RECEIVABLES 212 49 ------ ----- FIXED ASSETS, NET 2,658 610 ------ ----- OTHER ASSETS 342 79 ------ ----- 12,252 2,813 ====== ===== CURRENT LIABILITIES Short-term bank debt 4,871 1,118 Trade payables 549 126 Other payables and accrued expenses 3,087 709 ------ ----- 8,507 1,953 ------ ----- LONG-TERM LIABILITIES Loans from banks 878 202 Loans from parent company and others 4,304 988 Accrued severance pay 1,129 259 ------ ----- 6,311 1,449 ------ ----- SHAREHOLDERS' DEFICIENCY Share capital 2 -- Accumulated deficit (2,568) (589) ------ ----- (2,566) (589) ------ ----- 12,252 2,813 ====== ===== The accompanying notes form an integral part of the financial statements. -2- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENTS OF INCOME In Adjusted NIS of September 2001
Convenience For the nine For the nine translation (Note 3) months ended months ended For the nine months September 30, September 30, ended September 30, 2000 2001 2001 NIS NIS U.S.$ ------------- ------------- -------------------- (Unaudited) -------------------------------------------------------- In thousands -------------------------------------------------------- REVENUES FROM SERVICES 16,689 20,270 4,654 COST OF REVENUES 12,929 14,589 3,350 ------ ------ ----- Gross profit 3,760 5,681 1,304 DEVELOPMENT COSTS 1,277(*) -- -- SELLING AND MARKETING EXPENSES 1,037 1,239 285 GENERAL AND ADMINISTRATIVE EXPENSES 4,136(*) 3,154 724 ------ ------ ----- Operating income (loss) (2,690) 1,288 295 FINANCING EXPENSES, NET (389) (645) (148) OTHER INCOME, NET 5 790 181 ------ ------ ----- Income (loss) before equity in loss of affiliate and minority interest (3,074) 1,433 328 EQUITY IN LOSS OF AFFILLIATE (67) -- -- MINORITY INTEREST 330(*) 183 42 ------ ------ ----- Net income (loss) (2,811) 1,616 370 ====== ====== =====
(*) Restated - see Note 2B. The accompanying notes form an integral part of the financial statements. -3- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY In Adjusted NIS of September 2001 Share Accumulated capital deficit Total ------- ------- ----- NIS in thousands ------------------------------------- Balance as of January 1, 2001 2 (4,184) (4,182) Net income -- 1,616 1,616 ---- ----- ----- Balance as of September 30, 2001 2 (2,568) (2,566) ==== ===== ===== Convenience translation (Note 3) U.S. dollars in thousands ------------------------------------- Share Accumulated Total capital deficit ------- ----------- ----- Balance as of January 1, 2001 -- (959) (959) Net income -- 370 370 ---- ---- ---- Balance as of September 30, 2001 -- (589) (589) ==== ==== ==== The accompanying notes form an integral part of the financial statements. -4- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS In Adjusted NIS of September 2001
Convenience translation (Note 3) For the nine For the nine For the nine months ended months ended months ended September 30, September 30, September 30, 2000 (*) 2001 2001 NIS NIS U.S.$ ------------- ------------- -------------- (Unaudited) ----------------------------------------------------- In thousands ----------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) (2,811) 1,616 370 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities (see A below) (28) (1,208) (277) ----- ----- ----- Net cash provided by (used in) operating activities (2,839) 408 93 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (1,058) (911) (209) Proceeds from disposal of fixed assets 116 141 32 ----- ----- ----- Net cash used in investing activities (942) (770) (177) ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Receipt of long-term loans from banks and others 280 714 164 Repayment of long-term loans to banks (172) (218) (50) Short-term credit from banks, net 3,574 (1,050) (241) Increase (decrease) in the balance with parent company, net (90) 214 49 Proceeds from issuance of shares to minority shareholders of subsidiary -- 802 184 ----- ----- ----- Net cash provided by financing activities 3,592 462 106 ----- ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (189) 100 22 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 235 102 24 ----- ----- ----- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 46 202 46 ===== ===== ===== CASH PAID DURING THE YEAR FOR: INTEREST 237 556 128 ===== ===== ===== TAXES 97 84 19 ===== ===== =====
(*) Restated - see Note 2B. The accompanying notes form an integral part of the financial statements. -5- ENDAN IT SOLUTIONS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.) In Adjusted NIS of September 2001
Convenience translation (Note 3) For the nine For the nine For the nine months ended months ended months ended September 30, September 30, September 30, 2000 (*) 2001 2001 NIS NIS U.S.$ ------------- ------------- ------------- (Unaudited) ---------------------------------------------------- In thousands ---------------------------------------------------- A. ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Equity in net loss of affiliate 67 -- -- Minority interest (330) (183) (42) Gain on issuance of shares to minority shareholders of subsidiary -- (802) (184) Depreciation and amortization 513 668 153 Increase in severance pay Obligations, net 161 181 42 Purchasing power loss (gain) on long-term loans (10) 59 14 Loss (gain) on disposal of fixed assets (5) 11 3 Increase in trade receivables (1,203) (701) (161) Increase in other receivables (including long-term receivables) (204) (112) (26) Decrease in trade payables (222) (156) (36) Increase (decrease) in other payables 1,205 (173) (40) ----- ------ ----- (28) (1,208) (277) ===== ====== ===== B. NONCASH TRANSACTION Sale of an affiliate in consideration for short-term credit -- 240 55 ===== ====== =====
(*) Restated - see Note 2B. The accompanying notes form an integral part of the financial statements. -6- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - GENERAL A. These financial statements have been prepared in condensed form as of September 30, 2001 and for the nine months then ended in accordance with generally accepted accounting principles in Israel relating to interim financial statements. These financial statements should be read in conjunction with the annual financial statements and the accompanying notes of the Company as of December 31, 2000 and for the year then ended ("the annual financial statements"). B. In June 2001 the Company changed its name from Endan Systems Management and Computing Ltd to Endan IT Solutions Ltd. Note 2 - ACCOUNTING POLICIES A. The significant accounting policies followed in the preparation of these financial statements are identical to those applied in preparation of the annual financial statements. B. RESTATEMENT As described in the annual financial statements, the Company and a subsidiary restated their prior years' financial statements in order to reflect the effects of charging to operations costs in connection with the establishment of a subsidiary and certain software development costs that were previously capitalized, and included in other assets. Following are the effects of the restatement on the statement of income for the nine months ended September 30, 2000: NIS In thousands Net loss as presented previously (3,070) ------------ Adjustments resulting from restatement of prior years' financial statements : Minority interest (173) Software development costs (111) General and administrative expenses 543 ------ 259 ------ Net loss after restatement (2,811) ====== Note 3 - FINANCIAL STATEMENTS IN ADJUSTED VALUES AND U.S. DOLLARS The Company prepares its primary financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of the New Israeli Shekel ("NIS") based on the changes in the Israeli Consumer Price Index. The primary financial statements as of September 30, 2001 and for the nine months then ended have been translated into U.S. dollars using the representative exchange rate at that date ($1 = NIS 4.35). The translation was made solely for the convenience of the reader. -7- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 3 - FINANCIAL STATEMENTS IN ADJUSTED VALUES AND U.S. DOLLARS (Cont.) The U.S. dollar amounts presented in these financial statements should not be construed to represent amounts receivable or payable in dollars or convertible into dollars, unless otherwise indicated. Following are the changes in the Consumer Price Index and in the representative exchange rate of the U.S. dollar: Consumer U.S. dollar Price Index exchange rate % % ----------- ------------- For the nine months ended: September 30, 2001 2.0 7.8 September 30, 2000 (0.5) (3.1) Note 4 - SUPPLEMENTARY INFORMATION A. In March 2001 JBE Software Services Ltd, a 64% - owned subsidiary, issued shares to a minority shareholder, resulting in the Company's holdings decreaseing to approximately 54%. As a result of this issuance, the Company recorded a gain of approximately NIS 800,000. B. In August 2001 an agreement was signed according to which the Company sold its holdings of 33% in Mileon Ltd. to a related party in consideration for its carrying value (approximately NIS 240,000). C. In August 2001, the Board of Directors approved the grant of options to an employee to purchase 2% of the shares of the Company at an exercise price based on a Company valuation of US$ 5 million which amount approximates the fair value of the Company on the date of the grant. The options may be exercised prorata over a period of three years. The Board of Directors also approved that, in the event of a split-up of the Company and an investment of at least US$ 1.5 million by an outside investor in the split-up company, the employee will be entitled to 5% of the shares of the split-up company at no consideration, and that, in the event that US$ 10 million is invested in the split-up company, the employee will be entitled to 7% of the shares of the split-up company at no consideration. D. In September 2001 the Company submitted a claim against another party in the amount of approximately US$ 710,000 in respect of damages caused to the Company as a result of breach of contract by the other party, including in respect of a receivable not paid to the Company and loss of future income. In November 2001 the other party submitted a counter claim in the amount of approximately NIS 3.7 million alleging that the software system provided by the Company was not appropriate. Management of the Company believes, based on the opinion of its legal counsel, it is likely that most of the Company's arguments will be ultimately accepted and that the Company will not be required to pay a material amount to the other party in respect of the counter claim. Accordingly, no provision was included in the financial statements in respect of the counter claim. E. In October 2001 a Memorandum of Understanding was signed between the shareholders of the Company and the shareholders of Decision Systems Israel Ltd ("DSI"), in the framework of which it was agreed, inter alia, that the shareholders of the Company will transfer all their holdings in the Company to DSI for consideration that includes, shares of DSI. Consummation of the transaction is subject to signing of a final agreement and receipt of certain authorizations. -8- ENDAN IT SOLUTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5 - EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS A. In 2001, the Israel Accounting Standards Board issued Accounting Standard No. 12, "Cessation of Adjustment of Financial Statements". Under the provisions of this Standard, as of January 1, 2003, financial statements will cease to be adjusted for the effect of changes in the general purchasing power of the Israeli currency. Until December 31, 2002, the Company will continue to prepare adjusted financial statements in accordance with the provisions of Opinion No. 36 of the Institute of Certified Public Accountants in Israel. The adjusted amounts in the financial statements as of December 31, 2002, will serve as the basis for nominal financial reporting as of January 1, 2003. B. Concurrently with the issuance of Accounting Standard No. 12, the Israel Accounting Standards Board issued Accounting Standard No. 13, "Effects of Changes in Foreign Exchange Rates". The Standard establishes the accounting treatment for foreign currency transactions, and for the translation of financial statements of investee companies with foreign operations. In addition, the Standard provides guidance as to how to determine whether a foreign investee is integral to the operations of the reporting entity or an autonomous unit, and as to the manner in which the financial statements of the aforementioned investee companies should be translated. The new Standard is effective for financial statements for periods commencing after December 31, 2002. Management believes that the effect of the adoption of the new Standard on the Company's financial position and operating results is not expected to be material. Note 6 - RECONCILIATION TO U.S. GAAP The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles applicable in Israel (Israeli GAAP), which differ in certain respects from those applicable in the United States (U.S. GAAP). The main differences are described below: 1. FINANCIAL STATEMENTS IN ADJUSTED NIS In accordance with Israeli GAAP, the financial statements are presented in accordance with a comprehensive basis of accounting for inflation. U.S. GAAP does not generally provide for the adjustment of financial statements for the impact of inflation of entities which do not operate in a hyperinflationary economy. Pursuant to the United States Securities and Exchange Commission requirements applicable to foreign private issuers, however, the Company has not included the impact of inflationary accounting pursuant to Israeli GAAP in the reconciliation to U.S. GAAP. 2. ACCRUED SEVERANCE PAY According to U.S. GAAP, accrued severance and the related funded amounts are presented separately in the balance sheet. According to Israeli GAAP, the accrual and funded amounts are presented net in the balance sheet. The difference between the two methods described above is immaterial with respect to the financial statements of the Company. 3. TREATMENT OF COMPENSATION EXPENSE FOR OPTIONS ISSUED TO EMPLOYEES Under Israeli accounting principles, the grant of the stock options described in Note 4C does not require the recognition of compensation expense. For the purpose of the reconciliation between Israeli GAAP and U.S. GAAP the Company has adopted the provisions of APB 25 - "Accounting for Stock Issued to Employees". As the exercise price of the options approximates the fair market value of the Company's shares on the date of grant, under APB Opinion No. 25 there is no requirement to recognize compensation expense and as such no adjustment is required. # # # # # # # -9- Item 7. Financial Statements and Exhibits. (b) Pro Forma Financial Information. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial statements give effect to the acquisition by Data Systems & Software Inc. ("DSSI") of all the issued and outstanding shares of Endan IT Solutions Ltd. ("Endan") on December 13, 2001 in a transaction accounted for as a purchase business combination. The Unaudited Pro Forma Condensed Consolidated Balance Sheet (the "Pro Forma Balance Sheet") as of September 30, 2001 has been prepared as if the acquisition occurred on September 30, 2001. The Pro Forma Balance Sheet combines the historical consolidated balance sheet of DSSI, which is incorporated herein by reference, and Endan, which is included herein, at September 30, 2001, and give effect to the unaudited pro forma adjustments necessary to account for the acquisition as a purchase. The Unaudited Pro Forma Condensed Consolidated Statements of Operations (the "Pro Forma Statements of Operations") have been prepared as if the acquisition had occurred on January 1, 2000. These Pro Forma Statements of Operations combine the historical consolidated statements of operations of DSSI for the year ended December 31, 2000 and the nine months ended September 30, 2001, which are incorporated herein by reference, with the historical consolidated statements of income of Endan for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively, which are included herein, and give effect to the unaudited pro forma adjustments necessary to account for the acquisition as a purchase. The unaudited pro forma adjustments are based on an estimated purchase price and preliminary purchase price allocation made based on available information and assumptions that DSSI believes are reasonable. Therefore, the amounts in the Pro Forma Statements of Operations and Pro Forma Balance Sheet and accompanying notes (collectively, the "Pro Forma Financial Information") are subject to change which could be material. In the opinion of management, all adjustments have been made that are necessary to present fairly the Pro Forma Financial Information. The Pro Forma Financial Information is provided for illustrative purposes only and do not purport to represent what DSSI's results of operations or financial position would actually have been, had the acquisition occurred on such dates, nor do they purport to project the results of operations or financial position of DSSI for any future period or date. The Pro Forma Financial Information should be read in conjunction with, and are qualified by reference to, the audited and unaudited consolidated financial statements and accompanying notes of DSSI and Endan which are incorporated herein by reference and included herein, respectively. -10- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET September 30, 2001 (in thousands)
Pro Forma DSSI Endan Adjustments Note Pro Forma (Note 12) ASSETS Cash, cash equivalents and short-term investments $9,660 $46 (500) (3) $8,206 (1,000) (6) Trade accounts receivable, net 9,618 1,801 11,419 Other current assets 9,075 231 9,306 -------- -------- -------- Total current assets 28,353 2,078 28,931 Property and equipment, net 1,753 629 2,382 Goodwill, net 1,973 -- 6,030 (1) 8,003 Other intangible assets, net 375 81 500 (1) 956 Other assets 765 52 817 Prepaid employee termination benefits 2,436 315 2,751 -------- -------- -------- Total assets $35,655 3,155 $43,840 ======== ======== ======= LIABILITIES Short-term debt and current maturities of long-term debt $7,184 1,118 8,302 Trade accounts payable 4,278 126 4,404 Other payables and accrued expenses 5,526 709 100 (1) 6,335 -------- -------- -------- Total current liabilities 16,988 1,953 19,041 -------- Deferred tax liability -- -- 180 (1) 180 Long term debt 9 1,190 (1,000) (6) 199 Employee termination benefits 3,289 574 3,863 -------- -------- -------- Total long-term liabilities 3,298 1,764 4,242 -------- Minority interests 40 -- 2,772 (4) 2,812 -------- SHAREHOLDERS' EQUITY (DEFICIENCY) Common stock 81 -- 81 Additional paid in capital 36,290 -- 484 (2) 36,774 Warrants 114 -- 114 Deferred compensation (90) -- (90) Accumulated deficit (15,389) (562) 562 (2) 166 (5) (15,223) Treasury stock (5,677) -- 1,766 (2) (3,911) -------- -------- -------- 15,329 (562) 17,745 -------- -------- -------- Total liabilities and equity $35,655 3,155 $43,840 ======== ======== ========
-11- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 2000 (in thousands, except per share data)
Pro Forma DSSI Endan Adjustments Note Pro Forma (Note 11) Sales $57,839 $5,569 $63,408 Cost of sales 45,606 4,255 100 (7) 49,961 ---------- ----------- -------- Gross profit 12,233 1,314 13,447 Research and development expenses 928 353 1,281 Selling, general and administrative expenses 16,340 1,727 18,067 Gain on sale of division 1,144 -- 1,144 ---------- ----------- -------- Operating loss (3,891) (766) (4,757) Interest income 1,758 -- 1,758 Interest expense (709) (137) 40 (8) (806) Other (loss) income, net (50) 44 (6) ---------- ----------- -------- Loss before provision for income taxes (2,892) (859) (3,811) Provision for income taxes 171 -- (9) 171 ---------- ----------- -------- (3,063) (859) (3,982) Equity loss in investee -- (42) (42) Minority interest -- 130 130 ---------- ----------- -------- Loss from continuing operations before non-recurring gain on partial sale of subsidiary ($3,063) (771) (5) ($3,894) ---------- ----------- -------- Loss per share from continuing operations before non-recurring gain on partial sale of subsidiary - basic and diluted ($0.41) (10) ($0.50) Weighted average number of shares outstanding - basic and diluted 7,422 365 (10) 7,787
-12- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For the Nine Months Ended September 30, 2001 (in thousands, except per share data)
Pro Forma DSSI Endan Adjustments Note Pro Forma (Note 11) Sales $36,157 4,789 $40,946 Cost of sales 27,861 3,446 75 (7) 31,382 ---------- ---------- ---------- Gross profit 8,296 1,343 9,564 Research and development expenses 2,216 -- 2,216 Selling, general and administrative expenses 13,220 1,038 14,258 ---------- ---------- ---------- Operating (loss) income (7,140) 305 (6,910) Interest income 917 -- 917 Interest expense (361) (153) 30 (8) (484) Other income, net 26 187 213 ---------- ---------- ---------- (Loss) income before provision for income taxes (6,558) 339 (6,264) Provision for income taxes 18 -- (9) 18 ---------- ---------- ---------- (6,576) 339 (6,282) Minority interest -- 43 43 ---------- ---------- ---------- (Loss) income from continuing operations before ($6,576) 382 (5) ($6,239) non-recurring gain on partial sale of subsidiary ========== ========== ========== Loss per share from continuing operations before non-recurring gain on partial sale of subsidiary - basic and diluted ($0.95) (10) ($0.85) Weighted average number of shares outstanding - basic and diluted 6,943 365 10) 7,308
-13- DATA SYSTEMS & SOFTWARE INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1 To record the preliminary allocation of the purchase price over the historical net assets of Endan at September 30, 2001. In accordance with FASB Statement No. 141, Business Combinations, the assets and liabilities of Endan are required to be adjusted to their fair values. The estimated purchase price of $5,788 is the sum of the following: (i) $2,250 representing the issuance of 365,210 shares of DSSI common stock valued at $6.16 per share, which represents the average closing price of DSSI common stock for a 60 day trading period prior to the closing of the acquisition as agreed upon by the parties (this amount is not materially different from a valuation of the DSSI common stock based on three days before and after the date the acquisition was announced), (ii) $2,912 representing the estimated value of 32% of the outstanding ordinary shares of DSSI's subsidiary, Decision Systems Israel Ltd. (DSI), (iii) $26 representing the fair value of options to purchase DSI ordinary shares in exchange for the cancellation of outstanding Endan stock options, (iv) $500 of cash, and (v) $100 of estimated closing costs. The final purchase price will be dependent upon the actual closing costs and the final valuation of 32% of the outstanding ordinary shares of DSI. The following pro forma adjustments give effect to the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired based upon available information. These adjustments are subject to the determination of the final purchase price as described above and completion of the valuations as of the date of consummation of the acquisition. Valuations of the specifically identifiable intangible assets are in progress. Consequently, the actual allocation of the purchase price could differ materially from that presented below. The following represents the preliminary allocation of the purchase price: Estimated purchase price $5,788 Net liabilities assumed 562 -------- $6,350 Fair value adjustments: Acquired intangibles with estimable lives - software licenses $ (500) Deferred taxes 180 -------- Purchase price in excess of fair value of net assets acquired (goodwill) $6,030 ======== In addition to the purchase consideration mentioned above, DSSI also is required to provide a loan of $1,100 to DSI to enable repayment by Endan of a $1,000 loan previously made to Endan by Kardan Communications Ltd. ("Kardan"), Endan's majority shareholder. For purposes of the Pro Forma Financial Information, the estimated amount of goodwill generated by the transaction of $6,030 is not amortized in accordance with FASB Statement No. 142, "Goodwill and Other Intangible Assets". Intangible assets with estimable useful lives are amortized over that period. The acquired intangible assets with estimable useful lives include $500 for the estimated fair market value of Endan's "Easy Bill" and "Clinic" software licenses. The estimated useful life of these licenses is five years. NOTE 2 To eliminate the historical Endan shareholders' equity balances and to record the issuance of DSSI common stock from its treasury stock. NOTE 3 To record the issuance of cash consideration of $500. -14- NOTE 4 To record the minority interest ownership of DSI of $2,746 (32% of the fair value of Endan and 32% of the historical book value of DSI before the transaction) and the fair value of DSI options issued in exchange for the cancellation of outstanding Endan stock options. NOTE 5 To record the gain on the exchange of 32% of the difference between the fair value of DSI before the transaction of $4,300 and the book value of DSI as of September 30, 2001 of $3,780. The gain is excluded from the Pro Forma Statement of Operations as it is non-recurring. NOTE 6 To record the repayment of Endan's debt to Kardan. NOTE 7 To record amortization of acquired intangibles with finite lives on a straight-line basis over 5 years. NOTE 8 To record estimated interest expense saved resulting from repayment of Endan's debt to Kardan. NOTE 9 No pro forma income tax provision (benefit) is recognized because of a loss before income taxes in each period and the need to recognize a valuation allowance on deferred tax assets. Given the history of incurring losses, DSSI believes that it is more likely than not that no deferred tax assets will be realized. NOTE 10 The weighted average number of outstanding common shares outstanding assumes that the 365,210 shares of DSSI common stock issued in the acquisition are outstanding throughout each period. Pro forma basic and diluted loss from continuing operations per share are the same because the inclusion of options and warrants in the calculation would be antidilutive. NOTE 11 The reconciliation of the condensed consolidated statements of income of Endan prepared in accordance with accounting principles generally accepted in Israel ("IGAAP") to accounting principles generally accepted in the United States of America ("USGAAP") is as follows: -15-
Nine months ended September 30, 2001 ------------------------------------ Endan Endan Endan IGAAP Adjustments (i) USGAAP USGAAP(iii) ----- --------------- ------ ----------- (NIS) (NIS) (NIS) (US$) Sales 20,270 (209) 20,061 4,789 Cost of sales 14,589 (150) 14,439 3,446 ------ ------ ----- Gross profit 5,681 5,622 1,343 Research and development -- -- -- -- Selling, general and administrative 4,393 (46) 4,347 1,038 ------ ------ ----- Operating income 1,288 1,275 305 Interest income -- -- -- -- Interest expense (645) 7 (638) (152) Other, net 790 (8) 782 187 ------ ------ ----- Income before provision for income taxes 1,433 1,419 340 Provision for income taxes -- -- -- ------ ------ ----- Equity income (loss) in investee --- -- -- Minority interest 183 (2) 181 43 ------ ------ ----- Net income 1,616 1,600 383 ====== ====== ===== Year ended December 31, 2000 ---------------------------- Endan Endan Endan IGAAP Adjustments(ii) USGAAP USGAAP(iii) ----- --------------- ------ ----------- (NIS) (NIS) (NIS) (US$) Sales 22,652 22,652 5,569 Cost of sales 17,306 17,306 4,255 ------ ------ ----- Gross profit 5,346 5,346 1,314 Research and development 1,435 1,435 353 Selling, general and administrative 7,024 7,024 1,727 ------ ------ ----- Operating loss (3,113) (3,113) (766) Interest income -- -- -- Interest expense (557) (557) (137) Other, net 179 179 44 ------ ------ ----- Loss before provision for income taxes (3,491) (3,491) (859) Provision for income taxes -- -- -- Equity income (loss) in investee (172) (172) (42) Minority interest 530 530 130 ------ ------ ----- Net loss (3,133) (3,133) (771) ====== ======= =====
(i) The financial statements of Endan were prepared in accordance with IGAAP which require that the financial statement be prepared on the basis of historical cost convention adjusted for changes in the general purchasing power of the Israeli currency (New Israeli Shekel - "NIS"). Endan's accounts are maintained in nominal shekels. The nominal figures are adjusted to shekels of equivalent purchasing power in conformity with the principles prescribed by Statements of the Institute of Certified Public Accountants in Israel, on the basis of changes in the Consumer Price Index (the "Index"). Revenues are adjusted in accordance with the change in the Index from transaction date to balance sheet date. Expenses, other than financing expenses and those deriving from nonmonetary items, are adjusted for the changes in the Index from transaction date to balance sheet date. Expenses deriving from -16- nonmonetary items are adjusted in correspondence with the adjusted balance sheet item. Equity in the results of the affiliate is based on the adjusted financial statements of the affiliate. The balance of the inflationary adjustment, not attributed to revenues or expenses as referred to above, is included in net financing income or expenses. During the nine month period ended September 30, 2001, the Index increased by 2.0%. All of the adjustments reflected in the nine month period ended September 30, 2001 are to reverse the effect of the adjustment to the Index. No adjustment has been made for the effect of adjusting historical assets due to immateriality. (ii) During the year ended December 31, 2000, there was no change in the Index. Accordingly, no adjustments are reflected in the year ended December 31, 2000 to reverse the effect of the adjustment to the Index. (iii) The consolidated statement of income for the nine months ended September 30, 2001 has been translated from NIS to U.S. dollars based upon the monthly average foreign currency translation rate for the nine months ended September 30, 2001. NOTE 12 The reconciliation of the condensed consolidated balance sheet of Endan prepared in accordance with IGAAP to USGAAP is as follows:
As of September 30, 2001 ------------------------ Endan Endan Endan IGAAP Adjustments USGAAP USGAAP(vi) ----- ----------- ------ ---------- (NIS) (NIS) (NIS) (US$) Assets Cash and cash equivalents 202 202 46 Trade accounts receivables, net 7,845 7,845 1,801 Other receivables 993 993 231 ----- ------ ----- Total current assets 9,040 9,040 2,078 Long-term receivables 212 212 52 Property and equipment, net 2,658 (78) (iv) 2,580 629 Other assets 342 (6) (iv) 336 81 Prepaid employee termination benefits -- 1,370 (v) 1,370 315 ------ ------ ----- Total assets 12,252 13,538 3,155 ====== ====== ===== Liabilities Short-term bank debt 4,871 4,871 1,118 Trade payables 549 549 126 Other payables and accrued expenses 3,087 3,087 709 ----- ----- ----- Total current liabilities 8,507 8,507 1,953 Loans from banks 878 878 202 Loans from parent company and others 4,304 4,304 988 Accrued severance pay 1,129 1,370(v) 2,499 574 Shareholders' Deficiency Share capital 2 2 -- Accumulated deficit (2,568) (84)(iv) (2,652) (562) Total shareholders' deficiency (2,566) (2,650) (562) ------- ------- ----- Total liabilities and shareholders' deficiency 12,252 13,538 3,155 ======= ======= =====
-17- iv) The financial statements of Endan were prepared in accordance with IGAAP which require that the financial statement be prepared on the basis of historical cost convention adjusted for changes in the NIS. Endan's accounts are maintained in nominal shekels. The nominal figures are adjusted to shekels of equivalent purchasing power in conformity with the principles prescribed by Statements of the Institute of Certified Public Accountants in Israel, on the basis of changes in the Consumer Price Index (the "Index"). Non-monetary items are adjusted in accordance with the changes in the Index from the date of acquisition (transaction) to balance sheet date (published on the 15th of the following month). Monetary items are presented in the adjusted balance sheet at their nominal value. Accordingly, non-monetary items (fixed assets and capitalized software costs) are adjusted to their nominal value. For the purposes of the Pro Forma Balance Sheet, the effect of changes in the Index on non-monetary balance sheet items has been reversed as such adjustments are not permitted by U.S. GAAP. (v) According to IGAAP, the accrual and funding of severance pay amounts are presented net, in the balance sheet. According to USGAAP, accrued severance and the related funded amounts are presented separately in the balance sheet. (vi) The September 30, 2001 consolidated balance sheet has been translated based upon the foreign currency translation rate as of September 30, 2001, with the exception of non-monetary items which were translated at their historical rates. -18- (c) Exhibits. Exhibit 1--Consent of Luboshitz Kasierer -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, in the Township of Mahwah, State of New Jersey, on February 12, 2002. DATA SYSTEMS & SOFTWARE INC. BY: s/George Morgenstern ---------------------------------- GEORGE MORGENSTERN Chairman of the Board, President and Chief Executive Officer -20- EX-1 3 d27893_ex-1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public Accountants, we hereby consent to the inclusion in this Current Report on Form 8-K of Data Systems & Software Inc. of our report dated August 27, 2001 (except for Note 22, as to which the date is December 7, 2001) relating to Endan IT Solutions Ltd. and to the incorporation by reference in the registration statements of Data Systems & Software Inc. on Form S-3 (Registration Nos. 333-90017 and 333-76614) and in the registration statements of Data Systems & Software Inc. on Forms S-8 (Registration Nos. 33-88422, 33-94974, 33-99196, 333-36159, 333-65799, 333-82416 and 333-82418). s/Luboshitz Kasierer Luboshitz Kasierer Arthur Andersen Tel-Aviv, Israel February 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----